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If your company's unknowingly evading tax you could find yourself in Lionel Messi's shoes

by , 13 June 2013
Football maestro, Lionel Messi has been red carded for tax fraud. Spanish financial crimes prosecutors allege the Barcelona superstar and his father engaged in tax fraud worth more than €4million ($5million). If you think this has nothing to do with you, think again. It's possible to evade tax unknowingly. Here's what you can do to ensure your company isn't unknowingly evading tax when entering into transactions.

'The player and his father are accused of three crimes of defrauding the state of taxes related to income from the use of his image from 2006-2009,' reports iAfrica.com. According to the prosecutor's complaint, the pair intended to 'deceive the taxman by ceding Messi's image rights to companies based in tax havens such as Belize and Uruguay.'

The Argentinean has since denied the allegations saying they've 'always fulfilled tax obligations'. Now, says Forbes, Messi must prove his father didn't engage in a complicated scheme to hide his earnings from Spanish tax authorities, where he currently resides.

The same could unwittingly happen to your company.

After all, SARS is tightening its grip on tax evaders and ignorance of the law is never an excuse, even if your company unknowingly evades tax when entering into transactions.

In fact, avoiding your company's tax obligations could land you a 200% penalty or a jail term.

Fortunately, your company can play it safe, especially if you use SARS' prevention measures to ensure you pay tax when entering into a transaction.

Ask yourself these three questions before you enter into a transaction to ensure your company's not evading tax

1. Is the transaction prohibited? A prohibited transaction could either be abnormal or lack commercial substance.

2. Is the transaction abnormal? A transaction is abnormal if it's unusual and differs from what would normally apply in a commercial setting.

For example, you set up a transaction with a series of companies where profits are removed from these taxpaying companies and put into an entity that's exempt from tax, such as a provident fund. 'This is abnormal as the taxable companies are shifting profits to a tax exempt entity for no other reason than to evade tax,' explains The Practical Tax Loose Leaf Service.

3. Does your transaction lack commercial substance? If you get a big tax benefit, but it doesn't have an effect on your business risks or nett cash flow, the transaction might lack commercial substance.

For example, you borrow money from a friend to pay for your company's business development. Instead of offering your friend a market-related interest rate, you give him a 50% interest rate per annum, and ask him to give you 30% of that interest back in cash to help you out. The interest doesn't exceed your friend's annual exempt interest income limit (so no tax is payable), and your business gets to deduct the exorbitant interest from its profit.

'SARS will cry tax-avoidance because this transaction offers large benefits, such as reduced tax liability or the deferment of a tax liability, but doesn't have the added elements of risk associated with this type of transaction,' warns the Loose Leaf.

By asking yourself these questions before entering a business transaction you can ensure your company doesn't shrug off its tax obligations or land itself in the kind of trouble Messi now finds himself in.

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