It is common to hear the terms tax fraud and tax evasion in El Salvador and give them the same meaning; however, they are two different things. Firstly, fraud refers to the deliberate violation of criminal and tax laws, while evasion involves concealing income to pay less taxes.
Tax fraud is a deliberate administrative offense commonly known as "defraudation," which is taken into account in our tax and criminal laws when referring to the "intention" of the taxpayer's actions.
Our associate lawyer, Adalicia Torres, explains that El Salvador's legislation and regulatory norms are explicit regarding defraudation. The Tax Code and the Penal Code encompass this type of offense.
"Basically, the offense of defraudation consists of committing one or more acts to prevent the payment of all or part of the taxes, harming the tax collection and public expenditure system," she adds.
The Penal Code includes five crimes related to defraudation of the treasury: tax evasion, misappropriation of tax withholdings or collections, improper reimbursements, returns, compensations, or improper credits; forgery in the printing, issuance, delivery, or granting of documents supporting tax operations; and the proposal and conspiracy to commit any of the aforementioned offenses.
Tax evasion, according to Salvadoran laws, occurs when the taxpayer omits declaring taxable events or declares non-existent costs, expenses, purchases, or tax credits with the purpose of evading taxes. It can be punished with imprisonment from 4 to 8 years.
"Many times, people act with malicious intent and hide their true income and information from the Ministry of Finance. Why? Because this way, they would pay a lower amount of taxes than they actually owe," says the head of the Tax Department.
The Tax Code indicates the existence of unintentional evasion by not filing or filing an incorrect tax return, and intentional evasion when taxpayers attempt to fully or partially evade taxes through omission, assertion, simulation, concealment, maneuver, or other means.
Our expert recommends implementing internal controls within the company as the main element of prevention against any fraudulent activities that employees may engage in during their daily operational activities, as it is capable of deterring fraudulent behaviors that put the company at risk.
"It is important to establish a culture of compliance with tax laws, have robust information systems, and trained personnel. Organizations need to seek advice to identify and minimize these practices," she suggests.
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-Written by the Torres Legal Team.