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Inland Revenue Issues Revenue Alert against use of ESST to evade tax

Image from IRD Website

Venkat Raman
Auckland, December 13, 2022

Businesses and individuals using Electronic Sales Suppression Tools (ESST) to understate or conceal revenue have been told to cease the practice and avoid severe punitive measures.

A Revenue Alert Issued by the Inland Revenue Department (IRD) today (December 13, 2022) said that ESST are used to alter the point-of-sale data collected by businesses, often to tamper with the revenue collected.

The Department has warned users of these tools of ‘severe consequences.’

This Revenue Alert sets out the Commissioner’s response to the threats arising from ESST. IRD has implemented several measures to discourage the use and spread of this practice.

IRD Spokesman Tony Morris said that the ESST pose a significant threat to the integrity of the tax system.

“These tools create the electronic version of two sets of books. Using this software amounts to tax evasion and an aggressive form of tax evasion at that. There is no purpose to ESST other than to facilitate tax evasion or money laundering. ESST seriously undermines the integrity of the tax system and IRD has an obligation to honest businesses to stamp out its use,” he said.

ESST facilitate money laundering

According to Mr Morris, these tools have been designed to facilitate money laundering and depending on the facts of a case, IRD may consider money laundering charges.

“IRD  has already identified a number of customers in New Zealand who may have been exposed to ESST. That number is expected to grow and hence the Department is working hard to identify who else has been exposed. When we find them, we will come knocking,” he said.

Mr Morris said that ESST are being used globally to systematically alter point-of-sale data collected by a business to understate or conceal revenue to evade tax.

“In response to the growing threat, several stiff measures were introduced into law in April this year. IRD  will consider using all available options to respond whenever these tools are found, to protect the veracity of our tax system. It is an offence to manufacture, develop or provide a suppression tool to anyone in New Zealand. The penalty is a fine up to a maximum of $250,000. Where ESS tools are used to evade paying tax, people can face prosecution and up to five years in prison,” he said.

Stringent punishment

Mr Morris said that when IRD Identifies specific instances of ESST being used to evade tax, it will require payment of any evaded tax, plus 150% shortfall penalties and use of money interest. Where payment is not made, the Commissioner will consider applying for the taxpayer to be put into bankruptcy or liquidation, he said.

ESST target the integrity of transactions, software, internal memory, external filing, or reporting to delete, change, or simply not record select sales data and transactions, he said.

“Anyone who believes that they may have become involved with ESST should discuss the matter with their tax advisor or IRD. They should also consider whether they need to make a voluntary disclosure,” Mr Morris said.

Guidelines for making a voluntary disclosure are contained in Standard Practice Statement SPS 19/02 and on the Inland Revenue website Voluntary disclosures (ird.govt.nz).

About ESST

The term, ‘Electronic Sales Suppression Tools’  is defined in Section 3 of the Tax Administration Act 1994 as meaning a software programme, device, tool, or other thing, part of a thing, or combination of things or parts (a) that can hide, conceal, modify, falsify, destroy, or prevent the creation of a record that (i) a person is required under a tax law to make or keep; and (ii) is or would be, created by a system that is or includes an electronic point of sale system; and (b) the use of which would lead to a reasonable conclusion that 1 of its principal functions is to facilitate the concealment, modification, falsification, destruction, or prevention of the creation of a record.

A new civil penalty and two new offences have been introduced in relation to involvement with ESS tools: New section 141EE establishes the ESS penalty of $5,000 for the acquisition or possession of a suppression tool. New section 143BB establishes an offence of manufacturing or supplying a suppression tool. A person convicted of such an offence is liable to a fine of up to $250,000. New section 143BC establishes an offence of acquiring or possessing a suppression tool. A person convicted of such an offence is liable to a fine of up to $50,000.

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