Musayev Akif (e-mail: ) Doctor of Economic Sciences, professor, Corresponding Member of ANAS., advisor to minister of taxes, Head of the Laboratory of the Institute of Fiscal Strategy Modeling Management Systems of ANAS.

THE TAX EVASION MODELS UNDER STIMULATION AND PENALTY CONDITIONS.

This research presents the results of using econometricmethodsand optimization in the restrictions ofcash transactions in the market of retail goods, jobs and services.

It should be noted that the considered problem is urgent and requires immediate action for developingcountries andcountries intransition.

  1. Introduction
  2. General concepts

The presented research work consists of several interrelated and complementary stages. The first stage of research is devoted to the definition of the problem, evaluation ofscientific researchrelated to the problem, analysis oftheinstitutionalfeatures ofthe behavior ofeconomic entities and separation ofeconomic entitiesinto groups of mere providers of consumersand goods and jobs and services. The second stage of the research covers variations of economic and mathematicalmodels of state and representative bank represented by taxpayers, representative consumers and tax authorites.

The last stage introduces special characteristics of representative taxpayer’s propensity to cashpayments.

In this stage the object of the research become the motive for tax evasion as a result of economic entity’s preference forcash payments.

The purpose of the research is to createthe models able to assess economiclossas a result oftax evasion by representative taxpayers and representative costumers under stimulation and penalty conditions.

1.2 Evaluation of international experience and scientific research into the related to problem.

1.2.1Evaluation of international experience

In modern times, the improvement ofelectronic paymentservices for and stimulationof non-cashpayments are essential for the development of the financial market, expansion of economic investment opportunities, creation of a single electron payment space and restriction of cashcirculation in the country. These measures serve to strengthen financial disciplinein economic subjects, to increase transparencyin the corporate sector and eliminatecases of tax evasion.

The main purpose of the activities carried out for the expansion non-cash payments is take economic developmentof the country onto a new level, to achievetransparency amongthe subjects ofthe economic system, reducethe sizeof the economycan notbe observed (shadow economy) and to minimize cases oftaxevasion. At present, theremaining uncontrolled economic operations cause decrease intax revenues to state budget on the one hand, andinthe effectiveness ofgovernmenteconomic regulationmechanisms on the other hand.

The World History of Economic thought proves that theeconomic theoriesbased directly on humanpsychology have beenlong-lasting and have led toconcrete results. An individual in an economy is the consumer and producer is at the same time.

Namely this dualism constitutes the main paradigm of of human developmentconcept so widely applied recently to.

The role ofpsychologicalfactorsareimportant in interrelations between cash and noncash turnovers and increasingnumber ofnon-cash transactions.Studies show that the influence of mentality andpsychologicalfactorsonlimitation ofcash transactions and increase of the volume ofnoncashtransactionsis more effectivethanthat of others(administrative penalties, severe limitationsetc). People’s revenues growth rate and spending growth rate are different. Households increase their consumptions by increasing their income, though inadequately to the scale of rising income, but in the amount of increasing deposits.

In the society, such an economical and psychological situation is formed that, they increase their consumption along with increased revenues but this growth is measured differently. The more rapidly income rises, the less people reduce personalconsumptionlevel, but they proportionally increase thepart of obviousand non-obvious deposits. At the same time it should be noted that, rise people’s incomes as the result of economic growth and meeting the demand (food and non-food) which play the basic role has createdsomeof the psychologicalstereotypes. Families are tending to compare their incomes with other higher-income families.

However, the amount of cashin the hands ofthe population enters cashpaymentcirculation in the best case, or will be kept as savings in the worst case.

In Russia,as a rule, payments made through POS-terminal with abank-issuedcardacquire from entities1-1.5percent of the amount, otherbank-issuedcards2percent. In Kazakhstan the amounts are 0.5-2percent and 1.5-3percent respectively. In MoldovaPOS-terminals are provided bya local bankcardtransactionsconductedby 1.8percent and2.8percentin case ofcardsissued byforeign bankswill becharged a fee. In Turkey, the situation is slightly different. In thiscountry relatively lowrepaymentrateswere determinedfor households. Thus, the operationconductedthroughthe bankcard installed by POS terminalsis 1,25-1,4percent, other local debit cardis imposed1,7-1,85percent and1-1,7percentofthecommissionsmade in foreign debit card. In Bulgaria,individuals(citizens) debitcardPOSterminalfeepaymentsaredueat 0.7 percent. For legal entities card transactions relatively highrate(1.7 percent) is applied.

As we have seen, comparedto othercountries, inthe CISmember states(Turkey, Bulgaria) POS-terminals in theapplicablefee schedulepaymentsweresetat a low level, this allows theeconomic subjectsto decrease bankcosts andincreasetheir financialcapacity.

1.2.2 Stimulation of noncash payments in international practice

In developed and developingcountries,the expansion ofnoncash paymentswere carried outin three main directions.These are stimulation, restrictions andimposition of a fine. Theexperience and theanalysis of psychologicalfactors of countries with high share of monetarystimulating measures in totalnoncash paymentsshow that it takes time for population to adapt to these habits. Transition of long-lastingcashtransactions by population groupsin the consumer markettononcashtransactions in a short time is associated with certain cognitive difficulties and costs.

As an example stimulation for noncash payment should be noted that, in Colombia which use debit andcredit cards, value-added taxis reduced by2 percent.InHungary, 3-year subsidies have been allocated for the installation ofPOS-terminals. In Swedenduring the yearbonuses of2percent to thecardholder who made payments by plastic cardsarethe added.

In international practice,restrictivemeasuresin expansion of non-cashtransactionsare carried outin different directions, which are mainly connected with cash paymentsexceedingthe maximumlimitsandamounts and dueto fine. Maximum limit of cashpaymentsdepends on the country's economic conditions and on the levelof developmentof electronicsystems.

1.2.2.1 Individual countries practice

In Spainin 2012 14 November,"in the fight against taxcrimes" lawwent into effect, which set the2500euro maximum on cash transactions. The main purposeof this lawis to combattax evasion. After such EU countries as France and Italy, Spain, with the exception ofdeposittransactions in financial institutions(the institutionsshall inform thetax authorities oncash deposits), has seta limit of2,500euros on cash transactions between any physical persons or legalpersons. If a taxpayer is non-resident, thelimitissetto 15000euros.

In case of failureto comply withthis rule, penalty is expected in the amount of25% of the cashsettlement. Both those payingand receivingpaymentare jointly liablefor a violation. However, if a taxpayer informs tax authoritywithin 3 monthsof theviolation, he/she shall be exempt frompenalties.

In addition the law ofviolationscreates a responsibility for a tax officer to report this kind ofinformation to the tax authority.

SpanishTaxAgency'swebsite is to provideonline informationsectionsabout violationsof the cashsettlement.

By entering the correspondingsectionand using thetaxidentification number(oridentification numberforforeigners), it is possible toprovideinformation onthe amount and the date ofthe offense. In1661Swedenbecame the firstEuropean countryto implementthe papernotes, and now itis the closest countrytorefuse them. In Sweden,the busesdo not acceptcash, insteadpre-filled card or sms paymentis available. Some banksdo not allow cash withdrawal. Banknotes and coins make up 3% of the Swedisheconomy. This figure is9% in the euro area, while itis about 7%in the US.

The Italian governmentmade a decisionto limitcash paymentsupto 1000euros in July2012.Is estimated that Italy is losing120billion eurosannuallyfrom taxevasion. In addition, government spends10 billioneuros cash paymentsfor the implementation ofsecuritymeasuresand workforce. According toinformation released, starting from 2013the Italian governmentcan reducethe limit oncash transactions to 50 EUR.

In Greece from 2011 Januarycash settlements higher than 1500 euro wasprohibited between physical andlegalpersons. The purposeof this measureis to combat theshadow of economy and to increasetax revenue.

From 2004, the Czech Republic adopted "Restriction of cashtransactions" law, according to whichboth physical andlegalpersons can carry outoperationsby cash in amountof 15,000euros.Exceeding the amount is allowed only withcashless transfer. A large volume of cash settlement in the United States is not prohibited. However,each bankisobliged to give information the government about deposits, exchange orwithdrawal of upto $10,000. If banks are suspicious of over $ 5000 transaction, theymust notifythe appropriateauthority.

According to February2012 order issued by Argentina's government, per persondailycashlimit was reduced from 10000pesos (US $ 2310) to 1,000pesos.
The purpose ofthe decisionis to prevent money laundering andcombat the financing ofterrorism. Mexico also havelawsthat prohibitlarge-scale cash payments. Buying and sellingof real estate for over 500 000pesos (US $ 38750) in cash is prohibited.For cars, precious stones, works of art, cashonlotterytickets,200 000pesos (US $ 15500) limithas been set. The lawprovides fora minimumpenalty of5 yearsimprisonment. In 2010,the Mexicanforeigncashexchangehas seta limit of$ 1,500per month. This has a negative impact on some cash exchange points and tourism objects. This lawalso createsan obligationto provide informationabout activities of notaryoffices, real estatebrokers and similar businesses’ ownersexceeding thelimits.Financial institutionshave an obligationto inform about credit cardbalances higher than50000pesos (US $ 3875) on a monthly basis.

1.2.2.2 Stimulation ofnoncash payments

Makingsmallpaymentsbycards

According to research conductedby McKenzie company, 25% of cashtransactionsarebetween5and 15euros. The company's marketresearch determined that40% ofthese operationscanbe donethroughthe card.Thisisrequiredto facilitatecard paymentforsmall amounts. For this purpose the card companies’ credit cards have created the chip-based function (such as MasterCard PayPass function). The cardholder loads a smallamount ofcardchip(for security reasons this does not exceed25dollars oreuros). This function is allows for the chip card to pay a small amount while a)transmittingthe radiosignals to POS, b) reading the cardmagneticstrip and c) inserting acard to thePOS terminals without entering a PIN.

PayPass is a special microprocessormanufacturedby MasterCard company.They are mostly installed into credit /debitcards(as well as mobilephones, wrist watches, ring keys, etc.). Itallows making small payments by holding a card close to thepaymentterminal. (Baku Metropolitanappliesanalogueswitchcards). The PayPasssystemwasthe first implemented by McDonaldsin 2004. The number ofretail outletsthat acceptPayPasssystemreached255000 in Europe, 2012. In addition, the number of users’ of Visa's payWave function increased. According to MasterCard information, the number of cardsPayPassfunction in Europeincreased to 50%. The leader of this list is Polandas half ofthe cardsin the country have been provided withthis function. In addition, France, Germany, Italy, Turkey, Russia, Switzerland and the UK each have at least 1 million PayPass -function cards. For example, more than 30 millioncontactlesscardsare usedin the UK, and the majority of them work withVisapayWavefunction. For example, in 8500London buses contactlesscardscan be used to buy tickets. In Poland, the cards with the function can be usedin 90000POS terminals.

The NFC basedSIMcards- Near field communication -designed for smartphones, 2 orsimilarinstrumentdraws to each other or touching for the radioto communicate withstandards used.This functionis widely usedforcontactlesspaymentsand exchange of information. The NFC standards communication protocols anddata exchange formatsarebased onstandardsand existingradio wavesidentification. This functionis also widely usedfor thecontactlesspayments. SowithNFC-equipped mobile phones,by placinga mobilephonecapable credit /debitcard detailsofreadingNFCpaymentterminalcloser, enter the amountof thepaymentcan be madeas necessary. For the noncash paymentsin order to expandthe use ofNFC-enabled SIMcardsare widely available. Paymentwith the applicationform PayWaveandPayPassdoing payments onmobiledevicesis expanding.In different countries mobile operators are expanding this function by installation sim-cards. European countriesas well asdeveloped countries ofAsia are especially active.

Zoompass -is applicablein Canada, to send moneyvia mobile phone, allowing youtoget the moneyand online paymentsoftware. Anyone can downloadingthis applicationto theirmobile phoneintothe memory ofthe programhasits ownbank accountinformation,send moneyto other people, makemoneyandbeable to makethe payment.Currently,thesystem onlyoperatesinCanada.

Cashback–Cashback throughPOS terminalsare usedin several European countries. This functionis veryhelpful, especially in places where theremay belessofATMs.In some countriesto withdraw moneyfromATMs are fee, even if you are not required topayextraforcashback.

One ofthe measures taken forthe expansion ofnoncashtransactionsis theinstallation of POS terminals.In some countriesforexpanding the use ofterminals itis also used asATMs. In other words, thedebitcard holdercan do the amount of cardpaymentthrough POS terminals, as well as the products(without buyingor no) may receivea fixed amountincash.Of thisapproachcan bethe following advantages:

The buyergetsof cashwithout difficulty;

It is important to promote of POS-terminals;

To theestablishment of the POS-terminals requirelessresources andinfrastructure than ATMs.

Taksit cards - Turkeyhas been inthird place in Europe by the endof 2011 year’s results for the usersmore than 50 millioncredit /debitcardusers, approximately 2millionPOS-terminals, more than 31000 ATMs and 80million bankcard paymentsystemsindustry. Making shoppingthrough the taksit cardsis widespreadin Turkey. Taksit Card– is conventional name of the system that allow forequal installmentspaidin settlementby plastic cards. Increasing sale by Taksit cards has resulted in Turkey decreasing of cash payments. So it, the amountpaidin cashduringa salesincrease ofdemand tomoney, but thepaymentinequal installmentsspreadhas led toa longperiod of time decrease the demand tomoney. At the same time, thelow level of interestratepaymentsystem by taksit card is encouragingthemto minimizethe demand formoney. It should be notedthat, since2012 some of Azerbaijan bankshave begun toapply thepaymentcard (other name Taksit card)system.

To organize winnings lotteries

In SouthKoreafor the promotion ofnoncash paymentsthe some noncashexpensesisdeducted from taxableincome. Also, in SouthKorea who is leading to noncashpaymentsby credit/debitcard for these usersisorganized winningslotteries. Winning lotteries, also in some countries (China, Taiwan, Malta, Georgia, and Puerto Rico, Zambia) during the cash settlements to control cash registers in checks required from buyers is in between to stimulation carried out the successful experiments.

Encouragementand deterrencemeasures

To take advantage ofthe benefitsoffered bythe governmentin Norwayfor thehome renovation a civil must do payment for the done work to the holderby the bank orin electronic form. Anotherimplemented measurewhileforto payisa jointresponsibility.So, during renovationif payment is higher than 10,000Norwegiankronor(1,250 euros) civil is responsible for to payment of taxandVATevasion.Bothmeasuresare in forcesince January2011.

The struggle to against the risksof noncashmeans ofpayment

Wide distribution ofnoncash paymentsincludingtax evasion has led abusein several countries. It islocatedin offshore areasphenomenasuch asbanks credit/debitcardsthrough the use ofoperations,the proceeds fromthe saleover the Internet, etc. declaration refers tosituationslike this.Differentstrategiesare carried outbythe tax authorities for the prevention ofsuch cases. Are published in 2012 morecommonstrategies of OECD's report:

to do regular information exchange with internetservice providers and banks;

obtaining informationfrom third parties and comparethese datawith the informationfromthe tax authorities;

determiningthe actualowners ofthe sharesin theoffshore areasof accounts andrelatedmeasures(USA, Australia), and the relevant internationalagreements;

disclosureof tax evasionbeingrevealedto the publicthrough the mediaandtoencouragevoluntary compliance oftaxpayerswho do not followthis way;

eBaysalesis higher than amountdeterminedby theresidentin charge of thecollection ofinformation on taxpayers;

Hungary'sNationalTaxand CustomsAdministrationselling and deliveringof goodsvia the Internetof theiractualincomefrom the saleof enterprisesfor identifytheyshare informationwithHungaryPostisused toimport and exportdata.

1.2.3The analysis ofnoncashtransactions in Azerbaijan

In 1 January 2015 Azerbaijan’s balance of bank deposits are 7188,4 million manat has increased by12.4 percent tocomparewith the same periodof the previous year. The deposits 4422,4 million manat or 61,5 percent is in national currency but 2766,0 million manat is foreign currency and compare previous year respectively has increased 13,7 and 10,3 percent.Suchrapid growthof household depositswith the rise ofliving standardsof the population, on the other hand, thosefunds arenotat riskof foreclosuredue tootherinvestmentprojects.One of the reasonsthey areremain inthe back ofthe requirements ofthe securities marketandfinancial marketinterest rateshigh enoughto beassociated withdeposits.

The development ofthe nationalpayment systemhas led tothe formation ofa new service area.So, the uses of POS terminals providing services to this area banking institutions are sourcesof additional income.Banksfor the use ofPOSterminalsandPOS-terminal operations carried out bytheeconomic subjectsareapplicable servicefees. In the international sphere this service is called an acquiring. So, the monthly volume of transactions carried out through POS terminals up to 1000 economic subjects which are the average fixed monthly service fee charged. Of thisthe monthly servicefeeis50manat. For theeconomic subjects which aretransaction more than1,000 manat the monthly servicefeeis set 1-3percent. Purchase and installation ofPOS-terminals, as well ascommunication servicesfortheequipment are includesof bankservicefee payment.

It should be notedthathightariffsdecrease in the levelof directuse ofPOS-terminals, paymentsellerscarryplastic cardsby consumers, and the end result isnotsoinclinedto favorthe adoption of thecausesof cash. Thehightariffsto preventthe expansion ofnon-cash paymentscan be regardedas one ofthe main factors. The number of cardsin Azerbaijanof 2014According to the informationJune, reached70thousand units. 80% of them aredebit cards, credit cards, while 20%. Analyzethe characteristics ofcash andnon-cash payments, consider the followingtables. First of all,the structure andpropertiesof plastic cardsin circulationis interesting. For thislet's lookatTable 1.

Payment cards in circulationforyears(per types) statistics / Table: 1
Year / Payment
cards
the total number, thousand(end of period) / Payment carts total number in circulation (%): / Transactionswithdebit andcredit cards
Debit carts / Credit carts / Number, thousand
operation / Volume,
million pounds
Social carts / Wages carts / Others
2010 / 4231 / 58,10% / 29,62% / 9,18% / 3,10% / 46 502 / 6 056
2011 / 4580 / 56,18% / 29,56% / 10,86% / 3,39% / 50 953 / 7 230
2012 / 5008 / 52,88% / 28,07% / 12,85% / 5,68% / 57 169 / 8 826
2013 / 5673 / 47,11% / 26,13% / 14,08% / 12,68% / 67 812 / 10 296
2014 / 5965 / 42,92% / 23,98% / 13,71% / 19,39% / 79 229 / 11 869
*Source–Central Bank.

As seenfrom the table,the use ofplastic cardsaccounted forthe majorpart of thesocial andwagescards.So, the number of all transactions made with the social and labor card transactions make up more than 70% of all transactions. Recentlyseenfrom the tablethe otherdebit cardsand credit cardsof otherresultsof operations carried outby theincrease inthe share ofoperations. So the general credit cart operations were equal 3% but in 2012 it was 5.6% and 2013 it was over 11%. Reachedto19% in 2014 year was the rapid growth oftheshare theretail tradeatthe beginning ofthe yearas a result ofthe closure the bank'sloanservices, credit cardsby banksas a result ofa small amountofmass.