10 June 2011
Kitco Shut Down By Revenue Quebec In Tax Evasion Investigation
Here is a translation of the Revenue Quebec press release from The Financial Post.
June 9, 2011
Major Investigation by Revenue Quebec into two networks in the Gold sector
Revenue Quebec has a major investigation underway related to two networks of companies and individuals that would be designed to evade taxes in the gold sector. The transactions generated by these activities totaled $1.8-billion, which represents a fiscal loss for Quebec Sales Taxes of more than $150-million.
The operation involves the execution of 70 search warrants in Montréal, Westmount Mont-Royal, Laval, Pointe-Claire, Rosemère, Brossard, Dorval et Saint-Bernard-de-Lacolle. More than 175 investigators from Revenue Quebec were deployed to execute the warrants in places of business, residences, offices of accounting firms, and receivers.
The investigation targets the activities of two networks that would seem to have participated in a artificial commercial activity consisting of repetitive transactions and the use of phony invoices. Revenue Quebec has reasonable grounds to believe that besides Kitco Inc. and Carmen International Inc., more than 125 other companies were complicit in the scheme.
On top of this, Revenue Quebec also has reasonable grounds to believe that Messers Viken Gebenlian, Haroutioun Dakessian, Oskan Hazarabedian and Benjamin Bensimon, as well as Mrs. Shadia Khatib, participated in the creation of artificial tax declarations for certain companies involved by furnishing them with false invoices.
Revenue Quebec is also investigating similar infractions involving GST.
Revenue Quebec must be vigorous with those who violate tax rules and has the intention of pursuing penalties wherever found. As well, the companies and their managers who participated in the tax fraud scheme, and any other accomplice, if found guilty, must pay the evaded funds plus interest and face the applicable penal sanctions. Also, all offenders face fines amounting to 125% to 200% of the evaded taxes and a maximum prison sentence of 5 years.
The mission of Revenue Quebec is to assure that each of us pays his or her fair share to finance public services. Obviously, respect for tax rules is in all our of interests.
The Gold Sector Scheme
What is the gold scheme?
The gold industry scheme uses several companies that generate artificial transactions for the sole purpose of creating tax credits on inputs.
The scheme essentially consists in the transformation of pure gold into gold scrap, which can then be sent to a refiner and transformed anew into pure gold. The cycle can then be repeated.
How is it possible to demand tax credits on the inputs by using pure gold?
Participants in the scheme claimed tax refunds under The Quebec Sales Tax Act. Obviously, this particular scheme was based on the fact that pure gold, being a form of currency like ordinary bills or coins, is in an untaxable form.
However, by transforming the gold into scrap, it is rendered taxable, which permits a buyer to claim tax refunds on the inputs. As the seller of the scrap does not submit retail sales tax to Revenue Quebec, the tax authority finds itself refunding taxes that it had never received.
It’s important to note that the scheme is based on artificial transactions. There was no legitimate commercial activity. The sole purpose of the transactions was to create eligibility for tax refunds on the inputs.
How did the scheme work
1.The provider of the gold (A) sells the gold to the gold refiner (B). As pure gold isn’t taxed, there is no retail sales tax treatment.
2.The gold refiner (B) transforms the gold into gold scrap, rendering it taxable.
3.The gold refiner (B) sells the gold scrap to the gold provider (A). The gold scrap being taxable, the gold refiner collects retail sales tax from the gold provider.
4.The gold refiner (B) doesn’t remit retail sales tax collected from the provider (A) to Revenue Quebec (a situation of taxation realized but not submitted).
5. The gold provider (A) claims a tax refund from Revenue Quebec on the retail sales tax inputs that it had paid to the gold refiner (B).
6.The gold provider (A) sends the scrap gold to another refiner to transform the gold scrap into pure gold.
The same cycle of transactions repeats itself, and each time a new cycle begins, it increases the size of the fraudulent gains generated by the scheme and lost to the province.
What’s more, you generally find that one or several intermediaries gets added in between the provider (A) and the refiner (B) in order to obfuscate the structure and make it more difficult for the scheme to be detected.