Can illicit income be taxed?

The controversy over the taxation of income from illicit sources is based on a discussion between the position that argues that taxing such income would lead to the logical incoherence of the state benefiting from the profit derived from activities that it sanctions and the position that is not taxing such income would result in profits not only from the illicit activity but also from the lack of taxation.
Articles 18/03/2024

Analysing both Article 10 of the General Tax Law and Article 1 of the Personal Income Tax Code (CIRS) and the Corporate Income Tax Code (CIRC), the answer seems straightforward at first glance.

According to these articles, the illicit nature of obtaining income or the acquisition, ownership or transfer of assets does not preclude their taxation when these acts fulfil the assumptions of the applicable tax rules.

The irrelevance above of the origin of the income is a consequence of the principle of axiological neutrality of taxes, with the only relevant factor being whether or not the tax incidence rule is met.

The question then arises as to whether or not all income derived from illicit practices should be subject to taxation.

The issue has increasingly been the subject of debate in connection with media investigations in which it is debated whether or not it is mandatory to declare income allegedly derived from illegal activities such as corruption. The answer is of the utmost importance since if it is considered that this obligation exists and the declaration of said income has not been made, another type of criminal offence will have been committed, that of tax fraud, as provided for in article 103 of the General Regime of Tax Offences.

The absence of a Category

One of the arguments put forward in favour of not having to declare income from illicit sources is that it does not fall into any of the categories of income set out in Article 1 of the IRS Code, which would mean that there is no crime of tax fraud for not declaring income from illicit sources.

According to this thesis, if such income existed and had not been declared, the consequence would instead be the application of the regime of loss of assets in favour of the state, as set out in Law 5/2002.

The scope of application of this law, set out in Article 1, includes offences such as receiving or offering an undue advantage, active or passive corruption, embezzlement, economic participation in business, and money laundering, among others.

The opposing doctrinal current argues that an obligation to declare illicit income potentially falls under Category G – that of Property Increases – and that failure to fulfil this obligation constitutes tax fraud.

Regardless of the position adopted regarding the classification of illicit income, the duties of collaboration and information to which all taxpayers are subject before the Tax Authority should not imply their right to non-self-incrimination since their tax returns do not constitute admissible evidence of any crime allegedly committed in the first place.

The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.

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  • Tax Law