The difference between those two is crucial. While tax avoidance is legal, tax evasion is not. It is understandable that the local governments try to fight with both, however very often it is a long-term and complicated process. In the meantime, the taxpayers might enjoy their attempts to pay less taxes. Let’s look at both of the terms in detail:
Understanding Tax Avoidance
Tax avoidance – it is a perfectly legal way to minimise or avoid taxation. This can be done in any way which is acceptable by the law.
Common Tax Avoidance Strategies:
Tax avoidance does not necessarily have to mean using offshore structure to minimise the tax burden. There are many other ways which can be used, also on the local level. Some of the main ways to minimise the taxes are:
- deductions from the taxable income by certain contributions (e.g social insurance contributions, insurance policies, charity donations, etc.)
- increasing the value of allowable expenses
- using tax credits
- using tax exemptions and tax allowances (actually related to the first point above)
- restructuring of the business (e.g. changing the type of entity, or changing the structure of group companies)
- using offshore or foreign structures
While tax avoidance is legal, it is important to note that it has to be used with caution as it also might impose penalties & cause many problems to the business.
Understanding Tax Evasion
Tax evasion on the other hand is minimising the tax liability in the way which is not legal. Tax evasion has criminal consequences and impose financial penalties as well as imprisonment in many cases. Evading taxes exists when it is intentional and deliberate.
Common Examples of Tax Evasion:
- ignorance of specific part of the law which would indicate tax liability
- manipulation of the deductions/allowances (e.g. trying to put some type of expense to tax-allowable while it is not)
- providing false information on the tax return
- non-compliance to the tax & legal rules
- not declaring income earned abroad or from different sources (when needed)
All the above are serious offences and might have serious consequences (financial penalties, imprisonment). It is therefore very important to seek for a proper professional advice when trying to optimise the tax liability.
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The Thin Line Between Tax Avoidance and Tax Evasion
The border between tax avoidance and tax evasion is sometimes very thin. Somebody once said “The difference between tax avoidance and tax evasion is the thickness of a prison wall”. I totally agree with the above sentence. Aggressive tax planning and tax avoidance strategies, when not properly used, might lead to serious negative consequences.
Governments and international organisations (like e.g. OECD) constantly try to fight tax avoidance (and tax evasion, naturally). By implementing new laws, changing the Double Tax Treaties and doing other smart things, governments try to decrease the possibilities of cutting taxes by the taxpayers who are involved in aggressive tax planning. It especially relates to those ones who do it on international level & are involving offshore structures.
Ethical Considerations in Tax Planning
Another thing standing in front all these is ethics (are tax avoiders good or bad people comparing to the majority paying taxes in the country? is it because of tax avoiders that governments don’t have money for building the infrastructure? is it just jealousy of other people or do tax avoiders really harm the economy?). I am not going to touch this topic now as it is too broad, but instead you can have a serious thinking about the problem of ethics and be ready for comments in the next articles!
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