Tax avoidance/evasion
(Redirected from Tax evasion)
This article contrasts tax avoidance, tax evasion, tax mitigation, tax fraud, tax resistance and tax protesters.
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Tax avoidance
Tax avoidance is the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance involve using tax deductions, changing one's tax status through incorporation or, depending on citizenship, establishing an offshore company, trust or foundation in a tax haven.
In the UK, there is no General Anti-Avoidance Rule (GAAR), but certain provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose), or one of the main objects (or purposes), of a transaction is to enable tax advantages to be obtained. Judicial doctrines, relying on a purposive construction of tax legislation, are being evolved to prevent tax avoidance involving circular, self-cancelling transactions (IRC v. Ramsay), or where steps with no commercial purpose other than the avoidance of tax are inserted into a transaction (Furniss v. Dawson). Controversially, in the 2004 Budget, it was announced that 'promoters' and users of certain tax avoidance schemes would be required to disclose details of the schemes to the Inland Revenue.
The UK authorities use the term tax mitigation to refer to acceptable tax planning, minimising tax liabilities in ways expressly endorsed by Parliament. As set out above, on this view tax avoidance flouts the spirit of the law while following the letter and is therefore thought by some to be unacceptable, albeit not criminal in the way that evasion is. Upholding a difference between mitigation and avoidance relies on a purposive reading of legislation, and commentators disagree as to the extent to which this is permissible.
Tax evasion
By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as underdeclaring income, profits or gains; or overstating deductions).
In the United States, persons who earn income by illegal means (gambling, theft, drug trafficking etc.) are required by the Internal Revenue Code to report unlawful gains as income when filing annual tax returns, but they usually do not do so, because doing so would serve as an admission of guilt. For this reason, suspected lawbreakers, most famously Al Capone, have been charged with tax evasion when there is insufficient evidence to try them for their substantive crimes.
Avoidance and evasion compared
Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of a strategy of not supporting violent government activities or just the right of every citizen to find all the legal ways to avoid paying too much tax. Tax evasion, on the other hand, is specific application of the Doctrine of Evasion and, as such, it is a crime in almost all countries and subjects the guilty party to fines or even imprisonment. Switzerland is one notable exception: tax fraud (forging documents, for example) is considered a crime, tax evasion (like underdeclaring assets) is not.
Tax protestors and tax resistance
Some tax evaders believe that they have uncovered new interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters.
Tax resistance is the refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). They typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for what they oppose than they are motivated by the desire to keep more of their money (as tax evaders typically are). Some have suggested the term tax avoision for people who adopt the techniques of tax avoidance in the service of tax resistance, thereby doing tax resistance legally.
In the UK case of Cheney v. Conn [1968] All ER 779, an individual objected to paying tax that, in part, would be used to procure nuclear arms in unlawful contravention, he contended, of the Geneva Convention. His claim was dismissed, the judge ruling that "What the [taxation] statute itself enacts cannot be unlawful, because what the statute says and provides is itself the law, and the highest form of law that is known to this country."
Tax shelters
Tax shelters are investments that allow a reduction in one's taxable income. The IRS and Federal Government have recently teamed up to crack down on "abusive" tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. TAX SHELTER INDUSTRY: THE ROLE OF ACCOUNTANTS, LAWYERS, AND FINANCIAL PROFESSIONALS. Many of these tax shelters were designed and provided by accountants at the large American accounting firms.
Examples of tax shelters include: FLIP and OPIS. Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions."
Local terminology
In the Republic of Ireland, specifically Dublin, a nixer is a job, outside a normal job, for "cash-in-hand" - no tax paid. In Cork it is known as a foxer and in parts of the north of the Republic its known as a foreigner. It originates from the German word Nichts, none as in no taxes.
In the United States, working for cash and paying no income taxes or workman's compensation is called "under the table" compensation.
Quotes
According to Denis Healey, former UK Chancellor of the Exchequer:
- The difference between tax avoidance and tax evasion is the thickness of a prison wall.
In the words of Lord Tomlin, in the UK House of Lords case, IRC v. Duke of Westminster (1936) 19 TC 490, [1936] AC 1:
- Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
And Lord Clyde said, in Ayrshire Pullman Motor Services and Ritchie v. IRC (1929) 14 TC 754:
- No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.
United States Supreme Court Justice George Sutherland, Gregory v. Helvering (1934-5) 293 U.S. 465,460:
- The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.