Tax avoidance is the legal utilization of the tax To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. By contrast, tax evasion is the general term for efforts to not pay taxes by illegal means. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. Latterly the term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law.

Some of those attempting not to pay tax believe that they have discovered interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters A tax protester is someone who refuses to pay a tax on constitutional or legal grounds. Many claim the tax laws are unconstitutional or otherwise invalid. Some refuse to file a tax return or file returns with no income or tax data supplied. Legal commentator Daniel B. Evans has defined tax protesters as people who "refuse to pay taxes or file. An unsuccessful tax protestor has been attempting openly to evade tax, while a successful one avoids tax. Tax resistance Tax resistance can be a form of conscientious objection . Tax resistance can also be a variety of protest, or a technique of nonviolent resistance (for example, in India’s campaign for independence led by Mahatma Gandhi) is the declared refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). Tax resisters 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 particular government policies that they oppose.

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Tax avoidance

Tax avoidance is the legal utilization of the tax To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The United States Supreme Court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." See Gregory v. Helvering Gregory v. Helvering, 293 U.S. 465 , was a landmark decision by the United States Supreme Court concerned with U.S. income tax law. The case is cited as part of the basis for two legal doctrines: the business purpose doctrine and the doctrine of substance over form. Examples of tax avoidance include:

Country of residence

One way a person or company may lower taxes is by changing one's tax residence Definitions of residence for tax purposes vary considerably from state to state. For individuals, physical presence in a State is an important factor. Some States also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests to a tax haven Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies, such as Monaco Monaco /ˈmɒnəkoʊ/ , officially the Principality of Monaco (French: Principauté de Monaco; Monégasque: Principatu de Múnegu; Italian: Principato di Monaco; Occitan: Principat de Mónegue), is a small sovereign city-state located in South Western Europe on the northern central coast of the Mediterranean Sea. It is surrounded on three sides by, or by becoming a perpetual traveler In practical terms, perpetual travelers are people who live in such a way that they are not considered a legal resident of any of the countries in which they spend time. Some countries, such as the U.S., tax their citizens, permanent residents, and companies on all their worldwide income. In these cases, taxation cannot be avoided by simply transferring assets or moving abroad.

The United States ^ b. English is the de facto language of American government and the sole language spoken at home by 80% of Americans age five and older. Spanish is the second most commonly spoken language is unlike many other countries in that its citizens and permanent residents are subject to U.S. federal income tax The federal government of the United States imposes a progressive tax on the taxable income of individuals, partnerships, companies, corporations, trusts, decedents' estates, and certain bankruptcy estates. Some state and municipal governments also impose income taxes. The first Federal income tax was imposed during the Civil War, then again in on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating. According to Forbes Forbes, Inc. is a privately held publishing and media company. Its flagship publication is Forbes, a bi-weekly magazine, with a circulation over 900,000. In August 2006, the private equity firm, Elevation Partners, became a minority shareholder in a newly formed company, Forbes Media, which encompasses Forbes magazine and Forbes.com, one of the magazine some nationals choose to give up their United States citizenship Citizenship in the United States is a status given to a legal member of the United States. It entails specific rights, duties, privileges and economic benefits including federal assistance. In accordance with the Citizenship Clause, people become citizens automatically by being born in the United States, known as birthright citizenship, or by a rather than be subject to the U.S. tax system;[1] however, U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2008 limit on the amount that can be excluded was US$87,000.

Double taxation

Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation Double taxation is the imposition of two or more taxes on the same income , asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to two distinct situations: treaties with many other countries to avoid taxing nonresidents twice—once where the income is earned and again in the country of residence (and perhaps, for US citizens, taxed yet again in the country of citizenship) -- however, there are relatively few double-taxation treaties with countries regarded as tax havens.[2] To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. nationals, renounce one's citizenship) to avoid tax.

Legal entities

Without changing country of residence (or, if a U.S. citizen, giving up one's citizenship), personal taxation may be legally avoided by creation of a separate legal entity The term legal person is a concept in philosophy of law topics wherein an entity is regarded by law to be like a person with such status being granted legal rights to protections and/or privileges under law. It is a term found in business-corporate law and animal rights law contexts, wherein corporations are regarded as highly productive human to which one's property is donated. The separate legal entity is often a company In the United States, a company is a corporation—or, less commonly, an association, partnership, or union—that carries on an industrial enterprise." Generally, a company may be a "corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and any receiver,, trust A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of trusts and in managing estates. Trust companies are, or foundation A foundation is a legal categorization of nonprofit organizations. Foundations may also and often have charitable purposes. This type of nonprofit organization may either donate funds and support to other organizations, or provide the sole source of funding for their own charitable activities. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. Usually one is only personally taxed on property and earnings that one actually owns; thus, by donating assets to a separate legal entity, personal taxation can be avoided, although corporate taxes Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity level in a particular jurisdiction. Such taxes may include income or other taxes. The tax systems of most countries impose an income tax at the entity level on certain type of entities (company or corporation). Many systems additionally tax owners or may still be applicable. If the legal entity is ever liquidated and the assets transferred back to an individual, then capital gains taxes A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for would apply on all profits.

The company/trust/foundation may also be able to avoid corporate taxation if incorporated in an offshore jurisdiction An offshore financial centre , although not precisely defined, is usually a small, low-tax jurisdiction specialising in providing the corporate and commercial services to non-residents in the form of offshore companies and the investment of offshore funds (see offshore company It is worth mentioning at this juncture that taxation of a company somewhere other than its place of incorporation is not by any means an exclusively offshore concept. By way of example consider a UK incorporated company which traded exclusively in France. If the board of directors of this company were based in France there would be no doubt that, offshore trust An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction or private foundation Private foundations are legal entities set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets. However, most private foundations are much smaller and approximately two-thirds of more than 84). Although income tax An income tax is a tax levied on the income of individuals or business . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual would still be due on any salary A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis or dividend Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be paid to the shareholders as a dividend. Many corporations retain a drawn from the legal entity. For a settlor In law a settlor is a person who settles property on express trust for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust or (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a trustee Trustee is a legal term for a holder of property on behalf of a beneficiary. A trust can be set up either to benefit particular persons, or for any charitable purposes : typical examples are a will trust for the testator's children and family, a pension trust (to confer benefits on employees and their families), and a charitable trust. In all or even a beneficiary In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction and may thus lose control of the assets transferred and/or may be unable to benefit from them.

Tax evasion

A "Lion's Mouth" postbox for anonymous denunciations at the Doge's Palace The Doge's Palace is a gothic palace in Venice. The palace was the residence of the Doge of Venice in Venice, Italy. Text translation: "Secret denunciations against anyone who will conceal favors and services or will collude to hide the true revenue from them."

By contrast tax evasion is the general term for efforts by individuals, firms A corporation is an institution that is granted a charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business, trusts In common law legal systems, a trust is a relationship whereby property is managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settlor (or feoffor to uses), who entrusts some or all of their property to people of their choice (the trustees or feoffee to uses). The trustees hold legal title to and other entities to evade taxes To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law 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 declaring less income, profits or gains than actually earned; or overstating deductions).

Statistics

The difference between the amount of tax legally owed and the amount actually collected by a government is sometimes called the tax gap Tax information reporting in the United States is a requirement for organizations to report wage and non-wage payments made in the course of their trade or business to the Internal Revenue Service . This area of government reporting and corporate responsibility is continuously growing, carrying with it a large number of regulatory requirements.

In the United States, the IRS estimated in 2007 that Americans owed $345 billion more than they paid, or about 14% of federal revenues for the fiscal year of 2007.[3]

This section requires expansion.

Illegal income and tax evasion

Main article: Taxation of illegal income in the United States In the United States, the Internal Revenue Code was enacted by the U.S. Congress in part for the purpose of taxing net income. The Code is not a mechanism for enforcing other codes of law, for example, criminal law. A person’s taxable income will generally be subject to the same Federal income tax rules, regardless of whether the income was

In the United States, persons subject to the Internal Revenue Code The Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States James v. United States, 366 U.S. 213 , was a case in which the United States Supreme Court held that money obtained by a taxpayer illegally was taxable income, even though the law might require that taxpayer to repay the ill-gotten gains to person from whom they had been taken[4]), but they often do not do so. Suspected lawbreakers, most famously Al Capone Alphonse Gabriel "Al" Capone was an American gangster who led a Prohibition-era crime syndicate, known then as the "Capones," dedicated to smuggling and bootlegging liquor and other illegal activities, in Chicago, from the early 1920s to 1931, when he was sentenced to federal prison, including a stay at the infamous Alcatraz, have therefore been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. The United States Supreme Court The Supreme Court of the United States is the highest judicial body in the United States, and leads the federal judiciary. It consists of the Chief Justice of the United States and eight Associate Justices, who are nominated by the President and confirmed with the "advice and consent" of the Senate. Once appointed, Justices effectively has ruled that this does not violate an individual's right to remain silent The Fifth Amendment to the United States Constitution, which is part of the Bill of Rights, protects against abuse of government authority in a legal procedure. Its guarantees stem from English common law which traces back to the Magna Carta in 1215. For instance, grand juries and the phrase "due process" both trace their origin to the, and so tax evasion remains a popular method for catching criminals.[citation needed] Other times tax evasion can be used as a "one more nail in the coffin" by prosecutors by stating that if a person earns illegal income, s/he may also be guilty of tax evasion. Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government and international regulators such as the US Office of the Comptroller of the Currency to mean any financial transaction which generates an asset or a value as the result of. By contrast: In the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared[citation needed] but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes[citation needed]. Soviet spy Aldrich Ames Aldrich Hazen Ames is a former Central Intelligence Agency counter-intelligence officer and analyst, who, in 1994, was convicted of spying for the Soviet Union and later Russia, who had earned more than $2 million cash for his espionage Espionage or spying involves an individual obtaining information that is considered secret or confidential without the permission of the holder of the information. Espionage is inherently clandestine, lest the legitimate holder of the information change plans or take other countermeasures once it is known that the information is in unauthorized, was also charged with tax evasion as none of the Soviet money was reported on his tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood.

Economics of tax evasion

In 1968, Nobel laureate economist Gary Becker first[citation needed] theorized the economics of crime, on the basis of which Allingham and Sandmo produced in 1972 an economic model of tax evasion. It deals with the evasion of income tax, the main source of tax revenue in the developed countries. According to them, the level of evasion of income tax depends on the level of punishment provided by law.[5]

This section requires expansion.

Evasion of customs duty

Customs duties are an important source of revenue in the developing countries. The importers purport to evade customs duty by (a) under-invoicing and (b) misdeclaration of quantity and product-description. When there is ad valorem import duty, the tax base is reduced through underinvoicing. Misdeclaration of quantity is more relevant for products with specific duty. Production description is changed match an H. S. Code The Harmonized Commodity Description and Coding System of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization (WCO) (formerly the Customs Co-operation Council), an independent intergovernmental organization with over 170 member commensurate with a lower rate of duty.[6]

This section requires expansion.

Smuggling

Smuggling Smuggling is the clandestine transportation of goods or persons past a point where prohibited, such as out of a building, into a prison, or across an international border, in violation of applicable laws or other regulations is importation or exportation of foreign products through unauthorized route. Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes.[7]

Evasion of value added tax (VAT) and sales taxes

During the latter half of the twentieth century, value added tax Value added tax is similar to a sales tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 1954, (VAT) has emerged as a modern form of consumption tax A consumption tax is a tax on spending on goods and services. The term refers to a system with a tax base of consumption. It usually takes the form of an indirect tax, such as a sales tax or value added tax. However it can also be structured as a form of direct, personal taxation: as an income tax that excludes investments and savings. A direct through the world, with the notable exception of the United States ^ b. English is the de facto language of American government and the sole language spoken at home by 80% of Americans age five and older. Spanish is the second most commonly spoken language. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales.[8] The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states A U.S. state is any one of 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of commonwealth rather than state. State citizenship is instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.

In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the law in most cases. Such evasion is especially prevalent in federal states like the US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. Intranational borders in such countries usually lack customs offices or similar facilities that could effectively control the movement of any goods carried in private vehicles from one jurisdiction to another and most of the respective state and provincial governments simply lack the manpower and resources to pursue and prosecute every case of state/provincial sales tax evasion arising from purchases which do not cross state or provincial borders other than for major purchases such as cars.[9]

Control of evasion

Level of evasion depends on a number of factors one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement,[10] tax farming,[11] and institution of Pre-Shipment Inspection (PSI) agencies.[12]

Corruption by tax officials

Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped countries.[citation needed]

Role of middleman

It is often alleged that tax lawyers and chartered accountants help taxpayers including firms and companies in evading taxes. In the same vein, the Clearing and Forwarding agents help in evasion of Customs duties. It has been suggested that removal of human interface is a reliable solution to this problem.[citation needed]

Level of evasion and punishment

This section contains weasel words, vague phrasing that often accompanies biased or unverifiable information. Such statements should be clarified or removed. (October 2009)

Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment - in China the punishment can be as severe as the death penalty. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.

Privatization of tax enforcement

Professor Christopher Hood first[citation needed] suggested privatization of tax enforcement for overcoming limitations of government tax administration in controlling tax evasion.[13] Some governments have resorted to privatization of tax enforcement to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. In Bangladesh, part of Customs administration was privatized in as early as 1991.[14]

Tax farming

Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Government leases out the collection system to a private entity for a fixed amount who then collects the revenue and shoulders the risk of attempts at evasion by the tax-payers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.[15]

This section requires expansion.

PSI Agencies

Pre-shipment Agencies like SGS, Cotecna etc. are employed to prevent evasion of customs duty through under-invoicing and misdeclaration. However, in the recent times, allegations have been lodged that PSI agencies have actively cooperated with the importers in evading customs duties. Authority in Bangladesh has found Cotecna, a PSI agency of Swiss origin, guilty of complicity with the importers for evasion of customs duties on a huge scale.[16] The same company Cotecna was implicated for bribing Pakistan's prime minister Benazir Bhutto for securing contract for importation by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.[17]

This section requires expansion.

The distinction in various jurisdictions

The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose.

The examples and perspective in this section deal primarily with Anglo-American law and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page.

The distinction in the United States

In the United States "tax evasion" is evading the assessment or payment of a tax that is already legally owed at the time of the criminal conduct.[18] Tax evasion is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties.

By contrast, the term "tax avoidance" describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place. Whereas an evaded tax remains a tax legally owed, an avoided tax is a tax liability that has never existed.

For example, consider two businesses, each of which have a particular asset (in this case, a piece of real estate) that is worth far more than its purchase price.

In the above example, tax may eventually be due when the second property is sold. Whether and how much tax will be due will depend on circumstances and the state of the law at the time. This is true of many tax avoidance strategies.

The distinction in the United Kingdom

The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed. There is, however, a further distinction drawn between tax avoidance and tax mitigation. Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament: IRC v Willoughby.[19] Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.

The clear articulation of the concept of an avoidance/mitigation distinction goes back only to the 1970s. The concept originated from economists, not lawyers.[20] The use of the terminology avoidance/mitigation to express this distinction was an innovation in 1986: IRC v Challenge.[21]

In practice the distinction is sometimes clear, but often difficult to draw. Relevant factors to decide whether conduct is avoidance or mitigation include: whether there is a specific tax regime applicable; whether transactions have economic consequences; confidentiality; tax linked fees. Important indicia are familiarity and use. Once a tax avoidance arrangement becomes common, it is almost always stopped by legislation within a few years. If something commonly done is contrary to the intention of Parliament, it is only to be expected that Parliament will stop it. So that which is commonly done and not stopped is not likely to be contrary to the intention of Parliament. It follows that tax reduction arrangements which have been carried on for a long time are unlikely to constitute tax avoidance. Judges have a strong intuitive sense that that which everyone does, and has long done, should not be stigmatised with the pejorative term of “avoidance”. Thus UK courts refused to regard sales and repurchases (known as bed-and-breakfast transactions) or back-to-back loans as tax avoidance.

Other approaches in distinguishing tax avoidance and tax mitigation are to seek to identify “the spirit of the statute” or “misusing” a provision. But this is the same as the “evident intention of Parliament” properly understood. Another approach is to seek to identify “artificial” transactions. However, a transaction is not well described as ‘artificial’ if it has valid legal consequences, unless some standard can be set up to establish what is ‘natural’ for the same purpose. Such standards are not readily discernible. The same objection applies to the term ‘device’.

It may be that a concept of “tax avoidance” based on what is contrary to “the intention of Parliament” is not coherent. The object of construction of any statute is expressed as finding “the intention of Parliament”. In any successful tax avoidance scheme a Court must have concluded that the intention of Parliament was not to impose a tax charge in the circumstances which the tax avoiders had placed themselves. The answer is that the expression “intention of Parliament” is being used in two senses. It is perfectly consistent to say that a tax avoidance scheme escapes tax (there being no provision to impose a tax charge) and yet constitutes the avoidance of tax. One is seeking the intention of Parliament at a higher, more generalised level. A statute may fail to impose a tax charge, leaving a gap that a court cannot fill even by purposive construction, but nevertheless one can conclude that there would have been a tax charge had the point been considered. An example is the notorious UK case Ayrshire Employers Mutual Insurance Association v IRC,[22] where the House of Lords held that Parliament had “missed fire”.

History of the distinction

An avoidance/evasion distinction along the lines of the present distinction has long been recognised but at first there was no terminology to express it. In 1860 Turner LJ suggested evasion/contravention (where evasion stood for the lawful side of the divide): Fisher v Brierly.[23] In 1900 the distinction was noted as two meanings of the word “evade”: Bullivant v AG.[24] The technical use of the words avoidance/evasion in the modern sense originated in the USA where it was well established by the 1920s.[25] It can be traced to Oliver Wendell Holmes in Bullen v Wisconsin.[26] It was slow to be accepted in the United Kingdom. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term “tax evasion” from “avoidance”. However in the UK at least, “evasion” was regularly used (by modern standards, misused) in the sense of avoidance, in law reports and elsewhere, at least up to the 1970s. Now that the terminology has received official approval in the UK (Craven v White[27]) this usage should be regarded as erroneous. But even now it is often helpful to use the expressions “legal avoidance” and “illegal evasion”, to make the meaning clearer.

Public opinion on tax avoidance

Tax avoidance may be considered to be the dodging of one's duties to society, or alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to pay no more tax than what is required. Attitudes vary from approval through neutrality to outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax being avoided.

In the judiciary, different judges have taken different attitudes. As a generalization, for example, judges in the United Kingdom before the 1970s regarded tax avoidance with neutrality; but nowadays they regard it with increasing hostility. See the quotes below for examples.

Responses to tax avoidance

Avoidance also reduces government revenue and brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for avoidance. In practice this has not proved achievable and has led to an ongoing battle between governments amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules.

To allow prompter response to tax avoidance schemes, the US Tax Disclosure Regulations (2003) require prompter and fuller disclosure than previously required, a tactic which was applied in the UK in 2004.

Some countries such as Canada, Australia and New Zealand have introduced a statutory General Anti-Avoidance Rule (GAAR). Canada also uses Foreign Accrual Property Income rules to obviate certain types of tax avoidance. In the United Kingdom, there is no GAAR, but many 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.

In the United States, the Internal Revenue Service distinguishes some schemes as "abusive" and therefore illegal.

In the UK, judicial doctrines to prevent tax avoidance began in IRC v Ramsay (1981) followed by Furniss v. Dawson (1984). This approach has been rejected in most commonwealth jurisdictions even in those where UK cases are generally regarded as persuasive. After two decades, there have been numerous decisions, with inconsistent approaches, and both the Revenue authorities and professional advisors remain quite unable to predict outcomes. For this reason this approach can be seen as a failure or at best only partly successful.

In the UK in 2004, the Labour government announced that it would use retrospective legislation to counteract some tax avoidance schemes, and it has subsequently done so on a few occasions. Initiatives announced in 2010 suggest an increasing willingness on the part of HMRC to use retrospective action to counter avoidance schemes, even when no warning has been given.[28]

In 2008, the charity Christian Aid published a report, Death and taxes: the true toll of tax dodging, which criticised tax exiles and tax avoidance by some of the world's largest companies, linking it to the deaths of millions of children in developing countries.[29]

Tax protesters and tax resistance

Main articles: Tax protester, Tax protester arguments, 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 (not liable): these individuals and groups are sometimes called tax protesters. Many protesters continue posing the same arguments that the Federal courts have rejected time and time again, ruling the arguments to be legally frivolous.

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).

In the UK case of Cheney v. Conn,[30] 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."

Definition of tax evasion in the United States

The application of the U.S. tax evasion statute may be illustrated in brief as follows, as applied to tax protesters. The statute is Internal Revenue Code section 7201:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.[31]

Under this statute and related case law, the prosecution must prove, beyond a reasonable doubt, each of the following three elements:

  1. the "attendant circumstance" of the existence of a tax deficiency — an unpaid tax liability; and
  2. the "actus reus" (i.e., guilty conduct) — an affirmative act (and not merely an omission or failure to act) in any manner constituting evasion or an attempt to evade either:
    1. the assessment of a tax, or
    2. the payment of a tax.
  3. the "mens rea" or "mental" element of willfulness — the specific intent to violate an actually known legal duty;

An affirmative act "in any manner" is sufficient to satisfy the third element of the offense. That is, an act which would otherwise be perfectly legal (such as moving funds from one bank account to another) could be grounds for a tax evasion conviction (possibly an attempt to evade "payment"), provided the other two elements are also met. Intentionally filing a false tax return (a separate crime in itself[32]) could constitute an attempt to evade the "assessment" of the tax, as the Internal Revenue Service bases initial assessments (i.e., the formal recordation of the tax on the books of the U.S. Treasury) on the tax amount shown on the return.

Application to tax protesters

This statute is an example of an exception to the general rule under U.S. law that "ignorance of the law or a mistake of law is no defense to criminal prosecution."[33] Under the Cheek Doctrine (Cheek v. United States[34]), the United States Supreme Court ruled that a genuine, good faith belief that one is not violating the Federal tax law (such as a mistake based on a misunderstanding caused by the complexity of the tax law itself) would be a valid defense to a charge of "willfulness" ("willfulness" in this case being knowledge or awareness that one is violating the tax law itself), even though that belief is irrational or unreasonable. On the surface, this rule might appear to be of some comfort to tax protesters who assert, for example, that "wages are not income."[35] However, merely asserting that one has such a good faith belief is not determinative in court; under the American legal system the trier of fact (the jury, or the trial judge in a non-jury trial) decides whether the defendant really has the good faith belief he or she claims. With respect to willfulness, the placing of the burden of proof on the prosecution is of limited utility to a defendant that the jury simply does not believe.

A further stumbling block for tax protesters is found in the Cheek Doctrine with respect to arguments about "constitutionality." Under the Doctrine, the belief that the Sixteenth Amendment was not properly ratified and the belief that the Federal income tax is otherwise unconstitutional are not treated as beliefs that one is not violating the "tax law" — i.e., these errors are not treated as being caused by the "complexity of the tax law."

In the Cheek case the Court stated:

Claims that some of the provisions of the tax code are unconstitutional are submissions of a different order. They do not arise from innocent mistakes caused by the complexity of the Internal Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable. Thus, in this case, Cheek paid his taxes for years, but after attending various seminars and based on his own study, he concluded that the income tax laws could not constitutionally require him to pay a tax.

The Court continued:

We do not believe that Congress contemplated that such a taxpayer, without risking criminal prosecution, could ignore the duties imposed upon him by the Internal Revenue Code and refuse to utilize the mechanisms provided by Congress to present his claims of invalidity to the courts and to abide by their decisions. There is no doubt that Cheek, from year to year, was free to pay the tax that the law purported to require, file for a refund and, if denied, present his claims of invalidity, constitutional or otherwise, to the courts. See 26 U.S.C. 7422. Also, without paying the tax, he could have challenged claims of tax deficiencies in the Tax Court, 6213, with the right to appeal to a higher court if unsuccessful. 7482(a)(1). Cheek took neither course in some years, and, when he did, was unwilling to accept the outcome. As we see it, he is in no position to claim that his good-faith belief about the validity of the Internal Revenue Code negates willfulness or provides a defense to criminal prosecution under 7201 and 7203. Of course, Cheek was free in this very case to present his claims of invalidity and have them adjudicated, but, like defendants in criminal cases in other contexts who "willfully" refuse to comply with the duties placed upon them by the law, he must take the risk of being wrong.[36]

The Court ruled that such beliefs — even if held in good faith — are not a defense to a charge of willfulness. By pointing out that arguments about constitutionality of Federal income tax laws "reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable," the Supreme Court may have been impliedly warning that asserting such "constitutional" arguments (in open court or otherwise) might actually help the prosecutor prove willfulness.[37] Daniel B. Evans, a tax lawyer who has written about tax protester arguments, has stated that:

[ . . . ] if you plan ahead to use it [the Cheek defense], then it is almost certain to fail, because your efforts to establish your “good faith belief” are going to be used by the government as evidence that you knew that what you were doing was wrong when you did it, which is why you worked to set up a defense in advance. Planning not to file tax returns and avoid prosecution using a “good faith belief” is kind of like planning to kill someone using a claim of “self-defense.” If you’ve planned in advance, then it shouldn’t work.[38]

Failing to file returns in the United States

According to some estimates, about three percent of taxpayers do not file tax returns at all.[citation needed] In the case of U.S. Federal income taxes, civil penalties for willful failure to timely file returns and willful failure to timely pay taxes are based on the amount of tax due; thus, if no tax is owed, no penalties are due.[39] The civil penalty for willful failure to timely file a return is generally equal to 5.0% of the amount of tax "required to be shown on the return per month, up to a maximum of 25%.[40] By contrast, the civil penalty for willful failure to timely pay the tax actually "shown on the return" is generally equal to 0.5% of such tax due per month, up to a maximum of 25%.[41] The two penalties are computed together in a relatively complex algorithm, and computing the actual penalties due is somewhat challenging.

In cases where a taxpayer does not have enough money to pay the entire tax bill, the IRS can work out a payment plan with taxpayers.

For years for which no return has been filed, there is no statute of limitations on civil actions—that is, on how long the IRS can seek taxpayers and demand payment of taxes owed.[42]

For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison.[43] In general, there is a six-year statute of limitations on Federal tax crimes.[44]

Tax shelters

See also: Tax shelter and Tax haven

Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the IRA for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive.

The Internal Revenue Service and the United States Department of Justice 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 U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions."

Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses.

In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26 U.S.C. § 469) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of 26 U.S.C. § 465. Coupled with the hobby loss rules (26 U.S.C. § 183), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses.

See also

Wikiquote has a collection of quotations related to: Tax avoidance and tax evasion

References

  1. ^ "The new refugees. (Americans who give up citizenship to save on taxes)". Forbes. 1994-11-21. http://web.archive.org/web/20060227051231/http://www.frissell.com/taxpat/FORBES1.HTM. Retrieved 2006-12-23.
  2. ^ There are certain well-known exceptions to this: Cyprus has a heavily exploited double taxation relief treaty with Russia; another frequently used treaty is the double taxation relief treaty between Mauritius and India. There are also a number of other less well known and less frequently utilized treaties, such as the one between the British Virgin Islands and Switzerland.
  3. ^ $345B tax gap: , 9 Oct 2007, Morning Edition.
  4. ^ 366 U.S. 213 (1961), overruling Commissioner v. Wilcox, 327 U.S. 404 (1946).
  5. ^ Allingham, M. G. and A. Sandmo [1972] ‘Income Tax evasion: A Theoretical Analysis’, Journal of Public Economics, Vol.1, 1972, p.323-38.
  6. ^ Chowdhury, F. L. Evasion of Customs Duty in Bangladesh, 2006: Desh Prokashon Dhaka.
  7. ^ Chowdhury, F. L. Evasion of Customs Duty in Bangladesh, 2006: Desh Prokashon Dhaka.
  8. ^ Spiro, Peter S. (2005), "Tax Policy and the Underground Economy," in Christopher Bajada and Friedrich Schneider, eds., Size, Causes and Consequences of the Underground Economy (Ashgate Publishing).
  9. ^ Tomášková, Eva (2008): "Tax Evasion in the Czech Republic" In: A Brief Introduction to Czech Law. Rincon: The American Institute for Central European Legal Studies (AICELS), 2008. p. 111 - 121, ISBN 978-0-692-00045-8
  10. ^ Chowdhury, F. L. (1992) Evasion of Customs Duty in Bangladesh, unpublished MBA dissertation, Graduate School of Management, Monash University, Australia.
  11. ^ Stella, P. [1992] Tax Farming - A radical Solution for Developing Country Tax Problem, IMF Working Paper No. 92/70
  12. ^ Alam. D (1999) Introduction of PSI system in Bangladesh: Facts and Documents, Desh Prokashon, Dhaka.
  13. ^ Hood, C. (1986) Privatizing UK tax Law Enforcement?, Public Administration, Vol. 64, Autumn, 1986, p. 319-33.
  14. ^ Chowdhury, F. L. [1992] Evasion of Customs Duty in Bangladesh, unpublished MBA dissertation, Graduate School of Management, Monash University, Australia.
  15. ^ Stella, P. (1992) Tax Farming - A radical Solution for Developing Country Tax Problem, IMF Working Paper No. 92/70.
  16. ^ "NBR showcauses Cotecna on car import scam", New Age
  17. ^ New York Times, 06 August 2003
  18. ^ The term "assessment" is here used in the technical sense of a statutory assessment: the formal administrative act of a duly appointed employee of the Internal Revenue Service who records the tax on the books of the United States Treasury after certain administrative prerequisites have been met. The term "assessment" has a separate, non-statutory meaning in the United States, viz. the act of the taxpayer computing the amount of the tax when preparing and filing a Federal income tax return.
  19. ^ 70 TC 57.
  20. ^ See for instance CT Sandford, Hidden Costs of Taxation, IFS, 1973.
  21. ^ (1986) STC 548.
  22. ^ 27 TC 331.
  23. ^ (1860) 1 de G F&J 643 (England).
  24. ^ (1901) AC 196 (England).
  25. ^ Minimising Taxes, Sears, 1922, Vernon Law Book Co.
  26. ^ 240 U.S. 625, 630 (1916).
  27. ^ (1988) 62 TC 1 at 197.
  28. ^ HMRC goes on £1bn retro warpath, Accountancy Age, 18 Feb 2010
  29. ^ "Tax evasion 'costs lives of 5.6m children'". http://www.independent.co.uk/news/uk/home-news/tax-evasion-costs-lives-of-56m-children-826252.html.
  30. ^ (1968) All ER 779.
  31. ^ 26 U.S.C. § 7201.
  32. ^ 26 U.S.C. § 7206.
  33. ^ Ignorantia legis neminem excusat, or "ignorance of law excuses no one." Black's Law Dictionary, p. 673 (5th ed. 1979).
  34. ^ 498 U.S. 192 (1991).
  35. ^ The U.S. courts have consistently rejected arguments that "wages" or "labor" are not taxable as income under the Internal Revenue Code. For example, see United States v. Connor, 898 F.2d 942, 90-1 U.S. Tax Cas. (CCH) paragr. 50,166 (3d Cir. 1990) (tax evasion conviction under 26 U.S.C. § 7201 affirmed by the United States Court of Appeals for the Third Circuit; taxpayer’s argument — that because of the Sixteenth Amendment, wages were not taxable — was rejected by the Court; taxpayer’s argument that an income tax on wages is required to be apportioned by population also rejected); Perkins v. Commissioner, 746 F.2d 1187, 84-2 U.S. Tax Cas. (CCH) paragr. 9898 (6th Cir. 1984) (26 U.S.C. § 61 ruled by the United States Court of Appeals for the Sixth Circuit to be “in full accordance with Congressional authority under the Sixteenth Amendment to the Constitution to impose taxes on income without apportionment among the states”; taxpayer’s argument that wages paid for labor are non-taxable was rejected by the Court, and ruled frivolous); White v. United States, 2005-1 U.S. Tax Cas. (CCH) paragr. 50,289 (6th Cir. 2004), cert. denied, ____ U.S. ____ (2005) (taxpayer’s argument that wages are not taxable was ruled frivolous by the United States Court of Appeals for the Sixth Circuit; penalty — imposed under 26 U.S.C. § 6702 for filing tax return with frivolous position — was therefore proper); Granzow v. Commissioner, 739 F.2d 265, 84-2 U.S. Tax Cas. (CCH) paragr. 9660 (7th Cir. 1984) (taxpayer’s argument that wages are not taxable was rejected by the United States Court of Appeals for the Seventh Circuit, and ruled frivolous); Waters v. Commissioner, 764 F.2d 1389, 85-2 U.S. Tax Cas. (CCH) paragr. 9512 (11th Cir. 1985) (taxpayer’s argument that income taxation of wages is unconstitutional was rejected by the United States Court of Appeals for the Eleventh Circuit; taxpayer required to pay damages for filing frivolous suit).
  36. ^ Cheek, 498 U.S. at 205-206 (footnote omitted; emphasis added).
  37. ^ See also Spies v. United States, 317 U.S. 492 (1943); Sansone v. United States, 380 U.S. 343 (1965); Cheek v. United States, 498 U.S. 192 (1991).
  38. ^ Daniel B. Evans, The Tax Protester FAQ; downloaded 24 April 2007
  39. ^ See 26 U.S.C. § 6651.
  40. ^ See 26 U.S.C. § 6651(a)(1).
  41. ^ See 26 U.S.C. § 6651(a)(2).
  42. ^ See 26 U.S.C. § 6501.
  43. ^ See 26 U.S.C. § 7203.
  44. ^ See 26 U.S.C. § 6531.

Further reading

External links

Look up Tax avoidance or Tax evasion in Wiktionary, the free dictionary.

Categories: Anglo-American law-centric | Tax avoidance | Tax resistance | Commercial crimes | Tax evasion

 

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