Since the release of the Panama Papers in 2016 there has been a lot of heated debate around tax evasion and tax avoidance. I think it is worth noting that while some may try to blur the two together, there are some distinct differences between tax evasion and tax avoidance which I will discuss further below.
Tax evasion is defined by the Internal Revenue Service as ‘the failure to pay or the deliberate underpayment of taxes.’ This carries varying penalties dependent on which jurisdiction one is in but can include severe financial fines or even jail time. Any of the following activities fall under the category of tax evasion: a) deliberate misrepresentation of material facts b) not disclosing relevant facts c) Making false financial representations and d) Maintaining incomplete records of transactions. Including personal expenditure as a business expense, hiding of income or false creation of expenses for purpose of deductions would all be examples of tax evasion.
Tax avoidance on the other hand is defined by the IRS as ‘an action taken to lessen tax liability and maximise after-tax income’ and is entirely legal. Every jurisdiction has its own unique level of allowable deductions, credits, personal allowances and adjustments to income. For instance one can claim for motor vehicle expenses that arise out of one’s business activities, retirement saving plans or for child allowance.
MAJOR DIFFERENCES BETWEEN TAX EVASION VS TAX PLANNING
- Tax avoidance is absolutely legal while tax evasion carries with it criminal penalties.
- Tax avoidance refers to the reduction or minimisation in taxes paid to the government while tax evasion refers to the suppression of tax payments.
- Reducing one’s tax burden within existing legislation is known as tax avoidance while undertaking an unlawful act to avoid making tax payments is called tax evasion.
- Tax avoidance is utilising the legal loopholes of the tax code in a specific jurisdiction to minimise one’s tax payments, on the other hand tax evasion has as its core aim the deliberate hiding of material facts.
- Tax avoidance has as its aim the postponement of tax while tax evasion has as its consequence if found guilty of imprisonment/financial penalty or both.
While tax avoidance and tax evasion all have the same ultimate goal; one is legal and the other is not and can carry heavy criminal penalties. Ensure that you get the best tax advice before getting involved in any jurisdiction in terms of both your personal tax and business tax liabilities. This will without doubt save you alot of aggravation and worry in the long run.
We hope this article was of benefit to you when it comes to determining the differences between tax avoidance and tax evasion. If you require our expertise in moving or setting up your business in offshore jurisdictions such as Cayman Islands, Barbados, Belize, Seychelles, Panama, St. Lucia or BVI; send us your queries at firstname.lastname@example.org or via our LinkedIn Company page and we will be in touch with you within 24 hours.