SOUMYA KUDIYARASU -08D0032 NIMMI SARA JOSE -08D0020
Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to lessen the tax amount that is payable to the government by ways that are legal. he Avoidance of ax is usually done by the people who desire to keep their money with themselves and not give it to the government. Avoidance ax includes situations when people eliminate or reduce tax by following a transaction or many transactions that are legal. he income tax department provides many provisions through which the people can go for ax Avoidance such as refunds, credits, benefits, and many other kinds of entitlements. ax Avoidance reduc es the revenue of the government and also brings into disrepute, the tax system. Ideally, Avoidance of ax should not be encouraged and the government should also take measures in order to prevent it.
ethods of tax avoidance:
Country of residence:
Country of residence is a method that people adopt when they go for Avoidance of ax. nder this method of ax Avoidance, the company or person changes the tax residence to a place that is a tax haven in order to lower the amount of taxes that they pay. n der this method, the person may also become a regular traveler so that taxation can be avoided. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. his creates a situation of tax competition among governments. ifferent jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies (tax haven A tax haven is a country or territory where certain taxes are levied at a low rate or not at all.)
Double taxation means that many countries charge taxes on the income that has been earned inside that country without taking into consideration, the resident country of the firm or person. So that people do not have to pay double taxes, once in the country where the income has been earned and then again in the resident country, many countries have gone for bilateral treaties of double taxation with other countries. his helps tax payers as they are able to avoid paying double taxes.
Legal entitie s are a method that people follow when they want to go for ax Avoidance. nder this method of Avoidance ax, people legally defer paying personal taxes by creating a legal separate entity to which they donate their property. he legal separate entity that is set up is often a foundation, company, or trust. he properties are transferred to the trust or
company, as a result of which the income that is earned belongs to this entity and not by the owner. sually, people are taxed personally on earnings and pr operty that they own and thus by transferring property to a legal separate entity, individuals can avoid personal taxation although certain taxes such as corporate taxes are still applicable. In order to go for ax Avoidance, the foundation, company, or tr ust can also avoid corporate taxes if the entity is set up in a jurisdiction that considered offshore.
ax results depend on definitions of legal terms which are usually vague. or example, vagueness of the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities. ore generally, any term of tax law, has a vague penumbra, and is a potential source of tax avoidance .
Tax Evasion entails the efforts that are made by trus ts, individuals, firms, and various other entities to avoid paying taxes by illegal and unfair means. he Evasion of ax usually takes place when taxpayers deliberately hide their incomes from the tax authorities in order to reduce their liability of tax. Evasion ax takes place when the people report dishonest tax that includes declaring less gains, profits, or income than what has been actually earned and they even go for overstating deductions. he Evasion of ax level depends on certain factors such a s fiscal equation which means that people's tendency to pay less tax declines when the payment due from taxes becomes obvious. he level of ax Evasion is also dependent on the tax administration's efficiency and corruption levels. he level of Evasion ax also depends on the chartered accountants and tax lawyers who help companies, firms, and individuals evade paying taxes. ax Evasion is a crime in all major countries and the guilty parties are subjected to imprisonment and fines. (tax gap: he difference between the amount of tax legally owed and the amount actually collected by a government is sometimes called the tax gap.)
Methods of tax evasion:
Evasion of customs duty:
Customs duty evasion is another method of ax Evasion under which the importers evade paying customs duty by false declarations of the description of the product and quantity. he importers in order to evade paying customs duty als o resort to under invoicing.
Smuggling 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 o f duties and taxes.
Evasion of value added tax (VAT) and sales taxes:
During the later half of the twentieth century, value added tax (VA ) has emerged as a modern form of consumption tax through the world, with the notable exception of the the amount of sales. [1
States. Producers who collect VA from the consumers may evade tax by under reporting he S has no broad based consumption tax at the federal level, and no state currently collects VA ; the overwhelming majority of states instead collect sales taxes. Canada uses both a VA at the federal level (the Goods and Services ax ) and sales taxes at the provincial level ; some provinces have a single tax combining b oth forms. In addition, most jurisdictions which levy a VA or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. his means that those consumers who purchase something in a lower taxed or untaxed jurisdiction with the intention of avoiding VA 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 igeria, S and Canada where sub national jurisdictions have the constitutional power to charge varying rates of VA or sales tax. In igeria for example, some local states enforce VA on each goods sold by trader. he price must be clearly stated and the VA distinct from the price of the good purchased. Any act by the trader contrary to this (like including VA in the price of the goods) is punishable as attempting to syphoning the VA . Intranational borders in such countries usuall y 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.
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 reso rt to various means for plugging in scope of evasion and increasing the level of enforcement. These include:
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privatization of tax enforcement tax farming, and institution of Pre Shipment Inspection (PSI) agencies .
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 .
Level of evasion and punishment
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. InSwitzerland, 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. oreover, civil ta x 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. ormally, the higher the evaded amount, the higher the degree of punishment.
Privatization of tax enforcement:
Privatization of tax enforcement was suggested for overcoming limitations of government tax administration in controlling tax evasion. 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. Abuse by private tax coll ectors (see tax farming below) has led to revolutionary overthrow of governments which have outsourced tax administration.
Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Governments lease 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 taxpayers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries. Governments have historically turned to tax farming for quick cash. A "tax farmer" buys a "franchise" by making pre payment to the government. The "tax farmer," then invested with the authority of the government, goes into the "farm" and begins extracting "taxes" from citizens. This is a system destined to be abusive as the "tax farmers" seek back their investment, plus profit, and are themselves unrestrained by "politics."
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.
Public opinion on tax avoidance
Tax avoidance may be considered to b e 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. At titudes 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 nited Kingdom b efore the 197 s regarded tax avoidance with neutrality; but nowadays they regard it with increasing hostility. See the quotes below for examples.
esponses 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 government s amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules. 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.
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. frivolous. any protesters continue posing the same arguments that the ederal courts have rejected time and time again, ruling the arguments to be legally
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 mor e concerned with not paying for what they oppose than they are motivated by the desire to keep more of their mone y.
The technique of esistance Tax is used by people who decide not to fund the violent activities of the government and it is also used by the people who follow the movements of non violent resistance. nlike the protesters of tax who deny that they have the obligation to submit tax, Tax esistors realize that the law orders them to submit taxes but even then they resist paying taxes. There are various arguments for Tax esistance such as that the government is involved in destructive, immoral, and unethical activities like capital punishment and war and so paying taxes will fund all these activities. That the government has no legal right to a p erson's money and so tax amounts to slavery or theft. Another argument for Tax esistance is that the government that is in power is full of corruption for it serves only its own needs. Tax resistors have also opined that the government is wasteful and in efficient for it provides insufficient returns on the tax that is collected. urther, they also claimed that the government in power is illegal for they have come to power by unfair means. The arguments against Tax esistance are that if in a democracy peo ple only funded those decisions which they go with then this would undermine the government. Also, if people resist paying taxes then the taxes would be left unpaid as a result of which the government would be forced to take money from other people, which would be unfair to them. urther, the arguments against Tax esistance are that it is too ineffective and passive to bring about a political change. It has also been opined that individuals who do esistance of Tax are actually free riders who benefit from the various services of the government such as security and road infrastructure without paying their part of tax. The government, in order to check Tax esistance applies interest, penalties, or fines against Tax esistors.
Various methods of Tax esistance:
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Paying tax under protest Tax avoidance edirection efusing to pay specific taxes Tax evasion educing income and expenditure
Tax Shelters are programs under which individuals participate in order to lessen their amount of taxes irrespective of their financial status. Tax Shelters include investments in equipment leasing, breeding and cattle feeding programs, real estate, and gas and oil companies. There are some Tax Shelters which are legal and there are some which are illegal.
The various types of legal Tax Shelters
etirement plan is a type of legal Tax Shelter that is used to lessen the burden of the pension funded systems of the government. In this type of Shelter Tax, the governments may also allow the individuals to make investments in their own retirement pension plan. In these kinds of retirement plans the income that is contributed will not be taxed at that point of time but will be taxed at the time of the retirement of the individual. The advantage of this kind of Tax Shelter is that the money is not taken out as tax and instead in the account is compounded until the withdrawal of the funds.
Flow through partnerships that are limited:
Another type of legal Tax Shelter is the flow through partnershi ps that are of limited nature. These investments are made in oil drilling and mining companies in which the investors normally do not want to invest for these companies take many years before they can generate profit. So in order to encourage investors to make investments in these kinds of companies, the governments reward the investors with Tax Shelters by giving them instant savings on tax and also huge gains in case the company discovers oil or gold.
The various types of illegal Tax Shelters
inancing arrangements ffshore companies
Financing arrangements is a kind of illegal Tax Shelter following which a person pays very high rates of interest to a party as a result of which the person can reduce from an investment the amount of income. But at the same time in the financing arrangements Tax Shelter the person makes huge gain of capital when he withdraws the financing investment.
Another type of illegal Tax Shelter is offshore companies under which the funds are transferred to a company which is located in a different country. ne may transfer the funds claiming that it is an expense and thus lower his income that is taxable.