Tax avoidance

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes.[1] Tax avoidance should not be confused with tax evasion, which is illegal.

Forms of tax avoidance that use legal tax laws in ways not necessarily intended by the government are often criticized in the court of public opinion and by journalists. Many corporations and businesses that take part in the practice experience a backlash from their active customers or online. Conversely, benefiting from tax laws in ways that were intended by governments is sometimes referred to as tax planning.[2] The World Bank's World Development Report 2019 on the future of work supports increased government efforts to curb tax avoidance as part of a new social contract focused on human capital investments and expanded social protection.[3]

"Tax mitigation", "tax aggressive", "aggressive tax avoidance" or "tax neutral" schemes generally refer to multiterritory schemes that fall into the grey area between common and well-accepted tax avoidance, such as purchasing municipal bonds in the United States, and tax evasion but are widely viewed as unethical, especially if they are involved in profit-shifting from high-tax to low-tax territories and territories recognised as tax havens.[4] Since 1995, trillions of dollars have been transferred from OECD and developing countries into tax havens using these schemes.[5]

Laws known as a General Anti-Avoidance Rule (GAAR) statutes, which prohibit "aggressive" tax avoidance, have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom.[6][7] In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in Gregory v. Helvering and in the United Kingdom in Ramsay. The specifics may vary according to jurisdiction, but such rules invalidate tax avoidance that is technically legal but is not for a business purpose or is in violation of the spirit of the tax code.[8]

The term "avoidance" has also been used in the tax regulations[examples and source needed] of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance exploiting loopholes in the law such as like-kind exchanges.[9][10][correct example needed] The US Supreme Court has stated, "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".

Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax evasion and some forms of tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavourable to a state's tax system.[11]

According to Joseph Stiglitz (1986), there are three principles of tax avoidance: postponement of taxes, tax arbitrage across individuals facing different tax brackets, and tax arbitrage across income streams facing different tax treatment. Many tax avoidance devices include a combination of the three principles.

The postponement of taxes is the present discounted value of postponed tax is much less than of a tax currently paid. Tax arbitrage across individuals facing different tax brackets or the same individual facing different marginal tax rates at different times is an effective method of reducing tax liabilities within a family. However, according to Stiglitz (1986), differential tax rates may also lead to transactions among individuals in different brackets leading to “tax induced transactions”. The last principle is the tax arbitrage across income streams facing different tax treatment.[12]

  1. ^ Dyreng, Scott D.; Hanlon, Michelle; Maydew, Edward L. (2008). "Long‐Run Corporate Tax Avoidance". The Accounting Review. 83: 61–82. CiteSeerX 10.1.1.638.2292. doi:10.2308/accr.2008.83.1.61.
  2. ^ Back, Philippa Foster (23 April 2013). "Avoiding tax may be legal, but can it ever be ethical?". The Guardian. ISSN 0261-3077. Retrieved 17 March 2016.
  3. ^ "World Development Report 2019: The Changing Nature of Work". World Bank. Retrieved 2022-08-02.
  4. ^ "MPs publish report on Google's tax avoidance". UK Parliament.
  5. ^ Jesse Drucker (21 October 2010). "Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes". Bloomberg.com.
  6. ^ UK’s general anti-avoidance rule process on schedule. T Magazine. Archived 20 October 2017 at the Wayback Machine
  7. ^ "UK Tax avoidance: General Anti-Abuse Rule".
  8. ^ For example, a Canadian organization describes Canada's law, first passed in 1988 in Section 245 of the Canada's federal income tax act (described here), as invalidating the tax consequences of a tax avoidance transaction if "not conducted for any primary purpose other than to obtain a tax benefit".
  9. ^ "HM Revenue & Customs, Tempted by Tax Avoidance?" (PDF). GOV.UK. Retrieved 6 April 2016.
  10. ^ David Kocieniewski (6 January 2013). "Major Companies Push the Limits of a Tax Break". The New York Times. Retrieved 7 January 2013. With hundreds of thousands of transactions a year, it is hard to gauge the true cost of the tax break for so-called like-kind exchanges, like those used by Cendant, General Electric and Wells Fargo.
  11. ^ Michael Wenzel (2002). "The Impact of Outcome Orientation and Justice Concerns on Tax Compliance" (PDF). Journal of Applied Psychology: 4–5. Archived from the original (PDF) on 15 June 2005. Retrieved 28 November 2011. When taxpayers try to find loopholes with the intention to pay less tax, even if technically legal, their actions may be against the spirit of the law and in this sense considered noncompliant. The present research will deal with both evasion and avoidance and, based on the premise that either is unfavorable to the tax-system and uncooperative towards the collective, subsume both under the concept of tax non-compliance. {{cite journal}}: Cite journal requires |journal= (help)
  12. ^ Stiglitz, Joseph. "The General Theory of Tax Avoidance" (PDF). National Bureau of Economic Research. National Bureau of Economic Research. Retrieved 21 April 2021.

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