NationMaster - Encyclopedia: Tax avoidance and tax evasion

Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to reduce the amount of tax that is payable by means that are within the law. Tax avoiders attempt to prepare their income and wealth statement either to attract a lower rate of taxes and/or to narrow the tax base which is to be used for assessing leviable taxes. Tax avoiders resort to loophole in the law that allows them to lessen the amount of taxes leviable on them and hence, they cannot be charged within the framework of law for evading taxes due to the public exchequer. This article does not cite any references or sources. ... Image File history File linksMetadata Size of this preview: 800 Ã— 600 pixelsFull resolution (2816 Ã— 2112 pixel, file size: 2. ... Finance that studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation The term direct tax has more than one meaning: a colloquial... The term indirect tax has more than one meaning. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation An income tax is a tax levied on the financial income... This article is the current Taxation Collaboration of the Month. ... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ... Stamp duty is a form of tax that is levied on documents. ... A sales tax is a consumption tax charged at the point of purchase for certain goods and services. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation Value added tax (VAT), or goods and services tax (GST), is... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ... The tax, tariff and trade laws of a political region, state or trade bloc determine which forms of consumption and production tend to be encouraged or discouraged. ... First discussed by the Physiocrats in France, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. ... A tax (also known as a dutyor Zakat in islamic economics) is a charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion of income), as opposed to a graduated, or progressive, scheme. ... A progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation A regressive tax is a tax imposed so that the tax... Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links Flag_of_the_British_Virgin_Islands. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links Flag_of_Germany. ... Image File history File links Flag_of_Hong_Kong. ... Image File history File links Flag_of_India. ... Image File history File links Flag_of_Indonesia. ... Image File history File links Flag_of_the_Netherlands. ... Image File history File links Flag_of_New_Zealand. ... Image File history File links Flag_of_Peru. ... Image File history File links Flag_of_Ireland. ... Image File history File links Flag_of_Russia. ... Image File history File links Flag_of_Singapore. ... Image File history File links Flag_of_Tanzania. ... Image File history File links Flag_of_the_United_Kingdom. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... Comparison of tax rates around the world is a difficult and somewhat subjective enterprise. ... This table lists OECD countries by total tax revenue as percentage of GDP (as of 2005). ... Not to be confused with Political economy. ... It has been suggested that monetary theory be merged into this article or section. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Government spending or government expenditure consists of government purchases, which can be financed by seigniorage (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), taxes, or government borrowing. ... A budget deficit occurs when an entity (often a government) spends more money than it takes in. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation Government debt (also known as public debt or national debt) is... This article does not cite any references or sources. ... This article does not cite any references or sources. ... A trade pact is a wide ranging tax, tariff and trade pact that usually also includes investment guarantees. ... Finance that studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... â€œTaxesâ€ redirects here. ...

By contrast tax evasion is the general term for efforts by individuals, firms, trusts, and other entities to evade taxes by illegal means. The term tax 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. Some people pay taxes under protest and sue to reclaim the disputed payment: these individuals and groups are 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). For other uses, see Corporation (disambiguation). ... In common law legal systems, a trust is a contractual relationship in which a person or entity (the trustee) has legal title to certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more... In United States tax law enforcement, a tax protester (sometimes spelled protestor) is a person who resists or refuses payment of a tax for which he or she is liable based on a belief that the tax laws are inapplicable or unconstitutional. ... A tax resister resists or refuses payment of a tax because of opposition to the institution collecting the tax, or to some of that institutionâ€™s policies. ...

Tax avoidance

Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to reduce the amount of tax that is payable by means that are within the law. Examples of tax avoidance include: â€œTaxesâ€ redirects here. ...

Country of residence

One way a person or company may lower their taxes due is by changing one's tax residence to a tax haven, such as Monaco or Switzerland, or by becoming a perpetual traveler; however, 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. Legal residence or domicile, is the principle that each legal person (natural or corporate) has a single location of primary residence. ... A tax haven is a place where certain taxes are levied at a low rate or not at all. ... The term perpetual traveler (PT, permanent tourist or prior taxpayer) refers to both a lifestyle and a philosophy. ...

The United States is unlike almost all other countries in that its citizens, and legal permanent residents, are subject to U.S. tax on their worldwide income even if they reside temporarily or permanently outside the USA. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating. According to Forbes magazine some nationals choose to give up their United States citizenship 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) from U.S. tax. The 1995 limit on the amount that can be excluded was US$80,000. Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... This article contrasts tax evasion, tax avoidance and tax mitigation. ... This article or section does not adequately cite its references or sources. ... // Possession of citizenship U.S. citizens have the right to participate in the political system of the United States (with most U.S. states having restrictions for felons, and federal restrictions on naturalized persons), are represented and protected abroad by the United States (through U.S. embassies and consulates), and...

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 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. Double taxation is a situation in which two or more taxes may need to be paid for the same asset, financial transaction and/or income and arises due to overlap between different countries tax laws and jurisdictions. ...

Legal entities

Without changing country of residence (or, if a U.S. citizen, giving up one's citizenship), personal taxation may be legally deferred by creation of a separate legal entity to which one's property is donated. The separate legal entity is often a company, trust, or foundation. 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 may still be applicable. If the legal entity is ever liquidated and the assets transferred back to an individual, then capital gains taxes would apply on all profits. This article does not cite any references or sources. ... A juristic person is a legal fiction through which the law allows a group of natural persons to act as if it were a single composite individual for certain purposes. ... The term company may refer to a separate legal entity, as in English law, or may simply refer to a business, as is the common use in the United States. ... A trust company is normally owned by one of three types of structures; an independent partnership, a bank, or a law firm, each of which specialize in being a trustee of various kinds of trusts, and managing estates. ... A charitable foundation is a legal categorization of nonprofit organizations that either donate funds and support to other organizations, or provide the sole source of funding for their own activities. ... Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations. ... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ...

The company/trust/foundation may also be able to avoid corporate taxation if incorporated in a offshore jurisdiction (see offshore company, offshore trust or offshore foundation). As settlor (creator of the trust), in order 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 or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them. An offshore financial centre (or OFC), although not precisely defined, is usually a low-tax, lightly regulated jurisdiction which specialises in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds. ... An offshore company is a company which does not conduct substantial business in its country of incorporation. ... An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction. ... An offshore foundation is simply a conventional foundation that is formed under the laws of an offshore jurisdiction. ... In law a settlor is a person who settles property on express trust for the benefit of beneficiaries. ... The word trustee is a legal term that refers to a holder of property on behalf of a beneficiary. ... In trust law, a beneficiary or cestui que use, is the person or persons who are entitled to the benefit of any trust arrangement. ...

Tax Evasion

By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade 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 declaring less income, profits or gains than actually earned; or overstating deductions). For other uses, see Corporation (disambiguation). ... In common law legal systems, a trust is a contractual relationship in which a person or entity (the trustee) has legal title to certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more... â€œTaxesâ€ redirects here. ...

Illegal income and tax evasion

In the United States, persons subject to the Internal Revenue Code 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^[3]), but they often do not do so, because doing so could serve as an admission of guilt. Suspected lawbreakers, most famously Al Capone, have therefore been charged with tax evasion when there is insufficient evidence to try them for their non-tax related crimes. 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. 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, who had earned more than $2 million cash for his espionage, 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. The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) 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... Holding Ill-gotten gains constitute taxable income, even if they must be repaid. ... This article is about the practice of confession in the Modern confessional in the Church of the Holy Name, Dunedin, New Zealand. ... â€œCaponeâ€ redirects here. ... Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source and destination of the money in question. ... Aldrich Ames Aldrich Hazen Ames (born May 26, 1941) is a former Central Intelligence Agency counterintelligence officer and analyst, who, in 1994, was convicted of spying for the Soviet Union. ... Spy and Secret agent redirect here. ...

Economics of Tax Evasion

In 1968, Nobel laureate economist Gary Becker first theorized the economics of tax evasion. He considered evasion of income tax which is the main source of tax revenue in the developed countries. (detailes and citation to be provided)

Evasion of Customs Duty

Customs duties are an important source of revenue in the developing countries. The importers purport to evade customs duty by (i) under-invoicing and (ii) misdeclaration. of quantities and product-description. (details and citation to be provided)

Smuggling

Smuggling is importation 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. (citation to be provided) This article does not cite any references or sources. ...

Evasion of Value Added Duty (VAT)

During the latter half of the twentieth century, Value Added Tax (VAT) has emerged as a modern form of consumption tax through the world. Producers who collect VAT from the consumers evade tax by under-reporting the amount of sales. (citation to be provided) Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation Value added tax (VAT), or goods and services tax (GST), is... A consumption tax is a tax on the purchase of a good or service. ...

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 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, tax farming and institution of Pre-Shipment Inspection (PSI) agencies. (citation to be provided)

Corruption by tax officials

Corrupt tax officials cooperate tax payers in evading taxes. When the detect an instance of evasion, they refrain from reporting for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax administration in a huge number of under-developed countries. (citation to be provided) Bribery is the practice of offering a professional money or other favours in order to circumvent ethics in a variety of professions. ...

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 to be provided)

Level of evasion and Punishment

Tax evasion is a crime in almost all countries and subjects the guilty party to fines and/or imprisonment - in China the punishment is death. 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 degree of punishment, the higher the level of evaded amount. FINE was created in 1998 and is an informal association of the four main Fair Trade networks: F Fairtrade Labelling Organizations International (FLO) I International Fair Trade Association (IFAT) N Network of European Worldshops (NEWS!) and E European Fair Trade Association (EFTA) // The aim of FINE is to enable these... A prison is a place in which people are confined and deprived of a range of liberties. ...

Privatization of Tax Enforcement

Some governments have resorted to privatization of tax enforcement in order to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. (citation to be provided) This article does not adequately cite its references or sources. ...

Tax Farming

Tax Farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. (to be detailed. citation to be provided)

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. (to be detailed. citation to be provided)

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 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.^[4] 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 that is worth far more than its purchase price. In the first case, the business sells the property and underreports its gain. The second consults with a tax advisor and discovers that it can structure the sale as a 1031 exchange (like kind exchange) for other property that it can use. In the first instance, tax is legally due, and the conduct is criminal. In the second instance no tax is due, because legally no sale took place, and the conduct is both lawful and aboveboard. It has been suggested that this article or section be merged with Internal Revenue Code section 1031. ...

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.

Illustrations of the distinction between tax evasion and tax avoidance can be found in the movies:

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.^[5] 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.^[6] The use of the terminology avoidance/mitigation to express this distinction was an innovation in 1986: IRC v Challenge.^[7]

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,^[8] 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.^[9] In 1900 the distinction was noted as two meanings of the word “evade”: Bullivant v AG.^[10] The technical use of the words avoidance/evasion in the modern sense originated in the USA where it was well established by the 1920s.^[11] It can be traced to Oliver Wendell Holmes in Bullen v Wisconsin.^[12] 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^[13]) 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.

Among tax practitioners, while of course there is no unanimity, the view most commonly held is that tax avoidance is not at all immoral^{[citation needed]}. This may be because tax practitioners are more aware than others how complex and sometimes unbalanced tax laws can be in certain situations, and they see avoidance in that context.

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. Foreign Accrual Property Income, usually known as FAPI, is a tax term meaning the government will tax foreign earnings, regardless of tax treaties, if it deems the source of earning to only be investment activity. It is a law applied in countries such as Canada. ...

In the United States, the Internal Revenue Service distinguishes some schemes as "abusive" and therefore illegal. Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series â€œIRSâ€ redirects here. ...

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.

Tax protesters 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. However, many protesters are posing the same arguments that the Federal courts have rejected time and time again. A tax protester is an individual who denies the obligation to pay a tax (for which the government has determined that person is liable) based on a belief that the government is acting outside of its legal authority when imposing such taxes. ... Tax protester arguments are a number of theories that deny that a person has a legal obligation to pay a tax for which the government has determined that person is liable. ... A tax resister resists or refuses payment of a tax because of opposition to the institution collecting the tax, or to some of that institutionâ€™s policies. ...

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,^[14] 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." The mushroom cloud of the atomic bombing of Nagasaki, Japan, in 1945 lifted nuclear fallout some 18 km (60,000 feet) above the epicenter. ... The Geneva Conventions consist of treaties formulated in Geneva, Switzerland that set the standards for international law for humanitarian concerns. ... This article does not cite any references or sources. ... The Statute of Grand Duchy of Lithuania A statute is a formal, written law of a country or state, written and enacted by its legislative authority, perhaps to then be ratified by the highest executive in the government, and finally published. ...

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:

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

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^[16]) 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. The mens rea is the Latin term for guilty mind used in the criminal law. ... My freinds are playing battlefeild 2 and they are all yelling about screen looking except for chris but he sucks balls. Category: ... Actus reus is the action (or inaction, in the case of criminal negligence and similar crimes which are sometimes called acts of omission) which, in combination with the mens rea (guilty mind), produces criminal liability in common law based criminal law jurisdictions such as the United States, United Kingdom. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series â€œIRSâ€ redirects here. ...

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."^[17] Under the Cheek Doctrine (Cheek v. United States^[18]), 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."^[19] 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. Holding --- Court membership Case opinions Laws applied --- Cheek v. ...

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."

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.^[21] Daniel B. Evans, a tax lawyer who has written about tax protester arguments, has stated that:

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.^[23] 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%.^[24] 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%.^[25] 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.^[26]

For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison.^[27] In general, there is a six-year statute of limitations for with respect to Federal tax crimes.^[28]

Tax shelters

Tax shelters are investments that allow, or 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. Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities including state and federal governments. ...

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. The Robert F. Kennedy Department of Justice Building in Washington, D.C. â€œJustice Departmentâ€ redirects here. ...

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. President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) 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... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) 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... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) 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...

A tax haven is a place where certain taxes are levied at a low rate or not at all. ...

Quotes

"Only the little people pay taxes," said Leona Helmsley, American property tycoon. Image File history File links Edit-copy_purple. ... Wikiquote is a sister project of Wikipedia, using the same MediaWiki software. ... Leona Helmsley (July 4, 1920 â€“ August 20, 2007) was a billionaire New York City hotel operator and real estate investor. ...

Lord Clyde said, in Ayrshire Pullman Motor Services and Ritchie v. IRC (1929) 14 TC 754:

Lord Tomlin, in the UK House of Lords case, IRC v. Duke of Westminster (1936) 19 TC 490, [1936] AC 1: This article is about the British House of Lords. ...

In the UK in the 1930s, this quote was put on the back of business cards of those marketing tax avoidance schemes, to the consternation of the Inland Revenue; see Philip Baker QC [2].

Also in the US, the influential Judge Learned Hand once famously remarked judicially: Billings Learned Hand (January 27, 1872 â€“ August 18, 1961) â€” usually called simply Learned Hand â€” was a famed American judge and an avid supporter of free speech, though he is most remembered for applying economic reasoning to American tort law. ...

Contrast more recent judicial comments. Lord Templeman said in IRC v. Fitzwilliam (1993) 67 TC at 756 (UK):

Politicians and Revenue administrators will generally express disapproval of avoidance. Denis Healey, former UK Chancellor of the Exchequer said: Denis Winston Healey, Baron Healey, CH, MBE, PC (born 30 August 1917), is a British Labour politician. ... The Chancellor of the Exchequer is the title held by the British Cabinet minister responsible for all economic and financial matters. ...

This is often quoted but the meaning is not entirely clear. Perhaps it just means that avoidance is legal and evasion is illegal. If so, it is trite albeit neatly expressed. It also may be intended to suggest that there is no moral difference.

Regardless of the views of contemporary judges and administrators, taxpayers still tend to approve of tax avoidance. For instance, Kerry Packer, an Australian media tycoon said Kerry Francis Bullmore Packer AC (17 December 1937 â€“ 26 December 2005) was an Australian publishing, media and gaming tycoon. ...

And the subtleness of the distinction between evasion and avoidance was expressed by Will Rogers: William Penn Adair Will Rogers (November 4, 1879 â€“ August 15, 1935) was an American comedian, humorist, social commentator, vaudeville performer, and actor. ...

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