difference between tax planning and tax evasion pdf

Difference between tax planning and tax evasion pdf

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Questions of Tax Reformation

Compare Tax Planning, Tax Avoidance and Tax Evasion


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Emanuel Mchani. Download PDF. A short summary of this paper. Tax avoidance simply involves structuring your affairs legally so that you are paying less tax than you might otherwise pay.

Avoiding tax could involve using loopholes, which are inadvertent errors in the Income Tax Act, but more commonly will involve using provisions of the law to your advantage. Tax evasion, on the other hand, is an attempt to reduce your taxes owing or increase refundable credits by illegal means, such as making false statements about your income or deductions, or destroying records.

It is the avoidance of tax payment without the avoidance of tax liability. Unlike tax avoidance, tax evasion is a direct violation of a tax provision and is illegal. One can also define tax avoidance as the manipulation of one's affairs within the law in order to reduce one's liability, whereas tax evasion is the illegal manipulation of one's affairs so as to reduce tax liability or to eliminate one's tax liability altogether.

Tax evasion occurs when a taxpayer uses fraudulent methods or deceptive behavior to hide the actual tax liability. Tax evasion usually involves the following: i the failure by a taxable person to notify the tax authorities of his presence or activities if they are taxable activities; ii the failure to report the full amount of taxable income; iii the deduction claims for expenses that have not been incurred, or which exceed the amounts that have been incurred but not for the purposes stated; iv falsely claiming relief s that are not due; v the failure to pay over to the tax authorities the tax properly due; vi the departure from a country leaving taxes unpaid with no intention of paying them; vii the failure to report items or sources of taxable income, profits or gains, where there is an obligation to declare.

Tax avoidance, however, is the use of legal methods allowed by tax law to minimize a tax liability. It generally involves planning an intended transaction to obtain a specific tax treatment.

Most importantly, tax avoidance is based on disclosure of relevant facts concerning the tax treatment of a transaction. What about Tax Planning? It is the arranging of one's affairs to take advantage of the obvious and often intended effects of tax rules in order to maximize one's after-tax returns.

There is a distinction between acceptable tax avoidance and unacceptable taxavoidance. Acceptable tax avoidance or "tax planning" reduces the tax liability through the movement or non-movement of person, transactions or funds, or other activities that are intended by the legislation. It refers to tax mitigation by the use of tax preferences given under the law or by means that the tax law did not intend to tax.

Example will include incentives, allowances and deductions. Thus, tax avoidance refers to transactions that are: a designed to avoid or reduce liability to tax; b are brought into existence solely for tax avoidance and not to achieve a commercial purpose and c are outside the legislative intent. Transfer Pricing -see: s. Improper transfer pricing methods lead to unjustified profit transfers. For example, artificially deflated or inflated prices on transactions would reduce or increase the taxable profits of associated companies.

Transfer pricing issues affect situations when goods and services are provided, knowingly or otherwise, on a non-arm's length basis by related entities. An arm's-length transaction is one in which all parties have bargained in good faith and for their individual benefits, not for the benefit of the transaction group.

The arm's length principle reflects the levels of income under prevailing market forces that each associated company within a multinational organization would earn for the value it adds to the transaction or relationship. Income Splitting. This entails the splitting of income between more than one taxpayer so as to reduce the marginal tax rate. If you can manage to split one figure into several the applicable marginal tax rate will be lower and therefore little taxable income.

If you earn Tshs. You can avoid tax by splitting the income into 4 individuals if you can. If you manage that, each will have Tshs. Thin Capitalization. The term "Thin Capitalization" is commonly used to describe "hidden equity capitalization" through excessive loans. It is the artificial use of interestbearing debt instead of equity by shareholders with the sole or primary motive to benefit from its tax advantages.

The loan may be provided on a market rate of interest but the size of the loan cannot be justified on bona fide business considerations. Such excessive interest payments constitute hidden distributions that should be properly treated as dividend on equality capital.

Asset Shifting. This is achieved by shifting the asset producing income to another person or entity that is taxed preferentially, i. Company vs. Sheltering of Income This is done by receiving incomes in tax havens Jurisdiction. These are jurisdictions with lower tax rates or no tax charge at all. Income CapitalizationThis means the conversion of taxable income into capital, e.

Anti-Avoidance Provisions: i Sniper Approach -the enactment of specific provision that identify with precision the type of transactions to be dealt with and prescribe against the tax consequences of such treatment.

See: ss. Judicial Anti-Avoidance DoctrinesCourts have stated certain principles intended to curb tax avoidance. The Duke had a large staff and paid them wages, which were not deductible in computing his income. The law was that all charges on income -annuities and the likewere deductible in computing one's taxable income.

Somebody came up with the wizard wheeze of the Duke agreeing to pay annuities to his staff on weekly basis, while they went on working for him at a reduced wage, although there was no obligation to take a reduction in wages.

The question was whether the annuities were really annuities or whether they were really wages. The court held that they must be regarded as covenanted payments deductible and not as wages non-deductible in law, and the taxpayer was entitled to deduct them in computing his taxable income. The Court favoured the legal form of the covenanted payments, although they were in substance the economic equivalent of wages.

The court followed a literal interpretation of the fiscal statute to the effect that a tax cannot be levied by inference or analogy but only by the plain words of a statute as applied to the facts and circumstances. In a Sham Transaction, they give effect to a transaction, which they do not carry out, or do not intend to carry out. The transactions are said to have happened that have not really happened, or are a cover up for another transaction. In short, they do not crate the legal rights and obligations, which they give the appearance of creating, since the relationships that are alleged to exist do not exist.

A sham transaction hides the economic reality of a transaction that exists only in form. In Snook vs. London and West Riding Investments Ltd.

Bull [] I QB For example, an entity may be legally set up as a partnership but it is not intended to operate as a partnership. Similarly, an employee may be deemed as an independent contractor. In a sale and lease back transaction; the transfer of the related rights and obligations of ownership may not accompany the sale of assets. A "letter-box company" in a tax haven for tax avoidance purposes may be regarded as sham.

The investment income was taxed at a lower capital gains rate and the interest payments were fully deductible for tax purposes. The net result after tax, therefore, provided a tax benefit. The US Supreme Court treated the transaction as a sham and disallowed the interest paid on the loan. It held that "there was nothing of substance to be realized by the taxpayer from his transacting beyond a tax deduction"Where the court holds that a transaction is a sham, they normally apply the tax rules based on the true economic position.

The form of the transaction is disregarded when compared with the underlying substance. The doctrine has also been involved to decide the price allocations in composite transaction. In Vestey vs. ITC [] 40 TC , the taxpayer had agreed to sell his shares at a consideration payable over yearly installment, and treated the entire price as a capital receipt. The court held that a proportion should be treated as an interest payment. The label that the parties chose to attach to their payments was not conclusive of their character for tax purposes.

In a step transaction, the intermediate steps in a chain of pre-ordained, even if bona fide, transactions may be disregarded and several related transactions treated as a single composition transaction. Alternatively the transaction may be broken into its distinct steps to determine their acceptance for tax purposes. The step transaction doctrine maintains that "purely formal distinctions cannot obscure the substance of a transaction.

Helvering , US, the taxpayer attempted to avoid dividend tax through a tax-free-corporate reorganization. She owned a company, called United Mortgage, which held shares of Monitor Securities.

A direct sale of these shares would have resulted in a capital gains tax in United Mortgage and an income tax on the dividend when the proceeds were subsequently paid to the taxpayer. She was prepared to pay the capital gains tax but not the income tax. United Mortgage set up a shell company, called Averill, and transferred to it all its shares in Monitor Securities in exchange for Averill shares. It then distributed Averill shares to the taxpayer under a tax-free corporate spin-off.

She subsequently liquidated Averill and the liquidation proceeded i. In WT Ramsay Ltd. To offset this gain, he entered into a series of separate share and loss transactions, which generated both a non-taxable gain and a fully allowable loss. He then sold the first loan note at a profit that was not taxable. The second loan note was repaid a week later. The shares in the subsidiary were subsequently sold to a third party at a loss due to the loan transaction.

He claimed an offset of the capital gain on the firm against the capital loss. In Ramsay case, each step in the circular arrangement was legal in its own right. The transactions and the documents that were executed with legal effect were not a sham, and money passed between the parties.

Questions of Tax Reformation

Set up your overseas company online. If you own a business, you generally have the right to organize it in a way that ensures you pay no more taxes than necessary. This strategy, known as tax avoidance, involves using legal means to reduce taxes. It is not the same thing as tax evasion , which is the practice of violating your country's laws and paying less than the minimum amount of taxes. Rather, tax avoidance is the practice of setting up your business in a way that ensures it will be taxed fairly by your country's government. The objective of tax evasion is quite obvious. Taxpayers are often attracted to these illegitimate means of tax evasion as they promise large savings on taxes and require less effort and planning than legitimate tax avoidance techniques.

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Abstract. The distinction between tax avoidance and tax evasion has been well established in the Australian taxation system. However, for some time the.

Compare Tax Planning, Tax Avoidance and Tax Evasion

Business Source Premier. Mehan, C.. Department of the Treasury, Aug.

By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of 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 underdeclaring income, profits or gains; or overstating deductions. Tax evasion, on the other hand, is a crime in almost all countries and subjects the guilty party to fines or even imprisonment.

Tax Planning , Tax Avoidance and Tax Evasion

No one likes to pay taxes.


Example Investments Under Section 80C i. Under Section 80CCD i.

Tax avoidance and tax evasion are two very different things with different definitions and different consequences. Claiming allowed tax deductions and tax credits are common tactics, as is investing in tax-advantaged accounts such as IRAs and k s. Putting money in a k or deducting a charitable donation are perfectly legal methods of lowering a tax bill tax avoidance , as long as you follow the rules. Concealing assets, income or information to dodge liability typically constitutes tax evasion. Prison time is a real possibility for willful tax evasion, but civil penalties may be more likely, according to Miller. Still, civil penalties add up — they can easily double the tax originally owed, he says. Some examples include:.

The terms tax planning, avoidance and evasion are closely connected and sometimes used interchangeably, though in legal parlance, these terms are distinct in their meaning as well as their effects.

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  • Madelaine B. 16.04.2021 at 14:41

    is to discuss the components which make tax evasion, the tent to which the tax practitioner can participate in tax planning. With an understanding of the above, one has the compromises the differences and publishes an explanation.

  • Turnpectpecve 17.04.2021 at 16:13

    Tax evasion is a crime for which the assesse could be punished under the law. Tax Planning: Tax planning is process of analyzing one's financial situation in the most efficient manner. Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability.

  • Marsilius B. 20.04.2021 at 12:53

    Tax planning and tax evasion are both methods of reducing the amount of taxes paid. The essential difference between tax planning and tax.


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