In the wake of the Panama papers revelations, the distinction between tax planning, tax avoidance, aggressive tax avoidance and tax evasion seems to have been lost between the lines. The basic difference is that avoidance is legal and evasion is not. But it’s not quite as simple as that.
There are many legitimate ways in which tax can be saved and that are actively promoted by governments. Tax-free investments, for example, donations to charity, or paying into a pension scheme. Through tax planning, a taxpayer exercises an option clearly allowed by law and does not exploit unintended loopholes. This respects both the “letter” and the “spirit” of the law.
Tax avoidance seeks to minimise a tax bill in a way that respects the letter of the law, but not necessarily the spirit of the law. To do so it takes advantage of unintended loopholes in tax legislation. This can, however, be taken too far and lead to prosecutions to recoup the taxes that have been avoided.
The loopholes that are exploited by tax avoidance may be in your home country’s tax law alone, but can also seek to exploit gaps that exist between domestic tax law and the law of other countries. In an increasingly globalised world businesses and individuals operate across many countries, all with slightly different tax rules. This makes it easier to structure their tax affairs to reduce taxable profits or hide their wealth altogether.
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