tax avoidance
the legal way to avoid paying taxes
Tax
avoidance is to avoid or delay
payment of certain taxes, using legal mechanisms and
strategies for doing so. When legislators draft a law, they
try to do it as accurately as possible. Nevertheless, it is
not uncommon for ambiguities to be produced in legal texts,
which give rise to different interpretations. The law may
conflict with other existing rules, or new situations that
were not planned or regulated may arise. The latter is what
is known as a legal loophole.
On the other hand, the tax rules of different countries around the world are not uniform at all. While in tax havens taxes are practically nonexistent (at least for non-residents), some northern states of Europe apply close to 50% taxes to their citizens and businesses. The same applies to the economic and commercial legislation. If you decide to incorporate a company, buy a property or make an investment abroad, you will find very different procedures and costs depending on the country you choose to do so. Making the most of these differences in policies and taking advantage of existing loopholes, in many cases it is possible to substantially reduce or even avoid legally paying taxes.
Tax avoidance can be practiced by anyone who has a proper legal and tax advice. But they are the multinationals and financial institutions that generally benefit most from it, because they have at their disposal the international structure and resources needed to implement real strategies for tax engineering.
As mentioned before, tax avoidance is not a crime, but it is easy to understand that it is not well regarded by the tax authorities. In any case, because of tax avoidance they may lose an important part of their revenue. It is therefore not surprising that they try to fight it with every means at their disposal.
The main actions are intended to eliminate possible loopholes that encourage circumvention. This is achieved by modifying the original law or supplementing it with administrative regulations. Some countries go further and have established general anti-avoidance rules. They are known under the GAAR acronym. They are applied by countries such as Canada, Australia or New Zealand. Other states, despite not having a general rule, have enacted numerous anti-avoidance or anti-tax haven laws.
These measures are generally very criticized by the economic and financial community. This is because in the effort to curb tax avoidance and tax evasion, very often business interests are damaged and freedom of investment and free movement of capital are threatened.
For example, if you are a shareholder of a corporation located in a tax haven, in many countries the benefits of this company would be considered personal income. This is true even if you decided not to pay dividends and therefore not repatriate these profits to your country of origin. You would then be forced to report them on your personal tax return and they would tax at a greater rate than if they were subject to corporate tax. That is, you would have to pay more taxes on your profits abroad than if these had occurred in your own country, which is clearly discriminatory. Even from a legal point of view it is a controversial measure because it does not take into account the fact that a corporation is a legal entity separate from its owner or shareholder.
The effectiveness of such measures is also questionable to say the least. Given that tax havens have special laws that do not require the revealing of the identity of the beneficial owners and shareholders of the companies, they often simply choose to conceal their operations.
On the other hand, authorities defend the legitimacy of the measures against tax avoidance, arguing that they are necessary to prevent abuse. For instance, they understand that a chained series of actions, though all legitimate, may constitute a crime if they are of “artificial” nature and if their sole purpose is to avoid paying taxes. They therefore try to guess what is behind the economic transactions and act on suspicion. This is a thorny path owing to the great difficulty in finding a balance between tax control and free enterprise.
Finally it should be noted that tax avoidance should not be mistaken with tax evasion, which itself is a crime. While in theory they are very different performances, in practice the line that separates one from the other is often not clearly defined and not surprisingly, tax evasion and avoidance end up intermingling.