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Last updated: 24 Jun 2020

Tax evasion, Tax avoidance and Tax planning are common terms when it comes to taxpayers’ manners for tax reduction. In this article, BBCIncorp will clarify meaning, features as well as differences between tax evasion, tax avoidance and tax planning!

Differences between tax evasion, tax avoidance and tax planning

1. Tax evasion

Tax evasion is any illegal method or unlawful attempt to reduce tax liability of taxpayers. It is highly attached to techniques or illicit practices which results in showing fewer profits to minimize the individual or company’s tax burden.

Examples of tax evasion usually are the followings:

  • Making false statements and information
  • Inflating deductions without legal proof
  • Hiding related documents to prove the actually earned business profits like records of transactions or report of cash income
  • Concealing or transferring assets illegally
  • Magnifying tax credit
  • Claiming excessive expenditure

Tax evasion can be deemed as a form of tax fraud which indicates illegitimate and deliberate actions for not paying tax. Due to the fact that employing such unfair means is fraudulent, any taxpayers regardless of individual or business committing tax evasion behaviors would be prosecuted for offence and must be subject to stringent punishments of a heavy fine or imprisonment.

2. Tax avoidance

Some people can be getting in a muddle over the meaning of tax evasion and tax avoidance. Those two terms sometimes are used interchangeably, but in fact they are strikingly different. A highlight to note down is that tax avoidance is totally legal, whilst tax evasion is not.

Tax avoidance is the act of minimizing tax liability within the limits of the law or without breaking the law. In other words, taxpayers can use legitimate methods to reduce the amount of tax payable in association with their financial activities. Such methods to allow taxpayers to avoid paying tax to the government may include the followings:

  • Using tax deductions for decreasing business expenses and business tax bill
  • Delaying the payment of tax until a later date with an appropriate tax deferral plan
  • Taking advantage of tax credits for legal purposes like business purchases, benefiting the company’s employees for sick leave and family leave
  • Sheltering revenue from tax liability through the establishment of employee retirement plans.

It should also be noted that seeking reductions of tax obligations by tax avoidance is 100% legal, but it must be within four corners of the tax law framework. Employing practices of tax avoidance if inappropriate in some cases may lead the taxpayer to step beyond the line to tax evasion, hence violation of the jurisdiction regulations.

Thus, it is advisable that both individuals and corporations should gain a good hold of relevant knowledge before using any tax strategies for minimizing taxes. Also recommended for companies is that they had better engage financial experts for legal advice on how tax avoidance can be utilized in the most efficient manner.

3. Tax planning

Tax planning, like tax avoidance, is totally legal.

Tax planning is the process of elaborating the company’s financial related matters to maximize the tax benefits under eligible provisions of the tax framework. The planning assists taxpayers to lessen their tax liability through a variety of means, namely deductions, credits, rebates and exemptions provided under the Income Tax Act or the corresponding tax laws.  

To give an example, one may look for incentives from tax planning by saving via retirement plans. They can also make investments in fixed deposit, mutual funds, provident funds or other similar accounts for the reduction of tax liability.  

A key feature of tax planning is its relation to the future. An efficient tax planner of the company with a good tax planning in hand may facilitate the tax minimization in either short term or long term. To bring the best possible outcome for the tax perspective, one’s tax planning should bring below some essential elements into considerations:

  • Choice of business entity
  • Timing of income
  • Size of business
  • Planning for expenditures and purchases
  • The owner’s residency status
  • Capital structure

Among three methods, tax planning is considered to be the most upright approach with respect to complying with the provisions of the tax laws.

4. Differences between tax evasion, tax avoidance and tax planning

Businesses in search of saving tax often come up with those couples of terms. Each term has been clarified quite obviously in our above-mentioned sections. Below is the table summarizing key differences between tax evasion, tax avoidance and tax planning:

 Tax AvoidanceTax EvasionTax Planning
Purpose

Minimizing tax

Not paying taxEnsuring tax efficiency
LegalityLegalIllegalLegal
Nature

Performed by availing loopholes in the law, but complying with the law provisions.

Performed by employing illegitimate means for nonpayment of tax.Performed by using the existing law provisions to reduce tax liability.
How it is exercised

Tax avoidance is characterized as tax planning, but it is done before the tax liability takes place.

It generally emerges in short-term benefits.

Tax evasion acts as illegitimate practice for tax payment, and it is done after the tax liability has arisen.

Tax planning should be done before tax liability arises.

It associates with the future and often serves for either long term or short term benefits of every assessee.

ConsequencesSubject to penalty or imprisonment if it violates the tax rules.Subject to penalty or imprisonment.Not subject to penalty or imprisonment.

 

5. Special considerations for choosing the right tax reduction manner

While the nature of tax planning is quite obvious, there sometimes seems to be some confusion over the difference between tax evasion and tax avoidance, hence making wrongful decisions. It is well advised that any taxpayers, whether individuals or businesses, should be fully aware of the tax practices being used.

In this regard, two essential tips that taxpayers need to take into account are as below:

  • Acquire knowledge of tax laws and methods for reduction of tax liability in the most efficient way. Keep in mind, differentiating such methods on the basis of its purpose, legality and features is very crucial as this would help you stay out of trouble and penalty.
  • Seek advice from a professional tax expert or service firm. This is also a good idea as the person with his/her area of expertise will always know how to apply the tax law to decrease your tax burden and maximize your benefits. Furthermore, tax regulations are often subject to changes, whether your tax-saving instrument is correct or not should be put under specific advice upon circumstances by tax experts as well.

In a nutshell, there are three instruments that taxpayers usually opt for minimizing of their tax liability, including Tax planning, Tax avoidance and Tax evasion. Each method is attached to a different manner for tax reduction. Note, however, that tax avoidance and tax planning are legal practices. By contrast, tax evasion is not and it is deemed a means of fraud in most cases.

Feel free to chat with us if you need to seek more advice for your tax strategies! 

In respect to practices for tax reduction, opening an offshore company may be one of the most popular vehicles for start-ups and entrepreneurs to opt for by dint of its great benefits. You can find out more useful information about this practice by contacting us or visit Offshore Company Formation now! 


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