The effects of tax avoidance and tax planning on the society has been a controversial issue for a long time yet governments the world over still have difficulty addressing it. It is believed that all these started from the beginning when business agreements were written by the government or associates of government to favour their family, friends or associates that are in business. Unfortunately, tax planning schemes are a legally accepted business practices for which tax professionals are paid huge sums of money to offer tax planning advisory services for both personal and corporate decision making.

According to Investopedia, tax planning is the analysis of a financial situation or plan from a tax perspective. It is an exercise undertaken to minimize tax liability through the best use of all available resources, deductions, exclusions, exemptions, etc. to reduce income and/or capital gains (businessdirectory.com). Tax planning therefore encompasses many different considerations, including the timing of income, purchases and other expenditures, the selection of investments and type of retirement plans etc. However, tax fraud or evasion unlike tax avoidance is not tax planning scheme and hence considered illegal in the tax professional.

Firms, both domestic and international employ numerous tax planning strategies to reduce their tax burden. An exhaustive review is impossible because known strategies are numerous and many strategies are likely unknown to tax analysts. Some forms of tax planning include (a) reclassifying business income as non-business income (b) using transfer pricing to shift income from high tax to low tax jurisdictions (c) employing passive investment companies (d) exploiting tax credits, exemptions and/or concessions in Tax Laws (e) treaty shopping (f) use of hybrids etc.

Judge Learned Hand in the case of Commissioner v Newman in 1947 stated:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere can’t”.

Indeed, tax planning has invariably become an integral part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for business success as it has gained prominence in today’s business planning strategies, all because Tax Laws have different provisions relating to entities based on location, type of activity or time period, thus invariably, every difference offers a planning opportunity to a taxpayer.

Then the question that arises is, does tax planning comes with any benefits?

Proper tax planning is essential in both domestic and international business to reduce the distortions that arises for instance due to the lack of harmonization in domestic tax systems. Without tax planning, entities are likely to suffer from excess tax payments and additional tax compliance costs. Among the reasons argued for tax planning are:

(a) Offers the opportunity to lower the amount of taxable income i.e. where a taxpayer’s financial and tax planning strategies are targeted at structuring expenditures to fit into the category of allowable expenses.

(b) Serves as a catalyst to reduce the tax rate at which you are taxed i.e. siting business operations at locations or business to take advantage of the little or no tax rate prevailing in that jurisdictions e.g. tax havens.

(c) It ensures you get all the credits available to you i.e. taking advantage of the tax credits, exemptions and/or concessions available in a tax jurisdiction e.g. the stability agreement provision for a holder of a mining lease in Ghana.

(d) It allows a cashflow forecast to be more effective while minimizing tax liability. A company looking to embark on massive capital or productive investment or re-investment will plan financial transactions with taxes in mind so to avoid making impulsive maneuvers. With a resultant good cashflow, entities positioned to embark on more capital and productive investments. Effective tax and financial planning maximize shareholders’ wealth, and improves cashflow for capital and productive re-investment among others.

(e) For the government, the granting of tax reliefs, exemptions and/or concessions is targeted at increasing private sector productivity, create employment and attract investors and improve cross-border trading.

Considering these benefits, won’t you recommend for more tax planning practices? Just consider these.

Governments efforts to improve national economy has always been limited due to inadequate tax revenue, which forms a larger percentage of government revenue. This could be attributed to the several tax planning schemes as well as tax evasions. In 2005, the average tax revenue to GDP ratio in the developed countries was approximately 35%. In the developing countries, it was equal to 15% and in the poorest of these countries, the group of low income countries tax revenue was just 12% of GDP and tax planning via tax avoidance are widely believed to be important factors limiting revenue mobilization.

The ActionAid and Tax Justice Network-Africa (TJN-A) in its West African Giveaway report published in August 2005 indicated that West African countries are losing an estimated US$9.6 billion of revenue each year by granting tax incentives to foreign companies and that three countries – Ghana, Nigeria and Senegal – are losing an estimated $5.8 billion a year through the granting of corporate tax incentives with Ghana’s portion being around $2.27.

Tax planning approaches like tax avoidance affect the extent to which the government can provide basic need of the population i.e. it results in inadequate supply of basic amenities such as poor infrastructure, poor educational and health systems, inadequate water and power supply as well as poor road networks. This could be one of the reasons why deficit budget financing has become the order of the day in most developing countries.

Income inequality is another adverse effect resulting from increasing tax planning. Taxation has an objective to redistribute income but the accumulation of wealth through tax avoidance schemes for instance has further widened the gap between the low-income earners and the high-income earners.

During an international conference jointly organised by OXFAM International and the International Tax Justice Network, Africa in Accra in February 2014 for instance, the Deputy Campaign Manager of OXFAM, Mr. Stephen Hale, indicated among other things that many developing countries faced challenges in their efforts at mobilizing domestic resources due to factors such as regressive tax regimes, wide range of corporate tax incentives etc.

But the question remains that, if the major source of revenue to every government is tax revenue whiles government revenue and capital expenditures are highly dependent on these tax revenue, can we then conclude that Governments efforts to reduce budget deficits and over reliance on development partners to finance national budget is a dead on arrival discussion, as most of the tax revenue loss is attributable to tax planning schemes such as tax avoidance, tax incentives and poor tax education and awareness?

Probably tax planning is not that beneficial to government as we are made to believe but instead a wolf in a sheep skin which is gradually ripping off government of billions of dollars in tax revenue to meet its huge public expenditures and to make reasonable economic policy. But who is to be blamed, the taxpayer, the government or both? I leave you to judge!

Tax planning has indeed come to stay, however, I suggest that (a) accountability on the part of governments and effective use of tax revenue will instill faith in the government thereby encouraging payment of taxes, (b) anti-avoidance provision should be of general application or refer to specific tax havens or tax avoidance devices (c) the concept of ethical and responsible investing should not be limited to companies products/services but also to their impact on society as well as (d) unification of tax rates and (e)The Organisation for Economic Co-operation and Development (OECD) and the United Nations which are famous in their models for international taxation should consider paying more attention to the increasing domestic and international tax planning schemes.

Implementing “flat tax” on Income Rate
One tax reform issue that requires addressing is the amount of revenue that needs to be raised by the federal tax system. When there is a disproportion between revenue and spending, debts and federal deficits will increase and reach unsustainable limits. Policy makers need to assess tax policies and come up with ways of alleviating fiscal pressures. Implement a flat tax on income at a rate of 18% for all Americans. Having a flat tax for all Americans will ensure that all citizens are taxed equally and there is no bias. However, a rate of 18% is too high for the citizens taking into account the citizens have different incomes. Implementing this policy will not be beneficial to the government, as it would benefit high-income earners only.

The working class in America pays too much in taxes compared to cooperation’s and millionaires. Most big and profitable corporations pay little on taxes as compared to the middle class citizens. If corporations and the rich pay their fair share, the nation will afford to cut taxes for most of its middle and common citizens. This can also be boosted by cutting on wasteful spending on weapons, military and war. On the contrary, taxing more on high-income earners will result to the government having more money to waste. It also acts as a deterrent for business and individuals to make money. This might lead to a reduction in investment by investors. In the past, high taxation slowed down the economy and resulted in stagnation. Cutting taxes on businesses promoted the revenue. However, increasing taxes led to a reduction in business spending and investments as they tried to cut their tax expenditure resulting to a decrease in revenue for the government.

Implementing Democratic Party’s Reform
There is an unbalanced proportion of Individual wealth in the US. Aggressive steps needs to be taken for a restoration of fair income distribution. The middle class and the poor pay a lot in terms of federal tax which is due to the unfairness of state taxes. System wide tax reform should be implemented to simplify the tax system. A tax policy should be implemented to eliminate loopholes. Democrats hold the idea that taxes should be increased for the upper class and reduced for the middle class. The tax code and system needs an overhaul. The United States needs a code that creates wealth for people and rewards work and not a code, which generates wealth for those who have it. 200000 dollars should be set at the income level where Americans should be taxed more heavily. This will pave way for cutting taxes for the rest of the citizens. Increasing taxes for wealthy Americans will lead to a 98% cut in taxes where most families will be able to meet their daily economic challenges.

GPO Blueprint Tax Reform Proposal
A proposal by the house GOP blueprint proposed that the corporate income tax should be replaced with a Destination Based Cash Flow Tax (DBCFT). This would help the cooperate income tax and the US worldwide tax system eliminate the distortions it caused. The worldwide system will be replaced with a territorial tax system where companies will be taxed based on their locations of profits and not according to their corporate residence. Companies in the US that earn profits overseas would not be taxed again on their profits when they are brought back to the United States. This tax system would also allow a free flow of capital back to the US by eliminating the lock out effect. This would encourage companies to expand and invest operations throughout the world.

Changing Tax Rates
The plan is to cut taxes at all income levels, but the taxpayers earning high incomes will receive the biggest cuts. The average tax bill will then be cut by 1810 dollars, which would increase the income by 2.5% after tax. The top 1% taxpayers would then benefit by 3/4 of the tax cuts while highest taxpayers would see a decrease in 16.9% tax cut after tax income. The middle class households will receive an estimated 0.5% tax cut after tax income while the poorest American would see a downfall in their tax cut 0.4% after tax income. The plan would see a reduction of 33% by the top individual tax income rate, 20% by the corporate, and 25% for partnership and sole proprietorship. This would reduce the child tax credit and standard deductions.

A cash flow consumption tax would replace the corporate income tax, which would apply for all businesses whereby interests in business would not be deductible and investments would be immediately deducted. This would result in a border adjustable cash flow tax with exclusion of exports receipts and imports purchased would not be deducted. This marginal tax rate cuts would reduce tax rates on new investments, incentives on US investments would be increased, and tax distortions would be reduced on allocation of capital. However, interest rates would increase in the event of increasing government borrowing and lead to a crowd out on private investment. This would offset the positive effects of the plans on private investment. In order to counteract the ramification of the tax cuts on the deficit the federal spending needs to be reduced.

VAT Implementation
National consumption tax (VAT). This is a levy on the difference between the purchase of goods and its sales. Generally, the tax is calculated on a business according to its sales, a credit for taxes that is paid on its purchase is subtracted and the difference is forwarded to the government. The incomes of multinational corporations that are resident in the United States should also be taxed. Discretionary and mandatory spending should also be reduced which will lead to a reduction in deficits and debts. Lowering federal spending on healthcare and reducing revenues below baseline amounts would offset deficit reduction. This would lead to an increase in domestic investment, national saving and the capital stock would be increased.

The majority of taxpayers in EU countries use tax professionals in some shape or form, and for this obvious reason the EU tax administration recognises that they play a very important role in their tax system. As well as helping to make the system run smoothly, they play a key role in influencing and shaping the tax compliance behaviour of their clients. This influence may be positive or negative, because of their professional knowledge of our tax system and its nuances.
Through their representative bodies, tax professionals also have an important role in developing our tax system. They are influential in forming public opinion and general attitudes as to the fairness and equity of the tax system and our administration thereof.
Because of their influential role and the unique position they have in influencing taxpayer behaviour, we recognise that they are one of the primary ingredients in our pursuit of our main corporate goal: “To ensure that everyone complies with their tax and customs responsibilities”.
We therefore spend a lot of time engaging with them using a combination of methods and through many different forums in our efforts to achieve improved taxpayer compliance.

WHAT CAN BE TAX STRATEGY ?

Our strategy in relation to dealing with tax professionals can be laid out in our recent Operational Strategic Programme 2007-2010. Because of the fact that the phrase “tax professional” encompasses persons with a variety of roles and responsibilities, the tax administration must prepare a response to ensure that strategy works.
I would like to give you some background on how the building relationships and partnerships strategy will come about. The relationship between taxpayers and tax administration, I must confirm that is very much an adversarial one characterised by mutual distrust and suspicion. Tax administration recognises that albanian tax professionals have a key role and that is why we have developed sophisticated consultative mechanisms to help administration engage with this wide community.
Let me give you some relevant facts about the Albanian tax system.

ALBANIA’s TAX SYSTEM

Our tax system is concerned with direct and indirect taxes, customs and duties. Albania has taxes on incomes, as well as taxes on goods and services.
Businesses (limited companies and individuals) pay tax on a self-assessment basis. There are approximately 49,000 self employed individuals and 13,000 limited companies on our register.
The General Taxation Directorate is the sole central tax authority in the Republic of Albania. The General Directorate of Taxes (HQ) and its Branch Offices in the districts possess authority to implement and administer taxes. The General Directorate of Taxes is located in Tirana. The General Taxation Directorate establishes its Local Tax Offices in 36 districts and since 1998 is established in Tirana the Large Taxpayer Office. Local Tax Office Heads are appointed and discharged by the General Director of Taxes. The Local Tax Offices provide taxpayers with tax certificates, prepare draft program of tax revenues for the district, supervise and are accountable for accomplishment of the tax revenues and the program, process tax declarations, assess tax liabilities, preserve and organise documents, audit taxpayers and collect taxes as well as implement special executive decisions.
General Taxation Directorate has recently undergone a major organisational restructuring. Essentially, this agency has rebuilt the organisation around different groups of taxpayers. These groups consist of taxpayers in each of four geographic regions and a national large taxpayer group. Apart from collection and debt management functions which remain centralised every other small taxpayer is managed from 2007 from tax offices of local power, as effect of fiscal decentralization in Albania.

WHO AND WHAT ARE ALBANIAN TAX PROFESSIONALS ?

In aLBANIA, a wide range of tax professionals such as accountants, lawyers, tax consultants, businesses and freight forwarders acting on behalf of their clients, the taxpayers, interacting with tax offices. These tax professionals perform a wide variety of functions.
The variety of professionals providing a great deal of tax advice or engaging in compliance activities is generated on the activities of such professionals. For example, accountants, advising on business transactions and internal audit; lawyers such as solicitors and barristers advising on business transactions, conveyancing, estate administration and litigation; auctioneers and real estate agents advising on capital transactions, and customs agents advising on customs matters. Each of these activities in its own right involves some form of tax advice and each professional can be regarded as a “tax professional”, each of which, play a very important part in ensuring that our tax administration and systems work.
Traditionally most VAT businesses and a little number of self-employed persons, i.e., businesses, professions, companies and their directors, use the accountant as tax professional, or “agent”, to engage with tax officials. This high level of representation, even for small business, is because we don’t operate an imputed income system. All businesses have to prepare business accounts on an “accruals” basis, and this generally requires the services of an accountant.
In Ireland we refer to our mainstream tax professionals as “tax practitioners” or “agents” and there are approximately 2,000 such “agents” registered in tax offices when they act as tax return preparers. As a result of this high level of agent representation, taxpayers in Albania tend not to be inhibited about challenging tax administration, and engage in more sophisticated business transactions and use tax professionals to this end.
Another reason for taxpayer challenges is the recent phenomenon of taxation departments being created in legal firms. Also, many corporations are employing lawyers who specialise in mainstream taxation matters and now lawyers are not just engaged in the traditional legal bastions of capital taxation and inheritance tax matters. Primarily, as a result of our Tax Investigation Department a dedicated part of tax administration which pursues the proceeds of crime, our barrister profession, who traditionally did not advocate in taxation matters, are now representing more and more taxpayers in tax matters in the civil and criminal courts.
This increasing competition from the legal profession has raised some issues as regards a level playing field between the different professions. Accountants see the prospect that lawyers might be able to claim legal professional privilege on behalf of clients against Revenue enquiries in certain circumstances as an unfair competitive advantage.

INFLUENCING COMPLIANCE BEHAVIOUR

One of the obvious benefits for tax administration from the engagements with tax professionals is the extent to which they can get them to influence good compliance behaviour. As already mentioned, tax offices regard tax professionals as being hugely influential in terms of promoting good compliance behaviour; indeed, because they may be the only point of contact that a taxpayer has in his/her interactions with tax administration.
However, it is important that tax professionals also see it as in their interest to do so. Not alone does ‘non-compliance’ cost money in lost taxes for tax administration, but it also puts the taxpayer, the client, at serious risk of severe consequences if caught. Being able to deal with taxpayers through their agents substantially reduces the cost of tax administration. Think of what life would be like for a tax administration if there were no tax professionals. Some people who work for tax administrations might say that life would be much easier without them. Yes, there might not be so much tax planning, or challenges to taxation, and taxpayers might be more willing to accept tax administration’s view. This might make life easier for the tax officials. But given the complexity of tax system for enyone that it’s no part of tax administration, despite all the efforts at simplification, think of what the disadvantages might be?
Instead of funnelling the interaction with businesses and corporations through 2,000 tax professionals, it would be necessary to interact directly with an additional 49,000 business and over 13,000 corporate taxpayers. This would have huge cost implications for tax administration, as more employees would be needed to service the substantial additional contacts and queries that would ensue.
It would also be immeasurably harder for tax administration to ensure that all taxpayers understood their obligations and this would adversely affect voluntary compliance.
For these reasons, tax structures try to make it as easy as possible for tax professionals to meet their client’s compliance obligations and we provide a variety of support services and measures to support and achieving client’s compliance.

SUPPORT AND SERVICE FOR TAX PROFESSIONALS

Tax professionals have a big interest in customer service efforts and are rightly critical when the tax services falls below standard. After all, the tax professional is in business to make a profit. Poor service on the tax offices costs money and the taxpayer does not always understand either.
Here are some examples of how tax administration can support and try to try to make life as easy as possible for tax professionals.

Simpler Organisational Structure
In the albanian tax structure, all taxes pertaining to a taxpayer are handled by one office. Prior to that, a taxpayer (or tax professional) could have to deal with a number of offices depending on the tax.
This tax structure makes it much easier for the tax professional to deal with their client’s compliance obligations. However there are problems following the reallocation of all our taxpayer cases in the restructuring period. For some time, tax professionals are unsure which office dealt with their clients. As a result of good contacts with the various professional bodies and in a spirit of openness and co-operation, which is part of taxation strategy of building partnerships, is the possibility for tax officials to engage proactively and positively with a view to implementing practical measures to remedy difficulties.

Some of these initiatives help illustrate this:

o Contact Points
There are special contact points in each of the regions for tax professionals who are experiencing service difficulties in dealing with tax administration. These contact persons are empowered to sort out the difficulty.

o Contact Locator
There is a tool known as ‘Contact Locator’ ,that in albania is not a function used, but in EU countries he can be used to find out which office deals with a taxpayer.

Information Tools
Tax strategy is to ensure clear and timely communication. Some of the many information tools are ready for providing up to date informatio:

– Tax official website http://www.tatime.gov.al

– Tax Buletin

– Tax leaflets

– Seminars and workshops

o Technology
By exploiting technology opportunities as much as possible such as electronic e-filing service, tax structures are able to provide better service while at the same time reducing compliance and their administrative costs. This makes it easier and cheaper for tax professionals to file and pay.

o Fair procedure
Through mechanisms such as tax procedures and Tax Audit Practice Guidelines and other papers and circulars that help the conduct of tax strutures in confront of taxpayers and tax proffesionals.

Having the right team of advisors is critical to achieving your financial goals faster than you ever thought possible. For most people, taxes are the single biggest expense. This makes finding the right tax preparer for your team extremely important.

HOW DO YOU FIND A TAX PREPARER THAT IS RIGHT FOR YOU?

First, not all tax preparers are the same. I previously wrote an article about this last year titled: “Tax Returns – Are they really all created equal”, and you may be as surprised as other readers about just how much tax return preparation can vary.

In fact, I calculated the average savings I typically find from annual tax savings, reducing professional fees and audit assessments. In total, the average savings are:

– $23,750 Annual tax savings

– $5,000 Audit defense savings

– $10,000 Reduced audit assessment savings

– $50,000 Reduced legal fees

– $3,000 Reduced tax return preparation fees

This is a total average potential savings of $91,750! Your tax preparer does make a difference! How much more could you do with these savings?

Second, the right tax preparer for you depends on what is important to you. Take a minute to answer this question:

WHAT MAKES YOUR TAX RETURN SUCCESSFUL?

How you answer this question will impact what type of tax preparer you need on your team. I’ve asked this questions to clients, prospects and colleagues. I have compiled the most popular answers and what it means to you as you find the tax preparer for your team.

ANSWER #1: Paying the least amount of tax legally

Your tax preparer needs to:

– Know the tax law very well and know how to be creative legally.

– Ask you a lot of questions about your situation in order to understand your situation and goals.

– Have a review process where at least one other person reviews your return solely for the purpose of how to reduce your taxes legally.

HERE ARE SEVEN (7) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER TO DETERMINE IF IT’S A GOOD FIT:

Q1: Can you tell me about the other ___________ (your industry) you service?

A: Your tax preparer needs to know how the tax law applies to your situation. Having other clients in your industry or with similar investments indicates that the tax preparer is likely to be familiar with the tax laws that impact you.

Introduction

There is a clear-cut difference between tax avoidance and tax evasion. One is legally acceptable and the other is an offense. Unfortunately however many consultants even in this country do not understand the difference between tax avoidance and tax evasion. Most of the planning aspects that have been suggested by these consultants often fall into the category of tax evasion (which is illegal) and so tends to put clients into a risky situation and also diminish the value of tax planning.

This may be one of the prime reasons where clients have lost faith in tax planning consultants as most of them have often suggested dubious systems which are clearly under the category of tax evasion.

In this chapter I provide some examples and case studies (including legal cases) of how tax evasion (often suggested by consultants purporting to be specialists in tax planning) is undertaken not only in this country but in many parts of the world. It is true that many people do not like to pay their hard-earned money to the government. However doing this in an illegal manner such as by tax evasion is not the answer. Good tax planning involves tax avoidance or the reduction of the tax incidence. If this is done properly it can save substantial amounts of money in a legally acceptable way. This chapter also highlights some practical examples and case studies (including legal) of tax avoidance.

Why Governments Need Your Taxes (Basic Economic Arguments)

Income tax the biggest source of government funds today in most countries is a comparatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax things that were easy to measure and on which it was thus easy to calculate the liability. This is why early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, as well as things such as the number of windows or fireplaces in a building. In the 20th century, particularly the second half, governments around the world took a growing share of their country’s national income in tax, mainly to pay for increasingly more expensive defense efforts and for a modern welfare state. Indirect tax on consumption, such as value-added tax, has become increasingly important as direct taxation on income and wealth has become increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For example, in United States tax revenue amounts to around one-third of its GDP (gross domestic product), whereas in Sweden it is closer to half.

Others are the preferred methods of collecting it (direct versus indirect), the rates at which it is levied and the definition of the tax base to which these rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also big differences in the way responsibility for taxation is divided among different levels of government. Arguably according to the discipline of economics any tax is a bad tax. But public goods and other government activities have to be paid for somehow, and economists often have strong views on which methods of taxation are more or less efficient. Most economists agree that the best tax is one that has as little impact as possible on people’s decisions about whether to undertake a productive economic activity. High rates of tax on labour may discourage people from working, and so result in lower tax revenue than there would be if the tax rate were lower, an idea captured in the Laffer curve in economics theory.

Certainly, the marginal rate of tax may have a bigger effect on incentives than the overall tax burden. Land tax is regarded as the most efficient by some economists and tax on expenditure by others, as it does all the taking after the wealth creation is done. Some economists favor a neutral tax system that does not influence the sorts of economic activities that take place. Others favor using tax, and tax breaks, to guide economic activity in ways they favor, such as to minimize pollution and to increase the attractiveness of employing people rather than capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity, because this is fair, and because when the tax system is fair people may find it harder to justify tax evasion or avoidance.

However, who ultimately pays (the tax incidence) may be different from who is initially charged, if that person can pass it on, say by adding the tax to the price he charges for his output. Taxes on companies, for example, are always paid in the end by humans, be they workers, customers or shareholders. You should note that taxation and its role in economics is a very wide subject and this book does not address the issues of taxation and economics but rather tax planning to improve your economic position. However if you are interested in understanding the role of taxation in economics you should consult a good book on economics which often talks about the impact of different types of taxation on the economic activities of a nation of society.

Tax Avoidance and Evasion

Tax avoidance can be summed as doing everything possible within the law to reduce your tax bill. Learned Hand, an American judge, once said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible as nobody owes any public duty to pay more than the law demands. On the other hand tax evasion can be defined as paying less tax than you are legally obliged to. There may be a thin line between the two, but as Denis Healey, a former British chancellor, once put it, “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” The courts recognize the fact that no taxpayer is obliged to arrange his/her affairs so as to maximize the tax the government receives. Individuals and businesses are entitled to take all lawful steps to minimize their taxes.

A taxpayer may lawfully arrange her affairs to minimize taxes by such steps as deferring income from one year to the next. It is lawful to take all available tax deductions. It is also lawful to avoid taxes by making charitable contributions. Tax evasion, on the other hand, is a crime. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized. Examples of tax evasion include such actions as when a contractor “forgets” to report the LKR 1, 000,000 cash he receives for building a pool, or when a business owner tries to deduct LKR 1, 000,000 of personal expenses from his business taxes, or when a person falsely claims she made charitable contributions, or significantly overestimates the value of property donated to charity.

Similarly, if an estate is worth LKR 5,000,000 and the executor files a false tax return, improperly omitting property and claiming the estate is only worth LKR 100,000, thus owing much less in taxes. Tax evasion has an impact on our tax system. It causes a significant loss of revenue to the community that could be used for funding improvements in health, education, and other government programs. Tax evasion also allows some businesses to gain an unfair advantage in a competitive market and some individuals to not meet their tax obligations. As a result, the burden of tax not paid by those who choose to evade tax falls on other law abiding taxpayers.

Examples of tax evasion are: ï?~ Failing to declare assessable income ï?~ Claiming deductions for expenses that were not incurred or are not legally deductible ï?~ Claiming input credits for goods that Value Added Tax (VAT)has not been paid on ï?~ Failing to pay the PAYE (pay as you earn a form of with holding tax)installments that have been deducted from a payment, for example tax taken out of a worker’s wages ï?~ Failing to lodge tax returns in an attempt to avoid payment. The following are some signs that a person or business may be evading tax: ï?~ Not being registered for VAT despite clearly exceeding the threshold ï?~ Not charging VAT at the correct rate ï?~ Not wanting to issue a receipt ï?~ Providing false invoices ï?~ Using a false business name, address, or taxpayers identification number (TIN) and VAT registration number ï?~ Keeping two sets of accounts, and ï?~ Not providing staff with payment summaries

Legal Aspects of Tax Avoidance and Tax Evasion Two general points can be made about tax avoidance and evasion. First, tax avoidance or evasion occurs across the tax spectrum and is not peculiar to any tax type such as import taxes, stamp duties, VAT, PAYE and income tax. Secondly, legislation that addresses avoidance or evasion must necessarily be imprecise. No prescriptive set of rules exists for determining when a particular arrangement amounts to tax avoidance or evasion. This lack of precision creates uncertainty and adds to compliance costs both to the Department of Inland Revenue and the tax payer.

Definitions of Tax Mitigation Avoidance and Evasion It is impossible to express a precise test as to whether taxpayers have avoided, evaded or merely mitigated their tax obligations. As Baragwanath J said in Miller v CIR; McDougall v CIR: What is legitimate ‘mitigation'(meaning avoidance) and what is illegitimate ‘avoidance'(meaning evasion) is in the end to be decided by the Commissioner, the Taxation Review Authority and ultimately the courts, as a matter of judgment. Please note in the above statement the words are precisely as stated in judgment. However there is a mix-up of words which have been clarified by the words in the brackets by me. Tax Mitigation (Avoidance by Planning) Taxpayers are entitled to mitigate their liability to tax and will not be vulnerable to the general anti-avoidance rules in a statute. A description of tax mitigation was given by Lord Templeman in CIR v Challenge Corporate Ltd: Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability.

Tax mitigation is, therefore, behavior which, without amounting to tax avoidance (by planning), serves to attract less liability than otherwise might have arisen. Tax Avoidance Tax evasion, as Lord Templeman has pointed out, is not mere mitigation. The term is described directly or indirectly by ï?~ Altering the incidence of any income tax ï?~ Relieving any person from liability to pay income tax ï?~ Avoiding, reducing or postponing any liability to income tax On an excessively literal interpretation, this approach could conceivably apply to mere mitigation, for example, to an individual’s decision not to work overtime, because the additional income would attract a higher rate of tax. However, a better way of approaching tax avoidance is to regard it as an arrangement that, unlike mitigation, yields results that Parliament did not intend.

In Challenge Corporation Ltd v CIR, Cooke J described the effect of the general anti-avoidance rules in these terms: [It] nullifies against the Commissioner for income tax purposes any arrangement to the extent that it has a purpose or effect of tax avoidance, unless that purpose or effect is merely incidental. Where an arrangement is void the Commissioner is given power to adjust the assessable income of any person affected by it, so as to counteract any tax advantage obtained by that person. Woodhouse J commented on the breadth of the general anti-avoidance rule in the Challenge Corporation case, noting that Parliament had taken: The deliberate decision that because the problem of definition in this elusive field cannot be met by expressly spelling out a series of detailed specifications in the statute itself, the interstices must be left for attention by the judges.

Tax Evasion Mitigation and avoidance are concepts concerned with whether or not a tax liability has arisen. With evasion, the starting point is always that a liability has arisen. The question is whether that liability has been illegitimately, even criminally been left unsatisfied. In CIR v Challenge Corporation Ltd, Lord Templeman said: Evasion occurs when the Commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasion may lead to a criminal prosecution as well as re-assessment.

The elements which can attract the criminal label to evasion were elaborated by Dickson J in Denver Chemical Manufacturing v Commissioner of Taxation (New South Wales): An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion. Not all evasion is fraudulent. It becomes fraudulent if it involves a deliberate attempt to cheat the revenue. On the other hand, evasion may exist, but may not be fraudulent, if it is the result of a genuine mistake. In order to prove the offence of evasion, the Commissioner must show intent to evade by the taxpayer. As with other offences, this intent may be inferred from the circumstances of the particular case. Tax avoidance and tax mitigation are mutually exclusive. Tax avoidance and tax evasion are not: They may both arise out of the same situation. For example, a taxpayer files a tax return based on the effectiveness of a transaction which is known to be void against the Commissioner as a tax avoidance arrangement.

A senior United Kingdom tax official recently referred to this issue: If an ‘avoidance’ scheme relies on misrepresentation, deception and concealment of the full facts, then avoidance is a misnomer; the scheme would be more accurately described as fraud, and would fall to be dealt with as such. Where fraud is involved, it cannot be re-characterized as avoidance by cloaking the behavior with artificial structures, contrived transactions and esoteric arguments as to how the tax law should be applied to the structures and transactions. Tax Avoidance in a Policy Framework We now turn from the existing legal framework in the context of income tax to a possible policy framework for considering issues relating to tax avoidance generally. The questions considered relevant to a policy analysis of tax avoidance are: What is tax avoidance? Under what conditions is tax avoidance possible? When is tax avoidance a ‘policy problem? What is a sensible policy response to tax avoidance?

What is the value of, and what are the limitations of, general anti-avoidance rules? The first two questions are discussed below What is Tax Avoidance? Finance literature may offer some guidance to what is meant by tax avoidance in its definition of ‘arbitrage’. Arbitrage is a means of profiting from a mismatch in prices. An example is finding and exploiting price differences between New Zealand and Australia in shares in the same listed company. A real value can be found in such arbitrage activity, since it spreads information about prices. Demand for the low-priced goods increases and demand for the high-priced goods decreases, ensuring that goods and resources are put to their best use. Tax arbitrage is, therefore, a form of tax planning. It is an activity directed towards the reduction of tax. It is this concept of tax arbitrage that seems to constitute generally accepted notions of what is tax avoidance. Activities such as giving money to charity or investing in tax-preferred sectors, would not fall into this definition of tax arbitrage, and thus would not be tax avoidance even if the action were motivated by tax considerations. It has been noted that financial arbitrage can have a useful economic function. The same may be true of tax arbitrage, presuming that differences in taxation are deliberate government policy furthering economic efficiency.

Are you struggling to make all of your payments on time every month? Are you getting behind? You’re not the only one – in fact millions of people around the world need help with debt problems. No matter how bad your finances seem, there is always somebody out there who has it even worse. The good news is that since it is such a common problem, there are many programs and services available to help those with debt issues.

Since there are so many services, however, not all of them are going to be very good. Some are just a waste of money and time. There are certain types of debt that no debt relief organization will be able to help with, such as child support, government loans, utility bills, etc. Mostly, there are programs to help with credit card debt, certain types of loans, tax relief, and medical bills.

The first step before contacting any of these organizations is to make a list of all of your bills and the minimum payment you owe each month. If possible, try and prioritize them. The bills you need to pay in order to live should be at the top, as well as mortgage if you owe any. If you have secured lines of credit with collateral that you could be in danger of losing, then that should be near the top also.

Services that Offer Help With Debt Problems

The next step is to look over services and read reviews on the best companies that provide help with debt problems. You should obviously never pay for a consultation or estimate. Only consider companies that will speak with you and give you a consultation for free before deciding on a strategy that would be best suited for your needs.

Will a debt management program be ideal? Debt settlement? Bankruptcy? Negotation? A debt extension loan? A new repayment strategy? Will the program you join benefit you in ways such as helping you obtain lower interest rates or discounts? These are all important options to consider when seeking help with debt problems.

A consolidation loan, as nice and convenient as it sounds, isn’t for everyone. For some indidivuals, the best solution is to leave certain debts where they are, and try to get some professionals to negotiate on their behalf to lower the interest rates and provide them with some relief to make it easier to make payments.

Debt negotiation should be viewed as a last-resort measure before filing bankruptcy. A lender has little motivation to accept a pay off for less than the full amount unless the debtor is already months behind on bills. Debt negotiation, also sometimes called debt settlement or debt arbitration, is best reserved for use when debt is seriously delinquent. If you’re considering debt negotiation, it’s important to be informed about all the options available to help you deal with your debt.

Contact your creditors, negotiate payment arrangements, ask permission to skip a payment, or ask for a lower interest rate. These are simple measures you can take as a first step to manage your debt. Try these options first before you attempt any other course of action.

If you have a large amount of debt, a qualified credit counseling service may be able to help you reduce payments and prevent further damage to your credit report. Although credit counseling can provide consumers with valuable assistance, some firms exist only to cheat their unknowing clients. These companies use their non-profit status to attract customers who are then scamed into paying large upfront fees. Those fees are then sometimes funneled to for-profit companies. Recently, the FTC and IRS issued the following tips for choosing a credit counseling organization.

* Pay very careful attention to the fees you are being charged, the nature of the services the agency offers, and the terms of the contract.
* Check to make sure that your creditors are willing to work with the agency the you plan to choose
* Consider using agencies that offer actual counseling and education, instead of simply enrolling all clients in a debt management program

Another option for consumers overwhelmed by debt is to consolidate debt by establishing a new loan (debt consolidation loan) with lower monthly payments. A debt consolidation loan helps manage your debt because the loan is usually over a longer period of time and possibly at a lower interest rate than your existing debt. Consolidation should be used when debts are mostly current.

While there are many options to help you cope with unmanageable debt, sometimes debt negotiation may be the only appropriate course of action remaining. For example, debt negotiation would be a good course of action if a long-forgotten debt is the only bad entry on your credit report. However, keep in mind, you may owe income tax on the debt owed. Any forgiven debts of $600 or more are considered income to the consumer. If you do negotate a debt down, the creditor will send you and the IRS a Form 1099-C at the end of the tax year.

As a general safety precaution, anyone who plans on using a third party to handle their finances should remember to check them out with the Better Business Bureau and State Attorney General’s Office of Consumer Protection. These agencies keep records of credit repair services that have mislead their customers about the impact the service would have on their credit rating, the fees involved, and the possibility of legal action from the creditors.

The cat is out of the bag and debt settlement companies are facing adaptation or extinction. Debt settlement can be a tedious process that lasts from a year to four or more depending on the extent of the debt load.

For the most part these settlement companies will explain the process along with the pros and cons of a debt settlement.

The pros:

-Settle debt for less than the amount owed

-Get out of debt faster than paying it all off

-Avoid bankruptcy if you are able to afford the process and have a smooth ride

-Once you are done you can reestablish your credit quicker

So really the benefit of the program lies in a quicker debt relief option and the avoidance of having bankruptcy on your record:

The cons:

-hurts credit badly for duration of the program

-you might get sued and get a judgment on your record (maybe even wage garnishment)

-you will get collector calls

-you will have to pay taxes on the debt forgiven

There are always negatives that come with the pluses and every individual will have to determine if the pluses are worth more to them than the possible negative consequence.

However, negotiating the debt on your own with a do it yourself program will definitely have one major benefit, no exorbitant fees (such as 15% of total debt), along with the bonus that creditors prefer to work with you directly rather than a debt settlement company which might decrease the chances of you getting sued significantly.

Do it yourself debt settlement is led by a passion, or hatred rather, towards eliminating debt in an efficient, affordable manner. This is all about bringing about an awareness that the consumers can eliminate their own debts without hiring a very expensive debt settlement company.

But how can it be done?

By choosing the best possible educational portal that provides the most convenient system and make sure that the consumer can adhere to.

Find a debt settlement guide that will include a system rather than just a book, audio CD’s, and simple tables or charts. Those can become tedious and the debtor, already having enough on their plate, might give up thinking it’s too hard and just go ahead and sign up with a debt settlement company after just wasting their money on a do it yourself debt settlement course.

Consumers do not need a course or a cheap e-book put together from free material already found on the web. You need to stay away from those and do enough research to make sure the system you purchase will have enough support to be able to guide you through the entire process to finish.

One thing is for certain: soon consumers will never have to spend any more money on these debt settlement companies and debtors that were not able to afford that option before, or didn’t qualify will soon have the best agent working for them: themselves.