Tax avoidance
Tax avoidance is the legal use of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal.
Forms of tax avoidance that use legal tax laws in ways not necessarily intended by the government are often criticized in the court of public opinion and by journalists. Many businesses pay little or no tax, and some experience a backlash when their tax avoidance becomes known to the public. Conversely, benefiting from tax laws in ways that were intended by governments is sometimes referred to as tax planning. The World Bank's World Development Report 2019 on the future of work supports increased government efforts to curb tax avoidance as part of a new social contract focused on human capital investments and expanded social protection.
"Tax mitigation", "tax aggressive", "aggressive tax avoidance" or "tax neutral" schemes generally refer to multiterritory schemes that fall into the grey area between common and well-accepted tax avoidance, such as purchasing municipal bonds in the United States, and tax evasion but are viewed by some as unethical, especially if they are involved in profit-shifting from high-tax to low-tax territories and territories recognised as tax havens. Since 1995, trillions of dollars have been transferred from OECD and developing countries into tax havens using these schemes.
Laws known as a General Anti-Avoidance Rule statutes, which prohibit "aggressive" tax avoidance, have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom. In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in Gregory v. Helvering and in the United Kingdom in Ramsay. The specifics may vary according to jurisdiction, but such rules invalidate tax avoidance that is technically legal but is not for a business purpose or is in violation of the spirit of the tax code.
The term "avoidance" has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance exploiting loopholes in the law such as like-kind exchanges. The US Supreme Court has stated, "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted".
Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means.
According to Joseph Stiglitz, there are three principles of tax avoidance: postponement of taxes, tax arbitrage across individuals facing different tax brackets, and tax arbitrage across income streams facing different tax treatment. Many tax avoidance devices include a combination of the three principles.
The postponement of taxes is the present discounted value of postponed tax is much less than of a tax currently paid. Tax arbitrage across individuals facing different tax brackets or the same individual facing different marginal tax rates at different times is an effective method of reducing tax liabilities within a family. However, according to Stiglitz, differential tax rates may also lead to transactions among individuals in different brackets leading to “tax induced transactions”. The last principle is the tax arbitrage across income streams facing different tax treatment.
Anti-avoidance measures
An anti-avoidance measure is a rule that prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action.Legislative measures
Two kind of anti-avoidance measures exist; General Anti Avoidance Rules and Specific Anti Avoidance Rules. The GAAR implies a set of generic anti-avoidance rules, while SAAR targets a specific avoidance practice or technique. Also, there is a set of bilateral measures pursued thorough treaties or double taxation agreements, this can be done via various clauses.Judicial anti-avoidance measures
Courts around the world have played an important role in developing SAAR and GAAR measures. But the two guiding principles in judicial anti-avoidance are business purpose rule and substance over form rule. The business purpose rule states that the transaction must serve as a business purpose. Which means that mere tax advantage cannot be the main business purpose. On the other hand, the substance over form principle is wider than the business rule and it is defined by the OECD as the ‘prevalence of economic or social reality over the literal wording of legal provisions’.EU Anti-Tax Avoidance Package
The Anti-Tax Avoidance Package is part of the European Commission's agenda as an effort to implement a more effective corporate taxation in the European Union. This package was implemented in 2016 and offers measures to prevent aggressive tax planning and encourage of tax transparency among others. The Anti- Tax Avoidance Package counts with an Anti-Tax avoidance directive, recommendation on Tax Treaties, revised administrative cooperation directive and communication on external strategy.Anti-Tax Avoidance Directive : On 20 June 2016 the European Council adopted the Directive 2016/1164 which contains five legally binding anti-abuse measures that should be applied as common forms of aggressive tax legislations. The member States must have applied these measures as from 1 January 2019. ATAD contains the following five anti-abuse measures: 1. Interest deductibility, to discourage artificial debt arrangements which are design to minimise taxes, 2. Exit taxation, for preventing the avoidance of taxes when companies are re-locating assets, 3. Incorporation of the GAAR for disregarding of non-genuine arrangements, 4. Controlled Foreign Company Rule, to deter that the profit is transferred to a low or no tax country, 5. Switchover rule, to prevent double non-taxation.
Anti-avoidance measures by country
Australia
Australia has a strong tax regime regarding avoidance which applies to large corporate groups, underpinned by the General Anti- Avoidance Rule adopted since 1981 with the Income Tax Act. The multinational anti-avoidance law is an extension of Australia's general anti-avoidance rules. This aims to make multinational enterprises pay their fair share of tax of the profits received and earned in AustraliaUnited States
Since 1980s there have been six major tax reforms in the US. The first one, in 1981, introduced a variety of tax loopholes. With this, the tax shelter industry boomed, giving rise to a demand for tax reform. The 1986 tax reform was the most accurate attempt at reducing tax avoidance, but then the next reforms of 1993 and 1997 opened new opportunities for tax avoidance and increased incentives of tax avoidance. The 1986 tax law reduced the demand for tax shelters and the opportunities for tax avoidance by constricting the gap between regular rates and the minimum tax rates. Lowering the top marginal rates, restricting the ability to use losses on just one type of income for balancing gains on other income and finally by taxing capital gains with full rates. There was another tax act in 1993, in which the alternative minimum tax rates were increased, also the regular rates, and an increase in the absolute gap for upper-income people. In the 1997 act, a gap between the rates at which capital gains and ordinary income was introduced to all taxpayers. During the 2001 and 2003 tax acts introduced more opportunities for tax avoidance because the gap between the capital gains and ordinary income tax remained the same as both rates were reduced by 5%. Finally, in the 2013 tax act, increased the tax on capital gains and ordinary income to 20 and 39.6% respectively.Methods
Country of residence
A company may choose to avoid taxes by establishing their company or subsidiaries in an offshore jurisdiction. Individuals may also avoid tax by moving their tax residence to a tax haven, such as Monaco, or by becoming perpetual travelers. They may also reduce their tax by moving to a country with lower tax rates.However, a small number of countries tax their citizens on their worldwide income regardless of where they reside., only the United States and Eritrea have such a practice, whilst Finland, France, Hungary, Italy and Spain apply it in limited circumstances. In cases such as the US, taxation cannot be avoided by simply transferring assets or moving abroad.
The United States is unlike almost all other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from the U.S. According to Forbes magazine some citizens choose to give up their United States citizenship rather than be subject to the U.S. tax system; but U.S. citizens who reside outside the U.S. may be able to exclude some salaried income earned overseas from income in computing the U.S. federal income tax. The 2015 limit on the amount that can be excluded is US$100,800. In addition, taxpayers can exclude or deduct certain foreign housing amounts. They may also be entitled to exclude from income the value of meals and lodging provided by their employer. Some American parents do not register their children's birth abroad with American authorities, because they do not want their children to be required to report all earnings to the IRS and pay American taxes for their entire lives, even if they never visit the United States.