Tax Avoidance

Posted in Finance, Accounting and Economics Terms, Total Reads: 323
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Definition: Tax Avoidance

Tax avoidance is the use of legal devices of the tax authorities to one's own benefit, to diminish the amount of tax that is to be paid by means that are within the purview of law. It is not similar to tax evasion which is to use illegal approaches to avoid paying tax. It often involves contrived, artificial trades and transactions which serve no purpose but reduce tax liability.


Some of the methods of tax avoidance are:

Country of Residence: An organization may establish their company or subsidiary in an offshore jurisdiction. Individuals may also moving their tax residence to tax havens to reduce the taxes to be paid


Legal Entities: One can legally avoid personal taxation through creation of a separate legal entity to which one’s asset is donated. One doesn’t have to change the country of residence and the separate entity created is usually a company, trust or foundation


Legal Vagueness: Payment of tax may be altered due to vagueness in legal definition or policies


Tax Shelters: They are investments which allow a reduction in tax liability through plans such as retirement fund, pension accounts and home ownership. The fund invested in such investments are not taxed provided they are held for a required period of time.


Transfer Mispricing: Fraudulent transfer pricing or transfer mispricing is done through trade between related parties at prices meant to deceive the taxation authorities and to manipulate the market.


Most of the taxpayers use some practises of tax avoidance. Tax avoidance leads to reduction in government revenue, so governments try to have a stricter anti avoidance stance to prevent or keep tax avoidance within limits. The common way to do this is to frame tax rules and regulations so that there is little scope for avoidance. In exercise this has not always been realizable and thus, has led to a continuing battle between governments amending laws and tax advisors' discovering new scope or ambiguities for tax avoidance in the amended regulations.

 

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