Tax avoidance and tax evasion

"Tax avoidance” is generally assumed to refer to legal means of underpaying tax, while "tax evasion" refers to illegal means. In the real world, however, this legal-illegal distinction often falls apart.

Tax avoidance or tax evasion happens when a person or company structures their financial affairs to pay less tax than they should. Dictionaries insist that “tax avoidance” involves legal behaviour (for example, using loopholes to escape the rules without actually breaking the rules) while “evasion” is illegal.  In the real world, however, this legal/illegal distinction often falls apart.

A lot of what gets called “avoidance” cannot be called “legal” because it is in a grey area: one only finds out definitely which side of the law the activity falls on until it has been challenged in court. Many tax structures, whether set up by wealthy individuals or multinational corporations, are highly complex cross-border arrangements that hinge on interpretations that are open to question.

In fact, much of what gets called “avoidance” turns out to be rather more like evasion: it involves pocketing tax money that legally should be paid. It’s just that they don’t get noticed or challenged, or successfully prosecuted.  It has been described as “risk mining” – where individuals or companies deliberately push the boundaries of the law, and hope to get away with it. For example, in 2013 a senior official at a Big Four accounting firm testified to the UK’s Public Accounts Committee, a government watchdog, that they would sell tax schemes to clients even if they thought there was only a 25 percent chance they would survive a court challenge.

The problem is likely far worse in low-income countries, where courts and tax officials are often poorly resourced, poorly trained, and perhaps more susceptible to pressure from companies or wealthy individuals to reach certain decisions favourable to the companies.

For these reasons we rarely use the term “tax avoidance” and instead use the term “tax abuse”.

The term “tax abuse” steers clear of the misconception that “tax avoidance” is legal, and focuses instead on the essential issues, notably the economic and political aspects of abusing laws and financial mechanisms to underpay tax.

Legal or not, is tax avoidance legitimate? In a word, no, tax avoidance is not legitmate: for two reasons. First, what often gets called avoidance isn’t ‘legal’, as explained above. Second, what is legal isn’t necessarily legitimate. (Apartheid was legal, in its day.)

Further reading