Tax Avoidance vs Tax Evasion
What is Tax Avoidance?
By definition, the term tax avoidance refers to the legal use of the tax regime to one’s own advantage to reduce the amount of taxes payable by means that are within the law.
What is Tax Evasion?
Tax Evasion on is using illegal means to avoid paying taxes.
How Does Tax Evasion and Tax Avoidance Affect Me?
Many citizens may knowingly or unknowing engage in tax evasion measures. This usually occurs with non-emolument income earners (self-employed) who may misrepresent their income on their respective tax returns or may even elect to not file at all.
The desire to pay less taxes in a “relaxed” taxation environment usually manifests in individuals and corporations adopting various methods and strategies so as to not fulfil their legal obligations.
What are some tax evasion practices?
Cash incentive operations/businesses are usually at the highest risk of the proprietor not reporting their total income nor filing the required the tax returns and remitting the relevant taxes that are due and payable. The reporting of cash earnings is usually easier to manipulate since without same being actually deposited into a bank account, there exists no third party verification method of ascertaining just how much cash one has actually collected.
Tax evasion is illegal within the jurisdiction of Trinidad and Tobago yet it is widely practiced. The Board of Inland Revenue seldom investigates non-emolument income earners and the probability of being caught remains slim to none. The appeal therefore to save money by paying less taxes in a “relaxed” taxation environment is quite tempting.
It is much more difficult for corporations on the other hand to engage in tax evasion measures. This is because corporations are usually governed by much more enforced operational regulations and carry certain operations obligations that must be legally complied with.
Corporations may adopt illegal transfer pricing practices, related party billings (fictitious billings) using non-coterminus accounting periods, keeping two sets of books and not recording cash sales in order to engage in tax avasion measures. These are however more complex undertakings and may carry higher degrees of punishment.
What happens if one is caught?
It is dangerous to engage in tax evasion measures as one runs the obvious risk of being caught and punished in accordance with punishments (penalties, fines and jail terms) that are available under the respective suite of taxation legislation. The Board of Inland Revenue may also reserve the right to levy on the assets of the individual or corporation as the case may be, in the event that any amounts due and owing cannot be settled.
What are some tax avoidance measures?
There are many measures that can be adopted to reduce an individual or corporation’s taxes without participating in any illegal practice.
Usually an individual ought to possess a working knowledge of the taxation system in order to successfully advance any tax avoiding positon.
Methods adopted may be business planning by the setting up of the entity’s operations to take maximum advantage of available tax breaks and allowances. Another method may be the utilising of tax havens by setting up operations within that jurisdiction having considered the impact of the taxation legislation of returning revenues into the country.
Methods usually adopted will depend on the nature of business activities undertaken as the operating environment may present a unique opportunity in which a tax avoiding position may be favorable to the entity.
Accounting treatments particularly in instances whereby revenues can be legally deferred so as to avoid paying taxes within a particular period may also be adopted.
It must be noted however that deferrals simply defer the obligations to other periods. In some cases deferrals may continue for a long period of time thereby creating the illusion of no longer paying high taxes. In so doing one runs the risk of being subjected to increased tax rates in a future period.
For corporations and larger entities that are able to pursue these complex undertakings and employing the resources in order to monitor and advise these measures, it may appear to be a viable option.
For the simpler tax payer, i.e. the non-emolument income earner (musician, photographer, doctor, lawyer, decorator, vendor and other such self-employed personnel ) the only tax avoidance measures that can be adopted are usually business planning measures and other allowances that may be accessed from time to time. Current allowances available are:
Personal Allowance - $60,000.
Tertiary education expenses.
First time home ownership.
Approved deferred annuity contributions or premiums.
Alimony or maintenance payments.
Venture Capital Tax credits.
Solar water heating equipment tax credits.
Should you have any questions or require assistance in tax planning you may contact us for a more detailed review of your particular circumstances.