Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance involve using tax deductions, changing one's business structure through incorporation or establishing an offshore company in a tax haven.

By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as underdeclaring income, profits or gains; or overstating deductions).

Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of a strategy of not supporting violent government activities or just the right of every citizen to find all the legal ways to avoid paying too much tax. Tax evasion, on the other hand, is a crime in almost all countries and subjects the guilty party to fines or even imprisonment. Switzerland is one notable exception: tax fraud (forging documents, for example) is considered a crime, tax evasion (like underdeclaring assets) is not.

Some tax evaders see their efforts to evade taxation as based upon novel legal theories: these individuals and groups are sometimes called tax protesters. U.S. tax protesters are an example of this kind of approach to tax evasion that has generally ended in failure for those making such claims.

Tax resistance is the refusal to pay the tax for conscientious reasons (because they do not want to support the government or some of its activities), sometimes breaking the law to do so. Some donate their unpaid taxes to charity, while others (at least in the US) take creative "deductions" such as not paying a percentage of tax equal to the defense budget. In either case, they typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for what they oppose than they are motivated by the desire to keep more of their money (as tax evaders typically are). Some have suggested the term tax avoision for people who adopt the techniques of tax avoidance in the service of tax resistance, thereby doing tax resistance legally.

In the UK, there is no General Anti-Avoidance Rule (GAAR), but certain provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose), or one of the main objects (or purposes), of a transaction is to enable tax advantages to be obtained. Judicial doctrines, relying on a purposive construction of tax legislation, are being evolved to prevent tax avoidance involving circular, self-cancelling transactions (IRC v. Ramsey), or where steps with no commercial purpose other than the avoidance of tax are inserted into a transaction (Furniss v. Dawson). Controversially, in the 2004 Budget, it was announced that 'promoters' and users of certain tax avoidance schemes would be required to disclose details of the schemes to the Inland Revenue.

The UK authorities use the term tax mitigation to refer to acceptable tax planning, minimising tax liabilities in ways expressly endorsed by Parliament. As set out above, on this view tax avoidance flouts the spirit of the law while following the letter and is therefore thought by some to be unacceptable, albeit not criminal in the way that evasion is. Upholding a difference between mitigation and avoidance relies on a purposive reading of legislation, and commentators disagree as to the extent to which this is permissible.

In the United States, thieves are required to report their stolen money as income when they file for taxes, but they usually do not do so, because doing so would serve as a confession of theft. For this reason, suspected thieves are sometimes charged with tax evasion when there is insufficient evidence to try them for theft.

While the US Government is working on the fine print of a new carbon regulatory system, one thing is clear: we are all going to face a new tax. It's important that business leaders avoid the mistake of thinking this will be a new burden assessed on just a few, like the chemical industry and power utilities. Carbon is ubiquitous — part of every industry, and indeed, every human activity — from pharmaceuticals to farming to family field trips. This tax is inescapable, yet where and how hard it will hit is very hard to predict.

It's unpredictable because of the astonishing variation in both how the rules on upstream businesses will work their way to yours, and in the timing and amount of the tax itself. As of this writing, for example, there are a number of allowances in the Waxman-Markey bill so that electric utilities and other high carbon intensity industries won't have to buy pollution permits in the early years of a new cap and trade system. With a complicated policy patchwork to figure out, the application of this new system will feel quite random — especially to consumers, and to those suppliers who are part of long, complex industry value chains.

In fact, the impact may vary — quite a lot — between you and your competitors in the same industry. The particulars of your technology relative to competitors, the specific suppliers you use — all may make your costs higher or lower than rivals. This makes it essential that you view this new carbon economy not as a set of regulations you need to follow, but as an opportunity to separate yourself from those who don't understand the implications of the new rules as well as you do.

This is about competitiveness, not compliance. Understanding the implications is a strategic imperative. And because the changes are going to be big, the time is now to develop your strategic intent and prepare for a new operational playbook.

Consider the following hypothetical. Starting tomorrow, the government will impose a new set of fees on everything in your company that contains blue. The more blue something is, the higher the fees. Other colors don't require fees. The choices companies made to use blue based on materials, production processes, geographic locations (proximity to blue sources) are now all subject to reevaluation because of the cost of the new government fees.

Some firms' original value proposition has little to do with blue — one makes cobalt-shaded containers, another, robin's egg-blue clothes, still another, indigo-toned cars — but now they find themselves facing the imperative to reevaluate everything they do and how they do it. Is it essential to keep their current systems in place? Are there alternatives? What are competitors doing? As every company asks these and other questions, executives at two firms facing similar options in the same industry may reach very different conclusions.

Let's agree that the rationale for reducing carbon is critically important. But let's also acknowledge the effects on business will produce outcomes that feel arbitrary and unfair.

There are big changes ahead. It will take a while for the new carbon rules to go into effect, and for businesses as well as regulators to figure out their full implications. But the impacts are large enough so that you should use this grace period to assess how the carbon tax will influence your strategy. If you take too long to move, you may get buried.

Article by : Bob Lurie

eCommerce is finally a staple of the US economy. Comscore reported a record holiday season with total spending exceeding $29 billion dollars across a two month period. eCommerce continued to grow, despite the worst economic downturn since the Great Depression. This included a record day of nearly one billion dollars! For many people, the main advantage is convenience, variety and of course price comparisons. But there is also a huge hidden advantage in the United States: no sales tax.

For years, Internet commerce has had a hugely advantageous tax loophole, wherein the majority of purchases are not subject to sales tax. But that will likely change given the fiscal crisis that is looming for many state governments. What has been stopping this change to date has been that everyone hates the idea of taxing businesses on the Internet: Consumers hate it because they will need to pay state taxes; Small businesses hate it because they will become less competitive online and will have a logistics nightmare trying to tax across numerous states; Internet businesses hate it because they lose a huge competitive advantage against brick-and-mortar stores. And of course, all this will ultimately lead to lower sales (and taxes) so even the municipalities fare poorly.

But that is what economists call "short range thinking." As Stanford's Thomas Sowell eloquently expressed, people often think through problems one layer deep but we need to move beyond stage one to truly understand the economic impact of a fiscal decision. It is true that in the short run, taxing small businesses has serious disadvantages. The long term effects of an Internet sales tax, however, are beneficial to almost everyone:

Small Businesses: Many small businesses will likely stop selling across state lines. The cost of doing business with a convoluted state tax system is far more costly than the benefits. This disadvantage will certainly hurt many small businesses who sell out of state...in the short run.

But I believe that small businesses have the most to gain by having this tax. A main advantage for small businesses is that they are a part of the community. This enables trust, a higher service level, and loyalty. In fact, most small businesses, even those that offer ecommerce, principally sell to their local market — most often offline. Plus, most consumers want to see an item before they purchase it (that's why so many online stores offer free return shipping). Today, many consumers actually look at a product locally and then buy online to find a cheaper price — and to avoid sales tax. But once the tax loophole is closed, small businesses can grow their local customer base, where they have a true competitive advantage (price is never a competitive advantage).

eCommerce Businesses. Internet companies will need to start charging taxes, just like their counterparts offline. This will certainly impact the price advantage online stores have held and that may impact sales in the short run. But they will also face less competition as a result. Many small businesses that had been competing online will cease to do so. This will give eCommerce providers more dominance in the marketplace, particularly for products that are most conducive to online sales (such as Jeff Bezos' top 20 list).

State Governments. Local governments will see increases in taxes, both from eCommerce (particularly from those pesky online stores that locate in 0% tax havens) but also because small business revenues will grow as people focus more on service and less on price. This tax is a huge boon to states that desperately need funding.

As a consumer, you may not want to pay an additional tax. But this is not really a tax increase; it's just closing a tax loophole. And while as a consumer you may rebel against the idea of an internet sales tax, remember that we all wear multiple hats: perhaps you'll pay a little more as a shopper, but that slight cost will be outweighed by the benefits to your business or the services offered by your state government.

Considering there are almost thirty million small businesses in the United States, and most of those are sole proprietorships, the benefits to the small businesses should outweigh the costs. And our local governments are suffering massively. Services are being cut and taxes have to be raised. But before we raise taxes, let's start by eliminating loopholes such as this one.

 Source:http://blogs.hbr.org/

If there is anything that unites politicians and the general public it's the belief that the U.S. tax system is too darn complicated. Yet somehow the process of paying taxes has resisted almost every attempt at simplification. It's an amazing paradox: The one thing we all agree on seems to be the one area where it is virtually impossible to make progress. What's going on?

Let me start by saying that I am not referring to fundamental changes in tax policy, such as the introduction of a "flat tax" or replacing incomes taxes with a national sales tax. While these proposals may simplify the process, for this post I'm assuming that we will continue to have a tax system with different rates for different income levels.

However, within our current system, even the Commissioner of Internal Revenue Service, Douglas Shulman, admits that he uses a professional tax preparer for his returns because the tax code is too complex. Thus it is no surprise that virtually every president and every Congress for the last 20 years has vowed to simplify taxes, including President Obama. Almost a year ago, he condemned what he called the "monster tax code," which has grown to more than 5600 pages and 3.7 million words. To slay this monster, he asked Paul Volcker, chairman of the President's Economic Recovery Advisory Board, to appoint a tax reform task force that would develop recommendations by the end of 2009. But to date the task force has not presented anything.

Meanwhile, other proposals have been tossed on the table, the latest a bipartisan plan by Senators Judd Gregg (R-NH) and Ron Wyden (D-OR). And the chances of this bill passing? You get the point.

So, I ask again, what's going on? Here's one possibility: Over the years, the government turned the tax code over to technical experts, who wrote the regulations, forms, and processes in their own language without regard for the end-user, the citizen, who would be required to use them. As the language and process became more and more arcane, fewer end-users could actually do their own taxes, so an industry of "tax preparers" formed to provide an interface between the tax payer and the taxing authorities. It is estimated that there are at least one million tax preparers in the United States; and that this year 60% of all taxpayers will use a professional and another 20% will use tax preparation software (another industry). In essence, the government has created a process for citizens that most citizens can't navigate.

Now if the government was a private sector company, and there were competitive alternatives, many of the alienated and disenfranchised customers would have gone elsewhere. But there is no alternative to paying taxes — so the pressure for reform doesn't really exist as it would with a private company. At the same time, the industries that the technical tax process has spawned are now very powerful, with significant lobbying and communication ability. It's in their best interest for the tax process to continue to be complex, and therein lies the cause for the stalemate.

There is, however, a glimmer of hope for simplification. Oddly enough, it comes from the IRS itself. There is nothing to stop the IRS, if it has the will and courage, to simplify the language and process of paying taxes. And in the past year, under the leadership of Commissioner Shulman, positive steps have indeed been taken in that direction. For example, more than half of all 2009 returns will be filed electronically, a process that the IRS has finally embraced. The IRS has also set up a permanent "Office of Taxpayer Correspondence," which identifies and acts on ideas for simplifying communication and has already streamlined various tax collection "notice letters" and inserts. The IRS also is beginning a process of certifying professional tax preparers, which is probably a good thing (even if it reinforces the power of the technical industry).

To be sure, filing taxes is still a long way from simple. But a little bit of progress is certainly better than no progress at all. 

Source :http://blogs.hbr.org/

The decline in tax revenue through the increase in international tax planning is indeed of great concern for many governments.
It is greed -- and the fear of seeing their deep pockets depleted -- that drives their frenzied attacks against offshore havens, and not a fight against international crime as we are led to believe.
It is the increased use of offshore tax free companies and secretive offshore banking by the general populace that is a major headache for the avaricious high-tax regimes, and not offshore money laundering as they claim.

The offshore exodus

Over half of Europe's top 500 companies have some kind of subsidiary incorporated offshore. About 40% of the companies quoted on the Hong Kong stock exchange are actually domiciled offshore in Bermuda. Multinational companies often create some of the most efficient and ingenious tax mitigation methods through the use of multiple jurisdictions.

			More and more investors are sending their hard-earned cash on an offshore holiday and are seeing it work harder for them as a result.

And it's not only multinationals.
Hilary Morison, writing in the mainstream conservative British paper The Daily Telegraph, noted:
"More and more investors are sending their hard-earned cash on an offshore holiday and are seeing it work harder for them as a result.
"Make no mistake, tax evasion, wherever it takes place, is illegal. Tax mitigation, on the other hand, is legal -- and financial advisers reckon it should play an important part in everyone's financial planning."
No wonder the taxman is worried.

Taxman's tactics

Quite predictably, a popular tactic currently in use is to create confusion and blur the line between legal tax avoidance and criminal tax evasion, thus scaring prospective clients of offshore havens into falling back into line.
At the same time, offshore financial centres have been accused of "unfair tax competition" and put under undue pressure to throw out all legislative provisions offering tax breaks and bank secrecy to international investors.

Blurring the line

The Fiscal Affairs Committee of the Organisation for Economic Co-operation and Development (OECD) has been at the forefront of the campaign to snuff out "unfair tax competition" at the behest of industrialised world's governments.
Donald Johnston, Secretary-General of the OECD, gave his views on the difference between tax evasion and tax avoidance:

			The OECD has been at the forefront of the global campaign against legal tax avoidance.

"I would like to be clear at the outset that the focus of the OECD's work and our discussion today is tax evasion and illegal tax avoidance. I personally was a tax lawyer for many years and I know these definitions can be tricky.
"Tax evasion is easy: it involves breaking the law. By tax avoidance OECD means unacceptable avoidance ... This can be contrasted with acceptable tax planning. What is critical is transparency."
Tax evasion, as Johnston correctly notes, involves breaking the law. It is plainly and simply not paying one's taxes where the law clearly states that they must be paid. It is illegal, and Johnston wastes no time pointing this out.
However, he seems to be reluctant to give a clear definition of tax avoidance.
All good lawyers rely on their books, so to help Johnston out with this "tricky" definition let's seek the answer in the 1995 Oxford Dictionary which defines tax avoidance as "the arrangement of one's financial affairs so that one only pays the minimum amount of tax required by law."
By definition, paying the minimum amount required by law is within the law. It is always legal.

Legal but unacceptable?

In most western democracies, we have come to understand that one's actions can either be within the law, or outside of it -- legal or illegal. This is how civilised societies have functioned for centuries. Yet Johnston's comment suggests that he wishes to introduce an entirely new concept into the legal system: acceptable legality and unacceptable legality.
Johnston isn't alone. In Britain, Dawn Primalo, the Paymaster General, is leading a campaign not dissimilar to the Salem Witchhunts. Primalo has warned of the fires that await those who dare to deprive the public purse of its due with the following sermon:
"There is a limit to what we ... regard as acceptable. And that limit is breached when people take advantage of tax breaks in a way Parliament would not have anticipated ... Those who do so must be prepared for us to ... clamp down ... They must recognise they are playing with fire."

Target: Bank secrecy

Let's once more return to Donald Johnston's view on tax avoidance vs. tax evasion. The following remark deserves attention:
"What is critical is transparency," says Johnston.
Not only a tax lawyer and a politician, the OECD Secretary-General is proving to be a skilled wordsmith.
In Johnston's world, "transparency" should be understood as the right of high-tax governments to access on demand overseas bank records, thus revealing the location of assets that might have escaped their net.

			The OECD has committed itself to ending all forms of bank secrecy worldwide.

Up until now, offshore bank secrecy legislation and the unwillingness of offshore financial centres to exchange information have protected the international investor from the clutches of ex-spouses, litigants, political oppressors and tax zealots alike.
The OECD would like to change all that. Under Johnston's direction, the organisation has duly committed itself to ending all forms of bank secrecy worldwide and establishing supranational information exchange protocols.

Source : http://www.offshore-fox.com/