Benjamin Franklin was apt when he said “In this world nothing can be said to be certain, except death and taxes ”. Centuries after that famous quote by the one-time American President, taxation remains a certain and consistent source of revenue for governments, albeit to varying degrees of reliance.
While it is arguable that a significant portion of total government revenue is attributable to tax in most advanced economies, developing economies are putting in efforts to ramp up contributions from tax. Consequently, tax authorities the world over often seek to assess, enforce and collect the right amount of taxes from taxpayers.
Conversely, taxpayers – whether corporate or individual – see taxation as costs and engage in various activities to optimize tax costs as with other costs, in order to maximize profits.
For “compliant” taxpayers, such activities may include taking advantage of legally available tax planning opportunities to ensure that the minimum but correct amount of taxes are paid. This speaks to the fact that it is within the right of taxpayers to plan their financial and tax affairs in such a manner as to optimize their tax positions or manage their tax exposures, as long as the provisions of the tax laws are not infringed on. Such taxpayers achieve this objective by using tax shelters provided in the tax laws, while avoiding “tax traps” in order to optimize their tax positions. Activities by taxpayers which are within the ambit of the laws and geared towards optimizing tax costs may fall within the umbrella of tax avoidance.
On the other hand, some other category of taxpayers, in the process of trying to manage tax liabilities, infringe on the provision of the laws. This category of taxpayers deliberately and illegally pay less taxes than the law permits or do not fulfill their tax obligations at all. They do this by willful non-disclosure and falsification of records. In some other instances, the taxpayers do not register with the tax authorities at all or change business address without notifying the tax authorities – all with a view to avoid their tax obligations. Such activities by taxpayers, which lead to breach or infraction of tax legislations fall within the realm of tax evasion.
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