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Tax Avoidance vs. Evasion Explained

This chapter discusses tax avoidance, tax evasion, and tax planning. It notes that tax avoidance legally exploits loopholes to reduce tax liability, while tax evasion illegally hides or misrepresents financial information. Tax planning systematically analyzes options to legally minimize current and future taxes. Causes of evasion include high tax rates, complex laws, low audit probabilities, and lack of penalties or education. Strategies to address evasion include lowering rates, increasing deductions, education, and strengthening enforcement.

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embiale ayalu
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193 views14 pages

Tax Avoidance vs. Evasion Explained

This chapter discusses tax avoidance, tax evasion, and tax planning. It notes that tax avoidance legally exploits loopholes to reduce tax liability, while tax evasion illegally hides or misrepresents financial information. Tax planning systematically analyzes options to legally minimize current and future taxes. Causes of evasion include high tax rates, complex laws, low audit probabilities, and lack of penalties or education. Strategies to address evasion include lowering rates, increasing deductions, education, and strengthening enforcement.

Uploaded by

embiale ayalu
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

CHAPTER FIVE

TAX AVOIDANCE AND EVASION


CONT…
Tax evasion and tax avoidance are neither new
nor peculiar to a certain country
Prevalent in all countries through out the world
◦ As early as 1920, tax evasion was evident in the
UK…that evasion of IT exists at the present is
beyond question
◦ In 1936, it was found that efforts of tax evasion in
the US were widespread
◦ In the past few years, the situation has got serious
attention in Ethiopia
CONT…
Tax avoidance - an attempt to reduce tax liability by
legal means, for example, by exploiting loopholes;

legalexploitation of the tax regime to one’s own


advantage;

Examples
• Donations 10% of taxable income… is it taxable income
before donation or after donation
• CGS to be computed at average cost method… simple,
weighted or moving?
CONT…
Tax evasion - attempting to reduce tax
liability illegally (by breaking laws);  

Tax evasion - intentional


misrepresentation or hiding of the true
state of taxpayers’ affairs;
CONT…
Tax evasion may be through suppression
of income or exaggeration of
expenditures;

Includes taxpayers that:


◦ deliberately understate their income;
◦ over claim deductions, credits;
◦ fail to lodge returns and pay; or
◦ do not keep the required records etc
Other various forms of evasion
Maintenance of multiple books of
accounts
Opening accounts under dummy names
Securing contracts under dummy names
Deducting personal expenses
Omission of income from irregular
sources
CONT…
Theoretically,there are a number of factors
causing tax evasion:
• high tax rates- first and foremost reason for
evasion which makes the evasion attractive and
profitable
• Complexity of tax laws- demanding lots of time
and cost to comply with
• low probability of audit-inadequacy of power and
lack of experienced personnel in the tax authority
• Lack of publicity- lack of public information
about the person’s return or assessment
CONT…
• low penalty rate-penalty in money terms or no
penalty
• level of education-lack of awareness of taxpayers
• Corrupt practices- the general environmental
practices
• peers’ evasion decision- a sense of equity … others
are doing it why not me

As both of them happen to occur together, one


expert coined his own term for the scheme as
‘tax avoision’
Measures to be taken
Reduction of tax rates
Allowance of additional business
expenses
Education to people
Change in penal provisions
Permanent account number
Public opinion
No awards or recognition
CONT…
Tax planning

Systematic analysis of differing tax


options aimed at the minimization of tax
liability in current and future tax periods;
CONT…
Features of tax planning :

tax planning is legal;

consider tax effects before transactions are


finalized;

pay close attention to the structural and


transactional categories established by the
government;
CONT…
◦ mitigate tax liability by:
 avoiding statutory income, obtaining
deductions;
 use exclusions
 postpone income recognition;
 accelerate losses and deductions;
 change tax jurisdictions – to those that have
preferential treatment;
 Spreading/shifting income among related
taxpayers
CONT…
Basics of tax planning

• deduct,
• defer and
• Divide
……

THE END

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