Definition of tax avoidance
Tax avoidance is a practice of using legal means to pay the least amount of tax possible. This is different to tax evasion which is the practice of using illegal methods to avoid paying tax.
There is also a difference between avoidance and tax planning as paying minimal tax is not necessarily a sign of avoidance.
Tax avoidance is using the tax law to obtain a tax advantage that the government never intended. It frequently involves contrived, artificial transactions that serve no purpose other than to reduce tax liability. Tax planning involves using tax reliefs for the purpose for which they were intended. Also see tax haven and tax shelter.
tax avoidance in the news
In 2013, the plan to tackle multinationals’ tax avoidance has been drawn up for the G20 in the wake of a firestorm of public anger – particularly in Europe and Australia – over the low tax bills paid by certain companies.
The existing principles were designed decades ago in an era before tax havens and the digital economy. Increasingly, globalisation has put a strain on the system, not least because of the ease with which multinationals have centralised their intangible assets – the intellectual property, brands, trademarks and knowhow that now make up 80 per cent of their value – in low tax countries.
Policy makers have attempted to tackle these issues before but never in such a comprehensive, ambitious and public way. Governments – with differing degrees of enthusiasm – agree that the system needs reform and the status quo is not an option.
Internet companies have also become the poster children of aggressive tax avoidance. The OECD is setting up a dedicated task force to look at their business models and examine the question of how companies can have a significant digital presence in a country without being liable to taxation.