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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.
In 2013, a plan to tackle multinationals’ tax avoidance was drawn up by 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.
It was argued that existing principles had been designed decades ago in an era before tax havens and the digital economy. Increasingly, globalisation placed 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.
Governments – with differing degrees of enthusiasm – agreed that the system needs reform and the status quo is not an option.
Internet companies also became the poster children of aggressive tax avoidance. The OECD set 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.
In 2014, plans to “restore taxation” in the countries where digital companies make their sales and base their headquarters were set out by the OECD in the first international response to the worldwide political row over the sector’s low tax payments.
Campaign groups and charities also voiced support for extending taxing rights so that countries would be able to tax companies even when these businesses have no people or buildings in a country – provided they have a website or gather data there. But business groups voiced strong opposition to the idea, saying it would cause significant complexity and uncertainty. 
In April 2014 an FT story described how US companies were using a practice known as inversion – by moving their headquarters overseas they have been able to slash their tax rate. See graphic: