The paper 'International Tax Evasion and International Tax Avoidance" is an outstanding example of macro and microeconomics coursework. Tax avoidance is the legitimate use of a tax regime to an individual’ s advantage, which entails reducing the amount of tax that one is legible to pay by utilizing the various ways that are legitimate within the prevailing law concerning taxation. On the other hand tax evasion is used to describe the illegal ways that corporations and individuals utilize with the aim of not paying taxes. They would evade taxes completely. According to Farmer and Lyal (2004), tax mitigation is used interchangeably with tax avoidance and they mean the same thing.
International tax avoidance is tax avoidance, which is analyzed on the international scene. Tax avoidance can happen in the following ways: Legal entities By avoiding the change of residence, personal taxation may be legitimately done away with by enacting a separate legal entity in which donations of one’ s property is made. The legal entity may be in the form of foundation, trust, or company. The company or trust receives assets transferred to it so that profits are recorded.
The income is reflected as being earned by the new entity as opposed to the former. If the assets are reversed back to the individual, all profit will be subjected to capital gains taxes. The formed entity can avoid corporate taxation if is formed in an offshore jurisdiction. Salary or dividend will attract income tax. The trust settler will not be permitted to be a beneficiary or trustee and may lose management of the asset transferred or maybe draw benefits from it. Legal entities that are formed this way are a form of tax avoidance (Lan Mo, 2006). Double taxation Majority of nations place taxes on profits or returns earned overlooking the residence of the firm or person.
Majority of countries have signed double taxation bilateral treaties with other countries in order in an effort of avoiding those who are not residents twice-that is the country of residence and where the income is earned. Few taxation treaties have been enacted. Moving one’ s assets to a tax haven in itself is not sufficient to guarantee avoidance of tax, the person may also have to relocate to the tax haven.
Loopholes in this create a chance for tax avoidance. Legal vagueness The result of tax is dependent on legal terms definitions which are more often than not vague. Differentiation between personal expenses and business expenses raises some vagueness that has been troubling the tax authorities and taxpayers. Vague penumbra in many tax law terms and it is a potential origin of tax avoidance cases (Pasquale, 2002). Country of residence Another form in which a person can underrate or undervalue taxes that he owes to the relevant authorities by transferring to a tax haven his tax residence or being always on transit.
A haven is a country where the tax rate imposed on assets, or tax for carrying out business is very little therefore making those who would want to avoid high taxation in their own countries to transfer there. A number of countries impose taxes on permanent residents, companies and citizens on their worldwide income. This has an impact to the extent that is not easy to avoid tax in that particular country.
A very good example of such a country in the United States of America. Permanent residents and citizens alike are subject to federal income tax levied by the United State of America. Consequently simply moving abroad or just relocating one’ s asset cannot accomplish taxation avoidance. This culture in the United States of America has prompted, according to reports by some news agencies, to relinquish their American citizenship in favour of the other country that may seem to be a tax haven. This is after discovering that they cannot simply avoid tax by only emigrating.
Nevertheless, United States citizens may succeed in excluding some of their salaried income obtained overseas from their total income and therefore end up with a lesser figure when computing the United States of America federal regime tax. However, there is a ceiling to how much should be excluded (Farmer & Lyal 2004).
Lan Mo, P., 2006, Tax avoidance and anti-avoidance measures in major developing economies. Greenwood Publishing Group, New York.
Thuronyi V., 1998, Tax law design and drafting, Volume 2. International Monetary Fund, New York.
Farmer P., & Lyal R., 2004, EC tax law. Oxford University Press, Oxford.
Terra B. J. M. & Wattèl, P. J. 2001, European tax law. Kluwer, Kluwer.
Pasquale P., 2002, The impact of Community law on tax treaties: issues and solutions, Kluwer: Kluwer Law International.