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July 27th 2017 / BY: Wisteria

Tax Planning, tax avoidance and tax evading – what do these terms mean and what is ethical?

What is Tax Planning?

Any company with good tax governance will seek to minimise their tax liability by using tools and mechanisms that the government makes available. These include things like, allowances, deductions, rebates and exemptions, to name a few. The government accept that all taxpayers are entitled to organise their affairs in such a way to mitigate their tax liability, as long as they do so within the law.

What is Tax Avoidance?

Tax avoidance is when financial instruments and arrangements are used in ways which may or may not have been intended or anticipated by the government to gain a tax advantage. This includes using tax havens, or ‘bending’ the rules of the tax system in a way that is not illegal, to advantage yourself.

The difference between tax avoidance and tax evasion is that tax evasion is when taxes are unpaid illegally or under-paid.

Tax avoidance is often called a grey –area and there is a lot of debate about if this is ethical. However, activities that fall under the definition of Tax Avoidance are not prohibited by law.

Is Tax a social responsibility?

Tax is used to fund public services such as education, hospitals and roads to name a few. Individuals and businesses in a country benefit from these services directly and indirectly and it is therefore seen a social responsibility for them to pay their fair share of taxes. Evading or avoiding paying your taxes can be viewed as free-riding by some.

Given the current situation of the UK – where funding cuts are seen to be affecting some of our most stretched services like the NHS and emergency services, tax avoidance and evasion has been gaining a lot of media and political attention.

Companies and Individuals that have been seen to avoid/evade tax have gained a lot of negative media attention. They have been accused of being greedy and immoral, and this has damaged their reputations. Many celebrities have been caught up in this over the last few years.

Millennial consumers are ever becoming conscious of the products they are consuming. Consumers nowadays think about ethics and buy products and services that are aligned with their morals. This behaviour has seen companies like Starbucks and Amazon being criticised and boycotted as a result of their tax policies.

Conversely, J K Rowling has been praised for her stance deciding not to move any of her assets and accounts offshore for tax avoidance purposes.

What do company directors who have aggressive tax policies have to say in their defence?

Many directors and CEOs have argues that their responsibility is to maximise the returns they give their shareholders by minimising their tax bills.

They also argue that their companies contribute to the economy in other ways that cannot necessarily be quantified. For example, by creating jobs and not to forget the positive externalities created by their activities.

This is of course true and economics teaches that the more money circulates in the economy, the better things are for everyone.

Does the government need to do more to ensure the right taxes are paid?

It is a known fact that many multinational companies pay very little corporation tax. Markets have become globalised and the improvements in communication and technology in the last 30 years now mean that a business can be based anywhere in the world. This allows exploitation of differing tax rules in different countries and jurisdictions.

Corporation Tax is paid on profits that a company makes. However, due to very complex structures of multinationals, calculating and affirming the profit made in certain countries can become tedious and complicated. Double-tax treaties and tax havens in place complicate this further.

More and more governments are finding it necessary to share information and develop common tax policies. Game theory however means there will always be an incentive for countries to break ranks and offer a low tax rate – many countries have built their whole economy based on tax rates.

For more information about tax planning and advice, please contact us on 020 8429 9245 or email us at info@wisteria.co.uk.