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Legal Tax Avoidance vs. Criminal Tax Evasion Legal Tax Avoidance vs. Criminal Tax Evasion

Legal tax avoidance vs.
criminal tax evasion

Confusing legal tax planning and illegal tax evasion has become a popular tactic. Ending bank secrecy is one of the goals.

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The decline in tax revenue through the increase in international tax planning is indeed of great concern for many governments.

It is greed -- and the fear of seeing their deep pockets depleted -- that drives their frenzied attacks against offshore havens, and not a fight against international crime as we are led to believe.

It is the increased use of offshore tax free companies and secretive offshore banking by the general populace that is a major headache for the avaricious high-tax regimes, and not offshore money laundering as they claim.

The offshore exodus

Over half of Europe's top 500 companies have some kind of subsidiary incorporated offshore. About 40% of the companies quoted on the Hong Kong stock exchange are actually domiciled offshore in Bermuda. Multinational companies often create some of the most efficient and ingenious tax mitigation methods through the use of multiple jurisdictions.

More and more investors are sending their hard-earned cash on an offshore holiday and are seeing it work harder for them as a result.

And it's not only multinationals.

Hilary Morison, writing in the mainstream conservative British paper The Daily Telegraph, noted:

"More and more investors are sending their hard-earned cash on an offshore holiday and are seeing it work harder for them as a result.

"Make no mistake, tax evasion, wherever it takes place, is illegal. Tax mitigation, on the other hand, is legal -- and financial advisers reckon it should play an important part in everyone's financial planning."

No wonder the taxman is worried.

Taxman's tactics

Quite predictably, a popular tactic currently in use is to create confusion and blur the line between legal tax avoidance and criminal tax evasion, thus scaring prospective clients of offshore havens into falling back into line.

At the same time, offshore financial centres have been accused of "unfair tax competition" and put under undue pressure to throw out all legislative provisions offering tax breaks and bank secrecy to international investors.

Blurring the line

The Fiscal Affairs Committee of the Organisation for Economic Co-operation and Development (OECD) has been at the forefront of the campaign to snuff out "unfair tax competition" at the behest of industrialised world's governments.

Donald Johnston, Secretary-General of the OECD, gave his views on the difference between tax evasion and tax avoidance:

The OECD has been at the forefront of the global campaign against legal tax avoidance.

"I would like to be clear at the outset that the focus of the OECD's work and our discussion today is tax evasion and illegal tax avoidance. I personally was a tax lawyer for many years and I know these definitions can be tricky.

"Tax evasion is easy: it involves breaking the law. By tax avoidance OECD means unacceptable avoidance ... This can be contrasted with acceptable tax planning. What is critical is transparency."

Tax evasion, as Johnston correctly notes, involves breaking the law. It is plainly and simply not paying one's taxes where the law clearly states that they must be paid. It is illegal, and Johnston wastes no time pointing this out.

However, he seems to be reluctant to give a clear definition of tax avoidance.

All good lawyers rely on their books, so to help Johnston out with this "tricky" definition let's seek the answer in the 1995 Oxford Dictionary which defines tax avoidance as "the arrangement of one's financial affairs so that one only pays the minimum amount of tax required by law."

By definition, paying the minimum amount required by law is within the law. It is always legal.

Legal but unacceptable?

In most western democracies, we have come to understand that one's actions can either be within the law, or outside of it -- legal or illegal. This is how civilised societies have functioned for centuries. Yet Johnston's comment suggests that he wishes to introduce an entirely new concept into the legal system: acceptable legality and unacceptable legality.

Johnston isn't alone. In Britain, Dawn Primalo, the Paymaster General, is leading a campaign not dissimilar to the Salem Witchhunts. Primalo has warned of the fires that await those who dare to deprive the public purse of its due with the following sermon:

"There is a limit to what we ... regard as acceptable. And that limit is breached when people take advantage of tax breaks in a way Parliament would not have anticipated ... Those who do so must be prepared for us to ... clamp down ... They must recognise they are playing with fire."

Target: Bank secrecy

Let's once more return to Donald Johnston's view on tax avoidance vs. tax evasion. The following remark deserves attention:

"What is critical is transparency," says Johnston.

Not only a tax lawyer and a politician, the OECD Secretary-General is proving to be a skilled wordsmith.

In Johnston's world, "transparency" should be understood as the right of high-tax governments to access on demand overseas bank records, thus revealing the location of assets that might have escaped their net.

The OECD has committed itself to ending all forms of bank secrecy worldwide.

Up until now, offshore bank secrecy legislation and the unwillingness of offshore financial centres to exchange information have protected the international investor from the clutches of ex-spouses, litigants, political oppressors and tax zealots alike.

The OECD would like to change all that. Under Johnston's direction, the organisation has duly committed itself to ending all forms of bank secrecy worldwide and establishing supranational information exchange protocols.


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