What is Tax Avoidance and Tax Evasion?

If you are unaware of the exact meaning of tax avoidance and tax evasion then you should read on. Tax avoidance refers to the process of utilizing the tax policies of a country in a legal way to lessen the money which one needs to pay as tax. There are different ways which are used by people for tax avoidance. By changing the tax residence to some tax haven like Monaco, an individual can lessen the taxes he needs to pay. However, in those countries where tax is levied on the worldwide income of an individual or company; it becomes impossible to avoid taxation just by going to some other country or transferring the assets.

Another way to legally avoid taxation is to create an altogether different legal entity towards which one donates his property. By using this method, a person does not need to change his country of residence. Any trust, foundation or company may act as the separate legal entity. In this method, all the assets are required to be transferred to the trust or company so that the income generated is associated with the company or trust and not the individual owner.

Now, we would talk about tax evasion. Tax evasion is a general term which refers to all those tactics and efforts which are applied by various companies, individuals, trusts and firms to evade taxes through illegal means. Tax evasion usually involves false representation of the earnings of a firm or company to the tax authorities. It means that lesser income is reported to the tax authorities for evading the taxes. In order to evade taxes, a lot of tactics are used by people and companies. Evading the custom duties is one of the most commonly used methods for tax evasion. In developing countries, custom duties form a very important source of revenue.

In order to evade taxes, importers do under invoicing and false declaration of amount and description of products. Under invoicing helps in reducing the tax base in those cases where ad valorem import duty is levied. Smuggling is also a way of tax evasion. Smuggling refers to export and import of goods through unauthorized routes. Smuggling altogether evades taxes as it involves getting good received or delivered in to or from a country without giving any clue to the concerned custom authorities.