Chapter 5: Tax

avoidance and evasion

 Pervasiveness
Tax evasion and tax avoidance are neither new
nor peculiar to a certain country
Prevalent in all countries through out the world
As early as 1920, tax evasion was evident in
the UKthat evasion of IT exists at the
present is beyond question
In 1936, it was found that efforts of tax
evasion in the US were widespread
In the past few years, the situation has got
serious attention in Ethiopia
Tax avoidance - an attempt to reduce tax liability
by legal means, for example, by exploiting
loopholes;
Legal exploitation of the tax regime to ones
own advantage;
Examples
Donations 10% of taxable income is it
taxable income before donation or after
donation
CGS to be computed at average cost
method simple, weighted or moving?
 Tax evasion - attempting to reduce tax
liability illegally (by breaking laws);
Tax evasion - intentional misrepresentation or
hiding of the true state of taxpayers affairs;
Tax evasion may be through suppression of
income or exaggeration of expenditures;
Includes taxpayers that:
deliberately understate their income;
over claim deductions, credits;
fail to lodge returns and pay; or
do not keep the required records etc
 Other various forms of
evasion
Maintenance of multiple books of accounts
Opening accounts under dummy names
Securing contracts under dummy names
Deducting personal expenses
Omission of income from irregular sources
 Theoretically, there are a number of factors
causing tax evasion:
high tax rates- first and foremost reason for
evasion which makes the evasion attractive and
profitable
Complexity of tax laws- demanding lots of time
and cost to comply with
low probability of audit & detection-
inadequacy of power and lack of experienced
personnel in the tax authority
Lack of publicity- lack of public information
about the persons return
 Low penalty rate- nominal penalty or no penalty
Low level of education-lack of awareness of
taxpayers
Corrupt practices- the general environmental
practices
Peers evasion decision- a sense of equity
others are doing it why not me
Financial constraint
As both of them happen to occur together, one
expert coined his own term for the scheme as
tax avoision
 Measures to be taken
Reduction of tax rates
Allowance of additional business expenses
Education to people
Change in penal provisions
Permanent account number
Use of public opinion as feedback
awards or recognition
 Tax planning
Systematic analysis of different tax options
aimed at the minimization of tax liability in
current and future tax periods;
Features of tax planning :
Tax planning is legal;
Consider tax effects before transactions are
finalized;
Pay close attention to the structural and
transactional categories established by the
government;
 Mitigate tax liability by:
Postpone income recognition;
Accelerate losses and deductions;
Change tax jurisdictions to those that
have preferential treatment;
Spreading/shifting income among
related taxpayers
Basics of tax planning
Deduct,
Defer and
Divide
End of Chapter 5