Tax avoidance,tax evasion,tax mitigiation Essay

Tax avoidance,tax evasion,tax mitigiation - Essay Example Tax avoidance and Tax evasion are two of the most common terms and concepts used and utilized by the taxpayers in escaping from payment of taxes. Learning and understanding these terms will help the taxpayers avoid criminal and civil liabilities. Tax avoidance is a means to escape from taxation, which is allowed and sanctioned by law. A taxpayer committing this will not be legally held civilly or criminally liable to the government provided it is used in good faith and within the process allowed by law, otherwise the taxpayer will be committing tax evasion which is a crime. The utilization of the means and methods sanctioned by law would enable the taxpayer reduce the amount due to be taxed. Example of tax avoidance is when the taxpayer structures his/her any legitimate transaction to save tax and such transaction is what would really appear in form. And this transaction if the taxpayer is the vendee or payee could declare this as deduction. Tax Evasion on the other hand, is reductio n or elimination of tax due by means outside the law. It is illegally committed and punishable by law. A corporation, individual and other entity may resort to means in order to avoid paying the taxes. And the means employed is always dishonest like declaring less or no income, less profits or no gains than the taxpayer actually earned or it could be committed by inflating deductions. For example, a corporation will evade tax by declaring charitable contributions of $ 2.5 million as deduction although what was actually contributed is $.5 million only. The law does not allow this and anyone caught doing this will be held criminally and civilly liable. The difference between tax avoidance and tax evasion is on the tax itself. In tax avoidance, the taxpayer is legally avoiding the payment of any tax liability that is not in existence at the time. Meaning to say, there is no tax due at the moment of transaction and the taxpayer utilized method within the law so that no tax liability wou ld be incurred later or if there is, it would be less. In tax avoidance, there is already a tax due to be paid and the taxpayer resort to illegal means so that it will not be able to pay the owed tax. This type entails concealment or misrepresentation of earnings that are taxable immediately.. Tax mitigation is also similar to tax avoidance. Both resort to means not prohibited by law. Sometimes, these two concepts are used interchangeably. Tax mitigation is known as tax planning to mitigate or reduce tax liability. It is a conduct made to reduce tax liability without conducting tax avoidance or which is contrary to the intention of the Parliament. There are conducts which are allowed for tax mitigation and which are not in the case of tax avoidance. It is important in distinguishing one from the other, especially the two concepts which are tax avoidance and tax evasion because it will help the taxpayer in understanding the consequences of each conduct to reduce tax liability. Since tax avoidance is a criminal offense punishable by law, knowing the distinction would save one from committing this criminal offense while saving money from taxes without breaking the law. It will help taxpayers to arrange their affairs and keep taxes as low as possible. The tax code is confusing not only for average people but also for those knowledgeable professionals. Hence, it is important to define these two concepts so as not to fall into a criminally punishable offense. The Ramsay Principle: My understanding This principle emanated for two cases : W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling, [1982] A.C. 300 and IRC v. Burmah Oil Co. Ltd., [1982] S.T.C. 30, H.L.(Sc.)decided by the House of Lords in connection with tax payment and schemes resorted to avoid it. In this case, the company in order to lessen the amount of taxes for the transaction of transfer of assets and payment resorted to scheme by drafting sets of documents,