Tax evasion and tax avoidance are two concepts widely used in taxation. Businesses or even individuals can save their tax liabilities through various techniques that are either tax evasion or tax avoidance. Even though these involve saving tax liabilities, there is a massive difference in terms of legality and ethical reflection.
Tax Evasion vs. Tax Avoidance
Tax evasion refers to avoiding tax liability through illegal, fraudulent, or impermissible means. Therefore, tax evasion, in simple terms, is illegal. It is actually a deliberate failure to comply with tax laws. Tax evasion involves concealing earnings or moving income to foreign jurisdictions that do not abide by a taxpayer’s native country’s regulations. Moreover, it also includes falsifying tax documentation and exaggerating expenses or understating revenue. Engaging in tax evasion can lead to penalties and potential legal prosecution.
Tax avoidance, on the other hand, involves reducing tax liabilities through legal means. For instance, in the UAE, corporate tax should be in accordance with Federal Decree-Law No. 47 of 2022 and other related laws and regulations. Tax avoidance actually involves tax planning that reduces tax liability and keeps the business compliant. For instance, it includes, making use of available tax reliefs, properly using tax losses to reduce tax liabilities in the current year and future years, and so on. Generally, tax avoidance is totally legal; however, there is a continuous discussion on whether it is always ethical or not.
The scenario of tax evasion
Tax evasion is often difficult to spot; therefore, extreme professionalism and knowledge are needed to highlight tax invaders. The tax invaders usually structure the transaction in such a way that it looks legitimate. For instance, if a business in the UAE imports goods that are to be taxable at the standard rate, the business states that the goods are actually re-exported and thus claims a VAT refund. However, in reality, the goods are present in the UAE at different locations. This is a clear case of tax invasion. As the motive is to save the tax liability through fraudulent reporting to the tax authorities, it is tax evasion.
The UAE government has a whistleblower program, “Raqeeb”, to identify tax evasion. In this program, anyone can report instances of tax violations to the Federal Tax Authority (FTA) for a potential monetary reward. It actually aims to increase tax compliance and decrease tax evasion in the UAE.
The legal vs. ethical battle
Tax evasion is, by no means, an illegal practice, while tax avoidance is legal. There is a continuous debate on whether tax avoidance is ethical or not. However, ethics itself is a subjective topic.
Tax avoidance is no doubt a legitimate way to manage the tax burden. It is generally accepted by the authorities. While it is legal and beneficial, abusive or exploitative tax avoidance that makes use of loopholes can sometimes lead to scrutiny. If there is no economic substance in tax avoidance, it points out that there might be misuse. This will ultimately signal the need for a change in tax laws.
Types of tax avoidance
Tax avoidance reduces tax liabilities within the boundaries of tax laws. There are various legal means to avoid or reduce taxes; however, we are discussing a few examples below.
Structuring business in a tax-efficient manner:
Sometimes, only structuring a business in an efficient manner can result in a low tax liability. For instance, in the UAE, forming a tax group has tax benefits. A business might be able to set off its taxable losses against the taxable profits of other companies in a group. However, it is subject to conditions. Check out this blog on group relief for further information.
Incorporating in a jurisdiction with favorable tax laws:
Businesses, even certain MNCs, incorporate their businesses where there is low taxation. For instance, many businesses from around the world consider incorporating in the UAE due to the favorable tax environment. However, the UAE has started corporate tax and VAT, but it is still low compared to other larger economies in the world. Furthermore, depending on their nature, businesses in the UAE may consider incorporating into the free zones to get advantages. For instance, Qualifying Free Zone Persons (QFZP) may be subject to 0% corporate tax. However, it is subject to conditions. For further discussion, check out this blog on free zones.
Making use of tax exemptions and reliefs:
Making use of all the exemptions and reliefs is beneficial and legal. Furthermore, there is usually no question about their ethical compliance. In the UAE, there are various exemptions and reliefs available. For instance, a business can claim Small Business Relief (SBR), in which case it may get an exemption from paying taxes. For further detail, check out this blog on Small Business Relief.
In conclusion, tax evasion and tax avoidance represent two different approaches to managing tax liabilities. While tax evasion involves illegal and fraudulent practices to evade taxes, tax avoidance incorporates strategies to minimize tax obligations within the boundaries of tax laws. Although tax avoidance is generally acceptable, ongoing discussions persist regarding its ethical implications. Responsible tax planning remains essential to maintaining a balance between legal tax optimization and ethical conduct.
Consult Creative Zone Tax & Accounting (CZTA) for tax planning:
We strongly believe that integrity is the key to a successful business. This is what we practice in our organization as well as what we recommend to our clients. Tax planning is something that is necessary nowadays; therefore, proper management and forecasting of taxation are important. We at CZTA always consult our clients on ways of tax avoidance that are both legal and ethical. For any tax guidance or consulting, feel free to contact us.