Tax Evasion and Tax Avoidance

This study note looks at tax evasion and tax avoidance.

Tax evasion and tax avoidance are both ways of reducing your tax liability, but they are very different in terms of legality.

Tax evasion is the illegal act of deliberately understating your taxable income or overstating your deductions in order to pay less tax. Tax avoidance, on the other hand, is the legal act of using legitimate tax planning strategies to reduce your tax liability.

Tax evasion is a serious crime that can result in jail time and financial penalties. Tax avoidance, on the other hand, is not illegal, but it can be controversial. Some people believe that tax avoidance is unfair because it allows wealthy individuals and corporations to pay less tax than they otherwise would. Others argue that tax avoidance is a legitimate way to reduce your tax liability and that it is not the government's job to tell people how to spend their money.

The line between tax evasion and tax avoidance can be blurry. In some cases, it may not be clear whether a particular strategy is legal or illegal.

How can multinational companies engage in legal tax avoidance?

Multinational companies can engage in legal tax avoidance in a number of ways, including:

• Transfer pricing. Transfer pricing is the practice of setting prices for goods and services that are transferred between different parts of a multinational company. Multinational companies can use transfer pricing to shift profits to low-tax jurisdictions.
• Intangible assets. Multinational companies can use intangible assets, such as patents and trademarks, to shift profits to low-tax jurisdictions.
• Hybrid mismatch arrangements. Hybrid mismatch arrangements are complex financial structures that can be used to shift profits to low-tax jurisdictions.
• Base erosion and profit shifting (BEPS). BEPS is a tax avoidance strategy that involves artificially shifting profits to low-tax jurisdictions.

Here are some real-world examples of multinational companies that have been accused of tax avoidance:

• Apple. Apple has been accused of using transfer pricing to shift profits to Ireland, where it pays a corporate tax rate of 12.5%.
• Google. Google has been accused of using transfer pricing to shift profits to Bermuda, where it pays no corporate tax.
• Amazon. Amazon has been accused of using a complex web of subsidiaries to shift profits to Luxembourg, where it pays a corporate tax rate of 20%.

Tax avoidance is a complex issue, and there is no easy solution. Governments are working to close the loopholes that multinational companies use to avoid paying taxes, but it is a difficult task.