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Understanding tax avoidance

Updated Thursday 3rd March 2016

How can we reduce tax avoidance, and who is responsible for addressing it? Peter Bloom breaks down a growing phenomenon.

Tax return Creative commons image Icon Images_of_Money under CC-BY licence under Creative-Commons license In recent years, tax avoidance has emerged as an important economic and political issue. As countries struggle with debt and providing public services, the efforts by leading companies to limit the amount of tax they pay has raised serious concern and demands for reform. It opens up larger questions about the fairness of the economic system and the responsibility of corporations to society.  This episode of the Bottom Line looks at these timely themes in depth.

A deceptively simple question: what is tax avoidance? In particular, how can we distinguish it from tax evasion? Tax avoidance is the legal use of the given system to minimise one’s taxes. It can include loopholes and tax haven. Companies who are avoiding taxes do so openly and legally. By contrast, tax evasion is the illicit attempt to not pay one’s taxes. While these concepts are different, they are by no means identical. Graeme Cooper explores these differences in his article Tax avoidance or tax evasion? A haven for misunderstanding in The Conversation.

There is a growing legal industry emerging around this phenomenon. ‘Wealth management professionals’ have arisen to help companies and rich individuals cut their tax payments. Specifically, they are paid to navigate the tax code precisely for this purpose. They can find loopholes and other opportunities for lessening how much their clients pay within an increasingly complex set of regulations. Although completely licit in their profession, they often act outside the public view. Brooke Harrington uncovers this commonly hidden world in her article Inside the Secretive World of Tax-Avoidance Experts for The Atlantic.

Whether or not it is legal, there is a growing majority of the population who would like to see this practice substantially reduced. A crucial issue for doing so is to increase the transparency of information between countries about tax data. It also entails ‘fixing’ what many see are unfair discrepancies in financial regulation and reporting between countries. The OECD Base Erosion and Profit Shifting (BEPS) project, for instance, attempts to address these issues. Additionally, there are nationally based legal measures, such as closing certain loopholes, which can help to offset the negative impact and minimise the instances of tax avoidance. Antony Ting critically investigates such potential solutions in his article ‘War’ on tax avoidance overlooks some obvious legal fixes in The Conversation.

There are more radical ideas for dealing with this problem. One of the more popular is to directly punish the banks who assist corporations in avoiding taxes. Huge banks continue to serve as attractive places for companies to place their money to pay less taxes. They also create financial mechanisms such as the ‘Interest Rate Swaps’ and ‘Trade Return Swaps’ to evade taxes. Governments are for this reason increasingly seeking to reduce the role of banks because of their contribution to this problem. In doing so they are revealing their willingness to potentially not only punish businesses but all those who help facilitate tax noncompliance. Pat McConnell describes these efforts in his article If you want to crack down on tax avoidance, go after the banks in The Conversation.

Others have advocated for a more global solution. Whereas recognising that tax avoidance is technically legal, they point out that it is the poor who most suffer from its effects. Further, these avoidances take precious resources from projects and services vital to a country’s welfare and development. These conditions can threaten other countries because of problems of economic migration and political instability. For this reason, it is far from a national problem. Consequently, there is a rising call for international organizations such as the United Nations to play a direct role in dealing with this issue. José Antonio Ocampo and Magdalena Sepúlveda Carmona discuss this possibility in their article Tax avoidance by corporations is out of control. The United Nations must step in in The Guardian.

This article was written to accompany the Winter 2015-16 series of The Bottom Line.
For more information on the series, visit the series page.

 

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