Following up on my recent comments on piracy, recent news reports have forced me to learn the subtle difference between “tax evasion” and “tax avoidance”. Apparently “evasion” is when you don’t pay the taxes you’re required by law. “Avoidance” is when you don’t pay the taxes you’re required by law, but structure your property or income in such a way that you don’t pay (much) tax. It sounds like a pretty clear distinction, but the application can be dubious.
The Times recently reported on a widely used scheme that is so banal, so transparent, that one can hardly see it as representing anything other than a fig leaf to cover the authorities’ wish not to to tax the wealthy and powerful. The way it works is, extremely wealthy individual X doesn’t like his salary from company Y being taxed by government G, as though he were just an ordinary citizen. So he comes to an agreement with Y that they will stop paying him a salary, and instead pay an offshore shell company K2 for his services. So far so good. Y now pays no tax, because he has no income, but for obvious reasons this is not entirely satisfactory. Poor Y, who is now starving in a garret with no visible means of support, appeals to the good will of K2 (which has made such a great profit from Y’s tax aversion) for a loan. They’re a soft touch, and they loan him essentially all the money they’ve earned on his case, telling him, “Pay us back when you can.” He never pays it back, but they never lose hope. Loans are not taxable, of course, unless they are written off. Continue reading “Evasion and avoidance”