Basics on Tax Evasion, Tax Avoidance and Tax Planning

• Background

The terms tax evasion, tax avoidance and tax planning are very common in the taxation literature. Any student of taxation, even at elementary level, is expected to have at least a fair understanding of these terms, their objectives, as well as their similarities and differences.

While the three terms share a common objective; that is elimination or reduction of the taxpayer’s tax liability, their differences arise from the mode and the spirit behind the approaches taken to achieve the objective.

• Tax Evasion

The Organisation for Economic Cooperation and Development (OECD), defines tax evasion as a term which is generally used to mean illegal arrangements, where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities.

Tax evasion is technically illegal. It is when people or businesses deliberately do not declare and account for the correct taxes that they owe the Government.

Tax evasion includes the hiding of taxable income, deliberately overstating deductible expenses and other fraudulent practices.

Tax evasion is generally a criminal offence punishable by fines or imprisonment.

• Tax Avoidance

Tax avoidance is defined by the OECD to mean the arrangement of a taxpayer’s affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal, it is usually in contradiction with the intent of the law it purports to follow.

Tax avoidance involves taking advantage of some tax rules in the tax system to gain a tax advantage that Parliament never intended. It involves operating within the letter – but not the spirit – of the law.

Tax avoidance is generally not a criminal offence. However it is worth noting that tax avoidance may be unsuccessful because statutory anti-avoidance rules or judicial anti-avoidance doctrines apply to counteract tax avoidance transactions.

There are several approaches Governments and courts use to deter or curb tax avoidance arrangements or transactions. These include the use of general and specific ant-avoidance provisions within the tax laws. Examples of anti-avoidance provisions in Tanzania include section 8 of the Tax Administration Act, 2015, Section 12, 33 and 34 of the Income Tax Act, 2004.

• Tax Planning

Tax planning refers to the process of studying and ensuring full utilization of the tax saving opportunities provided under the tax laws.

Tax planning emanates from the fact that tax laws are usually enacted with some incentives or opportunities for reduction of tax liabilities which are specifically intended by the legislature, because of some fiscal policies driven by some social, economic and political reasons. These incentives are of different categories including allowable deductions, capital allowances, tax credits, exclusions, tax exemptions, tax reliefs, tax deferrals and many others.

Tax planning involves elimination or reduction of a taxpayer’s tax liability legally by complying with both the law and the spirit of the law or the intention of the legislature. This marks a clear distinction between tax avoidance and tax planning.

Taxpayers’ usually engage in tax planning activities, through the assistance of competent and experienced Tax Consultants.

The author of this article is an experienced Tax Consultant, working as a Managing Director at Rook Consultants Ltd and he can be reached through Jiduma.luhende@rookconsultants.co.tz.