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The difference between
Tax Evasion and Tax Avoidance


There is a distinct difference between tax evasion and tax avoidance, and yet I've seen some people write as if they are confused about the distinction. So here's an explanation to make the definition clear to understand:

Tax evasion is illegal, but tax avoidance is legal.

To draw a parallel in shopping, it's like the difference between shoplifting and shopping around. If you're in a shop and you think the prices are too high, one way to evade the high prices is to steal the stuff. Illegal, and can cause a lot of trouble. However, if you think the prices are too high, you could AVOID the high prices by leaving the shop and going to other places, ie shopping around. That's legal, in a free market.

It is fair and reasonable to shop around to get good value, and as well as shopping around for physical goods, you can shop around for more intangible things such as electricity and insurance. You can compare different solutions such as different electricity companies, and the possibility of having your own generator, and if you're determined to avoiding paying anything for electricity you can get a wind turbine generator. You might pay for the equipment start up costs, but you get the electricity free. This isn't the solution for everyone, and there are issues of maintenance and convenience to consider. However, it is legal to avoid paying for electricity, by engineering solutions. (as distinct from being evasive about paying electricity bills!). Similarly, insurance cost avoidance is also possible by being your own insurance company, but that's an option which isn't for everyone, for some very good reasons!

Tax avoidance, which is legal, takes many forms. The simplest in principle is to shop around, as tax regimes have different pricing policies around the world. The countries are in competition with each other, like shops, to attract your business. Tax Havens are countries where the tax is either very low, or zero. However moving to a tax haven is a somewhat involved logistic endeavour which requires a lot of planning, research, and overcoming various problems.

There are a wide variety of other tax avoidance measures which can be taken, besides international relocation. By doing the right things tactically, you can avoid paying tax, or at least avoid paying so much tax. The magic term is: * INDEPENDENT FINANCIAL ADVISOR *, and it's worth your while doing some searches. Tax planning is a complex business and solutions are different for different people according to personal circumstances. So, it's up to you to find the right tax planning solution that's right for you. * "Independent Financial Advisor" was advertised long ago during ad-breaks during a punk movie. I always considered this a positive open-minded choice of advertising.

Tax avoidance is good. In contrast to tax avoidance, which is recommended and is a dignified good-sense business, tax evasion is cheating and has sinister overtones of dodgy dealing.

A good test for whether a particular method is "tax avoidance" (legal) or is "tax evasion" (illegal) is to determine if it is possible to be open about it or if it needs to be kept secret. Having an offshore bank account is legal, and if the money has been acquired by honest means there shouldn't be any need to hide in secrecy. The principle is known as "transparency". This works if the authorities are honest. Let's hope they are. To draw an analogy, supposing your car is parked on your own driveway, and you see a traffic warden coming along the street, you should not feel the need to run away or hide. You're not doing anything wrong. However, if traffic wardens were crooked and might stick a ticket on a car that's parked legally off the road, the situation would be more complex as you're then up against authority-based corruption.

(Politicians saying they are going to "clamp down on TAX AVOIDANCE" are being inherently dishonest)

Problems can be avoided, but you need to take evasive manoeuvres against your enemies. Tax is a problem that can be avoided. The tax authorities might be a problem, but they should not be your enemy if you are honest and they are honest. Tax authorities should be judicious rather than being out to persecute you. If the situation remains that of diplomacy, that's good, but if it becomes evasion and persecution, both sides are on a hiding to nothing.

Also see tax, finance, tax havens, opening a bank account, and how to set up in business


Update: On 26th March 2011, protesters seemed to be unaware of there being a difference between tax avoidance and tax evasion, and were describing some honest companies as "tax dodgers". This appears disingenuous, a deliberate muddying of conceptualisation. A shame, because there are things worth protesting about. Protesting about the government, like in Tunisia, would be justified. Protesting because some people are rich, looks like jealousy.