CORPORATE

TAX PLANNING
TAX EVASION AND AVOIDANCE

VIVIAN NANYUNJA, MBA COHORT 1:

SEMESTER 3; December 21, 2018
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INTRODUCTION
Taxation is a term for when a taxing authority, usually a government, levies or imposes a
tax. Taxation is the system by which a government takes money from people and spends it on
things such as education, health, and defense among others. The term "taxation" applies to all
types of involuntary levies, from income to capital gains to estate taxes. There is a variety of
types of tax including Value Added Tax, Customs tax, Inheritance tax, Income tax and so much
more.
TAX PLANNING
According to the business dictionary, tax planning is the exercise undertaken to reduce the tax
liability of individual, company or country through the best usage of all available and
permissible allowances, deductions and exemptions to minimize capital gains/income (Business
Dictionary, 2018).
In other words, tax planning involves conception and implementation of various strategies so as
to minimize the amount of taxes paid for a given period (Inc., 2018). Therefore, tax planning
makes use of all beneficial provisions indicated in the tax law so as a reduction in the tax
incidence is made possible (Business Jargons, 2018).
The major purpose of tax planning is to ensure tax efficiency; for instance through tax planning
all elements of the financial plan work together in the most efficient manner possible there by
making tax planning an essential part of a financial plan (Kagen, 2018).
Objectives of tax planning

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Types of tax planning

long range
and short
range

Types of
tax
planning

purposive permissive

1. Short-range and long-range Tax Planning: Tax planning which is made every year to
arrive at specific or limited objectives, is called short-range tax planning. On the other
hand, long-range tax planning refers to practices undertaken by the tax payer that are not
paid off instantaneously.
2. Permissive Tax Planning: Tax planning, in which the planning is made as per expressed
provisions of the taxation laws.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning technique
which misinforms the law. Under this type, there is no expressed provision of the statute.
Reasons to do planning
It is necessary for companies, individuals and countries at large to plan for their tax payments
because; it helps in forecasting of tax obligations based on previous liabilities. To an individual
households and small business, tax planning ensures that one takes advantage of existing or new
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government incentives and for national governance, tax planning is a fundamental technique that
helps with wealth creation activities (The practice, 2018).
Summarily, with tax planning one can logically apply tax provisions to manage his own
individual affairs so as to benefit from tax remunerations based on national priorities in
accordance with the government and the general public’s interests.
TAX EVASION VS TAX AVOIDANCE
Taxes can be costly and so much of a burden to many which explains why most people/company
do not like paying taxes however by law taxes ought to be paid. The terms tax evasion and tax
avoidance are often used interchangeably but these two concepts are far different from each
other. In summary tax avoidance is legal whereas tax evasion is illegal.
Tax Evasion
Tax evasion is the criminal act of using illegal means to dodge or avoid paying taxes by
individuals, companies or trusts. It involves tax payers intentionally misrepresenting their
incomes to tax authorities in order to reduce their tax liability, dishonest tax reporting such as
stating less income. Profits or gains than the actual amounts earned or inflating deductions or
expenses and hiding money in off shore accounts in order for it not to be liable for tax
(Wikipedia, 2018). In the United States of America, every year, people misrepresent their
earnings and declare deductions that they are not entitled to in efforts of keeping money away
from Internal Revenue Service (IRS). There is an estimated 300 billion lost every year by the
U.S government as a result of tax evasion (Legal Dictionary, 2018).
Title 26 of the U.S. Code, section 7201 states, “any person who willfully attempts in any manner
to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not
more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5
years, or both, together with the costs of prosecution.”
Therefore according to the above tittle, it to be noted that in the United States, a person who
intends to or intentionally evades taxes commits a felony act that is punishable by law and such
individuals are fined heavily and serve prison sentences (Legal Dictionary, 2018). Individuals
like Wesley Snipes, Martha Stewart have all been punished under this law for tax evasion.
Causes of tax evasion
Apart from not wanting to pay taxes, the reasons why people evade taxes range from the
complexity of the tax system and ineffectiveness of tax administrative machinery coupled with
instabilities in amendment of tax laws which makes it difficult to understand and adhere to,
leniency while punishing tax evaders, inadequate funding of sensitization programs to enhance
human resources in tax administrative posts and lack of enough information to the public about
what the government uses their paid taxes for.
Impact of tax evasion
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Since taxes are the blood life of a country’s economy, the impact of not receiving these taxes can
be heavy on a nation through slowing down of a country economic growth, increased inflation,
corruption, increased costs of living among others (Bhaurya, 2018)

Tax avoidance
Tax avoidance on that other hand is the legitimate usage of tax laws to minimize one’s tax
burden. This can be through usage of legal methods such as tax codes (Murray, 2018) or taking
advantage of loopholes in the tax system to avoid paying taxes legally. Therefore, tax avoidance
reduces one’s taxable income or the tax payments he/she owes. Examples of tax avoidance
strategies are; deductions of business expenses thus lowering the company’s tax bill, setting up a
tax deferral plan and taking tax credits for spending money on legal duties such as hiring workers
in a business. Unlike tax evasion, tax avoidance is not punishable by law since every procedure
is done as per tax laws and therefore the breach that would bring up convictions or hefty fines to
individuals never occurs.
The major cause of tax avoidance is the need to minimize tax liability and as a result
governments tend to receive understated revenue gains as the expected revenue from taxes is
higher than actualized revenue thus widening the tax gap. And with this, government expenditure
towards social and welfare development, national security, infrastructural development and so
much more is all hindered.
Real world cases of tax evasion and avoidance
Recently, International singer Shakira has been charged with tax evasion worth 16 million
dollars in Spain. The alleged charge comes indicating that she failed to pay 16 million USD
between the years of 2012-2014. Shakira listed her home in Bahamas as her official residence for
purposes of tax payment but in fact she was staying in Spain with her partner Spanish footballer
Gerard Pique. Her declaration somewhat points to the fact that she never wanted to pay because
tax rates are much lower in the island of Bahamas which Shakira co-purchased in 2011 just one
year before her tax claims in the Caribbean. However, Shakira has denied these charges saying
that she was never a legal resident in Spain during the years in question. Prosecutors in
Barcelona are probing for her to pay tax in Spain on her worldwide income, a bond equal to the
amount she owes in taxes and a 33% in accordance to Spanish otherwise a freeze of her assets in
accordance to her evaded taxes is recommended (Riotta, 2018). Many Celebrities are implicated
on tax evasion cases for example Lionel Messi, Lil Wayne Cristiano Ronaldo, Nicholas Cage,
Martha Stewart and Wesley Snipes who actually served a 3 year jail sentence for willingly
failing to pay taxes for 6 consecutive years.
Additionally, President Donald trump of America has been on a number of times accused of
engaging in schemes to help his parents dodge millions of dollars in taxes while still a business
man and also avoiding to pay inheritance tax. These accusations have not been proven true and
the president himself shut them down as garbage propaganda (Buncombe, 2018).
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The most famous and remarkable example of tax avoidance is the case of Apple Inc. In 2013,
Apple Inc’s CEO Timothy Cook testified before the Senate Homeland Security and
Governmental Affairs Committee's Investigations Subcommittee on the company's offshore
profit shifting and tax avoidance. The report alleged that Apple reduced its U.S. corporate
income tax by an average of $10 billion a year for four years. To achieve this, Apple mostly
relied on the three strategies of international tax avoidance that is; deferral which allowed Apple
to avoid paying U.S taxes on its foreign income, transfer pricing, and check-the-box. Apple did
this by setting up two entities in Ireland through which it was able to funnel two-thirds of its pre-
tax worldwide income. The committee staff found that while the income from those Irish subs
was not repatriated to Apple (which would have triggered U.S. tax) it did apparently did make its
way back to the U.S., where it sat in bank accounts of those Irish subs unaccountable for taxation
(Gleckman, 2018).

Conclusion and Recommendations

The most essential function of taxation is to finance government expenditures therefore it is
imperative for the government to set strict rules that govern taxation and a very formidable tax
administrative infrastructure to ease the work of tax collectors and punish those who evade taxes
heavily.
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References
Andrew Buncombe. 2018. Donald Trump responds to report he dodged millions in taxes.
[ONLINE] Available at: https://www.independent.co.uk/news/world/americas/us-politics/trump-
tax-dodge-twitter-respond-new-york-times-us-president-fred-father-a8566706.html. [Accessed
30 November 2018].
Business Jargons. 2018. Tax planning. [ONLINE] Available at: https://businessjargons.com/tax-
planning.html. [Accessed 28 November 2018].
BusinessDictionary. 2018. Tax planning. [ONLINE] Available
at: http://www.businessdictionary.com/definition/tax-planning.html. [Accessed 28 November
2018].
Chris Riotta. 2018. Shakira charged with $16 million tax evasion in Spain. [ONLINE] Available
at: https://www.independent.co.uk/arts-entertainment/music/news/shakira-charges-tax-evasion-
spain-bahamas-income-net-worth-a8685156.html. [Accessed 30 November 2018].
Howard Gleckman. 2013. The Real Story On Apple's Tax Avoidance: How Ordinary It Is.
[ONLINE] Available at: https://www.forbes.com/sites/beltway/2013/05/21/the-real-story-about-
apples-tax-avoidance-how-ordinary-it-is/#617827bd6523. [Accessed 30 November 2018]
Inc. 2018. Tax planning. [ONLINE] Available at: https://www.inc.com/encyclopedia/tax-
planning.html. [Accessed 28 November 2018].
Jean Murray. 2018. What Is the Difference Between Tax Avoidance and Tax Evasion?.
[ONLINE] Available at: https://en.wikipedia.org/wiki/Tax_evasion. [Accessed 29 November
2018].
JULIA KAGEN. 2018. Tax planning. [ONLINE] Available
at: https://www.investopedia.com/terms/t/tax-planning.asp. [Accessed 28 November 2018].
Legal Dictionary. 2018. Tax Evasion. [ONLINE] Available at: https://legaldictionary.net/tax-
evasion/. [Accessed 29 November 2018].
Mumta Bhaurya. 2018. TAX EVASION IN INDIA: CAUSES AND REMEDIES. [ONLINE]
Available
at: https://www.academia.edu/6810585/TAX_EVASION_IN_INDIA_CAUSES_AND_REMED
IES. [Accessed 29 November 2018].
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The Practice. 2018. 3 REASONS TO DO TAX PLANNING THIS YEAR. [ONLINE] Available
at: https://www.thepractice.com.au/3-reasons-to-do-tax-planning-this-year. [Accessed 28
November 2018].
Wikipedia. 2018. Tax Evasion. [ONLINE] Available
at: https://en.wikipedia.org/wiki/Tax_evasion. [Accessed 29 November 2018].