Many offshore investment decisions are driven by tax, or rather the desire to pay less of it. Paying less tax can be many means, but the terminology that is employed by tax authorities includes the words evasion, avoidance and mitigation. So what is the difference, and what is allowed?
A species of fraud, tax evasion is a crime and an all round Bad Idea. Precise definitions vary among international jurisdictions, but the international community typically agree that evasion involves deliberately not paying tax that is owed. So for example refusing to pay a tax bill or failing to declare income or a capital gain are both incidences of tax evasion.
Next on the spectrum of seriousness when you talk about non payment of tax is avoidance. Avoidance involves using a tax system to reduce your tax bill. While the taxpayer (or more appropriately, the non taxpayer) does not do anything illegal, the UK and US taxmen have taken the view that tax avoiders are acting against the spirit of tax legislation, and are typically swift to close loopholes that allow non payment of tax where government’s intended it should have been paid.
Avoidance is a grey area. On one hand, if a loophole exists, then a taxpayer should be entitled to take advantage of it. On the other hand, tax authorities may start up their anti avoidance provisions and come after tax avoiders if they suspect that a scheme constitutes unacceptable tax planning. If a series of offshore investments is intended to be a tax avoidance measures, investors need to make sure that they have received sound professional advice to ensure the effectiveness of the proposed measures.
Tax mitigation is at the opposite end of the spectrum from tax evasion, although some would argue that there is no clear cut distinction from tax avoidance. By using reliefs and exemptions, taxpayers can lawfully mitigate their liabilities without fear of being stalked by a suspicious taxman.