What is the difference between avoidance and evasion?

Draw a clear line

As we approach this year’s pre-Budget report, it is likely that tax avoidance
will be raised yet again. Hopefully the debate will move from the emotional to
the rational.

It is time to recognise that using the words ‘tax avoidance’ synonymously
with ‘unacceptable behaviour’ gets in the way of progress on an important area
of corporate and government finances.

Much of the problem stems from trying to draw a ‘bright line’ between
acceptable and unacceptable behaviour using terms that encompass a range of
behaviours and have long been held to have a different meaning.

The traditional bright line between avoidance (using legal means to reduce
tax burdens) and evasion (illegal acts) is not sophisticated enough to delineate
the difference between appropriate and inappropriate actions in a society that
relies on a public private partnership to create wealth and regulate behaviour.

Equally the arbitrary ‘smudging’ of that line to shift the boundaries of tax
evasion to cover legal actions that have unintended fiscal consequences not only
creates uncertainties and mistrust, but could also tempt the tax agencies to go
beyond their remit to enforce the blurred definition on taxpayers.

We need to restore the certainty that acting within the law is a right and an
obligation of taxpayer and tax collector. The law must be made clearer and the
process of law made more transparent, informed and efficient. We also need to
realise that the law can be a clumsy and inefficient instrument to define and
regulate behaviours in a sophisticated, rapidly changing and competitive world.

If there is to be a partnership, we should look to mutually agreed behaviours
by all parties that allow the partnership to prosper with those behaviours
regulated more by a code of conduct backed up by appropriate incentives and
punishments for appropriate and inappropriate behaviour.

By separating the development and operation of the law (rational) and the
discussion and regulation of behaviours (emotional) we have a chance for real
progress.

Loughlin Hickey is the head of KPMG’s Europe, Middle East and Asia tax
practice

Costing the Third World dear

The accountancy profession is at a crossroads when it comes to tax.Pressure
is increasing upon it from governments attacking tax avoidance, while
campaigning groups are increasingly linking tax with the corporate
responsibility agenda.

Now Christian Aid and the Tax Justice Network are linking tax avoidance and
the use of tax havens to the perpetuation of poverty.

Christian Aid knows that poor countries need to invest in health, education
and basic infrastructure to improve people’s lives. But as the Tax Justice
Network is proving, these countries are haemorrhaging public money due to tax
avoidance.

Raymond Baker, an American expert on capital flight, estimates that poor
countries lose US$500bn per year to tax havens. Up to US$200bn of this loss is
due to tax avoidance by companies, mainly through transfer pricing abuses. Most
involve tax havens, through which 50% of the world’s trade passes with little
value added, but much profit extracted.

The Tax Justice Network estimated earlier this year that the offshore
holdings of the world’s high net worth individuals amounted to US$11.5 trillion,
with a conservative annual cost in terms of lost tax revenue to the governments
of the world of at least US$255bn a year.

Poor people of the world cannot afford these losses, from which doubtless
accountants and their clientshave profited. The challenge for the profession is
to change this so that accountancy can play its part in Making Poverty History.

To achieve this, professional bodies should take a clear stance on these
issues. General anti-avoidance provisions and more automatic tax information
exchange between countries are needed. And through stronger accounting
standards, it must be made clear who makes money and pays tax where in the
world.

The accountancy profession would then not only be benefiting poor people, but
would also provide a shot in the arm for the wider corporate responsibility
movement.

Andrew Pendleton is senior policy adviser at Christian Aid and Richard
Murphy is from the Tax Justice Network