The separate legal entity is often company, trust, society, NGO or foundation.
Under this practice an individual transfer his property and his assets to these legal entities so that the income earned is transferred to this legal entity. 1986)Usually one is only personally taxed on property and earnings that one actually owns; thus, by donating assets to a separate legal entity, personal taxation can be avoided, although corporate taxes may still be applicable. equivalent to what is being charged in the outside market for similar goods, or it can be non-market based.
If the legal entity is ever liquidated and the assets transferred back to an individual, then capital gains taxes would apply on all profits. Importantly, two-thirds of the managers say their transfer pricing is non-market based.
Transfer pricing is simply the act of pricing of goods and services or intangibles when the same is given for use or consumption to a related party (e.g. There can be internal and external reasons for transfer pricing. Tax evasion is a general term often used in cases where in an individual or a company evades taxes all together.
Internal include motivating managers and monitoring performance, e.g. Here in this case an individual or a company deliberately conceals his or her income from the tax authorities to reduce the tax liability or not to pay taxes all together.
Various forms of tax evasion are: This is the most common form of tax evasion practiced by individuals.
Under this form of tax evasion an individual would not declare all his income to the tax officials.
Sometime an individual may be working at more than one places and hence has more than one source of income, he may choose not to disclose all the income.
This is generally possible only if the extra income he generates comes in form of cash and does not show on the system.
Customs duties are an important source of revenue for any country.
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First we will define the concept of tax avoidance and tax evasion.
Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm.
Although many countries have entered into bilateral double taxation treaty.
In this treaty an individual or a company once taxed by one country is not again taxed by another country.
Though, this kind of treaty is rarely done with tax havens.
Another general practice adopted by individuals for tax avoidance is to create a separate legal entity.
Tax avoidance is the utilization of the legal loopholes or the legal privileges provided to citizen or company of a country by its government.
Tax avoidance is the legal right of an individual provided by the government to reduce the tax burden and decrease the level of tax evasion.( Stella, P.
1992) Some of the examples of tax evasions are: One of the ways utilized by an individual or a company to lower the tax burden is by constantly travelling to different countries or by shifting permanently to a country with lower or no tax environment. The policy adopted in this case is that an individual or a company shifts its asset or base of operation to tax havens thus avoiding higher taxes.( Stella, P.
1992) But now many countries such as USA have realized the potential loss of revenue through such a practice of tax avoidance.
Hence these countries are now taxing all their citizens and companies on all income generated by them throughout the world. 1986) Double taxation is a policy where in an individual or a company is taxed by the country of its residence and by country of its origin.
In this case the importers avoid paying of custom duty by either under pricing the products that are brought in the country or by understating the quantity of the goods brought in the country.
It is a practice where in an individual do not pay any kind of custom duty on the product that is being brought in or being taken out of the country, it is a criminal offence in most countries.
Under this an individual or a company may evade paying Value added Taxes or sales tax by underreporting the sales of the good.
While the term “Tax evasion and Avoidance” was well established in USA by 1920's (Sears, 1922), in UK there was still no distinction between Tax avoidance and tax evasion by as late as 1950.
Till that time the term evasion was regularly used in the sense of avoidance.
There is no universally accepted definitions of tax avoidance and tax evasion.
HMRC define tax avoidance as an activity that a person or a business may undertake to reduce their tax in a way that runs counter to the spirit and the purpose of the law, without being strictly illegal.
Tax evasion, in contrast, is usually defined as a violation of the law (Hood, C. Tax avoidance is the utilization of the loopholes in the countries tax laws to one's own advantage, while tax evasion is not paying the taxes al together.
While tax avoidance is within the legal framework of the countries law tax evasion is illegal.
Now we will get into more detailed definitions of tax evasion and avoidance.