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What is the Difference Between Tax Evasion and Avoidance?

10th July, 2020 at 9:30am

It can be quite difficult to take out a portion of your hard earned income to give to the government.  In addition to that, the Law makes it compulsory for everyone to pay tax and even provide penalties for non-compliance. It is common to find a number of people use the term 'tax evasion' and 'tax avoidance' interchangeably, with the misconception that both terms mean the same thing. They do not mean the same thing. They are both forms of tax noncompliance; but the major difference between them is the fact that tax avoidance, although morally dubious is legal, while tax evasion is illegal.

Tax Evasion

Tax Evasion is the unlawful means of concealing taxable income from the tax authorities, so as not to remit taxes. It has also been interpreted to mean an illegal practice where a person, organisation or corporation deliberately evades paying their authentic tax liability. Tax evasion is the fraudulent and intentional means of not paying taxes. Tax Evasion has been explained to mean, an individual escaping the payment of tax.

When you conceal, under report or misrepresent your income to the government for the sole purpose of not paying tax, then you are evading tax. It falls under this sub-topic and it is a criminal offence in Nigeria, punishable under the Federal Inland Revenue Service Act.

Tax Avoidance

Tax Avoidance is the reduction of taxable income or tax owed through legal means.  The taxable individual or entity structures his businesses and affairs in a way that precludes him from paying the full amount of tax due. It is a legitimate way of avoiding tax by taking advantage of loopholes in the tax laws that actually allow you to reduce the amount of tax you are supposed to pay on your income.

Another definition of tax avoidance can be explained as, legally taking advantage of the tax system, to minimise tax liabilities by means not intended by the law. It involves transactions that are designed to produce a tax advantage.

If you minimize your taxes based on the provisions of the law, for example making legitimate deductions that the law provided for, changing one's business structure through incorporation, etc. These can be referred to as tax avoidance.

Tax Evasion vs. Tax Avoidance

The major distinction between the two terminologies hinges on the fact that tax evasion occurs when a tax payer does not pay taxes while tax avoidance is the legal reduction of tax liabilities by a tax payer.

Examples of tax evasion are, refusal to report or under-reporting the actual income earned to the tax authorities, hiding money, or other assets in an offshore bank account so as not to pay tax. On the other hand, examples of tax avoidance include, claiming capital allowances on things used for business purposes, to pay tax at a lower rate.

Another difference between these terms is the fact that, tax evasion is a criminal offence under the provisions of the Federal Inland Revenue Services Act while Tax Avoidance is not a criminal offence.  In order parlance, a person cannot be penalised for taking advantage of the available tax laws to reduce tax liabilities.

People only know that tax evasion is unlawful but are not aware of the consequences this practice has on the economy. Both tax avoidance and evasion reduces the revenue that is expected to be generated from the citizens of a particular country, which in turn negatively affects the economy.

What usually happens is that the country becomes cash strapped and is restrained from carrying out what is expected of it for the benefits of its citizen. The continuous generation of low revenue hinders the country from economic development, and the effect of this usually falls back on the poor who depend on the Government for everything.

In conclusion, tax evasion and avoidance are both detrimental to growth of the country of any economy. What differentiates these two forms of tax noncompliance is the illegality in tax evasion and the legality in tax avoidance. Even though the Law does not criminalise tax avoidance, it is not advisable to indulge in such practice as it doesn't make it healthy for the economy of any country.

For a detailed explanation of this topic, read our article on tax avoidance and tax evasion in Nigeria on our website.

Written by: Adeiye Adenekan.
Email address: info@michaelmaschambers.com
LinkedIn: https://www.linkedin.com/in/michaelmas-chambers-5a49000146 
Twitter: @MichaelmasLaw
Phone no: 09090008231.  

Definition of Tax evasion. http://www.businessdictionary.com/definition/tax-evasion.html>   Accessed 19th February, 2020.
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Jean Murray: "What is the difference between tax avoidance and tax evasion" Published 29, 2020. Cited < https://www.thebalancesmb.com/tax-avoidance-vs-evasion-397671> Assessed 19th June, 2020.
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