Tax Evasion and Tax Avoidance: What is the Difference?
June 22, 2016
In modern world people find out a lot of information about different things. Due to a famous offshore leak named “Panama Papers”, such terms as an offshore company formation and offshore banking business are became known to the general public. But, unfortunately, the real truth of offshore structures remains not opened up to the end.
The worst moment in this situation is that people spread doubtful information about offshore incorporation and opening bank accounts overseas. As a result uncertain rumors generate emergence of others, and people don’t know who can be trusted. Recently offshore business began to be considered as an illegal way for money hiding. Nevertheless, it is not so.
On juridical issues you should hold a lawyer’s consultation, but we can answer to all offshore questions. How to set up an offshore company? How to open an offshore account? How to avoid taxes and is it legal?
Read on if you want to know more about reasons why mass media accuses offshore business owners in illegal activities. We’ll explain to you all about legality of offshore firms and how to use offshore structures for tax planning and for tax avoidance.
The difference between Tax Evasion and Tax Avoidance
It is necessary to understand what is the difference between tax evasion and tax avoidance? Most people used to consider that both of them are illegal methods of saving money and avoiding taxes. But we’ll show you that the difference between tax evasion and tax avoidance is very considerable. In reality, tax evasion is illegal in contrast to tax avoidance that is one of the best legal ways to minimize tax burden and increase wealth. In fact, tax evasion – this is deliberate failure to pay taxes or tax payment in the amount which is lower than necessary. It means illegal actions. Just the opposite – tax avoidance – this is the legal method to decrease taxes.
But why the difference is so important? For one significant reason: legitimate way helps you to be rich, illegitimate way makes you violator of the law which has to pay penalties or even go to the prison.
In order for clear understanding a difference, we suggest to review an example below.
John is looking for the best way to minimize taxes that he must pay according to governmental rules by lowering his gross income. He chooses between two options: tax evasion and tax avoidance.
– Tax avoidance
If John is selecting this variant, his main goal will be to concentrate on tax deductions. By lowering all possible tax deductions, he will reduce his gross income and reduce taxes.
For example, if John participates in retirement savings, charities and other Government’s plans, all these actions belong to deductions which are done before taxes. It is a legal way, but it is really hard and burdensome.
– Tax evasion
If John’s corrected gross income isn’t low enough and John wants to get more money, he can choose the other variant – tax evasion. John reports to Government about his gross income but he intentionally doesn’t pay taxes. This way John saves his taxes but also he is exposed to huge risk to be caught.
No one knows how long John can be in safety. The government constantly implements new methods of fight against violators of the law. The Government is always on the check and if John will be caught, he must pay heavy fines, penalties, and even criminal charges.
If you still doubt what way to choose, certainly, tax avoidance is better than tax evasion.
Offshore incorporation – alternative of tax avoidance
It would be good to repeat once again that legality of offshore formations depends on ways of use. All frightening stories about business owners who deal with offshore – are not entirely true. Only you can decide how to use offshore company – to avoid taxes or to evade taxes. Just act in a right way and nobody will be able to accuse you of illegality.
Probably you want to ask how offshore company can help to avoid taxes? It is easier than you can even imagine. If you move your business and business operations to one of offshore jurisdictions, you can legally reduce your taxes. Almost all offshore centers offer a wide range of advantages for business. For example, corporate tax rate in Cyprus – 12.5 percent, also Cyprus has a high level of maintenance, a stable political and economical situation and other privileges that you can’t have onshore.
Certainly, for better understanding how it works, you should get a professional consultation of lawyer or tax expert. But we honestly say to all our clients that if you avoid taxes, you shouldn’t be scared of sharing your secret information with local authorities.
Of course, if you want to protect your private or trade information from your competitors and outsiders, you can seize the opportunities of your offshore account. It guarantees your privacy.
We hope that now your level of offshore knowledge became wider, especially, when it comes to tax avoidance and tax evasion. The difference between two of these terms are very great and it directly influences on business and non-business life.
If you still have any questions regarding offshore structures and taxes, you can get our free consultation. We’ll help you with pleasure!