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Tax avoidance is the legal usage of the
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A
tax shelter Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international taxation, internatio ...
is one type of tax avoidance, and
tax havens A tax haven is a country or place with very low "effective" rates of taxation for foreign investors ("headline" rates may be higher). In some traditional definitions, a tax haven also offers financial secrecy. However, while countries with high ...

tax havens
are jurisdictions that facilitate reduced taxes. Forms of tax avoidance that use tax laws in ways not intended by governments may be considered legal but are almost never considered moral in the court of
public opinion Public opinion is the collective opinion on a specific topic or voting intention relevant to a society. Etymology The term "public opinion" was derived from the French ', which was first used in 1588 by Michel de Montaigne Image:ArmoiriesM ...
and rarely are in
journalism Journalism is the production and distribution of report Image:Hurt Report cover page.png, 220px, Example of a front page of a report A report is a document that presents information in an organized format for a specific audience and purpose. ...

journalism
. Many
corporations A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capa ...

corporations
and
businesses Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trade ...
that take part in the practice experience a
backlash Backlash may refer to: * Backlash (engineering), clearance between mating components * Backlash (sociology), a strong adverse reaction to an idea, action, or object * Backlash (pressure group), a UK group opposing the 2008 law criminalising possess ...
from their active customers or online. Conversely, benefitting from tax laws in ways that were intended by governments is sometimes referred to as tax planning. The
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its o ...
's
World Development Report{{Use dmy dates, date=April 2020 The World Development Report (WDR) is an annual report published since 1978 by the International Bank for Reconstruction and Development (IBRD) or World Bank The World Bank is an international financial institutio ...
2019 on the future of wor
supports
increased government efforts to curb tax avoidance as part of a new
social contract In moral A moral (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power ...
focused on
human capital Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or someth ...

human capital
investments and expanded
social protection Social protection, as defined by the United Nations Research Institute for Social Development The United Nations Research Institute for Social Development (UNRISD) is "an autonomous research institute within the United Nations that undertakes ...
. "Tax mitigation", "tax aggressive", "aggressive tax avoidance" or "tax neutral" schemes generally refer to multiterritory schemes that fall into the grey area between common and well-accepted tax avoidance, such as purchasing
municipal bonds A municipal bond, commonly known as a muni, is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial sys ...
in the United States, and tax evasion but are widely viewed as unethical, especially if they are involved in profit-shifting from high-tax to low-tax territories and territories recognised as tax havens. Since 1995, trillions of dollars have been transferred from
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de Coopération et de Développement Économiques, OCDE) is an intergovernmental economic organisation with 38 member countries, founded in 1961 to st ...

OECD
and
developing countries 450px, Example of Older Classifications by the IMF and the United Nations, UN from 2008 A developing country is a country with a less developed industrial base and a low Human Development Index (HDI) relative to other countries. However, ...
into tax havens using these schemes. Laws known as a General Anti-Avoidance Rule (GAAR) statutes, which prohibit "aggressive" tax avoidance, have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom. In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in '' Gregory v. Helvering'' and in the United Kingdom in '' Ramsay''. The specifics may vary according to jurisdiction, but such rules invalidate tax avoidance that is technically legal but is not for a business purpose or is in violation of the spirit of the tax code. The term "avoidance" has also been used in the tax regulations 'examples and source needed''/sup> of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance exploiting loopholes in the law such as
like-kind exchange A like-kind exchange under United States tax law The United States, United States of America has separate Federal government of the United States, federal, U.S. state, state, and Local government in the United States, local governments with taxes ...
s. 'correct example needed''/sup> The
US Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States of America The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a cou ...

US Supreme Court
has stated, "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted".
Tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a g ...
, on the other hand, is the general term for efforts by individuals, corporations,
trusts A trust is a legal relationship in which the holder of a right (eg. title to a chattel) gives it to another person or entity who must keep and use it solely for another's benefit. In English common law English law is the common law legal sy ...
and other entities to evade taxes by illegal means. Both tax evasion and some forms of tax avoidance can be viewed as forms of
tax noncompliance Tax noncompliance is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of tax liabilities. The use of the ...
, as they describe a range of activities that are unfavourable to a state's tax system. According to
Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American economist An economist is a professional and practitioner in the social science Social science is the Branches of science, branch of science devoted to the study of societ ...

Joseph Stiglitz
(1986), there are three principles of tax avoidance: postponement of taxes, tax arbitrage across individuals facing different tax brackets, and tax arbitrage across income streams facing different tax treatment. Many tax avoidance devices include a combination of the three principles. The postponement of taxes is the present discounted value of postponed tax is much less than of a tax currently paid. Tax arbitrage across individuals facing different tax brackets or the same individual facing different marginal tax rates at different times is an effective method of reducing tax liabilities within a family. However, according to Stiglitz (1986), differential tax rates may also lead to transactions among individuals in different brackets leading to “tax induced transactions”. The last principle is the tax arbitrage across income streams facing different tax treatment.


Anti-avoidance measures

An anti-avoidance measure is a rule that prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action. Legislative Measures Two kind of anti-avoidance measures exist; General Anti Avoidance Rules (GAAR) and Specific Anti Avoidance Rules (SAAR). The GAAR implies a set of generic anti-avoidance rules, while SAAR targets a specific avoidance practice or technique. Also, there is a set of bilateral measures pursued thorough treaties or double taxation agreements (DTAAs), this can be done via various clauses. Judicial Anti-Avoidance Measures Courts around the world have played an important role in developing SAAR and GAAR measures. But the two guiding principles in judicial anti-avoidance are business purpose rule and substance over form rule. The business purpose rule states that the transaction must serve as a business purpose. Which means that mere tax advantage cannot be the main business purpose. On the other hand, the substance over form principle is wider than the business rule and it is defined by the OECD as the ‘prevalence of economic or social reality over the literal wording of legal provisions’ (Ostwal, T.P.; Vijayaraghavan, Vikram 2010). EU Anti-Tax Avoidance Package The Anti-Tax Avoidance Package is part of the European Commission's agenda as an effort to implement a more effective corporate taxation in the European Union. This package was implemented in 2016 and offers measures to prevent aggressive tax planning and encourage of tax transparency among others. The Anti- Tax Avoidance Package counts with an Anti-Tax avoidance directive, recommendation on Tax Treaties, revised administrative cooperation directive and communication on external strategy. Anti-Tax Avoidance Directive (ATAD): On 20 June 2016 the European Council adopted the Directive (EU) 2016/1164 which contains five legally binding anti-abuse measures that should be applied as common forms of aggressive tax legislations. The member States must have applied these measures as from 1 January 2019. ATAD contains the following five anti-abuse measures: 1. Interest deductibility, to discourage artificial debt arrangements which are design to minimise taxes, 2. Exit taxation, for preventing the avoidance of taxes when companies are re-locating assets, 3. Incorporation of the GAAR for disregarding of non-genuine arrangements, 4. Controlled Foreign Company Rule (CFC), to deter that the profit is transferred to a low or no tax country, 5. Switchover rule, to prevent double non-taxation. Anti- Avoidance Measures by Country Australia Australia has a strong tax regime regarding avoidance which applies to large corporate groups, underpinned by the General Anti- Avoidance Rule (GAAR) adopted since 1981 with the Income Tax Act. The multinational anti-avoidance law (MAAL) is an extension of Australia's general anti-avoidance rules. This aims to make multinational enterprises pay their fair share of tax of the profits received and earned in Australia United States Since 1980s there have been six major tax reforms in the US. The first one, in 1981, introduced a variety of tax loopholes. With this, the tax shelter industry boomed, giving rise to a demand for tax reform. The 1986 tax reform was the most accurate attempt at reducing tax avoidance, but then the next reforms of 1993 and 1997 opened new opportunities for tax avoidance and increased incentives of tax avoidance. The 1986 tax law reduced the demand for tax shelters and the opportunities for tax avoidance by constricting the gap between regular rates and the minimum tax rates. Lowering the top marginal rates, restricting the ability to use losses on just one type of income for balancing gains on other income and finally by taxing capital gains with full rates. There was another tax act in 1993, in which the alternative minimum tax rates were increased, also the regular rates, and an increase in the absolute gap for upper-income people. In the 1997 act, a gap between the rates at which capital gains and ordinary income was introduced to all taxpayers. During the 2001 and 2003 tax acts introduced more opportunities for tax avoidance because the gap between the capital gains and ordinary income tax remained the same as both rates were reduced by 5%. Finally, in the 2013 tax act, increased the tax on capital gains and ordinary income to 20 and 39.6% respectively.


Methods


Country of residence

A company may choose to avoid taxes by establishing their company or subsidiaries in an offshore jurisdiction (see
offshore company The term "offshore company" or "offshore corporation" is used in at least two distinct and different ways. An offshore company may be a reference to: * a company, Corporate group, group or sometimes a division thereof, which engages in offshoring ...
and
offshore trust An offshore trust is a conventional trust that is formed under the law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, ...
). Individuals may also avoid tax by moving their
tax residence The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and "residence" can be different for other, non-tax purposes. For individuals, Physical presence test, physical presence in a jurisdiction is the main t ...
to a
tax haven A tax haven is a jurisdiction with very low "effective" rates of taxation for foreign investors ("headline" rates may be higher). In some traditional definitions, a tax haven also offers Bank secrecy, financial secrecy. However, while countries wi ...
, such as
Monaco Monaco (; ), officially the Principality of Monaco (french: Principauté de Monaco; Monégasque Ligurian: ''Prinçipatu de Mu̍negu''), is a sovereign Sovereign is a title which can be applied to the highest leader in various categories. The ...

Monaco
, or by becoming a
perpetual traveler The term "perpetual traveler" (also "PT", "permanent tourist", or "prior taxpayer") refers to the idea that by basing different aspects of one's life in different countries and not spending too long in any one place, a person can reduce taxes, avo ...
. They may also reduce their tax by moving to a country with lower tax rates. However, a small number of countries regardless of where they reside. , only the United States and
Eritrea Eritrea ( ), officially the State of Eritrea, is a country in the Horn of Africa The Horn of Africa (HoA), also known as the Somali Peninsula, is a large peninsula A peninsula ( la, paeninsula from ' "almost" and ' "island") is a ...

Eritrea
have such a practice, whilst Finland, France, Hungary, Italy and Spain apply it in limited circumstances. In cases such as the US, taxation cannot be avoided by simply transferring assets or moving abroad. The United States is unlike almost all other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from the U.S. According to ''
Forbes ''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family The Forbes family is one of the Boston Brahmins—a wealthy extended American family long prominent in Boston, Massachusett ...

Forbes
'' magazine some citizens choose to
give up ''Give Up'' is the only studio album by American electronic duo The Postal Service, released on February 18, 2003 by Sub Pop Records. The Postal Service was a collaboration between singer-songwriter Ben Gibbard, best-known for his work with indie r ...

give up
their
United States citizenship Citizenship of the United States is a legal status Legal status is the position held by something or someone with regard to law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accor ...
rather than be subject to the U.S. tax system; but U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2015 limit on the amount that can be excluded is US$100,800. In addition, taxpayers can exclude or deduct certain foreign housing amounts. They may also be entitled to exclude from income the value of meals and lodging provided by their employer. Some American parents don't register their children's birth abroad with American authorities, because they do not want their children to be required to report all earnings to the IRS and pay American taxes for their entire lives, even if they never visit the United States.


Double taxation

Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral
double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case of income taxes), asset (in the case of Wealth tax, capital taxes), or financial transaction (in the case of sales taxes). Double liability may be m ...
treaties with many other countries to avoid taxing nonresidents twice—once where the income is earned and again in the country of residence (and perhaps, for U.S. citizens, taxed yet again in the country of citizenship)—however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. citizens, renounce one's citizenship) to avoid tax.


Legal entities

Without changing country of residence (or, if a U.S. citizen, without giving up one's citizenship), personal taxation may be legally avoided by the creation of a separate
legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by ...
to which one's property is donated. The separate legal entity is often a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common pu ...
, trust, or
foundation Foundation may refer to: * Foundation (nonprofit), a type of charitable organization ** Foundation (United States law), a type of charitable organization in the U.S. ** Private foundation, a charitable organization that, while serving a good cause ...
. These may also be located offshore, such as in the case of many
private foundation A private foundation is a charitable organization A charitable organization or charity is an organization whose primary objectives are philanthropy Philanthropy consists of "private initiatives, for the public good, focusing on quality o ...
s. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. If assets are later transferred back to an individual, then
capital gains tax A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (t ...
es would apply on all profits. Also
income tax An income tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
would still be due on any
salary A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract An employment contract or contract of employment is a kind of contract A contract is a legally binding agreement that def ...
or
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
drawn from the legal entity. For a
settlor In law a settlor is a person who settles property on trust law A trust is a legal relationship in which the holder of a right (eg. title to a chattel) gives it to another person or entity who must keep and use it solely for another's benefit. ...
(creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a
trustee Trustee (or the holding of a trusteeship) is a legal term {{Short pages monitor