Tax Evasion
Introduction
Just as death and taxes are certainties in this world, so are ways and means to minimize if not eliminate altogether one's tax liabilities.Attempts to escape the tax net may take any one of two forms: tax evasion and tax avoidance. Tax evasion may be defined as the act of reducing taxes by illegal or fraudulent means.1Common practices of tax evasion include: under-reporting of income, over-statement of expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries in books, fictitious transactions in the name of dummies, non-recording of sales, and others.Tax avoidance, on the other hand, involves the legal rearrangements of one's economic activities in order to lowerthe tax liability.
This is done bymoving capital or laborto areas, geographical or otherwise, where tax rates are lowerand/or bymanipulatingthetax parametersthrough the legal means to spread or defer the tax liability over time thereby effectively reducing the tax rate. Tax evasion is done by a taxpayer either singlyor incollusionwith sometaxcollectionfunctionary,whiletax avoidance is done singly or with the help of some tax expert like a lawyer and an accountant. As such, evasion and avoidance are interdependentactivities.
Significant and well-known tax avoidance could induce increased evasion.
On the part of the individual taxpayer, evasion can substitute for avoidance when increasing thecost of tax avoidance mayincreasetax evasion. Butthe impact on the economy of both are the same: lossof government revenue, increase intaxpayer's after-tax income, and perverse effects on the equity and efficiency goals of the tax system.
From the administrative and policy perspective, determining the magnitude of tax evasion and an analysis of tax evasion levels are
Research Fellow, Philippine Institute for Development Studies. The author wishes to acknowledge the helpful comments of Merle Benjamin of the National Tax Research Center.
1.
Just as death and taxes are certainties in this world, so are ways and means to minimize if not eliminate altogether one's tax liabilities.Attempts to escape the tax net may take any one of two forms: tax evasion and tax avoidance. Tax evasion may be defined as the act of reducing taxes by illegal or fraudulent means.1Common practices of tax evasion include: under-reporting of income, over-statement of expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries in books, fictitious transactions in the name of dummies, non-recording of sales, and others.Tax avoidance, on the other hand, involves the legal rearrangements of one's economic activities in order to lowerthe tax liability.
This is done bymoving capital or laborto areas, geographical or otherwise, where tax rates are lowerand/or bymanipulatingthetax parametersthrough the legal means to spread or defer the tax liability over time thereby effectively reducing the tax rate. Tax evasion is done by a taxpayer either singlyor incollusionwith sometaxcollectionfunctionary,whiletax avoidance is done singly or with the help of some tax expert like a lawyer and an accountant. As such, evasion and avoidance are interdependentactivities.
Significant and well-known tax avoidance could induce increased evasion.
On the part of the individual taxpayer, evasion can substitute for avoidance when increasing thecost of tax avoidance mayincreasetax evasion. Butthe impact on the economy of both are the same: lossof government revenue, increase intaxpayer's after-tax income, and perverse effects on the equity and efficiency goals of the tax system.
From the administrative and policy perspective, determining the magnitude of tax evasion and an analysis of tax evasion levels are
Research Fellow, Philippine Institute for Development Studies. The author wishes to acknowledge the helpful comments of Merle Benjamin of the National Tax Research Center.
1.