Tax evasion versus avoidance
11 March 2019 | Business
Tax evasion refers to illegal activities deliberately undertaken by a taxpayer to free itself from a tax burden. The commissioner of inland revenue needs no special powers to counter tax evasion, which is in essence a fraud against the fiscus and if discovered, could result in heavy penalties being imposed.
Tax avoidance, in contrast, denotes a situation in which the taxpayer has arranged its affairs in a perfectly legal manner in order to minimise the amount of tax payable by the taxpayer.
For example, not declaring income arising from an all-cash business, foreign source or illegal activities (such as drug dealing or prostitution) may constitute tax evasion. However, increasing your retirement fund contributions or donating to an inland revenue registered welfare organisation in order to reduce your taxable income is regarded as tax avoidance or planning.
Guidance indicators are established under section 95, which enables the receiver of revenue to disregard a transaction for tax purposes if it can be proven that;
• The transaction, operation or scheme has the effect of avoiding, postponing or reducing the liability for the payment of any duty, levy or tax.
• It was entered into for the sole purpose of avoidance, postponement or reduction of any liability for the payment of any duty, levy or tax.
• It was entered into a manner that is abnormal when considering similar transactions, or
• It was entered into in a manner, which creates rights or obligations that would not normally be created between persons that are an arm’s length under similar transactions.
It is important to note that the provisions are not limited to the Income Tax Act but to any tax, duty or levy administered by the minister of finance.
According to section 95 for an impermissible avoidance arrangement to exist, the main purpose of the arrangement must be to obtain a tax benefit. However, at the same time for section 95 to be applied, all the above characteristics needs to be present to empower the commissioner to evoke the taxpayer’s taxability while inflicting penalties as per section 65 and 66.
Despite the fact that the Income Tax Act has specific and general avoidance provisions, it is not illegal for a taxpayer to plan their tax affairs in a manner that is the most beneficial to them as there is no obligation for a taxpayer to pay more tax than is legally required under the Income Tax Act.
The commissioner of inland revenue seeks only to disregard those transactions, which have been arranged with the intent to defraud inland revenue purposefully and within the criteria set out in Section 95 above.
Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.