Part V Tax avoidance and

evasion

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 Pervasiveness
 Tax evasion and tax avoidance are neither
new nor peculiar to a certain country
 Prevalent in all countries through out the
world
 As early as 1920, tax evasion was evident in
the UK…that evasion of IT exists at the present
is beyond question
 In 1936, it was found that efforts of tax
evasion in the US were widespread
 In the past few years, the situation has got
serious attention in Ethiopia
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Tax avoidance - an attempt to reduce tax
liability by legal means, for example, by
exploiting loopholes;

• legal exploitation of the tax regime to

one’s own advantage;

• Examples
• Donations 10% of taxable income… is it
taxable income before donation or after
donation
• CGS to be computed at average cost
method… simple, weighted or moving?
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 Tax evasion - attempting to reduce tax
liability illegally (by breaking laws);

 Tax evasion - intentional

misrepresentation or hiding of the true
state of taxpayers’ affairs;

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 Tax evasion may be through suppression
of income or exaggeration of
expenditures;

 Includes taxpayers that:

 deliberately understate their income;
 over claim deductions, credits;
 fail to lodge returns and pay; or
 do not keep the required records etc
(McKerchar 2002, p. 27)

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 Other various forms of evasion
 Maintenance of multiple books of
accounts
 Opening accounts under dummy
names
 Securing contracts under dummy
names
 Deducting personal expenses

 Omission of income from irregular

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• Theoretically, there are a number of factors
causing tax evasion:
• high tax rates- first and foremost reason
for evasion which makes the evasion
attractive and profitable
• Complexity of tax laws- demanding lots
of time and cost to comply with
• low probability of audit-inadequacy of
power and lack of experienced personnel
in the tax authority
• Lack of publicity- lack of public
information about the person’s return or
assessment
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 • low penalty rate-penalty in money terms
or no penalty
• level of education-lack of awareness of
taxpayers
• Corrupt practices- the general
environmental practices
• peers’ evasion decision- a sense of equity
… others are doing it why not me

• As both of them happen to occur together,

one expert coined his own term for the
scheme as ‘tax avoision’

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 Measures to be taken
 Reduction of tax rates
 Allowance of additional business
expenses
 Education to people

 Change in penal provisions

 Permanent account number

 Public opinion

 No awards or recognition
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 Tax planning

 Systematic analysis of differing tax options

aimed at the minimization of tax liability in
current and future tax periods;

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 Features of tax planning :

 tax planning is legal;

 consider tax effects before transactions are

finalized;

 pay close attention to the structural and

transactional categories established by the
government;

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 mitigate tax liability by:
 avoiding statutory income, obtaining
deductions;
 use exclusions

 postpone income recognition;

 accelerate losses and deductions;

 change tax jurisdictions – to those

that have preferential treatment;
 Spreading/shifting income among
related taxpayers

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• Basics of tax planning

• deduct,
• defer and
• Divide

The End

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