Tax compliance, by any other name

“A rose by any other name would smell as sweet,” goes Shakespeare’s famous line from Romeo and Juliet. The idea is the essence of thing is what matters, apart from the name it is given.

Still, names for things do contain important distinctions. In this post, let’s consider the distinction between “tax evasion” and “tax avoidance.”

The occasion for this consideration is a recent discussion in the United Kingdom about whether advisory firms that counsel clients on how to avoid taxes should face fines.

The flawed premise in this discussion is that tax avoidance is more or less the same as tax evasion. In reality, however, the two things are quite different.

Tax evasion involves willful intent to not pay lawful taxes. Tax avoidance involves lawful efforts to minimize or escape tax liability in the first place.

In other words, as a commentator in Forbes pointed out, trying to avoid taxes doesn’t mean lack of compliance with tax law.

For example, consider cross-border tax inversion transactions. In those transactions, numerous U.S. companies have taken a foreign partner and reincorporated abroad in order to minimize taxes in the U.S.

As we explained in our November 12 post, Treasury has issued new rules on those transactions. A company that follows those rules is in compliance with tax law, even if it is trying to avoid taxes.

To be sure, legitimate tax avoidance tactics can become overly aggressive and cross the line into tax evasion. Nonetheless, the distinction between avoidance and evasion is a real one, at the core of tax compliance.