Tax avoidance, tax planning and tax evasion
That each taxpayer has a right to use the full provisions of the law to reduce his tax payment has long been established by the courts for which the authority is found in the Duke of Westminster case where Lord Tomlin said:

"Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax." And he further stated that, "for it has to be recognized that the subject, whether poor or humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax."

But this is not what seems to upset the Commissioner or indeed anyone else. Within the accounting and legal professions there is a whole lot of money being made in advising individuals and businesses on minimising their tax liabilities in what is called tax planning. This involves taking advantage of various options available to the taxpayer such as those systems like ours which have different rates for different classes of business or different types of income. For example, commercial companies pay tax on their profits at 45% while non-commercial companies are taxed at the rate of 35 per cent. Tax planning would suggest that the business undertake a mix of activities thereby changing its category for tax purposes from commercial company to non-commercial. A company may also decide that in order to maximise the export allowance it receives, it will have no local sales and anyone may time a sale to avoid capital gains tax or to influence the rate which may apply.

Tax planning is a form of tax avoidance, but it is avoidance which is overtly embarked on. It is a genuine arrangement, openly carried out within the ambit of the law, to take advantage or to benefit from exemptions, incentives, deductions and allowances, for which the tax laws provide. It does not involve devious and unnatural methods to exploit the law. As a matter of fact, it is actually encouraged as it is only thus will the objectives of tax policy be realised.

In paragraph 1016 of the Royal Commission on the Taxation of Profits and Income in the United Kingdom final report, it distinguished avoidance and evasion in these terms:

"It is usual to draw a distinction between tax avoidance and tax evasion. The latter denotes all those activities which are responsible for a person not paying the tax that the existing law charges upon his income. Ex hypothesi he is wrong, though his wrongdoing may range from the making of a deliberately fraudulent return to a mere failure to make his return or to pay his tax at the proper time. By tax avoidance, on the other hand, is understood some act by which a person so arranges his affairs that he is liable to pay less tax than he would have paid but for the arrangement. Thus the situation which he brings about is one in which he is legally in the right, except so far as some special rule may be introduced that puts him in the wrong."

It is clear that tax avoidance is acceptable under circumstances where the taxpayer has a legal right to avoid. This is prevalent in genuine tax planning situations. A taxpayer may lawfully arrange his/her affairs to minimise taxes by such steps as we referred to above and although the tax authorities may not like it, there is nothing they can do about it once the law allows it. What is unacceptable is where avoidance is carried out that is not sanctioned by the law. It is established that legality is necessary and even the courts have often affirmed the right of the taxpayer to mitigate taxes.

Evasion, on the other hand, which is what our self-employed practise with apparent impunity is unlawful and will attract severe penalties prescribed in our tax laws. Evasion occurs through the omission, manipulation or invention of figures or other records. It involves deliberately compiling false accounts, or deliberately making false returns, claims or statements.

Guyana perspective
Section 74 (1) of the Income Tax Act, provides that "Where the Commissioner is of the opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious or that any disposition is not in fact given effect to, he may disregard any such transaction or disposition and the person concerned shall be assessable accordingly."

There is no reported case in which this section has been tested in the local courts but similar provisions exist in other Caribbean countries including Jamaica and Trinidad & Tobago. In the Jamaican case Seramco Trustees v Income Tax Commissioner which reached the Privy Council, the words 'artificial' and 'transactions' were dissected and the court ruled that in exercising his powers the Commissioner can treat certain transactions as if they had never existed. This is a very broad provision but does require the Commissioner to examine transactions for their business purpose - a task that requires considerable resources which his department does not now possess.

There are of course several other provisions in the tax laws to minimise tax evasion, some of which are quite modern in their concept. For example, we do have laws to deal with transfer pricing, excessive management charges, disallowing expenditure which is not incurred 'wholly and exclusively in the production of income;' a withholding tax, which imposes on the payer the obligation to deduct and a property tax that allows for a reconciliation of the profits reported.

In addition to the laws, the tax authorities have considerable powers and may demand information, visit premises, impose and waive penalties and interest and may, and sometimes do, selectively undertake field and desk audits. The law places (harshly in my view) the obligation to lodge 2/3 of the tax assessed if an appeal is made to the Board of Review and 100% if made to the court. This should be more than enough to encourage settlement by the taxpayer particularly if the authorities promise to waive some of the penalties and interest and allow a reasonable time for payment. At the extreme end is the threat of jail on both the taxpayer and those who aid and abet him. The Commissioner is not short of powers but the problem seems more one of resources, will and politics.

Governments are reluctant to have their supporters face the force of the tax laws as was so evident a few years ago when a sub-committee of professionals recommended the introduction of withholding tax to the rice industry in response to rice farmers' claim that record-keeping is onerous. The current administration has also contributed to the tax culture of the country by its almost reckless willingness to grant tax concessions in secret thereby conveying the impression that the tax system is not fair.