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Tax avoidance or tax evasion? A haven for misunderstanding

Distinctions matter. Maybe lawyers devote more effort than the average citizen to making distinctions, and invest the ones they find with improbable significance, but these are occupational hazards. Even…

High profile Wickenby targets like Glenn Wheatley make good headlines, but conflate avoidance and evasion. AAP

Distinctions matter. Maybe lawyers devote more effort than the average citizen to making distinctions, and invest the ones they find with improbable significance, but these are occupational hazards.

Even so, it is always frustrating when people mistakenly align legal concepts that differ in significant ways.

Take, for example, the recent attention to tax behaviour. A spate of press stories, a few books and some reports by NGOs in the UK have dwelt on exotic tax havens like Lichtenstein, Vanuatu and the Cayman Islands.

These stories often get traction by connecting the tax haven to a celebrity such as Paul Hogan or Glenn Wheatley.

Other stories gain their allure from connecting the tax haven to an anti-celebrity like the embattled News Corporation or everybody’s favourite villain, an Australian bank.

These stories are all about tax havens and tax havens are all about tax evasion, right? Wrong. These stories usually have about as much in common as “Joan Sutherland’s Greatest Hits” and “Beryl Spriggs Sings Joan Sutherland’s Greatest Hits”.

The distinction between them is typically described by lawyers as the difference between tax avoidance and tax evasion.

Both, if you like, can be thought of as a form of “tax non-compliance”, but putting the two ideas together under one label usually confuses more than it reveals.

Tax avoidance by multinational companies is typically about exploiting loopholes. The company’s basic position is, in effect, “I am happy to show you everything that happened and there’s not a thing you can do about it because that’s what the law allows.”

The multinationals don’t always win this argument, but that’s their basic posture. And it might be “morally challenged”, but there is a difference between the lawful and the virtuous.

Tax evasion, on the other hand, is about lies and deceit. The taxpayer’s basic strategy is, “I hope they never find out what really happened because I told them a load of malarky.”

Multinational companies rarely engage in tax evasion – there are reported instances but they are few. On the other hand, claims that many multinational companies engage in tax avoidance, and use tax havens to do so, belong in the “dog bites man” basket.

A moment’s reflection reveals it is unlikely that multinationals would bother with evasion.

After all, who is going to pay millions of dollars to lawyers and accountants, as they do each year, to implement a strategy that amounts to not much more than, “I hope they don’t look here…”?

Not only would it waste money, it doesn’t make much sense when multinationals are almost permanently audited by tax authorities, often in multiple countries, not to mention the accounting auditors responsible to shareholders to find trouble lurking in the accounts.

It is not a surprise, least of all to the tax authorities, that multinationals have lots of subsidiaries in tax havens and do lots of business with and through them.

News Corp apparently has 152 subsidiaries in tax havens, but that’s no jealously guarded secret – it’s in The Telegraph.

On the other hand, the evidence from the joint taskforce Project Wickenby, suggests that wealthy individuals and private businesses indeed play the evasion game.

Forget the niceties of finding loopholes; let’s just tell a load of porkies and pray very hard nobody comes snooping.

Some will even engage unusual characters to help buttress the misrepresentation they are relying on.

In law, though not the public imagination, there is world of difference between the two.

It is the difference between the criminal and the unsavoury. Unfortunately, too many stories align the two ideas.

But should anyone care? Why differentiate between the kind of non-compliance that ends up with someone behind bars and the kind that doesn’t? After all, both cost the government tax revenue.

There are a few answers to this question but a compelling one is, because it matters when seeking solutions. The solutions to evasion and avoidance are different and responsibility for implementing solutions rests with different people.

First, take evasion. We have lots of laws against the kinds of things that many high net wealth individuals embroiled in Project Wickenby are said to have done.

But just like speeding or parking offences, the problem is not that we lack the laws; the problem is that the laws haven’t deterred the activity.

In other words, the problem is in enforcement and we – and our parliament – should be looking to tax officials and the police for explanations and remedies.

Tax avoidance is different. The problem is the law – or rather the lack of it – and the responsibility for fixing laws lies exclusively with the government.

Multinationals may deserve social opprobrium if they bend tax laws, but if avoidance is a problem, we should be asking the government for explanations and solutions.

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2 Comments sorted by

  1. Michael Burrows


    Do as I say but not as I do.

    Credibility, lead by example?

    I believe, the people are still owed an explanation, if not an inquiry: but hopefully not buried in a Royal Commission: argument as to why criminal charges have not been laid.

    Some of the proceeds from the sale of Telstra, hence the Future Fund; to prop up previously unfunded public service superannuation, raises the 'other eyebrow'. Surely benefits to members would have been more robust if the funds were paid along the way; as legislation dictates those in private enterprise must. Defined benefits also attract an earn.

    Tax, superannuation, lore or law, legislation - time to change the goal posts again?

    I really couldn't imagine the government introducing retrospective legislation to investigate itself. Hmmm - AUSTRAC the funds left the country, ATO employer contributions and reporting, APRA,......,too hard basket!

  2. Jason Kerr

    logged in via Facebook

    Great article.

    You're right - unfortunately many people (including the media and the ATO) tend to lump evasion and avoidance in the same 'naughty' basket.

    I can ride a bus into the city and evade paying the fare. Or I can avoid catching the bus and walk instead.

    It would seem many people consider both as bad as each other.

    I like how you point out that the ATO should not be concerned with avoidance. As you quite rightly exert - it's the lawmakers problem.