Taxation 1 (MGMT3051)

TAX EVASION &

TAX AVOIDANCE
 LEARNING OUTCOMES
At the end of the lesson, students should be able to:
1) Explain the distinction between Tax Evasion and
Tax Avoidance;
2) Examine the need for an ethical and professional
approach in dealing with tax evasion and tax
avoidance
3) Discuss assessments raised by the Commissioner
4) Explain “Best Judgement” Assessment
5) Outline the disputed assessment procedure
6) Outline the Appeal Process
7) Outline the Powers of the Commissioner
 TAX AVOIDANCE VS TAX EVASION

 Tax liability of an individual can be reduced through

two different methods: Tax avoidance and Tax evasion.
 Tax avoidance are the legal ways to reduce tax
liabilities but Tax avoidance is not advisable as it
manipulates the law for one’s own benefit.
 TAX AVOIDANCE VS TAX EVASION

 Where tax avoidance measures are clearly within the

scope of the Income Tax Act these may be described as tax
mitigation or tax avoidance and are the legal methods of
reducing tax liability. Examples are age exemption of
$80,000 for individuals over 65, donations to registered to
a registered charity (to a maximum of 5% of statutory
income).
 When a taxpayer who should be paying tax does not file
an annual return and does not pay the tax that the law
charges on his income, this is tax evasion also occurs
when the Commissioner is not informed of all the facts
relevant to the taxpayer’s assessment. Under-reporting
are the most common forms of tax evasion.
 TAX AVOIDANCE

 Tax Avoidance: Tax avoidance is an act of using legal methods to

minimize tax liability. In other words, it is an act of using tax regime in a
single territory for one’s personal benefits to decrease one’s tax burden.
 Although Tax avoidance is a legal method, it is not advisable as it could
be used for one’s own advantage to reduce the amount of tax that is
payable.
 Tax avoidance is an activity of taking unfair advantage of the
shortcomings in the tax rules by finding new ways to avoid the payment
of taxes that are within the limits of the law.
 Tax avoidance can be done by adjusting the accounts in such a manner
that there will be no violation of tax rules.
 Tax avoidance is lawful but in some cases it could come in the category
of crime.
 TAX AVOIDANCE
Tax avoidance is the practice of using legal methods to lower the
amount of money that you owe the TAJ each year. These tactics
involve:
• claiming exemptions
• claiming tax deductions
• Take tax credits like Work Opportunity Tax Credit for
spending money for legitimate purposes (hiring workers in
your company).
• Increase your retirement savings/pension contributions with
your employer with your pre-tax earnings/income. Even if you
don’t have an employer, you can open an Pension Account
with tax-deductible contributions.
 TAX EVASION
 Tax Evasion: Tax Evasion is an illegal way to minimize tax
liability through fraudulent techniques like deliberate under-
statement of taxable income or inflating expenses. It is an
unlawful attempt to reduce one’s tax burden.
 Tax Evasion is done with a motive of showing fewer profits
in order to avoid tax burden. It involves illegal practices such
as making false statements, hiding relevant documents, not
maintaining complete records of the transactions, concealment
of income, overstatement of tax credit or presenting personal
expenses as business expenses.
 Tax evasion is a crime for which the assesse could be
punished under the law.
 TAX EVASION

Tax evasion consists of seeking to pay too little tax by deliberately misleading
TAJ by :
 Suppressing information to which they are entitled (example - failing to
notify TAJ that you are liable to tax, understating income or gains or
omitting to disclose a relevant fact, example - that business expenditure had
a dual motive)
 Providing them with deliberately false information (example - deducting
expenses which have not been incurred or claiming capital allowance on
assets that has not been purchased)
 Hiding relevant documents (example – invoices, bank statements, contracts)
 Not maintaining complete records of all the transactions.
 Making false statements.
Minor cases of tax evasion have generally been settled out of court on the
payment of penalties. Serious cases of tax evasion, particularly those involving
fraud, will continue to be the subject of criminal prosecutions which may lead to
fines and/or imprisonment on conviction
 TAX EVASION: UNDER-REPORTING

By section 72 (5) of the Income Tax Act where a person has been
guilty of any falsehood, willful neglect, fraud, or has colluded
with a taxpayer or others to deceive the Commissioner and the
Commissioner can proof of this, the tax payer shall be assessed
and charged three times the amount of the charge which ought
to have been made against him/her. This penalty will apply
where the taxpayer attempts to evade tax by:
 Fraudulently changing his/her place of residence
 Fraudulently converting or assigning any of his property
 Making and delivering any statement or schedule which is
false or fraudulent
 Altering any security relating to his property or by fraudulently
rendering it unproductive in order not be charged to tax on it.
 TAX EVASION: UNDER-REPORTING

If the Commissioner discovers that a taxpayer has

submitted an understated assessment of his/her tax
liability he may within the year of assessment or within
three years after the assessment has expired charge the
person three times the amount of the excess owed;
unless the tax payer proves to the satisfaction of the
Commissioner that the omission was not done with the
deliberate intention to commit fraud or was due to
willful neglect. (section 72 (6) (a)).
 TAX AVOIDANCE VS TAX EVASION

NATURE
Tax Avoidance is legal Tax evasion is illegal

ATTRIBUTES
Tax evasion is illegal &
Tax avoidance is immoral
objectionable

MOTIVE
Tax avoidance is Tax evasion is an act of
dodging/hedging of tax concealing tax
 TAX AVOIDANCE VS TAX EVASION

CONSEQUENCES
Tax avoidance leads to deferment
Tax evasion leads to penalty or
of tax liability imprisonment

Tax avoidance is to reduce OBJECTIVE

tax
Tax evasion is done to reduce tax
liability, using the script of the
liability by unfair means
law

PERMISSABLE
Tax evasion is illegal &
Tax avoidance is immoral
objectionable
 TAX AVOIDANCE VS TAX EVASION

Tax Avoidance and Tax Evasion both are meant to

reduce the tax liability ultimately but what makes the
difference is that the former is justified in the eyes of the
law as it does not make any offence or breaks any law.
However, it is biased as the honest taxpayers are not
fools, but they can also make arrangements for
postponing unnecessary tax. If we talk about the latter, it
is completely unjustified because it is fraudulent activity,
because it involves the acts which are forbidden by the
law and hence it is punishable.
 ETHICAL & PROFESSIONAL APPROACH
 Under self-assessment, all taxpayers (whether individuals or
companies) are responsible for disclosing their taxable income
and gains and the deductions and reliefs they are claiming against
them.
 The practicing accountant often acts for taxpayers in their
dealings with TAJ and situations can arise where the accountant
has concerns as to whether the taxpayer is being honest in
providing information to the accountant for onward transmission.
 How the accountant deals with such situations is a matter of
professional judgement, but in deciding what to do, the
accountant will be expected to uphold the standards of the
Association of Chartered Certified Accountants. He must act
honestly and objectively, with due care and diligence, and
showing the highest standards of integrity.
 QUESTIONS

Circle each example of tax evasion.

A. keeping a tip log
B. mailing tax forms on time
C. ignoring earnings for pet-sitting
D. keeping accurate and organized records
E. not reporting interest earned on loans
 QUESTIONS

Which TWO of the following are MOST likely to help reduce

tax avoidance and evasion?

A. Deduct tax at source whenever possible

B. Reduced penalties for late or incorrect returns
C. Make the tax structure as complicated as possible
D. Reduce audit of the tax returns
E. Change social attitudes by developing an honest and
customer friendly tax system
 ASSESSMENT RAISED BY THE COMMISSIONER

The Commissioner may raise an assessment:

 Where the taxpayer fails to file a return,
 Where he is not satisfied with the return and/or the
declaration made. Where the Commissioner raises an
assessment a penalty up to a maximum of three times the
amount owed may be added (s.72(5)). In addition interest
of 20% is charged on unpaid tax. The Commissioner may
make an assessment on a taxpayer on “the best of
judgement” basis in the following circumstances:
 ASSESSMENT RAISED BY THE COMMISSIONER

 Where the taxpayer has made a return and the Commissioner refuses to
accept it.
 Where the taxpayer has not made a return and the Commissioner is of
the opinion that he is liable to pay tax. This has been further reinforced
by the new provision that the Commissioner can require a return from
those listed as exempt.
 Where it appears to the Commissioner that the taxpayer has not been
assessed for a particular year or has been assessed to an amount less that
he/she should have paid.
 By section 72(4) the Commissioner may ‘within the year of assessment
or within six years after the expiration thereof’ make an assessment and
add a surcharge on the amount that should have been paid.
 Where ‘any form of fraud or willful default has been committed” the
Commissioner may recover any loss of tax “attributable to the fraud or
willful default” at any time (s. 72(4)).
 “BEST OF JUDGEMENT”
ASSESSMENT
 When the Commissioner makes a best of judgement assessment the
Act gives him the authority to use any means at hand in arriving at the
assessment and the onus is on the taxpayer to prove the assessment
incorrect of excessive.
 The notice of assessment must be duly served to the taxpayer and
“shall state the basis on which the assessment is made” (s.75(3)). This
means that the Commissioner must indicate the sources of income on
which the assessment is made.
 Where the Commissioner has failed to state the basis of assessment the
counts found for the taxpayer.
 Guyanese case Argosy Co. Ltd v. CIR (1971)
 Jamaica case Lynson Charlton v. CIR (1989,19960
 These decisions did not relieve the taxpayer of paying tax. The CIR
had to work-up and assessment in compliance with s. 75(3), Jamaica
ITA and corresponding Guyanese provision.
NOTICE OF ASSESSMENT & OBJECTION TO ASSESSMENT

 Under Section 75 (1), the Commissioner shall cause to be served

personally on, or sent by registered post to each person whose
name appears on one of the assessment lists, a notice addressed
to him at his usual place of abode or business, stating the amount
to which he is assessed and the amount of tax payable by him,
and informing him of his right under (s.75(4)).
 Provided that in cases of assessment the notice thereof shall be
duly served on the person intended to be charged and such notice
shall state the basis on which the assessment is made.
NOTICE OF ASSESSMENT & OBJECTION TO ASSESSMENT

SECTION 75(4)
 Where a taxpayer is served with a notice of assessment, he/she has the
right to object to the assessment but this must be done within 30 days
of receiving the Commissioner’s notice and must be in writing and
must state precisely the grounds of objection to the assessment.
 Provided that the Commissioner upon being satisfied that owing to
absence from the Island, sickness or other reasonable cause, the person
disputing the assessment was prevented from making the application
within such period, shall extend the period as may be reasonable in the
circumstances.
 The onus of providing that the assessment complained of is erroneous
shall be on the person making the objection (the taxpayer).
 In responding to the notice of assessment, the taxpayer should have
available all accounts and material information on which he/she wishes
the Commissioner to re-consider his liability to tax for the year(s) of
assessment for which he has received a notice.
 NOTICE OF ASSESSMENT & OBJECTION TO ASSESSMENT

 The Commissioner will usually request information such as final

accounts and proof of deductible expenses and may summon any
person who he thinks may be able to give evidence concerning
the assessment.
 If the taxpayer refuses or neglects to submit a return or furnish
particulars or to produce the books and documents as required by
the Commissioner within the time given then the objection
procedure is over and the assessment as made “shall be final and
conclusive” (s.75(5)(c)).
 If the required documentation is provided, the Commissioner and
the taxpayer may agree on the amount of income and the liability
to tax, the assessment may be revised.
 If there is no agreement, the Commissioner will issue a notice of
his final decision and that is the tax due and payable.
 APPEAL PROCESS
 Section 75(6a) provides that any person dissatisfied with the
decision of the Commissioner under section 75(4) may appeal to the
Commissioner of Tax Payer Appeals (Appeals Division) in writing
within the specified time – if the taxpayer gets no satisfaction,
 The case can be taken to the Revenue Court. Section 76 (1) of the
ITA states: Any person who has disputed his/her assessment by
notice of objection under section 75, and who is dissatisfied with the
decision of the Commissioner therein, may appeal to the Revenue
Court within 30 days of the date of receiving the Commissioner’s
decision … or within such longer period permitted by or pursuant to
rules of the court.
 Whoever loses the case (Taxpayer or the Commissioner) may appeal
to the Court of Appeal.
 If either party still disputes the decision then the case may be taken
to Judicial Committee of the Privy Council of the UK. The Privy
Council’s decision is final.
 POWERS OF THE COMMISSIONER
Powers which the Commissioner can use to require assessments, deal
with objections, enforce payment of tax due and deal with tax evasion
are:
 Require records and documents to be submitted
 Enter and search premises
 Require information from third parties
 Summon any person and examine them under oath
 Issue a restriction notice.
 CASES
 Tax Administration Jamaica (TAJ) through its Intelligence,
Investigation and Enforcement and Legal Units, recently prosecuted
Rogers Land Development Limited and its Director, Richard Rogers,
for breaching Section 99 (1) of the Income Tax Act (ITA).
 The Tax Authority’s legal counsel led evidence that for the period
January 01 to December 31, 2018 and October 01, 2019 to
September 30, 2020, Rogers Land Development Limited filed
Income Tax Returns, indicating that the business collected no income
(NIL Returns) for the stated period, knowing this to be false.
 On March 21, 2022 in the Sutton Street Tax Court, Company
Director Mr. Richard Rogers pleaded guilty to two (2) counts of
making false declaration and was sentenced to a fine of One Million,
Nine Hundred Thousand Dollars (J$1,900,000.00) or thirty (30) days
imprisonment; he subsequently paid the fines.
 CASES
 The Tax Authority’s legal counsel led evidence that for the period
September 01, 2012 to August 31, 2013 and September 01, 2013
to August 31, 2014, Income Tax Returns were filed indicating R
& R Xpress Group Limited, had conducted no business for the
stated period, knowing this to be false
 Ms. Banton pleaded guilty to two counts of making a false
declaration on March 30, 2021 and was sentenced to a fine
$100,000.00 or six months on each of the two counts on April
21, 2021 in the Mandeville Parish Court. The fines were
subsequently paid.
 QUESTIONS

1. Explain the difference between tax avoidance & tax

evasion
2. Distinguish between artificial transactions and
fictitious transactions
3. Under what circumstances might the Commissioner
General allow a transaction between connected
persons to stand? Illustrate your answer with an
example.
4. Outline THREE differences between tax avoidance
& tax evasion
5. What measures does the Commissioner have to
identify non-filers and under-reporting ?
 QUESTIONS

6. Last year Dave and Marie paid more taxes than they
owed. After they filed their tax return, they received
a refund for overpayment of taxes. This year, Dave
and Marie claimed a deduction for interest paid on
their home mortgage and claimed a credit for
childcare expenses in order to avoid overpayment of
taxes. Is this an instance of tax evasion or tax
avoidance? Explain why.
 QUESTIONS

7. Suppose that you and your best friend both work in a

restaurant. Tips make up a large part of your
earnings. You report all the tips you receive and are
surprised to learn that your friend does not. Explain
to your friend, why he or she should report all tips.