What Is Tax Avoidance?
Let’s face it. None of us, in general, enjoy paying taxes. Aside from biting a huge chunk out of our parent’s take home pay, it doesn’t do us any good hearing and reading stories about mismanagement of funds just like the current issue about Pork Barrel. Although it is the duty of every citizen to pay proper taxes, it doesn’t mean that we can’t find ways to reduce this liability. It is also our right to find ways of legally avoiding it and this is called Tax avoidance.
Tax avoidance and tax evasion are two different things. Remember, tax avoidance unlike tax evasion is perfectly legal, so it is up to the government to change the rules to make these people pay more in tax. Below are the legal tax avoidance schemes that are commonly used in different countries.
TAX AVOIDANCE SCHEMES
- Taxpayers maintain at least two books of accounts – one for the Bureau of Internal Revenue (BIR) and one for management’s use. The latter supposedly reflects the true income and value of the company. Indeed, some of these taxpayers have become successful in the past and some of them are still successful today.
- If the company is to choose between straight line method of depreciation or double declining method, our tax laws are silent as to which method you should adopt. This is an opportunity for tax avoidance. Tax avoidance allows us to go around the law and minimize the taxes payable.
- Corporations can also maximize the allowable deductions under the National Internal Revenue Code, which also includes premium payments on health and/hospitalization insurance, pension trust and charitable contributions. These deductions benefit the company, its employees and even the society. It’s hitting two (or even three) birds with one stone.
- You can also reduce the tax payable on capitals gains by taking into account transaction costs and stamp duty, offset prior realized capital losses and if you hold an investment for more than 12 months you only have to pay tax on half the profits you make.
- Some businessmen and women have employed their husbands or wives. They might do very little work, but are still paid a salary. This means that the couple divides its income tax bill, rather than one of them – who might be the boss of the company – receiving all of the income and so paying a larger amount in tax. If only one of the couple took all the income, he or she might also be pushed into a higher tax bracket. The couple may also pay less tax by sharing ownership of the company and paying themselves a dividend, rather than salary – something that governments have also tried to crack down on.
Although the tax avoidance schemes mentioned above are perfectly legal, the best way to have a successful and sustainable company is learning to incorporate honesty and transparency in their corporate values. An honest and transparent company is not just every businessman’s responsibility to the tax agency but it should be his legacy to his progeny. It can be done by:
- Maintaining only one set of accounting records. It is costly to keep more than one set of books of accounts. Having two sets of books would be prone to a lot of errors. Owners and officers have the burden of keeping these data confidential and avoid any leak of information which can lead to tax exposures and criminal prosecutions. Having more than one set of accounting records is like keeping a time bomb inside the house. For peace of mind, maintain one set of reliable and accurate accounting records.
- Comply with tax laws. Some businessmen say that if you will not cheat with your tax obligations, you will not succeed. But our country is replete with success stories of companies that complied with tax laws from the very start of their business and have continuously succeeded.
- Avail legal tax exemption Study your business operation and determine if it will qualify for registration with incentive giving bodies.
- Know when to consult a tax specialist. If you do not know which tax rules and regulations are applicable to your business, hire a good and reputable tax specialist to either perform tax consulting job or tax compliance review or both.
As Robert Kiyosaki said, “Taxes Are Fair I realize taxes may seem unfair. Yet, if you step back and ask, ‘Why do some millionaires pay less taxes than others?’ you will find an interesting answer. The answer is taxes are revenue neutral. This means the taxman takes and the taxman gives. If you do what the government wants done, you get tax breaks.
Many people see taxes as punitive and for most people, taxes do take money out of their pockets. Yet there is another side of taxes, the side very few people see. Taxes are actually incentives, a government stimulus plan to prod entrepreneurs to perform tasks the government wants done. Some of the things the government wants done are:
- Jobs: If you provide lots of jobs, you get tax breaks. If you are an employee, you pay the tax. This is “revenue neutral.”
- Housing: If you provide housing, such as apartment houses, you receive many tax breaks. People who own their own home but do not provide rental property, pays the tax.
- Debt: The government wants people to borrow. That’s why interest rates are so low. There are tax breaks for debt, but there is a tax on savings. The government does not need savers. It needs debtors to move money into the economy.
- Energy: Civilization runs on energy. This is why there are tax breaks for oil, wind, and solar companies. The taxes are collected each time you fill up your gas tank.
- Food: If the economy had no food, we might all be cannibals. This is why there are farm subsidies. Again, the taxes are collected from the consumers.
As ‘the tax the rich’ fervor grows, it is important for all of us to get smarter … especially about taxes.”