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FROM: JAN-FEB 2010 ISSUE | BY VERN KRISHNA
Three small words: avoidance, evasion, fraud. How significant are these words? Very if you are a multinational enterprise (MNE) doing global business or an individual with a Swiss bank account about which the tax authorities have made an official request for details.
All international business has tax consequences. Tax treaties seek to prevent – or at least minimize – the risk of double taxation by allocating taxing jurisdiction between the two treaty partners. Thus, MNEs are seriously interested in tax treaties.
Governments have a different focus: preventing fiscal evasion through the use of tax treaties. However, evasion is an elusive term and subject to considerable linguistic confusion in international tax law. For example, in English, the term “tax evasion” usually means “fraud” of a criminal nature. In French, however, “evasion” means “avoidance” – which is entirely proper and legal. The French equivalent should be “fraude fiscal” to denote evasion. But Swiss domestic law defines “fraud” to mean “forged, falsified, or substantially inaccurate documents.” Thus, Swiss banks cannot release banking information to a foreign government unless satisfied that the request complies with the stringent definition of fraud.
Linguistic confusion is not confined to nuances of different languages. The U.S. also uses the term “evasion” carelessly. For example, section 482 of the Internal Revenue Code uses “evasion” to describe “avoidance.”
In contrast to evasion, tax avoidance is an entirely legitimate form of tax planning. The United Kingdom gave us the Westminster principle, which Canada readily adopted:
“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise 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.”
Small words, to be sure, but with great consequences for corporations, individuals, and government treasuries alike.
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