Monday, June 4, 2012

Tax mitigation-avoidance-evasion

"Tax avoidance involves arrangement of a transaction in order to obtain a tax advantage, benefit, or reduction in a manner unintended by the tax law.  It is an unacceptable manipulation of the law which is unlike legitimate tax mitigation.  Mitigation involves use of the tax law to achieve anticipated tax advantages embedded in tax provisions.  Tax avoidance is also to be distinguished from tax evasion.  Evasion involves outright fraud, concealment, or misrepresentation in order to defeat application of the tax laws."
This is from Karen Brown's opening paragraph of "A Comparative Look at Regulation of Corporate Tax Avoidance," a new title edited by Prof. Brown and including 16 country reports.  She attributes the mitigation-avoidance-evasion taxonomy to Zoe Prebble & John Prebble's chapter on New Zealand.  They say:
"Tax mitigation and tax evasion, standing analytically before and after tax avoidance, have no statutory definitions.  ... New Zealand courts and practitioners prefer not to use the term "mitigation."  Instead, they employ circumlocutions like "permissible tax minimisation" [which] indeed encapsulates the meaning of tax mitigation, which is to reduce one's tax in a manner that not only complies with the letter of the law but that is consistent with the policy behind the legislation."
Mitigation is not a term I have used though I understand well enough the inclination to create some kind of ground around the term "avoidance."  I've used "aggressive tax avoidance" to suggest tax avoidance that may comply with the letter but not the spirit of the law, and have used "avoidance" to mean legal tax avoidance, e.g., taking advantage of provisions drafted for the purpose of giving the taxpayer an incentive or tax break (whether one agrees with the policy behind the law or not).  That would leave me with an avoidance-aggressive avoidance-evasion taxonomy, with evasion defined as Prof. Brown suggests above.  Perhaps mitigation or minimisation does a better job than plain "avoidance" and then "avoidance" can be used instead of "aggressive avoidance."  Still a spectrum but the variation in terms perhaps helps to more clearly describe the dividing line.

A major rhetorical difficulty I have had with this subject is that all of these terms suggest a shying away in degrees from an obligation that otherwise exists, and that doesn't quite capture the case of taking advantage of tax breaks the legislature has created by design.  Arranging one's affairs to take advantage of these intended gifts doesn't seem like shying away from an obligation, and that's likely why Learned Hand's quote remains so salient:
"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
 Using the term mitigation or minimisation to describe this arranging of affairs doesn't quite seem to capture the range of stories involved in "arranging ones affairs."  One story is that taxpayers are free to take advantage of all the deductions, exemptions, exclusions, etc. they can find, and it's not minimisation to do that: for example, it does not really seem like tax minimisation to be human and therefore eligible for a personal exemption, or to have high medical bills and therefore be eligible for some additional tax relief.  But another story involves the amassing of power and influence to obtain specific tax breaks for your industry and then take advantage of those breaks, c.f., Bain capital and the carried interest rule for private equity managers or the film industry and the many film industry tax breaks.  That looks a lot more like tax mitigation or minimisation somehow.

Is mitigation-avoidance-evasion descriptive?  Yes, I think more so than avoidance-aggressive avoidance-evasion.  But there may be room for one more category before mitigation or minimisation.


  1. Comment by John Prebble, Victoria University of Wellington
    I was pleased that l'Académie Internationale de Droit Comparé adopted the legal analytical framework and terminology of mitigation/avoidance/evasion that Zoë Prebble and I suggested for its 8th World Congress (Washington DC 2010). Complex discussion goes better with agreed labels. (Karen Brown’s book publishes papers from the 8th Congress.)
    It may be better to save "minimisation" and "reduction" to use as generic terms that refer to any reduction of tax, whether by means of evasion, of avoidance, or of mitigation.
    I suspect that it would not help legal analysis further to subdivide the category of mitigation. By "mitigation" I refer to ways of reducing tax that are within the spirit of the statute or within the contemplation of the legislature. In short, they are not targets of a GAAR. In the United States, falling sick and incurring higher medical bills is one such way. In Australia, mining for gold used to be another. In New Zealand, adding roll bars to your tractor was a third. We may draw moral distinctions between these examples (and re-label them if you fall sick because of smoking or eating too much) but their legal category remains the same.
    Drawing distinctions between different kinds of mitigation can be useful for discussion of policy and morality, but adding sub-categories within legal analysis risks confusion. I hope that the terminology that the Académie adopted will become the international norm.

  2. You're quite right John, I just need to adapt to this taxonomy through use. Thanks for the comment.

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  4. Staying within black-letter law may not be enough. Even though tax evasion is a crime and tax avoidance/mitigation are not technically - Inland Revenue can investigate where it feels necessary, the intentions behind various entity structures and payment plans: Penny and Hooper or Ben Nevis Forestry Ventures Ltd (Wolters Kluwer CCH, 2015: 1402, 1399). So it would be best for a corporation not to push too close to the boundary of legislation and its interpretation due to the financial penalties that can be and have been imposed.
    Ethical theory does not support tax avoidance/mitigation. Utilitarianism seeks to assess the sum of the greatest happiness between two options. A choice where the ends justify the means of any business decision is short sighted. The greatest good for the greatest number is not reflected in the biggest profits for the elite. Kantianism believes that people should not be treated as a means to an end but have rights inherently which reflects the need to treat people with respect rather than exploitation. Corporate taxes should be paid to reimburse the community on which the corporation relies while repaying previous incentives received to set up business in that community. Business has a duty to the community.
    Executives run big corporations not shareholders (Giddens, 1997: 256); but there is a fiduciary responsibility to a wider group of stakeholders (Heath, 2006: 533). But who pays the penalty of tax avoidance/mitigation or legal action when Inland Revenue investigates or the media release an exposé? It is not the executive of the corporation but the customer, workers, suppliers and shareholders as the executives attempt to increase gross profits to pay this penalty. Trans-national companies can have sales larger than the gross national product of some nations (Giddens, 1997: 295). But should that mean that they have the power to take more from a community than they provide? Capitalism and globalisation appear to have had a detrimental effect on democracy and have reduced the trust of people in their political system (Giddens 1997: 343). Shouldn’t it be the people of a nation that decide how it is run not the executives of multi-national companies?
    Acting within the law and social rules mean that corporations should in fact pay their taxes as the community intended when it created tax laws and Friedman misses this point. He also suggests exploitation is difficult but we still need employment, environment and international laws and the examples above demonstrate otherwise, e.g. Third World countries, film industry workers and voters. Incentives were given to companies to set up business to benefit the community and its environs not to exploit and destroy them and then move on. This puts the spotlight on a new type of dole-bludger- welfare for the wealthy.