What is tax avoidance?

This research proposes a classification of a variety of activities labelled “tax avoidance” in the current popular debate. It does so to bring some clarity to the debate and as a necessary first step in fashioning well-targeted actions in response. We propose the following classification.

A. Ineffective avoidance. This can be combated under existing laws provided the activity is discovered and action is taken. The appropriate actions will lie in the area of adequate disclosure provisions and a properly resourced revenue authority.

B. Effective avoidance. This is activity which reduces tax payable due to use of a defect in the legislation or other failure in the way that the legislation is written, that cannot be corrected by purposive interpretation. The appropriate actions will be revision of the law, a General Anti-Avoidance Rule, and, better still, improved tax policy-making translating into a more principles based approach to legislation.

C. Using legislation or the international tax system to one’s advantage. These cases do not involve the type of exploitation under category B. Supporting taxpayers’ rights to rely on national and international tax rules does not mean that there is no problem with the outcome. There is a growing consensus that the only way to tackle the way the international tax system works is through reform of that system. Possible radical responses include unitary taxation or a destination based cash flow taxes.

The paper discusses this classification in detail, as well as phrases such as “intention of Parliament” and “spirit of the law”. The avoidance debate has often been framed in terms of “fairness” and “morality”. The paper argues that the proper place for these discussions is alongside other considerations, to inform the policy process. In this way the widespread view of morality can be embodied in the law through proper democratic and parliamentary processes.

Michael Devereux, Judith Freedman and John Vella, Tax avoidance, CBT Report