Tax Evasion vs. Tax Avoidance: Know the Difference

image Tax Evasion vs. Tax Avoidance

Thanks to the offshore leaks, including the Panama Papers, people are now becoming more well-informed than ever on issues related to offshore banking, offshore company formation, and everything else in between. Unfortunately, it seems that the general public is still confused on the legalities of offshore structures.

The problem with all the confusion is that things are becoming more confusing every day. Think of it as blind people guiding blind people. The worst part of the whole situation is that offshore banking and company formation are considered as ways for the riches to hide their money illegally.

However, that's not the case.

We may not be a legal expert (you should consult a lawyer for any legal advice,) but we know what's right or wrong when it comes to offshore structures and how to use them legally for avoiding taxes.

“But isn't avoiding taxes illegal?” you might asked. If you asked the question, our short answer is “no”. But if you're curious about the reasons behind it – and why the media seem to have no love for those who use offshore structures for tax planning purposes, read on.

Tax Evasion vs. Tax Avoidance – what's the difference?

What many misunderstood is that they believe that tax evasion is the same as tax avoidance. Therefore, both are deemed as illegal practices of bringing wealth offshore for tax benefits – among others.

Here's the whole truth: Tax evasion is not the same as tax avoidance. Tax evasion is illegal, but that's not the case with tax avoidance. Not only tax avoidance is legal, but it's also one of the methods that people do in their wealth building endeavors.

In essence, tax evasion means that you're underpaying taxes deliberately, which makes your endeavor an illegal one. Tax avoidance, on the other hand, means that you're using legal ways to reduce your tax liabilities.

But why knowing the difference matter? It's quite simple: Doing it in the right way can lower your taxes, but doing it in the wrong way can get you fined, even take you to prison.

To explain the difference better, let's use a scenario as an example.

Meet Jacques

Jacques wants to find a way to reduce the taxes that he's obliged to pay to the Government by lowering his gross income. He has two strategies to choose: Tax evasion and tax avoidance.

- How tax avoidance works

Taking this path, Jacques should focus on tax deductions and tax credits. For example, he contributed to the Government's retirement savings plan; he also supported several charities of his choice. Those are categorized as deductions, and all done before taxes.

The aim is to lower the adjusted gross income as much as he can using different methods and strategies - legally, so his tax liability is becoming the lowest possible.

- How tax evasion works

Perhaps Jacques wants to take a more “creative” approach; perhaps his adjusted gross income is not low enough. Considering tax avoidance method, Jacques intentionally avoids paying taxes altogether: He only reports a portion of his gross income and intentionally not disclosing any taxes on his savings and other asset holding vehicles.

He's safe as long as he's not get caught; unfortunately for Jacques, the Government is getting smarter in detecting his wrongdoings – which exposes Jacques to heavy fines, penalties, even criminal charges.

From the scenario above, it's obvious that tax avoidance is better than tax evasion, and it's the best route for you to take.

Here's a more detailed explanation from Investopedia:

How to do a proper tax avoidance – using offshore structure

There are numerous ways your accountants and tax pros can suggest you, but we're sure that one of the many suggestions given involves using offshore banking, offshore company formation, or both.

As we've mentioned from time to time, offshore structures can be as legal or illegal as you want. That said, you can use offshore structures to avoid taxes or evade taxes – your choice. This is where many of the mainstream media only tell half of the story – again, not all who engaged in offshore banking or establishing a company offshore are bad guys.

Then, how to do tax avoidance using offshore structures? Fortunately, it's not as hard as you think - there's one of many ways: You can legally lower your taxes by moving your business operations, typically overseas operations, to an offshore jurisdiction that offers more benefits and incentives for companies - (e.g. Lower tax rate, such as Cyprus' 12.5 percent corporate taxes, better support, more stable political/economic environment and other upsides that you can't access locally/onshore.

Of course, again, for a better legal advice, you should go to your lawyer, accountant or tax professional – but what we can tell you is this: If you are doing tax avoidance, you shouldn't be afraid of getting your information shared with your local authorities.

You might want to exercise the secrecy option of your accounts offshore, but only for the right reasons – i.e. Protecting your trade secrets from your competitors or personal details from the prying eyes.


By now you should have a firm understanding of the difference between tax avoidance and tax evasion – including the implications of adopting each; most probably, you understand more about them than 80-90 percent of the general public.

If you still have more questions to answer, I suggest that you should seek any legal and/or tax help. However, if you have any questions regarding offshore structures that are suitable for your tax avoidance endeavors, you can consult with us (it's free!)

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