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34 Intertax 272 (2006)
Tax Evasion, Tax Avoidance and Tax Planning

handle is hein.kluwer/intrtax0034 and id is 272 raw text is: Tax Evasion, Tax Avoidance and Tax Planning Paulus Merks, Ernst & Young and Vrije Universiteit, Amsterdam* 1. Introduction As both KPMG' and two Dunkin Donuts operators2 found out recently, the consequences of crossing the line between (legal) tax avoidance and (illegal) tax evasion can be costly. Costly for the involved taxpayers (or, more accurately, the endeavoured non- taxpayers) since they typically face penalties and/or jail time in addition to the evaded tax liability. Costly for the usual suspects: (the partners of) the law firms and audit firms involved in certain illegal tax shelter3 or other tax evasive transactions.4 Costly for other parties involved, including the bankss and the employees of the law and audit firms concerned;6 and - last but not least - costly for society. That is, costly for all taxpayers who eventually pay the Ministry of Justice chasing the case, pay for the court deciding upon the case and pay for the penitentiary where the convicted tax evaders and their facilitators may end. During the last decades, there has been an increas- ing tendency for taxpayers, tax authorities, legislators and inter-governmental agencies to focus on the phenomena of (international) tax evasion, tax avoid- ance and tax planning.7 This is not only a subject of growing importance as a direct result of the recent recessionary economic climate in most OECD jurisdic- tions, which has fostered a tendency on the part of taxpayers to reduce their tax payments as a source of new finance. It is also a consequence of the increasing globalization that makes it easier for international operating companies and individuals to reduce taxa- tion.8 In this respect, a debate can easily be confused using one term to cover different phenomena. For example, from a public finance perspective, the term 'tax avoidance' may be used interchangeably with 'tax evasion' on the basis that a dollar or euro of lost revenue through tax evasion is the same as a dollar or euro of lost revenue through tax avoidance. Also, one might use the term 'tax avoidance' to describe the use of a tax shelter, on the basis that deviations from a certain comprehensive tax base are an 'avoidance' of the proper amount of tax from the perspective of horizontal equity.9 Especially murky in this respect is the distinction between the terms '(unacceptable) tax avoidance' and '(acceptable) tax planning'.10 The borderline here is far from clear since the vast majority of countries recognize the right of the taxpayer to arrange his affairs in a way which attracts minimum tax liability. For these reasons, in this article I try to shed some light in the 'dark' world of international tax evasion, tax avoidance and tax planning. Special attention will be given to the views of the OECD and to recent developments within the European Community. 2. Tax evasion Tax evasion12 is an inherently illegal activity that is punishable by criminal sanctions. It is an action by a WEM Paulus Merks is a corporate tax advisor with Ernst & Young. In addition, he lectures European and International Tax Law at the Vrije Universiteit in Amsterdam. The author may be reached at p.merks@rechten.vu.nl. See 'KPMG settles IRS tax-shelter case for $456 million', International Tax Review, 1 September 2005. 2 See 'Two Dunkin Donuts Operators Plead Guilty To Tax Evasion', WNBC.com, 18 November 2005. Pursuant to the OECD Glossary of Tax Terms, a tax shelter is defined in two ways. Either: '(1) An opportunity to use, quite legitimately, a relief or exemption from tax to pay less tax than one might otherwise have to pay in respect of similar activities, or the deferment of tax' or '(2) The polite term usually given to a contrived scheme to avoid or reduce a liability to taxation'. 4 The KPMG-IRS settlement included USD456 million in penalties and the acceptance of an outside monitor of its operations under the terms of an agreement with prosecutors. See J.D. Glater 'Settlement seen on tax shelters by audit firm', New York Times, 27 August 2005. s See J. Weil 'How big banks played key role in tax shelters', Wall Street Journal, 19 August 2005. 6 See 'KPMG shifts tax managers', New York Times, 13 September 2005. See L.A. Sheppard, 'Offshore Investments: Don't Ask, Don't tell', Tax Notes International, 18 July 2005, p. 209. The OECD website mentions in this respect: 'A borderless world is good for trade and global development. It also can provide opportunities for dishonest taxpayers. Governments need to take action to ensure that taxpayers do not abuse the borderless world to escape their tax liabilities' www.oecd.org (2005). J. Waincymer, 'The Australian tax avoidance experience and responses: a critical review', in G.S. Cooper led.), Tax Avoidance and the Rule of Law (IBFD Publications, Amsterdam, 1997). is See, for example, G.R. Simpson, 'Irish subsidiary lets Microsoft slash taxes in U.S. and Europe; Tech and drug firms move key intellectual property to low-levy island haven', Wall Street Journal (Europe), 7 November 2005, p. 1. See for a both extensive and multinational list of definitions and descriptions on tax evasion, tax avoidance and tax planning: D.A. Albregtse, Fiscaal-economische aspecten van internationale belastinguermijding (Kluwer, Deventer, 1983), p. 32. 12 In French Fraude fiscale, in German Steuerhinterziehung, in Spanish Evasidn fiscal, and in Dutch Belastingontduiking. INTERTAX. Volume 34, Issue 5 i Kluwer Law International 2006 272

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