Tax plan­ning vs tax eva­sion

Tax ex­pert Manoj Agar­wal ex­plains why busi­nesses must be aware of their tax li­a­bil­ity man­age­ment in or­der to avoid fall­ing foul of the law

Gulf Business - - HOW I GOT HERE -

It has been nine months since the UAE, an erst­while tax haven like sev­eral other GCC coun­tries, im­ple­mented its new value added tax (VAT). And across the coun­try, gov­ern­ment au­thor­i­ties, busi­nesses and con­sumers are grad­u­ally ad­just­ing to it.

VAT has changed the prospects of con­sumers and busi­nesses that were en­joy­ing and were ac­cus­tomed to min­i­mal or zero tax­a­tion. In line with the grow­ing com­pet­i­tive­ness of the world econ­omy and to en­cour­age eco­nomic di­ver­si­fi­ca­tion and boosts trans­parency, the UAE has shifted to­wards a tax­a­tion econ­omy which is both com­mend­able and nec­es­sary. Busi­nesses may think to man­age their cash flows by re­duc­ing their tax li­a­bil­ity as out­put VAT un­til they col­lect it from end con­sumers. These meth­ods may be clas­si­fied as tax plan­ning and tax eva­sion – two starkly dif­fer­ent sys­tems that busi­nesses must be aware of.

Tax plan­ning is the re­struc­tur­ing of ac­tiv­i­ties in a way to max­imise the tax ben­e­fits by mak­ing best pos­si­ble use of all the le­gal op­tions like set­ting up a new com­pany in free zones, fo­cussing on lo­cal pur­chases, and so on.

Tax plan­ning can be done by ap­ply­ing the ma­jor­ity of ad­van­ta­geous pro­vi­sions which are per­mis­si­ble by law. It’s the art of log­i­cally plan­ning the busi­ness in such a man­ner that the ben­e­fits of all eli­gi­ble pro­vi­sions of the law can be availed ef­fec­tively so as to re­duce or de­fer tax li­a­bil­ity. Tax plan­ning fol­lows an hon­est ap­proach by con­form­ing to those pro­vi­sions which fall within the frame­work of the tax­a­tion law.

On the con­trary, tax eva­sion is a tech­nique of re­frain­ing from tax li­a­bil­ity with the in­ten­tion of de­feat­ing the fun­da­men­tal mo­tive of the leg­is­la­ture. It is an il­le­gal ac­tion whereby a per­son or en­tity de­lib­er­ately avoids pay­ing a true tax li­a­bil­ity.

Tax eva­sion im­plies that any ar­range­ment of ac­tiv­i­ties over­pow­ers the ba­sic in­ten­tion of the law. It in­volves de­lib­er­ately park­ing fi­nan­cial af­fairs in a way that they do not overtly look like vi­o­la­tions of the tax law, but are in fact not le­gal.

Tax eva­sion in­cludes cases where a busi­ness mis­leads the law, and to do so they use any schemes or ar­range­ments that will re­duce, de­fer and even com­pletely pre­vent the pay­ment of tax. This may also be done by the shift­ing of tax li­a­bil­ity to another per­son, so as to min­imise the in­ci­dence of tax. Tax eva­sion re­quires the use of il­le­gal meth­ods to avoid pay­ing proper taxes.

VAT is a con­sump­tion tax which is to be borne by end con­sumer, and busi­nesses are us­ing var­i­ous tools of tax plan­ning for ef­fec­tive man­age­ment of its cash flows. While look­ing for tax plan­ning op­tions, busi­nesses must en­sure that the tools they are us­ing do not fall un­der that cat­e­gory of tax eva­sion. Manoj Agar­wal, CA, AFA (UK), MIPA (Aus­tralia), AAIA (UK), AFTA (UK), is a tax and com­mer­cial pro­fes­sional who has writ­ten and spo­ken ex­ten­sively on in­di­rect taxes – par­tic­u­larly the UAE’s VAT law, pro­ce­dures and reg­u­la­tions. For more in­for­ma­tion visit uae­tax­a­tion. com or email c4­ca­

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