Tax Evasion versus Tax Avoidance

Tax Avoidance is legal. Yes, business and property owners can resort to tax avoidance to minimize on taxes or lower taxes due within the means sanctioned by law. While tax evasion is illegal because it is a scheme used outside of those allowed by law.

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

For example, underdeclaration of sales or gross receipts by a businessman is considered tax evasion while treating a newly purchased office equipment as an expense rather than an asset is considered tax avoidance.

In the case of Commissioner of Internal Revenue versus The Estate of Benigno P. Toda Jr. etc., (G.R. No. 147188, September 14, 2004), it was held that "Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being 'evil,' in 'bad faith,' 'willful,' or deliberate and not accidental'; and (3) a course of action or failure of action which is unlawful."

On the other hand, Tax avoidance is the minimization of tax liability by taking advantage of legally available tax planning opportunities while tax evasion entails the reduction of tax liability by using illegal means. (Black's Law Dictionary, Sixth Ed., p. 1460)

It is therefore important for a business owner to know those tax schemes allowed by law to minimize on taxes.