Tax avoidance has been getting a lot of bad rep lately. Governments around the world are concerned about the tax revenues being collected and how certain corporations aren’t paying as much tax as they should be paying. The resulting narrative has been one where people have begun confusing tax avoidance with tax evasion. There is a stark difference between these two terms and one that everyone needs to be wary of if they are to live a financially unencumbered life.
If we are to have a discussion on the legality of tax avoidance, it’s really important to understand how it’s differentiated from tax evasion and how this makes it a completely legal activity.
Tax Avoidance Vs Tax Evasion
The real difference between these two actions is actually the legality of either. When it comes to tax evasion, people use false information about their incomes. Tax avoidance, on the other hand, involves no such fraud.
Tax evasion is the exercise of willfully refusing to pay taxes. It qualifies as a legal violation per IRS tax regulations. People who’re evading taxes have to hide the true value of their income, whether these are corporate or individual incomes, this under-reporting is considered fraud and therefore liable to be prosecuted by the law.
Tax avoidance, on the other hand, is the use of legal means to reduce the tax obligations on the individual. There is no fraud involved in it since there is space to move around your income in ways such that your overall tax burden is reduced.
The ways in which people can do this involves moving their funds into Individual Retirement Accounts or to incorporate at off-shore locations where you won’t be charged as much tax as you otherwise would. This doesn’t involve any type of fraud or lying; you’re still reporting the full amount of your incomes. It’s just that the way you’ve placed it so that it isn’t taxable or less so.
Tracing the Illegality of Tax Evasion
Legality is a really abstract concept. It goes all the way back to how the first American societies were formed. Often, it seems like the state system’s been constructed in a way that limits the individual’s liberty; which it does and it has an equally confusing justification for it.
As a businessman or an economic agent, the state creates a space for you to live the best possible life that you can. In this process, it places certain safeguards where your wellbeing is guaranteed against those who would take advantage of you and it charges taxes to fund the creation of those safeguards. This includes the law enforcement authorities, the judiciary system and similar institutions.
In return for the protection that the state offers, you’re supposed to honour certain implicit agreements which include upholding your legal responsibilities. This includes honestly answering any and every question that the state asks in the process of making sure that the law is upheld.
Although there is much to be said about why the state has the authority to ask these questions; when you under-report your earnings, it’s a violation of your agreement to uphold the law. This makes tax evasion a legally punishable offense, because now tax evasion can be considered a violation of your responsibilities to the state.
Tax Avoidance As A Legal Alternative
Tax avoidance, on the other hand, is completely legal. In fact, it’s encouraged by government institutions and built into our tax systems. IRAs are a prime example of how you can use tax avoidance and the government is okay with it since you’re left with greater income when you’ve retired. For as long as you’re reporting your full incomes, don’t have any illegal income and pay all other taxes, there’s no reason why you can’t just reduce your tax burdens.
Incidentally, it’s really ironic how the government lets you avoid certain tax payments to reduce its financial burdens; if this isn’t a reason to take your accounts into your own hands then I really don’t know what is.
How Does Offshoring Come Into All of This?
When it comes to the legality of offshoring, then I suppose this question can be reduced to categorizing whether it comes down to tax avoidance or tax evasion. The answer to this is pretty simple; offshoring is straight up tax avoidance.
As a citizen of the United States you are allowed to set up corporations anywhere you like in the world. You can hold whichever off-shore financial entities you like in the form of companies, bank accounts or precious metal vaults. There are no restrictions in these investments.
Once you set up your companies offshore, a majority of your income is registered in its ledgers and is only supposed to be subjected to the laws of wherever you set it up. For as long as you continue paying whichever taxes you have to your home country based, on whichever laws regulate financial activities; you can save up on a fair bit of your taxable incomes.
So if in the US you only have to pay 25% tax on corporate income and Ireland offers 12.5% tax rate on corporate income, it’s only reasonable that you take advantage of that. Since you have the liberty to set up offshore companies and whichever country you choose lets you do that; then there is no fraud or under-reporting involved in the process.
Since there is no under-reporting involved in this, this can’t under any circumstance be called tax evasion but instead falls under the heading of tax avoidance. As such, it’s absolutely legal to set up offshore bank accounts and corporations.
Understanding the Anti Offshore Narrative
See, sometimes it happens political debates take place when states can no longer effectively provide for the people through no fault of one individual but the government’s own. In the process, a lot of laws are rendered void retroactively to help curb whatever economic calamity the government has created.
You could wonder whether it’s your responsibility to help overcome the calamity, but in all honesty, it just makes you lose faith in the intellects of those who’re making laws. As an individual, you have a right to enjoy the fruits of your labour and we’re standing at a point where we have to safeguard our own interests against those who say they are protecting them.
In the face of incompetence, no one individual or a small collection of individuals has to bear the price. The negativity associated with offshoring is really a response to the realization that somewhere down the line the administration took the wrong step, but that’s no reason for why your legal status comes into question. It’s unfair, if not downright unjust and potentially illegal considering the overarching theme of the libertarian and freedom-loving principles of the US society.
On my podcast, we talk about flag theory, international business, how to become a perpetual traveller, ways to protect yourself from financial woes and other similar ideas. Along with my podcast, I offer consultancy to clients on the best ways they can incorporate their companies offshore, set up offshore bank accounts and use precious metal vaults to remove their wealth from the financial system. Reach out to me today to see how I can help you legally eliminate your tax bill and protect your wealth from the State.