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Avoidance and evasion Back  
Media treatment of tax matters over the last few years might cause some readers to believe that there is no distinction between tax avoidance and tax evasion, and that both are unlawful. They may also believe that any offshore transaction necessarily amounts to tax evasion. Neither proposition is true.

The public could be forgiven if they believed at this stage that the use of an offshore trust constituted tax evasion. It may do so. On the other hand it may not do so.

It is useful to remember what tax evasion is. Tax evasion occurs when a person, having the means to pay, fails to report and pay a tax liability imposed upon him by law. Tax evasion is a criminal offence in most cases.

Tax avoidance is something quite different. Tax avoidance is the organisation of a persons affairs, financial and otherwise, so as to ensure the tax liabilities they incur are lawfully minimised.

As long ago as 1936, in the famous Duke of Westminster case, it was said in the House of Lords in the UK ‘Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in altering them so as to secure this result, then however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax’.
That principle has been approved by the Irish courts on many occasions, most notably in the McGrath case in 1987.

Putting it another way, it would be a mark of recklessness to organise your affairs to pay more tax than you need pay. But it is a matter of criminality to conceal the fact that you have incurred a tax liability, and to wilfully fail to pay it.

The use of an offshore trust, or an offshore company, may involve tax avoidance, or it may involve tax evasion, or it may have nothing whatever to do with tax.

Dail Eireann has enacted various anti-avoidance measures which can tax Irish resident persons on the income or gains of persons not resident in Ireland. Typically such taxation can occur only if the Irish resident is capable one day of obtaining some benefit from the income or gains that are accrue to the non resident person, or does in fact obtain that benefit. If the Irish person who transferred the assets has so arranged matters that he will never in any circumstance whatever, obtain any benefit from them, then neither the income nor the gains arising to the non resident from those assets in the future will be taxed on the Irish resident person. And that is surely reasonable. He has given away his wealth. Why should he be taxed in relation to wealth he no longer owns, and can never again benefit from? For once, the law and reason coincide somewhat.

Of course if an Irish resident person transfers assets to a non resident trustee, or to a non resident company, and does not totally give up every possibility of ever deriving any benefit from them in the future, then the law can treat the non resident person’s income, and gains as being those of the resident person and can charge the resident person to tax accordingly. Should such a resident person not report that income and gains, and pay the tax properly due by him, and if his failure is wilful, he is guilty of tax evasion.

The moral of the story is to remember that the words offshore scheme do not necessarily come automatically linked with the words tax evasion or criminal. It is possible that the appropriate word association is ‘sensible move’ or ‘wish I had done it’. Only when the full facts of each individual case are known can you decide what the proper word association was. The media, quite properly, rarely have the full facts about any taxpayers affairs.

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