What is Tax Evasion?

Tax Evasion In The Philippines 1981 - 1985
Rosario G. Maranasan
Research Fellow, Philippine Institute for Development Studies.

Introduction

Just as death and taxes are certainties in this world, so are ways and means to minimize if not eliminate altogether one's tax liabilities.  Attempts to escape the tax net may take any one of two forms: tax evasion and tax avoidance.

Tax evasion may be defined as the act of reducing taxes by illegal or fraudulent means.

(Philippine tax jurisprudence has no general definition of the term "tax fraud."  However, the Bureau of Internal Revenue (BIR) Handbook for Special Agents defines fraud as "deception brought about by misrepresentation of material facts, and silence when good faith requires expression, resulting in material damage to one who relies on the same and has the right to do so." -- National Tax Research Center, 1980)

Common practices of tax evasion include: under reporting of income, overstatement of expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries in books, fictitious transactions in the name of dummies, non-recording of sales, and others.

Tax avoidance, on the other hand, involves the legal re-arrangements of one's economic activities in order to lower the tax liability.  This is done by moving capital or labor to areas, geographical or otherwise, where tax rates are lower and/or by manipulating the tax parameters through the legal means to spread or defer the tax liability over time thereby effectively reducing the tax rate.  Tax evasion is done by a tax payer either singly or with the help of some tax expert like a lawyer and an accountant.

As such, evasion and avoidance are interdependent activities.  Significant and well-known tax avoidance could induce increased evasion.

On the part of the individual tax payer, evasion can substitute for avoidance when increasing the cost of tax avoidance may increase evasion.  But the impact on the economy are the same: loss of government revenue, increase in taxpayer's after-tax income, and perverse effects on the quality and efficiency goals of the tax system.

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