There is a distinct difference between tax evasion and avoidance – the latter is a legal form of arranging one’s financial and other assets in such a way as to reduce one’s tax liability. Though it is a perfectly legal practise it is often not considered moral. Tax evasion is illegal and unethical.
Tax mitigation on the other hand is a more aggressive approach to tax avoidance that falls within a grey area of tax avoidance and tax evasion. Tax experts estimate that, over the past 20 years, tax mitigation schemes have been used to transfer trillions of dollars into tax havens. The leak of the Panama Papers has brought tax mitigation under the spotlight and whether there is a need for tax authorities throughout the world to come together to create legal certainty around the issue.
Around the world, private companies and individuals devise creative ways to reduce their tax liability in a bid to minimize what they think is an excess tax burden. They do this by studying the tax laws of that particular region and finding loopholes to exploit. Thus, tax avoidance is becoming increasingly prevalent in South Africa as more and more individuals move up the income ladder – primarily among the growing black middle class. These individuals are realizing that marginal tax increases come with moving up several income tax brackets, this apparently is giving rise to more tax avoidance schemes.
In many countries, the avoidance of personal income tax is more common among the more affluent individuals who have access to professional services such as tax law practitioners and private bankers.
Is it fair that wealthy people have the ability to circumvent the true cost of their tax liability when the same luxury isn’t available to the working class majority? The so-called rich will argue that it is fair because of the progressive personal income tax system South Africa employs, which has one of the highest income tax rates in the world. Whether or not they are justified in this view is contentious and often depends on one’s income bracket or social class. On the other hand, the progressive tax system had to be addressed due to the levels of income in South Africa being vastly skewed.
One concern, often not raised in the tax debate, is the blatant lack of accountability of the government when it comes to the blatant and intolerable waste of public revenue through pervasive corrupt behavior. I view these actions by government as an indirect contributor to tax avoidance schemes. Subconsciously, many are asking themselves: “Why should I be paying excessively high taxes if government perpetually squanders public funds?” And this is just one of the reasons people employ tax consultants to explore creative ways of reducing their income tax.
Can you blame them? I am not entirely sure. If I was taxed at a marginal tax rate of 41% of my income above the highest personal income threshold, I too would consider the possibility of reducing my tax liability – within the provisions of the law of course.
Going forward, I think that reducing government wastage could have a positive impact on the willingness of the rich to pay their full tax liability without apprehension. You never know, stranger things have happened.