The
art of dodging tax without actually breaking the law or lawfully carrying out
of taxation to missing tax liability. Tax avoidance is said to be legal if it
does not break the law.
Contrasted
with tax evasion-non payment of due tax
that law charges on ones income.Legislture may proceed to
seal loopholes that give a tax avoidance opportunity while tax
payers look for opportunities within law that limit payment of taxes.
Reactions
have been varied. The judiciary tends to be friendly if the taxpayer has not
stretched the law to engage in tax avoidance.
Lord
Sumnre in I.R.C v Executors observed the highest
authorities have always recognized that subject is
entitled so to arrange his affairs as not to attract taxes imposed
by the crown so far as he can do so within the law and that he may
legitimately claim advantage of any terms or omissions he can find in his
favor in the taxing statutes in so doing, neither has a liability nor
incurs claims.
Levin v I.R.C
His
majesty subjects are free if they can, to make their own
arrangements so that their cases may fall outside the scope of
taxing Acts, they incur no legal penalties and no moral censure
if having considered lines drawn by legislature for imposition of taxes they
make it their business to work outside them
TAX AVOIDANCE IN
KENYA
The
general anti avoidance provision adapted the commonwealth trend. Section 23
empowers the Commissioner of Income Tax to adjust any taxation designed to
avoid tax liability in any way that counteracts that avoidance.
The
commissioner has power to suspend any taxation carried out in any in any
provision of the Act and which tax avoidance intentions on the part of
taxpayer, which he may counteract by adjusting the taxation
Section
24 deals with dividend stripping. This empowers the commissioner where a
company has not declared dividends to direct any undistributed dividends to be
deemed as distributed and have the company pay tax on undistributed dividends
at individual taxpayer’s rates.
Section 25(a) income stripping
Settlement
of income on children and other person’s settlement enable commissioner to deem
settled income. If a child is below 19 years, settlement is deemed valid
Anti-Avoidance Legislation
Because
tax avoidance is a struggle but legislation and ingenious taxpayers on the
other hand, legislature seeks through the introduction of provisions that
impose tax to ensure that objective of raising revenue for the government is
achieved and thus blocks potential loopholes that may be used for tax avoidance.
This may take any of the following three forms
1.
May take specific provisions
2.
May impose specific ant-avoidance provisions
May use general anti-avoidance
provisions
1. Specific provisions
The
legislature may impose tax in certain circumstances or upon certain
taxations whether or not there is a motive for tax avoidance. It will not give
exceptions. It thereby casts a net so wide that every conceivable taxpayer is
caught and perfectly innocent taxations are subject to tax.
2. Specific anti-avoidance provisions
Law
may after imposing a tax under certain circumstances may aim at specific
taxation that may be entered into for purposes of tax avoidance. Provisions
tend to cancel tax advantages in certain taxations and this cast a duty on
courts that interpret this kind of statutes to consider the taxpayer and
whether acts amount to tax avoidance or give him/her a tax advantage.
Depending
on statutory definitions of tax advantage, the taxation must be one where
if it were carried out in one way, there would be a liability to pay
either tax or a greater amount of tax than if carried out in any other
way.
Lord
Upjohn in I.R.C vs. .Brebner .However circumscribed
circumstances under which a tax advantage may bee removed by saying, “When the
question of carrying out a general commercial taxation as this was and reviewed
the fact that there were two ways of carrying it out.
1) Paying the maximum amount of tax
2) Paying more or much less tax
It would be quite wrong s an unnecessary through
inference that in adopting another course, one of the main
object is for purposes of the section, avoidance of
tax. No commercial man in his right senses will carry out a commercial
transaction except a…
3) General anti-avoidance provisions
Seeks to nullify tax avoidance in general and in England have been
rejected as a mechanism of tax laws- insisted to have specific anti avoidance
provisions. In the Commonwealth countries, this is what the British exported
and it is what most tax laws have for tax avoidance statutes.
Lord Denning in Newton vs. Commissioner of Taxation (Australia)
The
directors of a company increased the capital and simultaneously made a capital
payment to shareholders out of undistributed profits. Was this arrangement to
avoid tax? It was held that this arrangement was to avoid tax and it was
therefore set aside.
In
order to bring an argument within this section, you must be able to predicate
by looking avert acts by which it was implemented in such a way as to avoid tax
If
you cannot so predicate. You have to acknowledge that taxation is capable of
reference to ordinary or family dealings and as such, they do not fall under
this section.
Mancin vs. I.R.C
The
appellant leased land to trustees upon which wheat was planted. Trustees were
to hold the land for one year, cultivate it at a nominal rent. Under trust, any
income that was to arise was to be held on trust for the benefit of appellant’s
wife and children for which he did a separate trusts.Appelant employed by
trustee to plant, harvest and sell what crop whose proceeds he accounted to
trustees. He paid for the labor and expenses in return. The bulk of the .NET
profit was distributed to the wife for benefit of the children. This continued
for three years and the effect was to reduce appellant’s income, which trust,
settled on wife and children from which the wife and the children claimed
allowances and paid tax at owners rates.
Under
general aanti-avoidancce provision, the commissioner sought to set aside
taxation and hence appealed.Held, dismissing appeal by taxpayer, scheme was
advised for sole purpose of escaping liability on substantial part of taxpayers
income.