Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Tax avoidance and tax evasion


The distinction between tax avoidance and tax evasion is well established by case law. The leading case is IRC v Duke of Westminister [1936] AC 1. The basic principle is that every person can arrange his affairs lawfully so as to reduce his tax payable. Some people called this "form over substance" --- that is to say it is the "form" of the arrangements done that should be based for determining the tax payable, and not the "substance" of the transactions should be taxed. This basic principle lays the legal foundation for tax planning (sometimes it is called tax mitigation or tax avoidance). 


Given the aforesaid principle, if a taxpayer arranges his affairs in such a way that they do not fall within any of the charging provisions of the tax law, he will pay no tax at all. As more and more people are using blatant schemes to avoid tax, the courts have introduced another tax principle, namely the fiscal-nullity principle, in a number of court cases. The leading ones are W T Ramsay Ltd. v IRC and Furniss v Dawson.  However, It is widely believed that the fiscal-nullity principle does not play a role in charging taxes under Inland Revenue Ordinance. This is because the courts say the fiscal nullity or Ramsay principle only applies where no specific anti-avoidance provisions are provided in the relevant tax law. As there are a number of anti-avoidance provisions stipulated in Inland Revenue Ordinance, the fiscal nullity principle is likely inapplicable. But caution: it can apply to Stamp Duty as the law concerned do not contain anti-avoidance provisions.


Although tax avoidance is undesirable to the Revenue or immoral to some people including judges, it does not constitute a criminal offence. On the other hand, if the taxpayer reduces his tax payable by cheating the Revenue with false information or lies --- for example he claims an expense which does not exist at all or he omits to disclose a taxable income --- he will be guilty of tax evasion. Tax evasion is a crime that can render the taxpayer to very heavy penalties including imprisonment.


At times, the Revenue sees tax avoidance versus evasion differently from the taxpayer and his tax advisers. And that's why  many tax avoidance cases end up in courts. Sometimes, the courts find that the scheme works and let go the taxpayer. But in some other cases, the courts rule in favor of the Revenue, declaring the scheme a sham.


From time to time, the Revenue warns that there is no one hard and fast rule to distinguish a tax evasion from a tax avoidance. Nevertheless, it points out that in general transactions that are artificial or fictitious are likely liable to penalized. As regards Section 61A cases, the IRD's usual stance is that those schemes that are not properly structured, or not adequately supported by evidence or not genuinely effected --- can constitute a tax evasion. It also says that a transaction executed as part of an arrangement is real may not make that the total arrangement real or legal.


A blatant and ineffective tax avoidance scheme can give rise to a criminal prosecution: Click here for more


From my experience, the distinction between tax avoidance and tax evasion is not clear. All cases fall somewhere in a continuous spectrum from full honest disclosure to fraudulent concealment. There are a lot of disputes from time to time between the taxpayer and the Revenue as to where the case lies in the spectrum. If the Revenue opines that the case is a fraudulent tax evasion, then criminal prosecution will be taken against the taxpayer, and if the prosecution is convicted, the sentence may be imprisonment plus heavy monetary fine.


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