Differences between tax planning and tax evasion

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The differences between tax planning and tax avoidance are important for you or your company to avoid problems in the future. We explain them better here…

Tax planning and tax avoidance: why they are not the same thing

In a tax context such as Spain’s, where the average tax burden on GDP is 3.4 points higher than in the OECD, it is logical that many individuals and businesses consider the possibility of paying less.

However, there are two ways of doing this: tax planning and tax avoidance.

And they are not exactly the same and, most importantly, they do not have the same consequences.

The difference between tax planning and tax evasion is clear: the former is, in principle, legal, while the latter is illegal in all cases.

Therefore, the risks involved in the second case can affect not only your wealth, but also your freedom.

This is why it is important, and very much so, to identify the characteristics of each case.

Let’s move on:

Features of tax planning

Tax planning basically consists of taking advantage of all the benefits provided by law in order to pay less tax.

These advantages can be explicit or implicit, since there are legal loopholes where there is no clear doctrine; until it is defined, it cannot be considered illegal.

The main examples are

Setting up tax companies in cheaper territories: Contrary to popular belief, setting up companies in low-tax countries or even tax havens is not illegal.

What is illegal is not notifying its existence and hiding it.

For example, setting up trading companies from Spain in Estonia, Malta or Ireland, where there are Corporate Income Tax (IS) exemptions and allowances, is perfectly legal.

In addition, you can take advantage of tax consolidation.

However, this circumstance must be declared to the Spanish Tax Agency.

Tax domicile in business-friendly Communities: in Spain, the tax domicile has an influence in determining personal taxes such as Inheritance Tax, Wealth Tax or Personal Income Tax (IRPF).

Therefore, if there is a choice, it is preferable to choose the territory where you pay the least.

In this case, it is not necessary to leave Spain.

Check tax deductions and allowances: every year there are legal changes at state or regional level related to taxation.

Here, it is enough to know what tax deductions are available and, above all, to take advantage of them.

After all, some deductions are made on request and you need advice.

Consequently, tax planning is all about taking advantage of the implicit or explicit benefits provided by the system.

The idea here, then, is that you should have all the necessary information.

Characteristics of tax evasion

Tax avoidance , on the other hand, consists of making the real personal or company wealth unknown.

In this way, when taxes have to be declared, a substantially lower amount would be declared because, for the tax office, certain income or assets would not exist.

These practices are usually done in full awareness of their illegality.

Here are some examples:

Establishing companies in tax havens without declaring them: as mentioned above, having a company or assets in a tax haven is not illegal, but not declaring them is.

Banking secrecy, which is guaranteed by some States, allows an opacity that, for many, is interesting.

Not declaring income in Spain: not invoicing income is a relatively common practice among some freelancers and small entrepreneurs.

Basically, what is done is to sell in “B” to certain clients, without any legal record of it.

It can also occur in some transactions, where only a percentage of the value of the sale is declared.

Falsified accounting: in this case, two offences are committed. In addition to the possible offence of tax fraud (depending on the amount), the offence of falsification of documents would also be committed.

In this case, the accounting records would be altered in order to present a situation of assets that does not correspond to reality.

Failure to declare taxes: Finally, there is the circumstance of not declaring taxes without even making the corresponding liquidation.

This circumstance can sometimes occur by chance if the information was not received when it was due or if the legislation is not known.

It should be noted that some of the tax avoidance manoeuvres are done because the tax planning possibilities are not known. It is therefore good to be aware of them beforehand.