Inside the tax avoidance loophole – 3 tips to avoid unnecessary taxes

Deliberate tax evasion occurs when, for example, individuals do not report income or do not pay taxes. But unintentional mistakes made in filing tax returns can also give rise to inadvertent tax evasion. Illegal tax evasion is distinct from tax avoidance, which is taking advantage of legal ways to reduce tax liability, such as using the mortgage interest deduction.  However, due to ambiguities in the law, differences in interpretations, the creation of new circumstances, and other factors, there can be some gray areas where it is difficult to distinguish between avoidance and evasion. Let’s see how:-

  • By paying in kind:

Payments-in-kind was a former tax loophole that has, fortunately, been rendered obsolete by tighter regulation. Previously, it was possible for executives to receive their payments in kind– so rather than receiving a regular wage, they would instead be paid in valuable, tradable commodities, such as gold, silk, or other consumer goods and benefits. These could then either be sold or ‘traded on’ for additional commodities, which could be used by the executive. Effectively, it reintroduced a mutated form of the old barter system as a tax loophole.

  • Through shell companies:

A shell company is a type of company that only exists on paper, allowing the person who uses it to funnel money through it and avoid paying taxes. Typically, this type of corporation has a legal existence but provides few or no actual products or services. One classic way of using these companies is buying and selling through them, which means that the owner does not need to report international operations conducted through the shell company and will be able to avoid any taxes on the profits.

  • Through equity swaps:

An equity swap is another shady method of tax evasion. Basically, it’s an official agreement that allows two parties (say, two rich individuals or companies with in interest in reducing their taxes) to exchange the gain and loss of a set of assets without actually transferring ownership. This exchange of value allows the parties to avoid transaction costs and, in some cases, local taxes pegged to certain locations. This is obviously a sneaky bonus for people who want to avoid high taxes in a particular area while still getting the benefits of owning assets in another.