Large businesses play a major in the American economy. Not only do they meet the demands of consumers, but they also provide employment to thousands of people throughout the country. In order to be successful, companies employ a variety of strategies to minimize losses. Part of this is determining how state and federal corporate taxes fit into all of this.
As a result of tax-related business strategies, companies might come under fire for not paying “enough” taxes. Amidst these charged — and often controversial — conversations, the terms tax avoidance and tax evasion may thrown around. To many, the two phrases may sound remarkably similar, but the difference is absolutely critical.
Put simply, tax evasion is a punishable crime, whereas tax avoidance is legal. Of course, it may be most helpful to tease out the primary differences.
Tax evasion is characterized by companies or individuals who knowingly violate the tax code in order to protect their bottom lines. On the other hand, tax avoidance involves careful reading of immensely complex tax code and finding ways to minimize a tax burden within the confines of the law. At times, this might be referred to as finding loopholes.
In order better understand this concept, Caterpillar’s recent hearing before U.S. Congress can be held up as an example. Reports indicate that the machinery company used a strategy that saved them $2.4 billion over the course of 10 years by moving certain operations overseas. This move was perfectly allowable under the law, but questions were raised when determining that Capterpillar pays an effective tax rate of 29 percent, as opposed to the base-line federal rate of 35 percent.
Ultimately, Caterpillar was simply complying with the laws as they currently exist. No charges are likely to be filed, but the congressional hearing was a trial held in the court of public opinion.
Given the complexities of tax law in the United States, it’s easy to understand how accusations of tax evasion could fly when an entity is simply working with the hand that’s been dealt — albeit a very intricate hand. In the event that the law changes, companies will probably be responsible and do what they need in order to comply.
Source: Washington Post, “What’s the difference between tax evasion and tax avoidance? Ask Caterpillar,” Danielle Douglas, April 1, 2014