There are various terms, including tax saving, tax avoidance, and tax evasion, and they are often used incorrectly.
Perhaps the most common mistake is calling tax evasion tax saving.
Let us confirm the terminology as general knowledge for business owners and businesspeople.
What Tax Evasion Means
An act of evading the payment of tax through deception or other fraudulent conduct.
Put simply, it means escaping taxes through a clear violation of the law.
Typical examples include failing to file while taking steps to conceal income, or understating profits in a false return.
This is conduct that carries the risk of criminal liability and possible imprisonment.
Even when an act is technically a legal violation, there may be cases where it does not lead to the severe sanctions associated with tax evasion because the person "did not know" or "forgot."
What Tax Avoidance Means
Avoiding taxes in a way that is not illegal but differs from normal practice, while obtaining the normal economic effect.
Put simply, it means reducing taxes by arranging matters in various ways without breaking the law.
This has become a global issue. The United States is particularly hostile to it, and an article reported on January 26, 2016, entitled "Clinton Proposes ‘Exit Tax’ to Stop Corporate Inversions (Japanese)," said that presidential candidate Clinton was proposing the introduction of an exit tax in the United States.
Article 30 of Japan's Constitution provides that "the people shall be liable to taxation as provided by law"; basically, if there is no law, there is no obligation to pay tax.
Because tax avoidance does not violate the law, it presents various problems but is, in principle, permitted. Of course, if it is too abnormal, you may be pressed to pay tax.
What Tax Saving Means
Choosing, from among several lawful and permitted options, the method that results in lower taxes.
This year, profits were high, so let us replace the employee computers that had been planned for next year, and confirm the tax treatment according to their acquisition cost and when they began to be used in the business. And so on.
Solar power generation, aircraft leasing, and insurance, which can have the effect of deferring taxation, are prime examples.
Criteria for Business Owners and Wealthy Individuals When Receiving Tax-Saving Proposals
- Whether it is lawful or unlawful, and whether it might be unlawful
- Whether the transaction form is normal or abnormal, and the degree of that abnormality
Take the first criterion. If, after hearing the explanation, it is unlawful or might be unlawful, it does not qualify as an option to take. There is no room to accept the proposal.
Then, the second criterion: whether it is abnormal. This is likely to be an area where judgments differ. Respect the judgment of your tax accountant, who is a specialist. However, be sure to ask about and understand the risks.
Also, in the world of taxation, the risk differs according to the amount. That is only natural: tax auditors devote different levels of effort depending on whether the amount is small or large. When the amount is large, you need to make an even more careful judgment.