Effectiveness of Rwandan Law of Tax Administration in addressing Tax Offences

CHAPTER II. A critical Analysis of Tax offences

II.1. Tax customs offences

II.2. Tax Evasion, Tax Avoidance and Tax Fraud

II.2.1 Tax evasion

Saleemi N. in his book, (Elements of Taxation simplified) suggested that, tax evasion is an economic crime whereby the taxpayer deliberately tries to avoid paying taxes by either not declaring his true situation of his total income or by claiming higher expenses to offset against his earnings by claiming allowances or relief to which he is not entitled and when the Tax evasion is done, the tax defaulter is legible to fines and penalties as per provisions in the tax/custom law whereby also sentencing Tax defaulter in the prison is provided for^13(*).

Tax evasion is the intentional and fraudulent underpayment or non-payment of taxes. It is paying less than the legally due tax liability by using illegal methods. The crime of tax evasion involves deliberately misrepresenting or concealing the nature of financial affairs to the tax authorities to reduce their tax liability, and may include such dishonest tax reporting tactics as under-declaring income, profits or gains; or overstating deductions^14(*).

For tax purposes, avoidance is the term used to describe taxpayer behaviour aiming at reducing tax liability. This where the taxpayer carries out his or her business in such a way that he will be required to pay less tax by exploiting the loopholes in the tax law/system. Examples of tax avoidance include locating assets in offshore jurisdictions, conversion of to non- or lower-taxed gains, spreading income to other taxpayers with lower tax marginal rates and splitting of business activities to avoid VAT registration^15(*).

II.2.2 Tax avoidance

This is where the taxpayer carries out his or her business in such a way that he will be required to pay less tax by exploiting the loopholes in the tax law/system.

II.2.3 Distinction between tax evasion and tax avoidance16(*)

«The difference between tax avoidance and tax evasion is the thickness of a prison wall^17(*).»

(Denis Healey British politician, 1917-____)

There is an important distinction between tax evasion and tax avoidance. Tax evasion refers to illegal activities deliberately undertaken by a taxpayer to free himself from a tax burden. An example of a tax evasion is where a taxpayer omits income from his annual tax return. Tax evasion is subject to severe penalties.

Tax avoidance, on the other hand, usually denotes a situation in which the taxpayer has arranged his affairs in a perfectly legal manner, with the result that he has either reduced his income or that he has no income on which tax is payable. No obligation rests against a taxpayer to pay a greater tax than is legally due under taxing Act. A taxpayer cannot be stopped from entering into a bona fide transaction, which, when carried out, has the effect of avoiding or reducing tax liability, provided that there is no provision in the law designed to prevent avoidance or reduction of tax. This principle is clearly brought out by the following extract from the judgment of Lord Tomlin in Duke of Westminster v IRC (1953) (at 520):

`Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, can not be compelled to pay an increased tax'.

* ¹³ Ruboneza A, The contribution of Revenue protection department on revenue collections in Rwanda Revenue Authority.»A case study of RPD, p. 22

* ¹⁴ http://definitions.uslegal.com/t/tax-vasion

* ¹⁵ International Tax Glossary, IBFD Publications, 3^rd Ed, 1996, p. 27

* ¹⁶ Jordan, K., et al, SILKE: South African Income Tax, Lexis Nexis, Butterworth, Durban, 2006, p.515

* ¹⁷ http://www.users.bigpond.com/crossover/Tax%20Avoidance.htm, 01/10/2008