The Difference Between Tax Avoidance and Tax Evasion

Many people assume that tax planning, tax avoidance, and tax evasion are all the same, but there are fundamental differences between the three.

• Tax planning is legal.
• Tax avoidance is not illegal.
• Tax evasion is illegal.

Tax planning refers to the legitimate use of tax incentives explicitly provided by laws and regulations. For instance, high-tech enterprises benefiting from the 15% corporate income tax rate offered by the government is a form of tax planning.

Tax avoidance, on the other hand, refers to exploiting tax benefits that are not explicitly prohibited by laws and regulations. For example, the deemed profit tax policies in many regions of China (where tax is calculated based on estimated profits rather than actual profits) fall under tax avoidance.

Tax evasion involves exploiting tax benefits that are explicitly prohibited by laws and regulations. For instance, according to the State Taxation Administration’s announcement on corporate income tax policies, depreciation and amortization expenses for cultural relics and artworks cannot be deducted before tax. If a company disguises such assets as regular fixed assets and deducts the related expenses before tax, this constitutes tax evasion.

While these distinctions are clear in theory, tax compliance is still challenging for many. Tax planning is straightforward, but the world is far too complex, and there are very few tax benefits that can be explicitly defined by tax laws. After all, the world is not black and white; there is a vast gray area between legal and illegal practices. The tax-saving strategies that exist in this gray area often spark significant debate, even among tax experts, regarding their legality.

In this article, we will outline several common principles to help individuals determine whether a tax benefit is more likely to fall under tax avoidance (or lean towards legality) or tax evasion (or lean towards illegality). Once you understand these principles, you will be able to judge which tax advice is reliable and which is purely nonsense.