Tax Evasion, avoidance or mitigation? That is the question
Wikipedia tells us that tax evasion is the term given to efforts to avoid paying taxes by illegal means while tax avoidance is the term used where the payment of tax is avoided or reduced by means that are within the law. Some persons also sometimes speak of tax mitigation, almost as a subcategory of tax avoidance: meaning reduction of tax which the legislators accept as legitimate as distinct to methods of avoiding tax which exploit unintended loopholes in the law with no commercial purpose.
With the widening of the tax net here in Jamaica and the possibility of more taxes on the horizon, Jamaicans may be ready to take a closer look at their tax structure, both in relation to their individual needs and for their business. The principle that "Every man is entitled if he can to order his affairs so as that the tax ... is less than it otherwise would be..." (Lord Tomlin, in the UK House of Lords case, IRC v Duke of Westminster (1936) 19 TC 490,  AC 1) has been considerably restricted over the years by a line of cases designed to counter tax avoidance.
Tax evasion therefore is illegal no matter how you look at it. On the other hand, the effectiveness of tax avoidance and tax mitigation strategies may vary with the result of failure being a requirement to pay taxes.
In the context of the requirement to pay income taxes, that is, a tax on the income earned by persons living in the particular country, one may be inclined to think, that an easy way to legitimately mitigate against income taxes is simply to make sure that you earn some of your income outside Jamaica. We know that the income earned in Jamaica will now be taxed at the rate of 25 per cent for individuals and most companies (leaving out the particular issues of thresholds, deductions and allowances) but if some of the income is earned outside Jamaica, will it be possible to save some taxes? The short answer is: possibly.
In Jamaica, income tax is payable on your worldwide income. It therefore is not enough to simply look at what income is being earned in Jamaica but consideration must also be given to income earned outside of Jamaica. How and where that income is earned therefore becomes an important question. Jamaica has double taxation treaties with several countries which allow for tax reliefs which extend to residents of those countries. The extent of the relief will vary depending upon which country is involved. It is important to note, however, that to be entitled to these reliefs, you must be deemed to be resident for tax purposes in the particular jurisdiction. Close consideration must therefore be given to whether you would fall within this category. Even if you are a company incorporated in that jurisdiction, it is possible that this may not be sufficient to be deemed to be "resident for tax purposes".
The why of it all is also important. Why is the income being earned in that jurisdiction? What difference does this make you may well ask? Well, our income tax laws include anti-avoidance provisions which essentially change what may otherwise be felt to be tax avoidance strategies into taxable transactions. What?! Yes. This is not an unusual feature of modern tax laws and not in any way unique to Jamaica. Essentially, these provisions provide that if the transaction actually results, or will result in a tax advantage, unless you can show that there was a bona fide commercial purpose for the way in which the transaction was structured and that the object of the transaction was not to avoid tax, then you could be required to pay taxes in Jamaica equivalent to the tax advantage.
Anti-avoidance provisions do not, however, mean that you cannot continue to try to order your affairs in the most tax-efficient manner possible. Notwithstanding statutory anti-avoidance provisions such as these, courts have continued to hold that this right does continue to exist. The courts, however, now make it clear that the quotation 'every man is entitled if he can to order his affairs so as that the tax ... is less than otherwise it would be', tells us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them.
Great care must therefore be taken to ensure that any strategies used will produce a tax efficient structure for the transaction that will be capable of successfully meeting any challenge from the taxing authorities of Jamaica.
Hilary Reid is a Partner at Myers, Fletcher & Gordon and is a member of the firm's Commercial Department and will be a Presenter at the Firm's Insolvency Seminar on April 17. Hilary may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.