What’s the Difference Between Tax Avoidance and Evasion?

In the wake of the Panama Papers revelations, the distinction between tax planning, tax avoidance, and tax evasion seems to have been lost between the lines.

George Town pictured in Grand Cayman, Cayman Islands, on April 24, 2008. David Rogers/Getty Images

In the wake of the Panama Papers revelations, the distinction between tax planning, tax avoidance, aggressive tax avoidance, and tax evasion seems to have been lost between the lines. The basic difference is that avoidance is legal and evasion is not. But it’s not quite as simple as that.

There are many legitimate ways in which tax can be saved and that are actively promoted by governments. Tax-free investments, for example, donations to charity, or paying into a pension scheme. Through tax planning, a taxpayer exercises an option clearly allowed by law and does not exploit unintended loopholes. This respects both the “letter” and the “spirit” of the law.

The difference between tax avoidance and tax evasion is the thickness of a prison wall.

— Denis Healey, former chancellor of the exchequer, U.K.