draining development.pdf - Khazar University

244 Draining Development?capacity of monitoring) of each of the tax authorities. In other words,the decision framework becomes a risk-based compliance exercise drivenby a fact-intensive and judgment-based analysis.In summary, application of the ALP is more complex in practice thansuggested by the relatively elegant theoretical construct. In recent years,the higher propensity for intrafirm trade to involve services, as well asintangible and financial assets, has raised particularly complex issues.Tax Avoidance and Tax EvasionTax avoidance and tax evasion are fundamentally differentThe courts first established the difference between tax avoidance and taxevasion in IRC v. Duke of Westminster ([1936] 19 TC 490). In this case, paymentswere made by the taxpayer to domestic employees in the form ofdeeds of covenant, but which, in substance, were payments of remuneration.The House of Lords refused to disregard the legal character (form) ofthe deeds merely because the same result (substance) could be broughtabout in another manner. Lord Tomlin commented, as follows: “Everyman is entitled, if he can, to order his affairs so that the tax attaching underthe appropriate Acts is less than it otherwise would be.” In other words,taxpayers are entitled to arrange their tax affairs in the most tax efficientway, and this is the principle behind tax planning and tax avoidance.Tax evasion, in contrast, involves an element of illegality and clearlygives rise to illicit financial flows. 12 Those participating in tax evasionmay underreport taxable income or claim expenses that are nondeductibleor overstated. 13 Tax evaders generally face criminal prosecution, andcriminals are sometimes charged with tax evasion (given their usualreluctance to report income from criminal activities) if there is insufficientevidence to try them on the underlying criminal action. In the contextof a transfer pricing system based on the ALP, income shifting couldbe characterized as illicit to the extent that it is not commensurate witha shift in assets, functions, and risks.In recent years, the public debate has focused on activities that may besaid to fall in a grey area, or situations open to an interpretation of thelaw. In this context, some commentators have described selected avoidancetactics as unacceptable because they may take unfair advantage oftax rules or run counter to the intentions of the legislators. The behavior