Taxes are an unavoidable part of life and an inevitable part of our economy.
It’s the price of civilization. Taxes help fund schools, libraries, roads, and government services. Therefore, with the help of some well-known tax scandals, it’s no surprise that the tax optimization question comes as a taboo that taxpayers discretely suggest to their tax accountants, hidden in an office, doors closed.
In reality, the analysis of tax management behaviors is more complex than simply paying full tax and being a good citizen (of the world) or optimizing and being considered as a white-collar delinquent.
Let’s have a look at the 5 different tax management behaviors and their real meaning.
1) Tax Evangelism
In our classification, we call a tax evangelist the taxpayer who simply reports all her revenues in her tax declaration and pays the corresponding amount of taxes a few months later.
This approach is a posteriori, as there has been no planning ahead.
This tax management behavior often leads to an over-taxation situation and has two implications:
- At a personal level: this indicates poor personal finance management, which limits the growth opportunities for the concerned tax household. From an economic perspective, households are expected to grow and contribute to society. Investments, services, and consumption are the main levers in this give-back process. Overpaying taxes implies a low level of economic growth or worst: a stagnating financial situation. Simply put, the contribution of the tax evangelist to society is low: less consumption, less investment, fewer services given to the society, less giving back globally.
The high level of taxation on tax evangelists is a penalty. The public institutions basically take your money to use it better than you do.
- At a professional level: simply paying taxes a posteriori, without prior planning, can be analyzed as abnormal business management. Which is legally punishable in most states under commercial legislation and even under tax legislation in some situations.
2) Tax Optimization
Tax optimization is about using the possibilities offered by the laws to reduce one’s tax burden.
It is important to note that those possibilities are not just a random toolbox. Each behavior that results in reducing your tax burden is compensated by the economic benefit brought to society. For instance:
- Tax deductions exist because the related expenses contribute to the value created by an economic actor.
- Tax credits exist to encourage certain behaviors, from investing in renewable energies to reinvesting your profits in your company.
- Tax rates are also designed to guide the behavior of economic actors, for the common good. A higher tax rate basically means that your contribution to society should be higher than what you currently do. This difference is compensated by law.
“Tax optimization is about using the possibilities offered by the laws to reduce one’s tax burden.”
But, what about international tax optimization?
At Heavnn, we consider the different laws to be equal and we adopt a global approach to our cases. The idea of tax havens being immoral is the result of an old fiscal and cultural competition between States that we can summarise as such:
- “Tax hells” are generally countries with a large geographical surface and important needs in terms of territory governance. This includes defense, a diversity of industries and economic activities, infrastructures … Those countries usually present a higher level of taxation, with a certain level of tax agility left to the taxpayers, depending on their situation (we are back to the economic contribution)
- “Tax havens” are generally countries with a smaller geographical surface and therefore with limited needs in terms of territory governance. They usually present a lower level of taxation and/or specific tax rules to attract foreign capitals and taxpayers (hello digital nomads 😉)
Most of these countries have a legislation that is internationally recognized. As such, in our tax optimization practice, we use all the possibilities that they offer, without any cultural distinction.
The OECD recently joined this position and most of the member states reached an agreement around a minimum level of taxation. This is the first step toward the end of this traditional competition between “tax hells” and “tax havens”.
3) Tax Avoidance
Tax avoidance can be defined as the choice of the least taxed option for the same economic situation. The rational taxpayer, confronted with different optimization schemes or just different economic options, will choose the least taxed one.
This is the expected behavior from rational economic actors, as long as the economic outcome remains identical.
It’s perfectly legal.
For example, creating an offshore company to benefit from a more favorable economic environment and business opportunities alongside a favorable tax legislation is completely legal.
4) Tax Evasion
Tax evasion practices are punishable under most tax laws. It is defined as the use of the different regulations with the sole goal of reducing one’s tax burden, without any real economic motive.
In contrast to tax avoidance, in this situation, the taxpayer has the choice between different options and chooses the least taxed one, even if it doesn’t correspond to the reality of her situation. For example, establishing your company in a privileged tax location, while exclusively doing business in a specific country. Or declaring your taxes in a country where you’re not a tax resident while omitting to submit a tax return in the country of actual tax residency.
The boundaries between tax avoidance and tax evasion can be very thin, depending on the specific situation.
“Tax evasion practices are punishable under most tax laws.”
5) Tax Fraud
Tax fraud practices are criminal offenses under most tax laws. One step further compared to tax evasion, it’s about presenting an artificial picture to the tax administrations, with no tangible reality behind it.
This can go from presenting a company with no real activity (a “mailbox”) in a specific country to false declarations (exaggerated amount of deductions, electronic sales suppression, false invoicing…).
Understanding tax management practices requires understanding the spectrum of approaches—from full compliance to aggressive tax minimization.
Selecting the right strategy involves balancing ethical considerations, legal obligations, and financial goals. As global tax regulations tighten, adopting a well-informed, proactive approach to tax management can ensure both compliance and financial efficiency, helping individuals and companies stay ahead in a complex fiscal landscape.
For more detailed information and resources, visit our other articles in the "Your Niche as a Nomad" series for digital nomadism tips and tricks!
