There has been lots of news lately about tax, both personal tax and corporate tax:

• Whether Prince Charles is paying the right amount of tax (corporate and personal income tax),
• How little corporation tax is paid to the UK government by big businesses (Vodafone, Google, Amazon, & Starbucks)
• The G20 group of nations agree to a plan to tackle widespread corporate international tax avoidance and evasion,
• The scandal about German tax authorities buying illegally obtained data on Swiss banks deposits held by German citizens continues.

So, there is a strong focus by governments on maximising tax revenues, and a steady shift in public opinion against individuals and companies who avoid or evade tax.

I know two people who have been charged with tax evasion in Germany (tax avoidance is the legal minimisation of tax liabilities; tax evasion is the illegal avoidance of tax payments), going all the way to arrests and strip-searches at work, home raids, the seizure of records (paper and electronic) and computer equipment, criminal charges and civil debt proceedings.

Those of you whose tax affairs are more conventional may ask why people get into these situations; why not just pay the tax and avoid the hassle? If only it were that simple.

Many freelance contractors work in many different countries, and, unless very careful, can end up owing tax in multiple tax jurisdictions. Although there is the "183 day rule", meaning that if you live and work in any one tax jurisdiction for less than half a year, you do not need to pay personal tax there, this rule can be interfered with if you were liable for tax (resident for tax purposes) in that tax jurisdiction the previous year (or even the subsequent year). This means that it is relatively easy to have tax bills in two different countries for the same tax year. Because the tax years in different countries are not aligned, it is even possible, although rare, to have tax liabilities for the same period in three countries at once!

So, you might ask, what about all those "no double taxation" agreements? Well, they work like this:

1. In some jurisdictions (such as in some parts of Germany), freelancers and small businesses are assessed for tax in advance (before the money is earned, and before it is known to whom tax is owed), and this must typically be paid in advance.
2. Only once the whole tax year is complete, is it possible to file a tax return, and have the tax authorities calculate how much is actually owed. Your tax liability will be calculated on the basis of your worldwide income for the whole tax year (all money that you earned in all tax jurisdictions, including interest and dividends). Eventually you will get a tax bill from each of the tax authorities (lets assume just two of them, for now).
3. Once you have an actual tax bill from the authorities in each tax jurisdiction, you can claim one tax bill as a deductible against another. Ideally you will want to claim the smaller one as a deductible from the larger one. Whilst you can claim income tax from one tax bill against another, you generally cannot do so with health care. pension and other mandatory social insurance costs, so you may just have to pay those twice (actually the situation for social insurance costs is very complex, and people who move for work are severely financially penalised in this regard).
4. When they get around to it, and after appropriate validation of the bills, the tax authority will (usually - there is no guarantee, and you may need to go to court to enforce your rights) pay you back the second tax bill. If you are dealing with a tax authority which requires prepayment of tax based on estimates, it can easily be three years between when you pay the first bill, and when you get the double tax back, and during most of that time, you will be out-of-pocket by two tax bills, and two sets of social insurance costs.

Please bear in mind that total deductions (tax and social insurance) in places like Germany, the Netherlands and Scandinavia can be around 50% of your income (especially since initial estimates for prepayments err on the high side), and that paying tax in two such jurisdictions therefore leaves you nothing to live on, for up to three years.

Can you afford to live on fresh air for three years (or even just one year)? I think very few people could. So, even if you don't approve, perhaps now you understand why people don't always pay tax.

Of course, the situation is a little different for corporations. That needs a post of its own.