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Posted on 21st July 2013
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There has been lots of news lately about tax, both personal tax and corporate tax:
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:
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.