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Treading the fine line between tax planning and tax avoidance


Tax planning is the art of arranging one’s financial affairs or transactions to minimize tax liability using available means provided by the law. Tax avoidance, on the other hand, is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law (i.e taking advantage of the loopholes to minimize tax liability).

Tax evasion happens when one intentionally under-declares income earned and/or claims excessive deductions. Tax evasion is easily differentiated from tax avoidance by equating of the former to breaking the rules and the latter to one bending the rules.

However, the problem arises when one tries to distinguish between tax planning and tax avoidance. Theoretically, it can be told apart by saying that tax planning is concerned with complying with the letter and spirit of the law whereas tax avoidance is only concerned with complying with the letter of the law. However, some would argue that tax avoidance is simply ‘successful tax planning’.

Treading the fine line between tax planning and tax avoidance

Treading the fine line between tax planning and tax avoidance

There are many shades of tax avoidance. The methods are not illegal but ultimately, tax authorities have the power to invoke anti-avoidance rules if they are able to prove that the transactions entered into does not make commercial sense, among st others.


In Malaysia, general anti-avoidance rules are provided under Section 140 of the Income Tax Act 1967 (ITA 1967). The provision grants the Director General of Inland Revenue the power to disregard arrangements/transactions that he deems to be entered into with the purpose of tax avoidance. However, the burden of proof lies with the Inland Revenue Board (IRB) to show that the transaction the taxpayer has entered into has an element of tax avoidance.

Treading the fine line between tax planning and tax avoidance


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