Tax Avoidance and Tax Evasion are forms of tax noncompliance, the distinction between both terms lies in the legality of tax avoidance and the illegality of tax evasion. Tax Avoidance is the reduction of taxable income or tax owed through legal means. The taxable individual or entity structures his businesses and affairs in a way that precludes him from paying the full amount of tax due. Tax evasion is the unlawful means of concealing taxable income from the tax authorities, so as not to remit taxes.
The duty to pay tax has been in existence from time immemorial, it is as important to any Government as air is to man. This is why tax has been defined as 'a pecuniary burden laid upon individuals or property to support government expenditure'.
In Matthew v. Chicory Marketing Board, tax was said to be a compulsory extraction of money by a public authority for public purpose; or raising money for the purpose of administering government budget by means of contribution from individual persons i.e. citizens.
The payment of tax in Nigeria is backed up by section 24(f) of the 1999 Constitution. It provides that:
"It shall be the duty of every citizen to- Declare his income honesty to appropriate and lawful agencies and pay his tax promptly."
The Court in the case of Independent Television/Radio v. E.S.B.I.R. also relied on the above Constitutional provisions of the duty of a citizen to pay tax. It added that:
"Failure of the citizen to pay tax shall strip him of the protection afforded by section 44(1) of the Constitution."
Other laws governing taxation include, Companies Income Tax Act, Petroleum Profit Tax Act, Capital Gain Tax Act, Value Added Tax Act, Personal Income Tax Act and Stamp Duties Tax Act 2004.
Tax Avoidance is not illegal, it is often done by witty taxable persons or entities who minimise taxable incomes by taking advantage of the loopholes in the tax laws. It is the lawful means of altering a person's taxable income in order to reduce the amount of tax owed. It is usually achieved by claiming tax deductions and credit. Tax avoidance involves sound financial planning techniques that will eventually lead to maximum exemption from Tax, e.g. Capital Gain Tax. It has been defined as "a lawful trick towards the circumvention of tax payment."
The English case of Ayrshire Pullman Motor Services and David M. Ritchie v. Commissioner of Inland Revenue explains the meaning of tax avoidance in the ruling of Lord President Lord Clyde when he held thus;
"No man in this country is under the smallest obligation moral or otherwise so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow and quite rightly to take every advantage, which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket and the taxpayer is in like manner entitled to be astute to prevent so far as he honestly can the depletion of his means by the Revenue."
The above ruling further justifies the legality of tax avoidance. It emphasises the fairness or justice in permitting a citizen to be clever in the depletion of his income or in taking advantage of the tax laws just as the tax administrative body is allowed to take advantage under the tax laws for the purpose of depleting the taxpayer's income.
In other parlance, tax avoidance is not illegal since it involves using the tax laws to reduce tax liability under the same laws. Examples of tax avoidance include; (a) submitting claims for the expenses in earning the income, thereby reducing the income to be taxed (b) increasing the number of one's children so as to enjoy tax deductions (c) seeking professional advice, etc.
This is the deliberate refusal to pay tax or the underpayment of tax. Tax evasion has been interpreted to mean an illegal practice where a person, organisation or corporation deliberately evades paying their authentic tax liability. Tax evasion can alternatively be defined as a wilful practice of not declaring full taxable income in order to pay tax at a reduced rate. It is an intentional violation of tax laws and is evident in instances where tax liability is fraudulently reduced. This is one of the problems plaguing the economic growth and development in Nigeria.
Tax evasion involves intentional misrepresentation of one's true financial status to the tax authorities so as to reduce his/her tax liability. Examples of tax evasion includes;
(a) False declaration of income, profits or gains actually earned.
(b) Deductions one is entitled to.
c) Failure to render tax returns to the Relevant Tax Authority.
This was the case in Independent Television/Radio v. E.S.B.I.R where the defaulter failed to render tax returns to the relevant tax authority. The Court held inter alia that,
"In this instant case, the tax being scuffled over was the tax of the appellant's employees from 2005-2010 which would have long time been deducted from the employees' salaries but which the appellant failed to remit to the appropriate authority. This is a despicable way for any tax payer to act and it is seriously detrimental to the development of any nation."
The court in the above case referred to the case of Phoenix Motors Ltd v. N.P.F.M.B. It can be inferred from the above judgment that tax evasion, irrespective of how undeserving a country is to one's tax. It is a despicable practice condemned by the judiciary and any rightful thinking person. A tax evader may be charged to court for evading tax. It is a criminal offence and one can be fined or imprisoned. Tax Evasion in Nigeria, is punishable under Section 40 of Federal Inland Revenue Service Act. In addition to this, it is also a criminal offence under Section 41 of the Act to hinder or assault any authorised tax officer in the performance of his duties. Anyone found guilty of this can be liable to a fine or three years imprisonment or both.
Reasons for Tax Avoidance and Tax Evasion in Nigeria
The reasons for tax avoidance and tax evasion in Nigeria have been discussed as follows;
Effects of Tax Avoidance and Tax Evasion on the Nigerian Economy
Tax avoidance and evasion reduces the revenue that was calculated to be generated from a total number of persons, this in turn affects the economy. The country becomes cash strapped and restrained from carrying out what is expected of it for the benefits of its citizen.Then the need to borrow huge sums of money from other big nations to provide amenities amongst other things will arise. The continuous generation of low revenue hinders the country from being able to pay back her debts and the consequences fall back on the poor who depend on the Government for everything.
It is said that Nigeria loses billions of dollars in tax revenues almost every year as a result of unreformed tax regimes and inefficacious tax legislations that have aided tax avoidance and tax evasion.
The following are the effects of tax avoidance and evasion in the economy;
Recent Developments in Tackling Tax Avoidance and Evasion in Nigeria
Fortunately, the enactment of the new Finance Act will bring a lot of changes in the administration of tax. For instance, the amended section 49(1) of the Personal Income Tax Act compels everyone every person to provide a Tax Identification Number as a condition precedent in opening a business bank account or to have access to a continued operation of his bank account in relation to its business operations. The Tax Identification Number is a number issued to individuals and organisations to track tax obligations and payments they make to the Government. Providing a Tax Identification Number will enable the Federal Inland Revenue Service track taxable persons in the habit of evading tax.
The provisions of Sections 34(4) (5) and (6) of the Personal Income Tax Act, granting children and dependent relatives allowance have been deleted under the Finance Act 2020. This is not favourable to persons who fraudulently increase the number of children they have or old parents under their care for the purpose of enjoying tax deductions. In addition, the new Section 8 of the Value Added Tax Act provides punitive penalties for non-compliance with the need to register with FIRS for the purpose of the tax. Such defaulter will be liable to pay the sum of N 50, 000 in the first month and N 25, 000 in the subsequent months. Any tax payer who plans to violate this law should consider the penalties before engaging in this illicit act.
Section 28 of the Value Added Tax Act was completely substituted for a new one to include the fact that incorporeal properties such as rights, patents, trademarks, royalty, etc. are now subject to Value Added Tax. The old Value Added Tax Act did not define goods. Hence, tax payers declared that incorporeal property was not subject to VAT on the grounds that such properties did not constitute 'goods & services' as provided by the erstwhile provisions of the VAT Act. Now that the provisions of the Law is clear, it will be difficult to try to avoid payment of tax.
In conclusion, Tax Avoidance and Tax Evasion are detrimental to the growth and development of any economy. Fortunately, the new 2020 Finance Act has sealed the loopholes dubious taxpayers are likely to take advantage of in trying to minimize tax liabilities. The Laws have been clearly spelt out and are no longer ambiguous, thereby curbing the practice of tax avoidance and evasion.
Written by: Adeiye Adenekan.
Associate, Michaelmas Chambers
Phone No.: 0900008231
LinkedIn Profile: https://www.linkedin.com/in/michaelmas-chambers-5a4900146