IMPACT OF TAX AVOIDANCE AND TAX EVASION ON ECONOMIC GROWTH: ISSUES AND CHALLENGES.

Transcription

1 THE IMPACT OF TAX AVOIDANCE AND TAX EVASION ON ECONOMIC GROWTH: ISSUES AND CHALLENGES. By BY-MIKE C OYERE * 1 INTRODUCTION The tax avoidance and tax evasion as used in this work refers to schemes, arrangements, plans or manipulations to gain tax advantage. Tax avoidance has gained prominence in tax literature and tax fora to draw attention to the inherent negative impact on the revenue interest of the government but it would appear that policy measures are not adequate to deal with them 2. This is so because the target enterprises are always a step ahead, aided by technological development and globalization. The judicial decisions on the subject also tend to point to the fact that the problem in attitudinal and that there will always be incentive for tax payers to indulge in tax avoidance schemes in as long as there is a tax advantage. The term International Tax Avoidance is a very wide concept since it is used to cover all tax planning schemes to minimize tax liability. Although, both tax avoidance and tax evasion lead to leakages in tax revenue, the legal and policy implications make it pertinent to distinguish between the two concepts 3. The Black law Dictionary, 6 th Edition defines the term, tax avoidance as the minimization of one s tax liability by taking advantage of legally available tax planning opportunities, and the term tax evasion as illegally paying less in taxes than the law permits; committing fraud in filing or paying tax. In other words, evasion is any form of fraud, willful default or neglect to reduce the tax liability or escape the payment of tax altogether. On the other hand, tax avoidance is a scheme that exploits or takes advantage of the weaknesses or ambiguities in tax laws to reduce or escape the tax liability. The implication is that what is seen as a tax avoidance case may be a tax evasion, depending on the method used 4. The current wave of globalization and technological development has created a fertile ground for tax avoidance, especially among multinational enterprises. The popular comment is that globalization opens the world of the multinational enterprises to avoidance possibilities while the information technology provides the mechanism for the perpetration of the various avoidance schemes. As one device is being plugged a more sophisticated device is being designed or planted to gain some tax advantage. * LLB, LLM, BL, CNA, Ph.D Student on Taxation. He teaches taxation in ESUT, Enugu 2 Arogundade J.A. Nigerian Income Tax and its International Demission (1 st ed ) Ibadan Spectrum books ltd. 3 Ibid. 4 Ibid 1

2 Tax Avoidance The dividing line between tax avoidance and tax evasion is very thin. But the most important thing there is that both end up in tax minimization to the detriment of economic growth. Tax avoidance involves the identification of a loophole in the tax laws and then taking the advantage of such a loophole to reduce the tax payable 5 What the courts look for is to see whether the law is breached in the arrangement of the tax payers affairs to gain tax advantage. This attitude of the court appears to have influenced increasing trend in international tax avoidance schemes. The traditional attitude of the court is that the intention of tax minimization is the normal business practice and the right of a tax payer which may therefore, not be material to its decision if this is done within the armbit of the law. Recent developments in judicial interpretation of tax avoidance laws have followed attempts of the laws to curb avoidance cases. This however, has led to the introduction of other concepts such as artificial transaction bonafide commercial reasons, substance over form; genuine business purpose, sham transaction, incomplete or incohate transaction and so on. The result is an endless review of the law which is followed by new devices 6. The battle continues. Nevertheless, Companies Income Tax Act (CITA) has made provisions for anti-avoidance measures which I will like to mention few here:- (1) Interest is now taxable in Nigeria if it is payable by a Nigerian resident or a person in Nigeria or if it accrues to a non-resident from a Nigerian resident or a person in Nigeria (this is to plug the loophole) in the law which was successfully exploited in the case of Aluminum Industries Aktien Gesellschaft v FBIR 7 (2) Section 17 of 1990 CITA 8 gives the Federal Board of Inland Revenue (FBIR) the power to treat the undistributed profits of a closed company as distributed; (3) Section CITA 9 gives the FBIR the power to set aside artificial and fictitious transactions and to impose adjustments to reflect arm s length transactions. There are also anti-avoidance measures included in the Nigerian Model Double Taxation Agreement; which I have to mention few of them here too. (a) Facilities that would normally be exempted from being a Permanent Establishment but which are used as sales outlet would be deemed to be a Permanent Establishment. (b) Dividend, Interest, Rent and Royalties effectively connected to the business of a Permanent Establishment in a source country are to be taxed as part of the profits of the Permanent Establishment and 5 Oyere M.C. Nigerian Tax Law The Principles and Practice of Taxation (1 st ed) Jos Deka Publications Arogundade J.A. Ibid. 7 (1971) NMLR Sect. 21 of 2004 CITA 9 Sect. 22 of 2004 CITA 2

3 Interest, Rent and Royalties payable between related persons to be limited to what would be applicable under arms length situation and the balance to be disallowed. Tax Evasion and Nigerian Tax Laws. Our domestic laws have identified examples of tax evasion which are contained in a number of legislations 10 these include: (1) Non-compliance with the provisions of the Act. (2) Failure to answer queries (3) Making of incorrect returns by omitting or understating any profits liable to tax. (4) Giving incorrect information. (5) Giving false statement and returns for the purpose of obtaining any deduction setoff, relief or refund. (6) Under declaration of income and inflation claims (7) Forgery, fraud, willful default or neglect. (8) Knowingly making false representations in a return, account or particulars made or furnished with respect to tax. The laws also provide for prosecution in case of tax evasion but the big question is, is it effective? Penalties are mainly in the form of court fines on conviction. One of the criticisms against the Nigerian tax laws is the treatment of tax evasion as a civil offence rather than criminal offence. The Board in most cases compound criminal tax offences on the payment of penalties. The fines are also too low to serve as a deterrent, and this can account for the incessant incidence of tax evasion. Apart from the negative impact on the efficiency of the Board, it also affects its effectiveness. This invariably sends wrong signals to the taxpayers that willingly comply with tax rules and encourage tax defaulters. Issues and Challenges. On the international scene, issues bothering on tax evasion and tax avoidance have been moved to the front burner of discourse after the 2007 financial crisis, although many of the initiatives on addressing the problems focus on tax avoidance by corporations and not personal income taxes 11. The Action Plan on Base Erosion and Profit Shifting (BEPS) was endorsed by the group of twenty (G20) most developed economies in July 2013 and identified 15 key areas to be addressed in order to address loopholes and gaps in the current domestic and international tax system. These loopholes and gaps are seen as creating opportunities for taxpayers who are involved in cross- 10 Part xiii of 2004 CITA, Part x of 2004 PPTA, Part xi of 2004 PITA. 11 Guardian Newspaper Tuesday October 6, 2015 p.45. 3

4 border activities 12 to aggressively structure their activities to mitigate potential tax exposure or achieve no tax liability. In February, 2016, the G20 Finance Ministers endorsed the Organization for Economic Cooperation and Development (OECD) initiatives in implementing the information technology Driven Base Erosion and profit shifting (BEPS) which enables government to close gaps in existing international rules that allow corporate profits upon which corporation taxes are levied to disappear or to be artificially shifted to low or no tax jurisdictions where companies have little or no economic activities. About 90 countries including Nigeria are currently involved in the development of multilateral instruments to speed up the process of effecting the new rules which will involve change to the existing companies Income Tax Act. According to OECD, it is estimated that by the time the new Information Technology (IT) driven BEPS framework takes effect in June 2016(ie in two months times) up to $240 billion representing about 10% of global corporation tax revenues that are currently being lost annually to complex tax avoidance schemes will start streaming into the government purses; especially that of the developing economies that rely on these corporation tax receipts for funding social and developmental programmes. The question now is; why is it that IT driven solutions cannot be applied to solve the problem of avoidance plaguing personal income tax collection. In Nigeria, corporation tax accrues to the Federal Government exclusively and are therefore of no effect in addressing the revenue shortfall facing the Federating States. The issue of tax evasion of personal income taxes which are levied on self-employed and employees is huge; and this has grossly affected the personal income tax revenue of the states. In theory, however, every employer is expected to act as an agent of the State Internal Revenue Services (SIRS) for the purpose of remitting taxes deducted from their employees monthly pay to the Tax Authorities on a Pay-As- You-Earn (PAYE) basis. It is a common knowledge that each state government is at various degree of efficiency in collecting these revenues. Thus they depend mainly on the monthly allocation from the Federal Government to finance their budgets. The State Governments have no effective apparatus to effectively collect personal Income taxes from those engaged in various individual businesses, trade, profession or vocation. The question here is what could be done to address this problem since most of them evade tax. In order to drag all working class into the personal income tax net; it is advisable that the Joint Tax Board implement a National Tax Card that captures all the bio-data of all individuals in a Central Database. If possible, the National ID Card Scheme could be expanded to hold electronic data with minimum duplication about individual s annual income, health status, age and tax records. With these arrangements individuals residing within the country can be uniquely identified for tax and credit purpose. This can be done to limit tax evasion particularly in Nigeria and in Africa at large. 12 Guardian Newspaper Tuesday April 12, 2016 p.17 4

5 The implementation of biometric smart card was one of the IMF conditions in approving Bailout Fund for Ghana in 2013, since it has been noticed that tax evasion is a major cause of revenue leakage for African governments 13. Most importantly the Joint Tax Board should champion this reform so that each individual irrespective of his place of residence in Nigeria will have one unique tax reference number. Since it is Biometric, it will automatically be impossible for an individual to hold more than one card in a life time. The records held can be shared amongst the various SIRS for tax collection purposes; and also to reduce the incidence of double taxation within the country. As it is done in other jurisdictions, the Joint Tax Board should make it. Criminal offence for any employer to hire anyone without a National Insurance Tax Number. Essentially, such a National Tax Number should be made a condition precedent for any taxable adult to own a bank account. This will make it easy for tax inspectors to track down and prosecute tax evaders. Conclusion Finally, we are living in an information technology age and it is important that Joint Tax Board becomes more vibrant and keep abreast of the latest technologies that can make life easier for the taxpayers from the comfort of their homes. A very good example might be the use of smart phones that require no electricity atal. If these issues are well articulated and addressed properly, there may be no need to increase the tax rates, as increase in compliance will automatically increase the tax revenues. This is so because the majority of the working class would have been captured automatically in a national database. It will equally be possible for our fiscal policies to be more effective, the corruption network will equally be a thing of the past in this respect. Our tax authorities can effectively investigate or query taxes under paid by citizens who live ostentations lives. Our country is highly populated and this is advantageous in a way, hence the need to plug the revenue leakages and this invariably will increase our internally generated revenue base through tax and thus stream in enough revenue for our economic revival. 13 Guardian Newspapers Tuesday April 12, 2016 p.17 5