By Abdulateef Olatunji ABDULRAZAQ, Founder, Taxmobile.Online and Principal Partner, AOA Professional Services
Tax evasion and tax avoidance are two critical concepts when it comes to taxation.
Tax avoidance is any legal method used by a taxpayer to minimize the amount of income tax owed. Individual taxpayers and corporations can use forms of tax avoidance to lower their tax liabilities.
Tax credits, deductions, and loopholes in tax laws are forms of tax avoidance. This is generally accomplished by claiming as many deductions and credits as are allowable.
It may also be achieved by prioritizing investments that have tax advantages, such as buying Federal Government bonds and investing in certain industries to get tax credits/holidays.
Tax evasion occurs when a person or business illegally avoids paying their tax liability. Tax evasion involves the intentional misrepresentation of one’s true financial status to the tax authorities to reduce his/her tax liability.
Examples of tax evasion include; (a) False declaration of income, profits or gains earned.
Principles of Tax Planning and Management
Tax planning and management refer to the processes and schemes by which taxpayers arrange their affairs and businesses in such a manner as to attract the lowest possible tax rates under applicable tax laws.
It is the art of limiting the amount of tax payable without breaking the law. Tax planning in Nigeria is legal and acceptable (See Akinsete Syndicate v Senior Inspector of Income Tax).
General principles of tax planning are to:
(1) Maximise non-taxable receipts:
Dividends, interest, rents, and royalties earned abroad and brought into Nigeria through government-approved channels are exempt from Nigerian tax; otherwise, the income is taxable at the applicable rate.
(2) Minimise non-deductible expenses:
Expenses are deductible for corporate tax purposes in Nigeria if they are wholly, reasonably, exclusively, and necessarily incurred for the business or trade.
(3) Apply capital receipts in the acquisition of qualifying capital expenditure:
Paragraph 16 (1) & (2) of the Second Schedule to Companies Income Tax Act(CITA) allows a company to claim Capital Allowance on either an asset in a state of temporary disuse or on an asset which is yet to be used but whose first use will be for the trade or business, subject to the approval of the FIRS.
Capital Allowance is a claim for tax relief by companies against assessable profits when computing their tax liabilities. It is granted to companies that prove that they have incurred qualifying capital expenditure (QCE) for a trade or business to generate taxable income in line with the Second Schedule to CITA.
(4) Avoid outright default of tax provisions to eliminate the payment of interest and penalties.
Tax Evasion: Offences and Penalties
Tax offence is the violation of any law, regulation or legislation. Tax offences comprise both civil and criminal vices under Nigerian tax laws.
The serious offences attract severe punishment while the mild offences attract less in form of fines in monetary terms. The Nigeria tax law empowers tax authorities to use both civil as well as criminal sanctions to ensure and enforce tax compliance.
Tax penalties or sanctions are officially imposed punishments aimed at the enforcement of legal obligations.
Nigeria has monetary penalties and criminal sanctions in connection with tax evasion, some of the sanctions include the tax authority’s power to sell off the defaulting taxpayer’s goods or other chattels, bonds or securities as well as his premises so that the amount owed can be recovered.
Measures adopted to curb Tax Avoidance and Evasion in Nigeria
The enactment of the Finance Act 2019, 2020 and the new Finance Act 2021 brought a lot of changes in the administration of tax and we would take a look at some examples.
For instance, the amended section 49(1) of the Personal Income Tax Act compels everyone to provide a Tax Identification Number as a condition precedent in opening business bank account or to have access to a continued operation of his bank account 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 to 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 individuals who fraudulently increase the number of children they have or old parents under their care to enjoy 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 tax. The 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 taxpayer 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, taxpayers declared that incorporeal property was not subject to VAT because such properties did not constitute ‘goods & services as provided by the erstwhile provisions of the VAT Act. Now that the provisions of the Law are clear, it will be difficult to try to avoid the payment of tax.
Tax advisers face a range of problems concerning professional ethics when managing the tax affairs of their clients. They are also under a duty to their clients, but they also owe a duty to observe professional standards in the course of providing professional advice.
Another interesting development of tax jurisprudence is the importation of the concept of abuse of rights in setting the limits that a taxpayer may go in legally planning his tax affairs in a way to limit his liability.
See the English case of Barclays Mercantile Business Finance Limited v Mawson(2005) that practice was abusive if the transactions concerned resulted in a tax advantage, the grant of which would be contrary to the purpose of legal provisions.
Other Article By Same Author
Subscribe to a Stitch in Tax Save Cash for more.
More About Author:
Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this,Olatunji worked as Director,Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax,Regulatory & Advisory Services at Saffron Professional Services.
The information contained herein is general and is not intended, and should not be taken, as legal, accounting or tax advice provided by Taxmobile.Online Inc to the reader. This information remains strictly the opinion of Taxmobile.Online Inc.
The reader also is cautioned that this material may not apply to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of other tax factors if any action is to be contemplated. The reader should contact his or her Tax Advisers before taking any action based on this information.
All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Taxmobile.Online Inc.