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Tax Evasion

Tax Avoidance and Evasion are some of the most perplexing problems facing the nation today. It is widely believed that there is a considerable difference between estimated revenue from taxation every year and what is actually collected. This disturbing aversion to taxation has some historical antecedents. Traditionally, there has always been a hostile response to the payment of tax by the people who viewed tax collectors as a nuisance to the society. And for the few that paid tax, they did so with the greatest reluctance.

Even in the Bible, instances abound where the Jews treated the tax collectors with disdain and contempt.1 This negative attitude transcended to modern times and with the consequence that various devises, has been formulated by the tax payers to frustrate the tax authorities.

To say the least, this negative attitude to taxation is unpatriotic in view of the well recognised role which taxation plays in the economy. In fact, it is undeniable today that every government depends to a large extent on taxation not only for its socio-economic development but also as a means of ameliorating the existing inequalities of wealth in the society.

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2 It is in this light that there has been various legislative and judicial attempts to impose liability on the tax payer in appropriate cases. Definition of Tax: The Nigerian tax Acts do not define the word tax. Thus for the purpose of ascertaining its meaning resort has been made to decided cases. It must be quickly pointed out here that even the various judicial attempts at defining it lacked precision.

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This maybe due to the Myriad function of taxation in the society.

In spite of the difficulty at definition, some definitions proffered by some leading authorities in the field may be examined. In the words of Chief Justice Lathman of the Australian Supreme Court in Matthews v. Chucory Marketing Board,3 a tax “is a compulsory exaction of money by a public authority for public purpose, or taxation is raising money for the purpose of Government by means of contribution from individual persons”. Similarly in United States v. Butter,4 Chief Justice Roberts of the United States of America Supreme Court, said tax is “… an exaction for the support of Government …” He debunked the continued conception of tax as the “expropriation of money from one group for the benefit of another”.

Coming nearer home, Professor C.S. Ola has defined tax as “The demand made by the Government of a country for the compulsory payment of money by the citizens of the country”.5 A more recent and comprehensive definition was given by Dr Ekenze Oliver of Buitas Consultancy to the effect that tax is: “a compulsory levy imposed by an organization or Government on its member citizens, for the sole purpose of providing common goods and services for the benefit of all members”.6 He continued: “tax is designed to raise revenue required for the Expenditure authorised in a Government budget Expectation.

It is also a veritable instrument of promoting social and Economic justice and equality amongst citizens of a State or members of an organisation”. As could be gleaned from the above definitions, a tax is not therefore a voluntary payment; it is a compulsory pecuniary burden placed upon the subjects of a given country to support the people. Definition of Tax Evasion and Avoidance: The Nigerian tax codes have neither defined nor drawn any distinction between Tax Evasion and Tax Avoidance. Tax Avoidance may be simply defined as the reduction or minimization of a person’s tax liability by carefully arranging  one’s affairs in such a way as to take advantage of loopholes in the tax Law provisions, it is the intentional act of a tax payer to pay less than what he ought to legally pay to the tax authority.

Commenting on the attitude of the courts and the legislature towards Tax Avoidance. Professor Wheatcraft observed that: “… tax avoidance is an art of winning games without actually cheating; thereby beating the internal revenue and the Government to their own game”.7 Similarly in IRe v. Duke of Westminster, Lord Tomlin observed in respect of T ax Avoidance that: “Everyman is entitled, if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it other wise would be. If he succeeds in ordering them so as to secure this result, then however in appropriate, the commissioner of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be .compelled to pay an increased tax”.8

Thus in spite of the generally held opinion that tax avoidance is unpatriotic and anti-social, it is clear that it is not a moral or legal issue unless the legislature expressly prohibits it. Tax Evasion on the other hand is the deliberate refusal or failure to pay one’s tax or the reducti9n of ones tax liability through illegal or fraudulent returns or failure to make a return or pay tax on time.9 Implicit in the definition is that Tax Evasion apart from being a moral wrong also amounts to a breach of the tax law.

Perhaps the distinction between Tax Avoidance and Evasion will be better understood and appreciated from the vivid illustration of the Royal Commission on “Taxation of profits and Income”.10 The Commission distinguished as follows: “The latter (that is evasion) denotes all those activities which are responsible for a person not paying the tax that the existing law charges upon his income. Exhypothesis, he is in the wrong, though his wrong doing may range from the making of a deliberately fraudulent return to a mere failure to make the return or to pay his tax at the proper time. By Tax Avoidance on the other hand is understood as  some act by which a person so arranges his affairs that he is liable but for the arrangement. Thus the situation which he brings about is one which he is legally in the right except so far as some special rule may be introduced that puts him in the wrong”. The consequence therefore, is that the court will not” pronounce in favour of the tax authority where the tax payer takes advantage of the taxing statutes or the absence of it to escape his tax liability.

Tax Avoidance Schemes


Income splitting schemes:

One of the commonest methods of reducing the incidence of taxation is by dividing into several hands the income which otherwise could have been taxed in one tax payer’s hand. In a progressive tax system such as ours with a high marginal rate of tax, income splitting has always been a popular tool of tax avoidance. It is a means which enables the transferred to reduce his tax liability while the transferee may be liable to lower rate of tax on the transferred income, obtain relief or altogether exempted from tax if the transferred income is within the rage of exemption.


Settlement and Trust Income:

Settlement schemes and trust income are some of the notable tax avoidance schemes employed by the tax payers. Under the income tax law, the income of a settlement, trust or estate is looked upon as income of the beneficiary where the beneficiary had an immediately vested interest. But where the interest depends on the occurrence of an event, the interest is deemed to belong to the settlement and not to the transferor nor the beneficiary. It is this sort of scheme that was adopted in the Federal Board of Inland Revenue V. Nasir.11 In the case, Nasir had by a deed of Gift conveyed his property in Lagos to himself and six other members of his family as tenants in common. He later followed it up by a deed of settlement.

The Board of Inland Revenue sought to make Nasir liable by bringing him under the purview of the then Income Tax Management Act (ITMA) of 1961 under which the income of a settlement  intervivos is deemed as the income of the settlor if the person creating the settlement makes use of any part of the income arising under the settlement directly or indirectly or he retains or acquires an immediately exercisable general power of appointment over the assets or income of the settlement or trust. The rationale being that he would be in a position to appoint the income or property to anyone including those over whom he might control and so restore himself into the full owner of the property or income legally but through the back door. But the court held in the Nasir’s case that the instrument establishing the trust or settlement must expressly empower the settlor or other person to make use of the income. Since this was not the case, the court held that, the Board could not contend that the settlor had benefited under the settlement.


Family Income:

Family income is defined as income of a family recognised under any law or custom in Nigeria as family income in which several interest of individual members of the family are indeterminate or uncertain.12 The recognition and acceptance of family income under Native Law and Custom may be an effective tax avoidance tool in the hands of a tax payer. This is more so, since the tax law does not provide stringent conditions on the effectiveness of alienation of income or income yielding assets of family. The reason is that usually the transferor of such income from which family income is derived would normally have died before the property could become family property.


Avoidance of Asset Valuation:

A person may deliberately prevent valuation of his assets under certain situations., This is where the assets are held up in the company while his liquid cash outside the same company and which is insufficient to meet the huge liability to the estate duty which would arise if valuation of the shares were done on the basis of the assets. The implication of such evaluation is that the company might ‘face the unpleasant consequence of liquidation or in the alternative rely on financial, assistance  from outsiders who in turn might demand for an active role in the management of the affairs of such a company. A way out of the above especially where the company has acquired substantial assets and good will is to either go public by converting it into a public company so that the asset basis of evaluation do not apply to the shares or debenture if they are of a class in respect of which permission to deal in them by a recognised stock exchange has been granted in the ordinary course of business during the year or to give out such assets by way of settlement shares.


Capitalization of profits through the issue of New shares:

Shares can be issued to existing share holders so that the capital paid on the new shares will be made out of profits and thereby deplete the taxable income of the company. Though section 8(3) Company Income Tax Act 1990 clearly provides that dividends include all distributions of profits including shares and debentures, it appears that only shares satisfied by bonus debentures are taxable and not those satisfied by bonus shares.13


Tax Avoidance by Transnational Enterprises in Nigeria:

Tax avoidance is not only a local problem or issue but has equally assumed an international dimension especially in a country such as Nigeria. This is due to the expanding internationalization of economic transactions. This has no doubt led to serious taxation problems. Thus in the economic relationship between transnational enterprises and a developing nation like Nigeria, the transnational adopt unfair transfer prices whose sole purpose is to minimise or diminish the appropriate tax payable.

As vividly illustrated by a learned author:14(a) “This can be done either by selling goods to a subsidiary in a tax haven at less than arms length prices or by a parent company overpricing its Exports to foreign subsidiaries so that by inflating the cost of imports of the final products or raw materials, a corporation can increase the margin of profits which of course will be concealed for tax purposes. This leads to artificially lower profits and therefore lower  tax collections in the taxing country. Thus by shifting profits from one company to another company in the group, the tax liability of the relevant company is consequently distorted …. These manipulations are likely to adversely affect the economic development generally and… tax revenues for a developing country such as Nigeria.” Though anti-avoidance measures were adopted to check these abuses, they have not been successful.

Thus as far back as 1968, the Company Act of 1968 made it mandatory for expatriates doing business in Nigeria to form subsidiaries in Nigeria with the view of providing avenues for exercising adequate control over such foreign companies with regard to their business in Nigeria. But this laudable endeavour had an unpleasant drawback which the foreign companies utilised to their advantage. In the final analysis, the so-called subsidiary companies were not Nigerian Companies, they were mere branch offices of their expatriate foreign companies in so far as the management and control of such companies are concerned. The subsidiaries were in no way independent local companies capable of holding their own.

The consequence is that the Nigerian Companies were subserviently dependent on their foreign companies with the result that the Expatriate Companies dictated what portion of revenue should be left to the Nigerian subsidiaries to take care of their local Naira requirement and pay already pre-arranged tax. Tax Evasion Schemes The problem of evasion is much more glaring under the direct assessment method under which the self-employed such as the businessmen, contractors, traders and professionals are taxed than with in the indirect assessment method under which employees are taxed.

It is generally believed that the self-employed paid less than 10 percent of their personal income tax to the Government yearly while employees paid the remaining percentage of 90 percent. Even the civil servants and the other salaried workers are equally guilty of this nefarious practice in the manner in which they abuse the personal allowances and relief statutorily provided by the law. Thus almost every potential Nigerian civil servant in their claim for personal allowances and reliefs would claim falsely that he is married with four children. Tax evasion has continued to remain an endemic problem in this country. In the words of Sosonya14(b) tax evasion” … has become so widespread that there now exist a cash economy of a widespread proportion which the tax man has no control”.

Tax evasion may be perpetrated in several ways some of which comprises the following: a b c d e Lack of voluntary compliance to payment of tax. False claims in respect of children, wife, capital allowances, dependent relatives, life assurance premiums etc; Understating or false declaration of income receipt from trade, business, professional, vocation or employment; omission to state gross amount of dividends, rents etc. received in Nigeria from outside sources; false claims of contribution to a pension scheme, National Provident Fund etc; Tax Evasion Measures under the Law The Federal and various states Governments have commendably dished out several tax measures aimed at curtailing or minimising tax evasion in Nigeria.

Most of these measures which are contained in various Legislations15 empower the Government department, Ministries, agencies or any commercial bank with who any Company has any dealing with respect to any kind of transaction or business to demand from such a person a tax clearance certificate of three years immediately preceding the current year of assessment. And in a similar manner, the Government introduction of provisional tax within 30 days by corporate entities or the declaration of interim dividends constitute a commendable antievasion endeavour. In some states, similar anti-evasion measures has been adopted.16

As at 1974, the internal revenue division of the former Western State carried out administrative reforms aimed at tackling the knotty problem of tax evasion. Thus it was mandatory for contractors to produce evidence of tax receipt before contract could be awarded. Even in the case of retired civil servants, tax report of such civil servants were first reviewed and scrutinised to determine appropriate gratuity or pension payable to such civil servants. In other instances, tax evasion measures took the form of legislation which compelled performing musicians to pay tax to the Government before being allowed to play. Stiff penalties were imposed for failure to comply with such directive.17 The tax evasion measures were by no means restricted to the Form Western States alone but cut across other States in the former Eastern and Northern States as well.

18 Our tax codes are replete with punitive momentary measures as well as criminal sanctions aimed at solving this problem. One of such many provisions is section 66 of the Companies Income Tax Act which conferred on the Board the power to seize and sell defaulting tax payers goods, chattels as well as the premise in extreme cases in order to recover the amount of tax owned by such tax payer. Court’s Approach to Tax Avoidance Schemes the Form and Substance Approach The courts position towards tax avoidance is that a tax payer is to be taxed in accordance with the form in which he arranged his business affairs and not their substance.

Thus where a tax payer has so ingeniously plan his affairs, no tax can be legally claimed from him by looking at the substance of the transaction. Thus in IRC v. Duke of WestMinster19 the doctrine of substance was rejected. Certain payments were made by the Duke of West Minster to his gardeners as annual payment pursuant to a deed of covenant Under section 27 of the Income Tax Act 1928, of United Kingdom annual payments were admissible as deductions while determining tax liability. The use of the deed of covenant was a tax avoidance devise which was meant to save the Duke higher rate certificate was  introduced. A taxable adult was expected to produce it before getting any form of licence of taxes. The revenue contended that the form of the transaction should be rejected since in substance the yearly payments were monthly payments. The argument was rejected by the Court of Appeal and the House of Lords respectively. While rejecting contention of the revenue, Lord Tomlim observed that: “The deed of covenant arc admittedly bonafide and have been given their proper legal operation.

They cannot be ignored or treated as operating in some different way because as a result less duty is payable than would have been the case if some other arrangements ….. had been made … The so-called doctrine of substance seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable”. But the point must be quickly made that in construing taxing statutes, the court do not regard as conclusive the name by which a transaction is labelled. Once the legal rights of the tax payer vis-à-vis that of the revenue is ascertained, the court will overlook whatever appellation the parties use and consider the issue of taxability. Thus mere nomenclature is of no legal consequence.

Also disregarded by the courts are sham and malafide transactions.20 But once a transaction is genuine, the court will consider all the surrounding circumstances in order to ascertain the rights and liabilities of the parties.21 Obviously encouraged by the Westminster principle, tax payers began to ‘order their affairs’ as best as they could so that “tax attaching under appropriate Acts is less than it would otherwise would be”. This took the form of splitting their transactions with the hope that the court will only restrict itself to the form of each part of the transaction in isolation rather than looking substantially at the whole transaction. The first sign that a decisive shift from the Westminster principle was imminent carne in the dissenting judgement of Eveleigh, K.J in the Court of Appeal case of Floor v

Davis22 when he quipped:
“I see this cue 88 one in which the court is not required to consider each step taken in isolation”.

Expectedly in 1982, the West Minister principle finally took a severe knocking in the House of Lords case of W.T. Ramsay Ltd v IRC.23 The case concerns artificial resort to self-canceling transaction. The facts which are fairly detailed are that Ramsay Ltd acquired the share capital off Caithmead Ltd for L, 185, 0.34. Ramsay Ltd. Subsequently borrowed the sum of L 437,500 from a finance company and advanced two loans to Caithmead Ltd each to the tune of L 218,750. Both loans carried interest at 11 %. The first loan was made repayable after 30 years while the second loan was to be paid after 31 years. Under the arrangement Ramsay Ltd. had right (he could only use once) to increase the rate of interest on one loan and decrease the rate on the other loan by a similar percentage In accordance with these terms, Ramsay Ltd a week later decreased the rate of interest on the first loan to 0% and increased the rate on the second loan to 22% The second loan therefore became more valuable.

Ramsay Ltd subsequently sold the second loan to a third party for L 391.481. Since the original loan had cost L 391,481, Ramsay Ltd. made a profit of L 172,731. A week later, Cathmead became liquidated and immediately the first loan was repaid. On liquidation, Cathmead was valued at L 9,387. And since Ramsay Ltd had paid L 185,034 for the loan, it is obvious that Ramsay Ltd made a capital loss of L 175,647 on the shares. It is important to note that the amount of capital loss would ordinarily have been available as a set off against its capital gain on the sale and lease bad transaction but since it had cost Ramsay Ltd. nothing in creating the loss as the profit in the second loan had in fact compensated for the loss, the court held that they were self-can ceiling transactions which did not occasion any loss to Ramsay which could be used to offset the capital gain on the sale and lease back transaction. The House of Lords therefore refused to adopt a step-by-step analysis of the transactions.

That the Ramsays case marked a turning point on judicial attitude to tax avoidance schemes, was re-echoed in IRC v Burmah Oil Co. Ltd.,24 When the  House of Lords further re-examined the scope of the West Minster principle. The court observed as follows: “It would be … dangerous on the part of those who advice on elaborate tax avoidance schemes to assume that Ramsay’s case did not make a significant change in the approach adopted by this House in its judicial role to pre-ordained series of transactions (whether or not they include the achievement of a Legitimate Commercial and) into which they are inserted steps that have no commercial purpose apart from the avoidance of liability to tax which in the absence of those particular Steps would have been payable. IRC v Duke of Westminster tells us little or nothing as to what methods of ordering one’s affairs will be recognised by the court as effective to lesson the tax that would attach to them if business transactions were conducted in a straight forward way”.

The point must however be emphasised that the new approach as exemplified in Ramsay Ltd and Burmah Oil case did not completely overrule the Westminster case. It only limited its application. And the distinction is that under the Westminster principle, the court was required to look at a transaction as a whole in order to determine the rights and obligations created under ordinary legal principles and give effect to it. Under the new approach however, the court is required to give effect to a transaction in its entirety even though it may mean overlooking certain rights and obligation which had arisen but subsidiary to the overall substance of the entire transaction.

The new approach no doubt shows that some judges were beginning to appreciate the all important function of taxation as a tool for a nation’s development, and the necessity for ensuring that taxation generates the much needed revenue and that any tax avoidance measure ought to be pronounced against. In fact apart from a few, the judges aside from seeing their judicial function as extending beyond the traditional declaratory function, recognise the complexity of modern business and the need to tackle the endemic problem of tax avoidance.

Legislative Efforts Against Tax Avoidance Schemes The legislature has made bold attempts aimed at minimising or curtailing the tax payers insatiable penchant to tax avoidance. Thus certain concepts or provisions have been introduced in our tax codes to strike against avoidance schemes where a particular relationship is suspected by the revenue to exist between the tax payer and a third party that can be exploited to the disadvantage of the revenue. Specific Anti-avoidance provisions


Family Income.

The resort to family income as a tax avoidance measure has been minimised by the definition of a family income as being income of a family recognised under any law or custom in which several interest of individual members of the family are indeterminate or uncertain.2S


Extending the natural and ordinary meaning of words in the taxing Acts to include schemes designed for tax avoidance purposes. The spectrum of transactions intended to be covered by anti-avoidance provisions have in certain situations been extended by elastically defining the operative words to include transactions that might be used for tax avoidance purposes.

Thus the word dividend which in ordinary meaning connotes that part of the profits of a trade or business distributed to the shareholders have been extended to encompass any profit distributed whether such profits are of a capital nature or not including any amount equal to the nominal value of bonds, shares, debentures or securities awarded to the share holder except capital profits earned before or during the winding up or liquidation.26 The extended meaning thus has the effect of rendering any profit distributed under whatever guise as taxable in the hands of the shareholder.


Deeming Provisions

The resort to deeming provisions may be used to deem an amount of money as ‘income’ which sum in normal circumstances would not have been subject to tax at all. Again deeming provisions may be used to deem a sum which is of an income nature as income of a named individual which in normal circumstances could not have been regarded as such. In Lagos and former Western State, benefits in kind such as living accommodation provided by employer for employee by virtue of the employee’s employment are treated for tax purposes as receipt of taxable income.27 In the main therefore, deeming provisions are phrases used to impose artificial construction of a word that could not otherwise give a comprehensive description which includes what is clearly obvious, what is uncertain and what is in ordinary sense impossible.28


Income Splitting Schemes:

Before income splitting schemes can be effective for the purpose of reducing tax liability, it must be satisfied that the transferor is not to benefit from it in any manner or later resume control directly or indirectly the same income at a later date. Thus for such transfer to be effective, not only must the transfer be legally enforceable against the transferee, the transfer must be an out and out transfer. Income splitting by way of settlement in favour of an infant and unmarried child of a settler is not effective for the purpose of transfer of income of a settlement for income tax purposes while the settler is still alive. But once the child is married or has attained the age of 21 if unmarried, the transfer will be effective.


Income Splitting through incorporated bodies

Section 17 Companies Income Tax Act 1990 deals with income splitting through incorporated bodies. The provision allows the Federal Board of Inland Revenue to take action where it appears to it that a Nigerian Company controlled by not more than five persons refuses to distribute profits to shareholders as dividends and the purpose for so refusing is to reduce the appropriate tax  payable by such Nigerian company and not because any detriment would result if the profits are distributed. Thus the Board has power to cancel such income splitting scheme between an individual and his company by giving appropriate direction in writing and serving it on the company. Though the section does not give any clue as to the nature of control, it appears where the share holding controlled by not more than five persons is anything above 51% that could be sufficient to ground such transaction.

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Tax Evasion. (2016, Oct 05). Retrieved from

Tax Evasion

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