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Tackling tax leakages in the 21st Century – What lessons can Nigeria learn from the OECD?

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Monday, July 3, 2017 7:02 PM /Deloitte 

Benjamin Franklin was apt when he said “In this world nothing can be said to be certain, except death and taxes1”. Centuries after that famous quote by the one-time American President, taxation remains a certain and consistent source of revenue for governments, albeit to varying degrees of reliance. 

While it is arguable that a significant portion of total government revenue is attributable to tax in most advanced economies, developing economies are putting in efforts to ramp up contributions from tax. Consequently, tax authorities the world over often seek to assess, enforce and collect the right amount of taxes from taxpayers. 

Conversely, taxpayers – whether corporate or individual – see taxation as costs and engage in various activities to optimize tax costs as with other costs, in order to maximize profits. 

For “compliant” taxpayers, such activities may include taking advantage of legally available tax planning opportunities to ensure that the minimum but correct amount of taxes are paid. This speaks to the fact that it is within the right of taxpayers to plan their financial and tax affairs in such a manner as to optimize their tax positions or manage their tax exposures, as long as the provisions of the tax laws are not infringed on. Such taxpayers achieve this objective by using tax shelters provided in the tax laws, while avoiding “tax traps” in order to optimize their tax positions. Activities by taxpayers which are within the ambit of the laws and geared towards optimizing tax costs may fall within the umbrella of tax avoidance. 

On the other hand, some other category of taxpayers, in the process of trying to manage tax liabilities, infringe on the provision of the laws. This category of taxpayers deliberately and illegally pay less taxes than the law permits or do not fulfill their tax obligations at all. They do this by willful non-disclosure and falsification of records. In some other instances, the taxpayers do not register with the tax authorities at all or change business address without notifying the tax authorities – all with a view to avoid their tax obligations. Such activities by taxpayers, which lead to breach or infraction of tax legislations fall within the realm of tax evasion. 

While tax avoidance activities may be perceived to be intended and unintended incentives granted to tax payers based on certain conditions, tax evasion activities challenge and strain governments’ objective of maximizing tax revenue as collection of the right amount of taxes as prescribed by tax legislations is impaired. Along with administrative weaknesses and inefficiencies in tax collection, tax evasion constitutes major source of tax revenue leakage, especially in developing countries where there is little or no collaboration between tax authorities and other vital monitoring agencies and/or organizations. 

According to the Organisation for Economic Cooperation and Development (OECD), the continual occurrence of tax evasion can be substantial, with revenue losses amounting to many billions of dollars per year. Not only is tax evasion against the law and defrauds the government of revenue, it also creates an un-level playing field for compliant taxpayers. 

Further, OECD noted that in recent times, tax authorities around the world are beginning to record particular types of tax evasion mechanisms such as under-reporting of income through electronic sales suppression and over-reporting of tax deductions through false invoicing. Tax evasion and fraud are also being facilitated by the cash economy. These forms of tax evasion are majorly associated with technology and a cash economy. 

In Nigeria, examples of tax evasion manifests in various forms including:

• Attempts by importers to evade customs duties by either under–declaring or changing product descriptions to attract lower duties

• Employers may also try to evade pay as you earn (PAYE) tax by intentionally failing to remit to the tax authorities, the PAYE tax deducted from employees’ compensation

• Taxpayers may try to evade value added tax (VAT) by using sales suppression techniques. These taxpayers keep different sales records solely for the purpose of VAT compliance/monitoring. Other taxpayers fabricate fictitious purchase invoices in order to increase input VAT claims. 

A major challenge and perhaps the biggest contributor to the incidence of tax leakages in the form of tax evasion in Nigeria is the size of the informal sector, which was said to account for 57.9%3 of Nigeria’s rebased Gross Domestic products (GDP) in 2014. The irregular, non-structured and cash-driven nature of the informal sector, coupled with the paucity of taxpayer data on the part of the tax authorities has also contributed to tax evasion in Nigeria. 

The impact of tax evasion in terms of lost revenue makes it pertinent for the governments at both federal and states level to identify ways and avenues through which these acts are perpetrated in Nigeria and in response, seek counter measures. A critical review of some of the causes identified above points to technology as a plausible solution in dealing with the issues. However, an important question which must be asked is “to what extent will technology battle the menace of tax evasion?” particularly for developing nation like Nigeria. 

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Disclaimer:
This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. 

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