Rising Tax Evasion And Falling Public Incomes

PERHAPS, tax is like death. With the full weight of its certainty, people still struggle to shrug it off. At least, not many smile to tax collectors when they call knocking. Hence, some people dodge payment or under declare taxable income where it is possible to do so, a practice often labeled as evasion.

   In Nigeria, incidents of tax evasion are rarely seen as criminal cases; at least, the payers do not see it so. Thus, offenders carry more of moral tag instead of being considered as criminals. Prof. Taofeeq Abdulrazaq, a tax expert and psychoanalyst, stressed at a lecture that individuals could be convicted for delaying or refusing to remit taxes just as when they commit other criminal offences.

  Last year, a popular footballer negotiated and paid 15 million euros to Spanish government to avoid prosecution for tax evasion. About three months ago, Massimo Cellino, an Italian sports entrepreneur, was convicted and fined £500,000 for failing to pay tax on his luxury yacht, a judgment taat substantially affected his planned takeover of Leeds United.

   In 2004, Domenico Dolce and Stefano Gabbana, founders of Dolce & Gabbana, sold the brand and the D$G label to a Luxembourg-based company, a transaction Italian government later considered a move to avoid paying higher corporate taxes. After a protracted legal battle that started 2008, the fashion designers were, few months backs, convicted and charged, alongside the company’s accountant, to one-and-half-year jail term.

  Of course, people do use legitimate tactics as well to evade tax. For instance, BBC recently reported that 1,131 expatriate Americans gave up their citizenship in the second quarter of last year (in contrast to 189 that surrendered the rights in the same period of the preceding year) to avoid being caught up by the new Foreign Accounts Tax Compliance Act (FATCA). The law requires financial institutions around the world to report to the US Internal Revenue Service (IRS) assets and incomes of the country’s citizens with $50,000 on their books, failure of which attracts serious penalty.

   The US experience shows how resolute countries have become to bring tax defaulters to book. Similar determination in different countries has paid of in terms of increase in the level of compliance. But that is elsewhere, not in Nigeria, which experts say records abysmal tax compliance as a result of lack of inadequate legal frameworks and political will to follow best global practices.

  Wondering how the country would develop when individuals and corporate entities are not tax-compliant, Akwa Ibom State Tax Controller, Mrs. Mafiana Uche, summed evaders in three categories: those who hide their books from relevant officers, those who open their books for examination but never pay taxes and those that do not register with the tax office. And these cases keep rising, just as more companies open doors for operation.

   Special Adviser to Lagos State Governor on Taxation and Revenue, Bola Shodipo, said only three million out of the eight million Lagos working residents pay their taxes. That brings the compliance rate, assuming they pay fully, to about 37 per cent, a feat achieved after several years of campaign that recently brought additional 400,000 people into the tax net.

   From Rivers through Kaduna to up north, the story is the same; responses to tax obligations are terribly low. A report by McKinsey & Company, a global tax auditor, says 65 per cent of registered taxpayers in Nigeria have not filed their tax returns in the past five years, while operations of 75 per cent of Small and Medium Enterprises (SMEs) are not yet in the net.

   It also claims that 30 per cent of companies operating under the pioneer status abuse tax exception privileges, a situation described by Coordinating Minister of the Economy/Minister of Finance, Dr. Ngozi Okonjo-Iweala, as demoralising to those who pay. The Minister added that non-complying people and companies unjustly push the burden to others.

  Indeed, tax evasion — manifesting in form of smuggling, falsification of documents and under-declaration of returns — takes its toll on the economy, just as it continues to establish its root. And, unfortunately, the same government that should fight the scourge (inadvertently) encourages its growth. For instance, Oigiagbe Oseme, an automobile economy analyst, expressed fear that the new automotive policy (that jacked up charges on imported vehicles from about 20 per cent to 70 per cent) would increase smuggling.

  In the past, stakeholders and interest groups warned against ambush policies like that of the automotive sector, which is raising dust at the Tin-can Wharf already. The popular argument is that such revenue-driven policies reduce, drastically, the volume of business transacted officially while increasing the footage of behind-the-scene operations. Results of past experiments are not farfetched. The volume of rice coming into the country from the Republic of Benin soared when duty on the staple food moved up to 110 per cent.

Even Okonjo-Iweala acknowledged this when she said: “We increased the tariff to 110 per cent, and it encouraged some people to go and grow rice and we grew 1.1 million metric tonnes of the product. But it also encouraged smuggling from neighboring countries because they immediately dropped their own tariffs to 10 per cent.”

  The general psychology of tax defaulters in other parts of the world, said Lagos Chairman of the National Association of Small Scale Industrialists (NASSI), Segun Kuti-George, is just a negligible component of the Nigeria experience.

  First, he described the rising cases of default as ‘protest’ evasion, explaining that there are people who make genuine profits but are not willing to part with taxes because they do not believe government uses the revenue for the common good. He wondered why entrepreneurs would take out part of their incomes for taxes when they are ‘government’ to themselves in their factories and homes.

   “The question is what do they do with it? Are they not supposed to use the money to provide security, power, roads, water and other infrastructure? When the government is not there for the people in terms of response to their infrastructural needs, there is tendency that they will use tax obligation as protest tool. That is part of the problem,” he noted.

  Kuti-George faulted the sincerity of government, arguing that people see taxation as avenue to increase the ‘take-home’ of politicians. He noted that business people are wary of throwing money at government when they are not sure it will remain in public coffer, considering the rising incident of corruption.

   Yet another factor peculiar to Nigeria environment is the high cost of doing business, which he said makes it difficult for businesses to make barely enough to cover operational expenses. Though he admitted that it is a moral obligation of every citizen to pay relevant taxes, he said many companies struggle with burden of loss accounts.

  He continued: “If you don’t make profit, from where do you pay taxes? Will you go to your personal assets? There is high cost of infrastructure, labour and raw materials, which are mostly imported. Inflation also has huge implication for the performances of businesses. No matter how much you feel compelled to pay, you will be incapacitated.”

Also, Lead Consultant to the Economic Community of West African States (ECOWAS) and trader consultant, Dr. Ken Ife, said tax evasion is practical demonstration of the level of trust in public officers. He said the situation would continue as long as there is no departure from the culture of reckless public leadership.

   “People do not even believe that the money will move from the pocket of the collecting agents to public account. That was why a directive was given to the effect that contractors should not be used henceforth to collect taxes. At one end, people say the money is not used judiciously whereas in worse scenario, people don’t even believe that the money will be handed over to the government,” Ife noted.

  Lax regulation, poor enforcement, weak inter-agency collaboration as well as inadequate legal framework have also been identified as key barriers to efficient tax system. But Ife said there are sufficient laws but poor implementation and transparency.

   In the face of massive implementation challenge, the trade expert, said self-assessment and volunteerism is the most assuring stopgap.

  “People should be allowed to assess themselves for sometime while you send assessors to them maybe after three years. When you allow them to tell you what their tax position is for three years, it gives time to study the trend before somebody go there for an audit. He will review the three-year payment, and discover the undervaluation. That will help you to collect more money from them via penalties.

   “The advantage of individual sell-assessment is that it will make people to bring themselves voluntarily into the tax net. It is strong tool for increasing tax compliance. What it also means is that you are not using your workforce every year, which saves time and resources. And once they send the returns, they would have undervalued and face false accounting law,” he noted.

   He tasked government to find a way to bring people into the tax net first before following up with assessment. He said this is the primary concern of economies around the world that want to increase tax compliance. According to him, it is far easier to determine the taxable income of businesses that are already in tax system than those outside.

   Besides, he pointed out value added tax (VAT) as a potent means of estimating what each company should pay as tax yearly. According to him, turnovers and incomes of companies are proportional to volume of VAT they collect. These along benchmarking companies, by sizes and industries, provide clue to actual performances.

   Still, Ife surest starting point is to bring SMEs, which constitute about 70 per cent of the business community, into the financial system. He suggested expanding the reach through aggressive financial inclusion and micro loans. Once they are trapped with loans, according to him, it will be easy to monitor their performance and determine their taxes.

   “Another thing is that those doing business with government have exposed themselves to thorough analysis and examination. You can study their transactions from the information left with the public offices they relate with. To attract more people into the tax system, you can expand the reach of public contracts to get information from as many companies as possible instead of rotating them among few people,” he suggested.

    In the past few years, Chief Executive of the Financial Reporting Council of Nigeria (FRC), Jim Obazee, has been on religious organisations to summit their accounts to the Council for examination. As he noted, the essence is to separate their for-profit business concerns from charity undertakings. He noted that most churches often lump up accounts of profit-making schools, press and other business lines with those of church operations. This, according to him, makes it is difficult to separate businesses of the religious houses for tax purpose, thus robbing the government of accruable income.