The Roles Of Multinational Companies In Tax Evasion And Tax Avoidance In Nigeria

Project and Seminar Material for Taxation

Abstract

Tax evasion and tax avoidance reduce government revenues. This has a significant detrimental effect on the provision of infrastructures, public services and public utilities. Multinational Companies (MNCS) in the oil, gas and manufacturing sectors have used various tax schemes, ranging from off-shore intermediary companies to claiming recharges, royalties or technical fees and under reporting of profit to avoid paying tax in Nigeria. This paper locates the causes of tax evasion and tax, avoidance of (MNCS within the broader dynamics of globalization, stimulated by profitability, and intense competition and pressure to increase earnings, capitalist enterprise constantly seek new ways of boosting their earnings by developing complex structure and novel ways of increasing their profits by exploiting ambiguities in the law. The evidence shows that tax hevens and offshore financial centre, shaped by globalization, are major structure facilitating the Anti. Social tax practice of (MNCS). The finding also suggest that the local business elite and local professionals are key actors in facilitating these anti-social tax practices also shift the tax burden to less probate capital of citizens, and thereby under mines the Nigeria social fabric. This paper therefore argues that tax reforms are needed to reduce the problems created by MNCS and their affiliates operating in Nigeria.

Chapter One

Introduction

1.1 Background to the Study

Taxation is considered a veritable source of revenue for financing developmental as well as people oriented programs in virtually all countries, irrespective of whether they are classified as developed or developing economies. History has however shown that individuals often exhibit one form of tax reduction behavior or the other, with series of arguments on the legal, economic and moral consequences of these acts.

Stimulated majorly by increased profitability, and intense competition and pressure to increase earnings, capitalist enterprises constantly seek new ways of boosting their earnings by developing complex structures and novel ways of increasing their profits by exploiting ambiguities in the law. The evidence shows that tax havens and offshore financial centres, shaped by globalisation, are major structures facilitating the anti-social tax practices of MNCs.

Tax evasion is an unlawful practice which has the effect of reducing the government revenues needed for the provision of infrastructures, and for public services and public utilities. Tax avoidance, while not regarded by some as being unlawful,has the same effect. Both practices are motivated by different factors and involve a wide range of different mechanisms (Mo, 2003). They are amajor feature of national and international fiscal policy and of the global capitalist economy.

These tax practices are not the prerogative of developed economies, but are also encountered in developing countries; and huge sums of money are lost to government coffers by such practices, Unlike tax evasion, tax avoidance is considered by some scholars to be a lawful activity. However, despite disagreement about whether tax avoidance is an unlawful activity, both practices have negative consequences and effects (Cobham, 2005; Kirchler et al., 2003) and have, similar impacts on fiscal revenues, Through tax havens and offshore financial centres it has been estimated that $1 trillion a year of ‘dirty’ money flows into the global banking system, one half of which comes from developing countries and transition economies.

Although public opinion perceives that localised corruption in developing countries is the key cause of global poverty, sixty tax havens and the banking sectors of London and New York have much more to account for. While the World Bank estimates that corruption by government officials costs developing countries a significant US$30 billion a year – this is only 3% of the US$900 billion of public funds lost through tax evasion schemes and other illicit practices by multinational companies.

Financial crimes such as tax evasion carried out by individuals and their Multinational companies, politically-exposed foreign elites’ collaborators are made possible and continue to be sustained by the unethical practices by the professionals, particularly accountants and auditors (local and foreign) (see the case of Osakwe, 2002). Despite the various statutory provisions, the tax legislations and policies, companies’ and professional bodies’ Acts in place in Nigeria, it is the members of the veteran Institute of Chartered Accountants of Nigeria (ICAN), in particular, who connived with Multinational companies and other foreign capitalists in siphoning the collective wealth of Nigeria into their foreign private accounts, and other their foreign collaborators [Dafinone, 2005; Aloba, 2002].

Despite the evidence, the consequent poverty all over Nigeria and the continued reluctance of these MNCs to cooperate with the regulators in Nigeria, little have been done by the authorities in the developed home countries of the MNCs and other foreign capitalist, to curb the act of tax evasion and avoidance and other trans-organised financial crimes atrocities being constantly perpetrated or sometimes collaborated by these multinational companies and some other foreign capitalist elite operating in Nigeria.

The relationship between tax evasion/avoidance and the multinational companies in developing countries can be situated in a contradictory role of capital accumulation ambition for the multinational companies and defence of capitalism for the developed capitalist countries (see Hoogvelt and Tinker, 1978]. It is the above capitalistic ambition of the Western economic powers, their multinational corporations (MNCs) and other foreign capitalists of reproducing capitalist relations at home that brought about the contradictory alignment between the corrupt local ruling elite in developing countries and the “good governance”, “accountability” and “transparency”-preaching Western capitalist world.

Thus, the corrupt activities of multinational companies and their accountants and the professional bodies, particularly accountants have got devastating effects on the socio-economic, political and cultural development of most developing countries.

1.2. Statement of Problems

Tax evasion and tax avoidance are considered by most governments to be serious threats to the integrity of tax systems in a democratic society. According to Spicer (1975), tax evasion and tax avoidance result in a loss of tax revenues, impair the chances of realizing the distributional or equity goal of taxation, and, if they become widespread, as they have in recent times, then more taxpayers may lose faith in the tax administration system and may be tempted to join the ranks of tax evaders.

While Companies and wealthy individuals use a range of tax evasion and tax avoidance schemes, tax havens, shell companies and inter-group structures to avoid and evade taxes in order to boost profits and capital , These schemes result in a loss of tax revenues which undermines government legitimacy and prevents economic and social development.

However, corporations regard tax avoidance schemes as justifiable and legitimate cost reduction programmes and not as practices which undermine social solidarity and the development of a just and fair society (Sikka, 2008a). In the last few years or so, the effects of such tax schemes on the world’s poor have been considered by various bodies, including charities and Tax Justice Network 2007); and there have been calls for reform to prohibit Multinational companies and the wealthy from using such schemes.

Despite the emphasis on the importance of taxation and the efforts made at improving its efficiency, citizens’ aversion to taxes have remained a problem that most tax authorities have to grapple with. This is because individuals will always look for a means –legal or otherwise–to reduce or even completely avoid paying taxes. This result in heavy revenue losses to governments and ultimately affects their ability to meet their obligations. This phenomenon is acclaimed to be a global one, but it is generally acknowledged to be higher among the less developed/developing countries of the world. In the United States of America for example, the IRS reported that the total amount of federal taxes that were either not paid voluntarily or on time were estimated at between $312bn and $353bn in the year 2002 (Alabede, Ariffin and Idris, 2012). While Cobham (2005) estimates that developing countries lose USD 285 billion per year due to tax evasion in the domestic shadow economy. It is also reported that half of sub-Saharan African countries mobilize less than 17% of their GDP in tax revenues, which is below the 20% minimum level considered by the UN as necessary to achieve the MDGs (Supporting the development, 2010). These facts underscore the extent of losses suffered by nations when individuals do not pay their taxes, and thus justify the attention the subject of tax compliance has generated over the years.

While accountants and tax professionals are not expected to condone tax evasion by their clients, and are expected to promote transparency and accountability and devise techniques for detecting tax fraud, it has been shown that Some professionals do, in fact, use their expertise to facilitate both tax avoidance and tax evasion practices (Bakre, 2007; Ezeoha and Ogamba, 2010; Sikka ) Accounting technologies, such as transfer pricing and the use of intangible assets, also make it easier for Multinational companies to hide and shift capital (see Baker, 2005; Otusanya, 2010).

Thus some professionals use accounting technologies and structures to make financial gains for their clients and themselves to the detriment of the public interest which they claim to be protecting (Bakre, 2007;)

It has been shown that tax revenues cannot be evaded or avoided without the involvement of accountants, lawyers and bankers (Ezeoha and Ogamba, 2010; Sikka, 2008a; US Senate Sub-Committee on Investigations, 2005; US Sub-Committee on Investigations, 2003, 2008).

Furthermore, Offshore tax havens which provide secrecy and low regulation, are key vehicles for the movement of ‘hot’ money (Christian Aid, 2005; Killian, 2006; Palan, 2002, 2003;Tax Justice Network, 2006).

1.3. Objectives Of The Study

Africa is losing more than $50bn (£33bn) every year in illicit financial outflows as governments and multinational companies engage in fraudulent schemes aimed at avoiding tax payments to some of the world’s poorest countries, impeding development projects and denying poor people access to crucial services.

The main objective of the study is to determine the major roles of multinational companies in tax evasion and tax avoidance in Nigeria.

Other specific objectives include:

To establish the key actors key actors and facilitators of anti-social tax practices in Nigeria.
To identify the problems created by MNCs and their affiliates operating in Nigeria through tax evasion and tax avoidance.
Determine the roles of professionals such as accountant in anti-social tax practices in Nigeria.
Suggest possible recommendation and solution for reducing tax evasion/avoidance in Nigeria.

1.4 Research Question

What is the Nature of Tax Evasion by Multinational Companies in Nigeria?
What are the causes of tax evationby Multinational Companies in Nigeria?
What is the Role of Professionals in Tax Evasion in Nigeria?
What are possible solution for reducing tax evasion/avoidance in Nigeria?

1.5. Significance of Study

The significance of this study lies in the fact that it will provide a framework for inter-state comparison between nations of the world. Moreover, our findings and conclusion will form a basis for further research work; the significance of this study lies in the fact that it will provide a framework for inter-state comparison between nations of the world. Moreover, our findings and conclusion will form a basis for further research work.

1.6 Scope and Limitation of Study

This study evaluates the effect of tax evasion, tax avoidance and tax compliance among multinational corporations in Nigeria. The study however, is limited to published cases of tax avoidance in Nigeria by multinational corporations. These organizations are selected because they are duly registered with the Federal Inland Revenue Service and the Lagos State Internal Revenue Service for Pay As You Earn (PAYE).

1.7. Definition of Terms

Tax:

Tax is an imposed levy by the government against the income, profit, property, wealth and consumption of individuals and corporate organizations.

Tax Evasion:

Tax evasion is a deliberate act on the part of taxpayer not to pay tax due.

Tax Avoidance:

Tax avoidance is a way of identifying the loop-hole in the tax law and then taking advantage of such a loop-hole to reduce the tax payable.

Tax Avoision:

Taxavoision is a situation where the tax law might be unclear, thereby, confusing taxpayer as to the correct tax payable.

Tax Morale:

Tax Morale is the intrinsic motivation to pay tax.

Tax Compliance:

Willingness to pay taxes without threat or coercion

Social Norms:

A set of behavioural models and rules or standard of behaviour shared by members of a social group.

Cultural Norms:

Are behavior patterns that are typical of specific groups.

Legal System:

A system for interpreting and enforcing the laws

Tax System:

A legal system for assessing and collecting taxes

Chapter Five

Conclusion and Recommendations

5.1 Conclusion

Taxation has been expressed to be a tool of social engineering useful in the hands of proactive and perceptive government. The enumerated deficiencies inherent in the Nigerian tax system give room for maneuver by Multinational corporations whereby they are able to circumvent taxes and thus bereave the country of the indispensable revenue for sustainable development. In order therefore to curb the incidence of tax evasion, it is recommended that tax laws be made very efficient by increasing the fines provided in the laws to reflect present economic realities. By so doing, it becomes easier to curb the incidence of tax evasion and thereby induce compliance with the law. Tax authorities and agencies such as FIRS and Nigerian Extractive Industry Transparency Initiative (NEITI), should be autonomous. This will enable them to perform their duties effectively.

Further, corporate tax collection methodology should be reviewed. Tax authorities should have the necessary determination to prosecute tax defaulters and seek collaboration with other relevant agencies in the investigation cum prosecution of indigenous and multinational corporations perpetuating tax evasion and tax avoidance in the country. The courts should heighten their role in the fight against tax evasion and tax avoidance. By and large, it is quite fundamental for our courts to discourage tax evasion. The various professional bodies whose members’ act as tax consultant/advisers should ensure that their members maintain a high ethical standard. The court of Appeal in the instant case decried unethical standards where it observed with displeasure thus;

“The action of the federal Government that brought about pre-shipment inspection of goods that were imported into the country was to bring sanity to the economy of the Country, therefore, agents who are appointed to carry out this assignment owe this nation and all those involved in the exportation and importation of goods to and from the country a duty of care in the performance of their duty. A situation where inspection agents create confusion which ultimately leads to loss of income and profit is not a healthy development for the country.”

In addition, sanction should be placed on culpable members. On the part of government, transparency and accountability in the implementation of policies should be ensured. Revenue generated from taxation should be judiciously utilized to impact positively on the citizenry and multinational corporations, and at the same time attract foreign investment, considering that a good operational environment is conducive to a boom.

5.2 Recommendations

If taxpayers do not understand what their obligations are, any intervention to enforce compliance will be perceived as unfair. Thus, there is a need to provide strong taxpayer’s services particularly during the tax filing stage. This will include dissemination of information in order to enhance taxpayer compliance and also introduce taxpayer education programmes. Taxpayer’s service can also be improved by: providing proper guidance on how the tax return forms are to be completed correctly, introducing automated systems to record and answer tax payers’ queries and wider use of the mass media to publicize important tax deadlines and so on.
The capability to detect fraud or evasion is crucial to tax compliance. As it would not be practical to audit all cases, the fear of being caught would be sufficient to act as a deterrent. Ideally, when a case is selected for audit a tax official will be required to visit the premises of the taxpayer. The tax returns will have to be scrutinized under the supervision, or be jointly examined with a senior tax official so that the discretionary powers being exercised by tax officials are not abused. The tax authorities should undertake criminal prosecution in respect of cases involving fraud or evasion, and where appropriate publish the names of tax evaders which will act as a deterrent
It is very important to educate the young (who are the next generation of taxpayers) on the significance and role of taxes. There is need to create an environment for tax education in schools through the establishment of councils for promotion of tax education. Tax education should be viewed in the medium and long-term perspectives, and as a means to enhance taxpayer consciousness. It would be more appropriate to target students in secondary and tertiary institutions. The overall effort should involve both the education and finance ministries in order to come up with an effective tax education curriculum.
The monarchs (Obi, Oba and Emir) are very close to the people they rule over. The tax authorities should therefore maintain close relationship with the monarch and explore such relationship to bring more people into the tax net and also increase the level of taxpayer’s compliance. Town hall meeting should be encouraged and through this, the general public can more fully understand taxation issues, changes in the law, filing obligations and so on.
Tax officials should be exposed to adequate and continuous training; both at home and abroad, for a better understanding of recent domestic and international tax issues, which could then be utilized, to formulate successful tax compliance strategies. The working conditions of tax officials also need to be improved in order to motivate them to carry out their duties in a more efficient and professional manner.

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