Tax Evasion And Tax Avoidance- Differentiations And Legal Implications

TAX evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax evasion also involves taxpayers intentionally misrepresenting and covering the actual position of earnings in order to shrink tax payment from the tax authorities. The act of evading involves particularly dishonest and unfair tax reporting by declaring abridged income, profits and gain that actually earned or exaggerating deductions. Tax Avoidance on the other hand is the arrangement of one’s financial affairs to minimize tax liability within the law. Tax avoidance is the use of legal methods to modify an individual’s financial situation to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. Tax avoidance is otherwise known as ‘tax planning’. Both seek to reduce the revenue of the Exchequer and consequently need to be checked to the greatest extent possible.

Tax evasion is mainly prevalent with respect to value added tax and withholding taxes. Tax evasion is a major impediment to the development of a country as it connotes a deliberate attempt by individuals/corporate bodies to defraud the government.

Tax evasion is unfortunately highly prevalent in Nigeria. In 2014, then Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, disclosed that 65% of companies in Nigeria had declined to forward their tax returns and a whopping 75% were not in the FIRS tax net. In 2017, only 214 people in populous Nigeria paid taxes above N20 million, then Minister of Finance, Kemi Adeosun emphasised that Nigeria’s infrastructural deficit could only be addressed through a national culture of consistent tax payment: “We have just 40 million active tax payers out of an estimated 69.9 million…and of that 40 million, majority are PAYE, those who have their taxes deducted at source.” Also in 2018, FIRS disclosed that over 6,772 billionaires do not pay tax. This category of individuals have between N1billion and N5 billion in their accounts, but no Tax Identification Number (TIN) with which they can file the statutory percentage of tax returns on their income.

Examples of common tax fraud schemes include: Failing to file an income tax return; Concealing income; Deliberately under reporting or omitting income; Overstating the amount of deductions; Hiding or transferring assets or income to someone else; Claiming false deductions; Making false entries in books and records; Keeping two sets of books; Claiming personal expenses as business expenses; Paying employees with cash; Transferring assets or income out of Nigeria.

Examples of tax avoidance schemes include: Investing in industries that the government is promoting with tax incentives; Deducting Vat paid on your purchases from vat received from your supplies; After selling an asset, reinvesting it into the same class of asset; Donating money to Organizations listed in schedule 5 of CITA.

ILLUSTRATION 1: COMPANY XYZ’s owner wilfully attempted to evade paying his federal income taxes by skimming gross receipts of his plumbing business and paying personal expenses from his business accounts and claiming them as business expenses;

As part of his tax evasion scheme, he instructed several of his employees to solicit checks from clients payable in his name, rather than in the name of the business. He then cashed these checks and did not deposit the monies into his business’ bank account. Since this money was not recorded on the books of the business, nor deposited into the business’ account, he did not include these gross receipts on his income tax return. He also deducted personal expenses as business expenses and similarly lowered the figures on his Schedule C profit, thereby substantially reducing his tax for tax years 2017 through 2019. This is a typical case of Tax Evasion.

ILLUSTRATION 2: COMPANY ABC makes 20 million naira profit and donates 2.5million money to certain organizations including: The Boys Brigade, Boys Scout, Christian Council of Nigeria, Girls Guide, any Educational Institution recognized by the law, Islamic Education trust, ICAN, Nigerian Red Cross. It invested an additional 5 million in a company given pioneer status. All these are deductible expenses with no tax ramifications and is otherwise referred to as tax avoidance.

Tax evasion and avoidance have adverse effect on government revenue. Tax avoidance generates investment distortion in the form of the purchase of assets exempted from tax or under-valued for tax purposes. These practices erode moral values and build up inflationary pressures, and should be discouraged at all costs.

Article by Omonijo Adedotun (Esq.) aaadedotunomonijo@gmail.com 0818 845 1113



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