(How to improve African States revenue through a more suitable tax collection system and a sound management of public finances)

Transcription

1 African Training and Research Centre in Administration for Development Centre Africain de Formation et de Recherche Administratives pour le Développement Seminar on the reform of fiscal policies based on innovation and modernization of institutions in charge of collection and management of public resources (How to improve African States revenue through a more suitable tax collection system and a sound management of public finances) TAX EVASION IN AFRICA: KINDS OF EVASION, HOW TO CONTROL IT- THE NIGERIAN EXPERIENCE By Dr. TEJU SOMORIN (Nigeria) 29 th November 1 st December 2010 Intercontinental Hotel Tangier (Morocco) 1

2 TAX EVASION IN AFRICA: KINDS OF EVASION, HOW TO CONTROL IT-THE NIGERIAN EXPERIENCE One of the greatest problems confronting African countries and most countries of the world is the problem of tax avoidance and evasion. There has been a silent agreement from many quarters that there is a tax gap between the actual tax collected and potential tax collections. However, this seems to be a problem that every tax system faces. The key terms relating to the sub-theme which require definitions are Taxation, Tax and Tax Evasion;. Taxation is the process by which government compulsorily transfers resources from private to public sector. (M.J. Graetz & D.H. Schenk, Federal Income Taxation, Principles and Policies, 4 th ed, (2001) or rather Taxation is a system used by governments to obtain money from people and organizations. (encyclopedia. com/searchpool.asp?target=%22taxation22) Tax Evasion can be defined as contravention of the Tax law whereby a person who derives a taxable income either pays no tax or pays less tax than he would otherwise be bound to pay. Tax evasion includes the failure to make a return of taxable income or the failure to disclose in a return the true amount of income derived. A comprehensive definition of the term Tax Evasion was given by the Canadian Department of National Revenue, Tax evasion is the commission or omission of an act knowingly with intent to deceive so that the tax reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit such an offence. This may be accomplished by the deliberate omission of revenue, the fraudulent claiming of expenses or allowances, and the deliberate misrepresentation, concealment or withholding of material facts. TAX EVASION DEVICES There are some forms of tax evasion devices which Nigeria has identified and provided sanctions against. These include : 2

3 Making an incorrect return by omitting or understating any income; Failure to furnish a return, statement, or information or to keep the required records; Outright Refusal or neglect to pay tax; Omission to state income receipts from landed properties; Omission to state income received in or brought into Nigeria from sources outside Nigeria; False claim of contributions to a pension scheme ; Reduction of quantum of tax liabilities through fraudulent tax returns. >Under declaration or dishonest declaration of income, earnings or assets. Giving any incorrect information in relation to any matter or thing affecting the liability to tax of any taxable person; A person can be found guilty of an offense only if both of the following facts are proved beyond a reasonable doubt: That the person owed substantial income tax in addition to that declared in his tax return; and That the person knowingly and willfully attempted to evade or defeat such tax. The proof need not show the precise amount of the additional tax due, but it must be established that the person knowingly and willfully attempted to evade or defeat some substantial portion of such additional tax as charged. The word attempt contemplates that the person had knowledge and an understanding that, during the particular tax year involved, he had income which was taxable, and which he was required by law to report; but that he nevertheless attempted to evade the tax, or a substantial portion of the tax on that income, by willfully failing to report all of the income which he knew he had during that year. Taxpayer s tendency to evade tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of tax administration. Corruption by the tax officials often render control of evasion difficult. 3

4 CHALLENGES COMBATING TAX EVASION IN NIGERIA INCLUDE: Absence of a national data base; (though we started a process of taxpayer identification number) Inadequate tax education; Advancement in technology and Globalization Cash based of the Nigerian economy Poor record keeping, Underground economy, etc. >Sophistication in tax planning schemes especially among the Multinational companies. Tax Evasion Offences in Nigeria include: Non Registration for Taxes; Refusal to file returns; Refusal to pay assessed taxes; Over/under invoicing; Fictitious loans; Understatement of activities; Claim of Fictitious expenses and assets; Under-declaration of income; Non remittance of WHT and VAT deducted at source; Late remittance of WHT & VAT; Deliberate claiming of tax credits to which claimant know they were not entitled; Suppression of turnover; Inflation of expenses higher than normal; Concealment of offshore businesses and income; Reporting non existent assets to claim capital allowances; Intentional failure to deduct or withhold tax from payments to contractors/suppliers, etc; Deliberate refusal of banks to remit tax funds to Central Bank on one flimsy excuse or the other; Falsification of security documents such as tax clearance certificate, tax receipts, withholding tax credit notes, official stamps, VAT certificates, etc; TYPES OF TAX EVASION 4

5 Customs Duties Another typical area of tax evasion in Nigeria is the attempt to evade customs duties. Typically, importers try to evade customs duties by either under-invoicing (reporting that less items were ordered than actually were), or by changing the product description (changing it to a description of a product that has a lower rate of duty). Smuggling Is the importing or exporting of products through an unauthorized route. Customs duties are an important source of revenue in Nigeria. The importers purport to evade customs duty by (a) under-invoicing and (b) misdeclaration of quantity and product-description. When there is ad valorem import duty, the tax base is reduced through underinvoicing. Mis-declaration of quantity is more relevant for products with specific duty. Personal Income Tax /Employment Tax Unscrupulous employers may try to evade paying employment taxes. Most often, this is done by intentionally failing to remit to the Tax Authorities the employment taxes it collected from its employees. After a certain amount of time, the employer would then dissolve the company or claim bankruptcy, leaving the employment taxes unpaid. Some other methods of employment tax evasion are: paying employees in cash; filing false payroll tax returns; or failing to file payroll tax returns. VAT EVASION VAT Evasion is similar to tax evasion. One of the simplest ways to evade VAT in Nigeria is to inflate the claims to deduct VAT paid at earlier stages. The simplest method is to fabricate fake invoices for purchases never made. 5

6 VAT Evasion can be recognized in any of these ways : Credit claimed for invoices from unregistered suppliers Credit claimed for Taxable supplies used in exempt activities Credit claimed for purchases that are not creditable. Accounting Errors False export claims Imported Goods and Taxed but unreported sales Omission of self deliveries VAT collected but not remitted to the Tax Authorities Underreported sales Unrecorded Cash Purchases Exaggerated Refund claims Traders who are liable to VAT but do not register CONTROL OF TAX EVASION Some steps are already in place to control tax evasion. Certain steps should urgently be taken to control tax evasion. All those receiving any form of employment income should be registered with the relevant Tax Authorities to help reduce the scope for non-compliance. Third party data from employers and financial institutions has proved highly effective in identifying cases of tax evasion, including employers withholding PAYE deductions and taxpayers failing to disclose interest and other income. Other sources of data including the stock exchange and registration data from other government departments provide further scope for closing the net on the non-compliant. Information should be shared among tax Authorities and countries on taxation. Fraudulent VAT refunds linked to exports should be identified and dealt with. STIFF PENALTIES IN THE NIGERIAN TAX LAWS TO DETER TAX EVASION In order to deter tax evasion, we have penalties listed in the FIRS Act and the VAT Act to discourage the harmful practice. OFFENCES AND PENALTIES LISTED UNDER the FIRS ACT 6

7 Some of the offences and the penalties under the FIRS Act include: SECTION 40 FAILURE TO DEDUCT OR REMIT TAX The penalty on conviction is pay tax withheld or not remitted. In addition to a penalty of 10% of the tax withheld or not remitted par annum plus interest at the prevailing CBN minimum re-discount rate and imprisonment for a period not exceeding three years. SECTION 41---OBSTRUCTION, HINDERING OR MOLESTING OR ASSAULTING AUTHORISED PERSON Penalty N200,000 or 3 years imprisonment or to both fine and imprisonment SECTION 42 FALSE DECLARATION Penalty As in section 41. SECTION 43 COUNTERFEITING DOCUMENTS, FALSIFICATION, ALTERATION Penalty is as in section 41. OFFENCES AND PENALTIES UNDER THE VAT ACT Those who seek to abuse the VAT system to defraud the tax authorities should be pursued and arrested. In Nigeria, the following constitute VAT offences and penalties: 1. Offence - Furnishing of false document or statement Penalty - guilty of an offence and liable on conviction to a fine of twice the amount under declared. Section Offence - evasion of tax - Penalty - liable on conviction to a fine of N,=30,000=00 or 2 times the amount of tax being evaded, whichever is 7

8 greater, or imprisonment for a term not exceeding 3 years. Section Offence - failure to make an attribution or having done so, failure to notify the Board. Penalty - payment of N,=5, Section 27 (a) 4. Offence - failure to notify change of address within one month of such change Penalty liable to a payment of N,=5, Section Offence - failure to issue tax invoice for goods sold or services rendered. Penalty - liable on conviction to a fine of 50% of the cost of the goods or services for which the invoice was not issued. Section Offence - resisting, hindering, obstructing or attempting to resist or to hinder or to obstruct an authorised officer from performing his duty on inspection. Penalty - liable on conviction to a fine of N,=10,000=00 or imprisonment for a term of 6 months or to both fine and imprisonment. Section Offence - Issuing of tax invoice by an unauthorized person Penalty - liable on conviction to a fine of N,=10,000=00 or imprisonment for a term of 6 months. Section Offence - Failure or refusal to register with the Board within the specified time. Penalty is guilty of an offence and liable on conviction to a fine of N,=5,000=00 and if after one month the person is not registered, the premises where the business is carried on shall be liable to be sealed up. Section Offence - failure to keep proper records and accounts of his business transactions to allow for the correct ascertainment of tax. Penalty - N,=2,000=00 for every month in which the failure continues. Section Offence - failure to collect tax by a taxable person. 8

9 Penalty - payment of 150% of the uncollected tax plus 5% interest above the CBN s re-discount rate. Section Offence - failure to submit returns by a taxable person. Penalty - payment of a fine or N,=5,000=00 for every month in which the failure continues. Section Offence - An officer of the Board or any other who aids and abets the commission of any of the offences listed in 1-11 above. Penalty - liable on conviction to a fine of N,=50,000=00 or to imprisonment for a term of 5 years. Section Offence - joint commission of offence by a body corporate or firm or individual such as a Director, Manager, Secretary, Partner in a firm, officer in a firm, any person connected in the management in the association. Penalty - will be punished as if he had himself committed the offence unless he proves that the act constituting the offence took place without his knowledge, consent or connivance. Section 37 This provision is also in section 49 (2) of the FIRS Act. SECTIONS OFFENCES 25 Furnishing of false documents, etc 26 Evasion of tax 27 Failure to make attribution 28 Failure to notify change of address 29 Failure to issue tax invoice 30 Resisting, etc an authorised officer 31 Issuing of tax invoice by an unauthorised person 32 Failure to register 33 Failure to keep proper records and accounts 34 Failure to collect tax 35 Failure to submit returns 36 Aiding and abetting commission of offence, etc 37 Offence by body corporate, etc TAX FARMING 9

10 This is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. By this method, Governments lease out the collection system to a private entity for a fixed amount who then collects the revenue and shoulders the risk of attempts at evasion by the taxpayers. Tax farming may perhaps be a solution to the problem of tax evasion seen in developing countries of Africa. In Nigeria, Tax Consultants are engaged to assist in collection of taxes. The tax consultant is a private business man engaged at the will of a tax administrator to carry out some professional advice on tax matters or to engage in tax collection for a fee. PRE-SHIPMENT AGENCIES Pre shipment Agencies can be employed to prevent evasion of customs duty through under-invoicing and mis-declaration. However, in the recent times, allegations have been lodged that such Agencies have actively cooperated with the importers in evading customs duties.. In conclusion, we should support: PROGRESSIVE AND EQUITABLE TAXATION We should support progressive taxation, a concept founded on the basic principle that tax should be based on ability to pay - that is, the wealthy should pay higher rates of tax. To advocate progressive taxation is to oppose regressive tax systems where the poorer sections of society pay a higher share of their income. Transparency The finances of wealthy individuals should be visible to their tax authorities, so they pay their fair share of tax. Markets work better, and companies are more accountable, in an environment of transparency. A LEVEL PLAYING FIELD IN COMPETITIVE MARKETS 10

11 We should support simplicity and a level playing field on tax. Complexity and loopholes distort markets, undermines market competition, mis-directs investment and rewards economic freeriders. These distortions favour multinational companies over national ones; they promote big companies over small, and they hinder start-up companies in the face of established vested interests. WE SOULD OPPOSE: CORRUPTION Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped countries. ] Corruption, crime and corporate abuse are in different forms such as insider trading, market rigging, tax evasion, the theft of public assets by a politician, the provision of corruption services, like the concealment of a politician s stolen assets offshore etc. Others are fraud, embezzlement, bribery, the illicit funding of political parties and they should be condemned by all African countries. The definition of corruption should not focus only on the narrow aspect of the problem such as bribery but to be expanded to include tax to a large extent and narrowly tax avoidance. TAX HAVENS AND OFFSHORE FINANCE Tax havens have been seen to heighten inequality and poverty, corrodes democracy, distort markets, undermines financial and other regulation as well as curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world. SECRECY 11

12 We should oppose secrecy in international finance as it hinders criminal investigation and fosters criminality; companies should be encouraged to be made more open about their financial affairs and to publish data on every country where they operate their businesses. The fight against tax evasion is one of the great challenges of our age and we should continue to fight this cankerworm. Thank You. DR TEJU SOMORIN 12