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THE ROLES OF MULTINATIONAL COMPANIES
IN TAX AVOIDANCE IN NIGERIA
CHAPTER ONE
INTRODUCTION
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.
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.
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 companiesand 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 charitiesand 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.
Ascertain the effect of tax
evasion/avoidance on Nigerian income generation.
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.
RESEARCH QUESTION
The research
question provides a framework and guidelines through which substantial
knowledge of the research study can be understood.
The research
question asked includes:
Who are the key actors key actors and
facilitators of anti-social tax practices in Nigeria?
What are the problems created by
Multinational companies and their affiliates operating in Nigeria through tax
evasion and tax avoidance?
Are there any effects of tax
evasion/avoidance on Nigerian income generation?
Are professionals such as accountant involves
in anti-social tax practices in Nigeria?
What are the possible recommendation and
solution for reducing tax evasion/avoidance in Nigeria?
1.5.
SIGNIFICANCE OF STUDY
“As the
world economy sputters along in the wake of the global financial crisis, the
illicit underworld is thriving - siphoning more and more money from developing
countries each year.
Anonymous
shell companies, tax haven secrecy, and trade-based money laundering techniques
drained nearly a trillion dollars from the world’s poorest in 2011, at a time
when rich and poor nations alike are struggling to spur economic growth. While
global momentum has been building over the past year to curtail this problem, more
must be done.
This study
should serve as a wake-up call to world leaders, foreign elites, government,
management of foreign companies, politicians, tax officials, and tax authority,
it will provide a positive insight on the roles and method through which
multinational companies carried out illicit financial activity in order to
increase profitability.
This
research study, would contribute to the existing literature by focusing on tax
reforms and administration of tax policy/laws in Nigeria with a view to
identifying the critical problems that are confronting the tax system so that
appropriate measures could be taken to tackle them.
This study
shall set out, a comprehensive analysis of financial crime (tax
evasion/avoidance) perpetrated by multinational companies and it will also
consider the ‘dark’ side of professional practice by examining the involvement
of professional accountants in facilitating tax avoidance, tax evasion and
corruption in Nigeria.
This study shall reviews related literature on
the subject matter with tax compliance with particular attention on the
dimensions of evasion and avoidance as forms of non-compliance. Attention is
also paid to the discussions and arguments relating to the distinction between
the two concepts as they affect tax revenue.
Finally this
study will be of great significance to schools and students, it will serve as a
reference point for future researchers who will want to research more on the
topic.
1.6.
STATEMENT OF HYPOTHESIS
Hypothesis
One
Hi: there’s
no significant relationship between tax avoidance, tax evasion and company
income generation in Nigeria
Hypothesis
Two
Hi: there is
no significant relationship between the tax rates and tax avoidance and tax
evasion.
1.7. SCOPE
OF THE STUDY
From the
foregoing discussion, the research focuses on roles of multinational companies
in tax evasion and tax avoidance in Nigeria, using the staffs federal Inland
Revenue Service.
1.8.
LIMITATION OF THE STUDY
Financial challenges:this factors serves as
a deficiency for the research work, and as a result of low financial
capability, it was not enough to give us desired results.
Inadequate source of data: the researcher
was faced with inability to generate enough required materials, and relevant
data for the research work.
Time constraint: this pose a great
challenges to the research work, due to the time frame given.
1.9.
DEFINITION OF TERMS
Taxation: is defined by Ogundele (1999) as
the process or machinery by which individuals, groups, or communities are made
to contribute in some agreed quantum and method for the purposes of the
administration and general development of the society they belong.
Tax evasion: refers to any intentional,
illegal reduction of tax payments, which usually takes the form of
underreporting income, sales or wealth, or overstating deductions (Schneider,
Braithwaite & Reinhart 2001), including failure to file appropriate tax
returns.
Tax Avoidance: refers to the reduction in
tax burden by means of practices that take full advantage of the tax code or
exploiting the loopholes in the tax laws to reduce tax liabilities by arranging
ones tax affairs using tax shelters in the tax law, and avoiding the tax traps
in the tax laws.
Anti-social practices involve behaviour
which confers improper benefits contrary to the legal and moral norms of
society and which undermine the capacity of the authorities to secure the
welfare of all citizens.
Offshore tax havens are regions which are
relatively small geographically, and which offer shelter to international
capital through bank secrecy, confidentiality, little (or no) regulation, and
low (or no) tax (Palan, 2003).
Non-Compliance: can be defined as the
failure on the part of a taxpayer to correctly file returns, report actual
income, claim the correct deductions, reliefs and rebates and remit the actual
amount of tax payable to the authority on time.
Accountant: An accountant is any person who
possesses a professional license to practice accountancy from a recognized
professional body and has legal capacity and authority to carryout the duties
of accountants in taxation and audit practice.
Tax:
is a compulsory levy payable by individual economic units or corporate
bodies to government without any direct quid pro quo from the government.
Multinational Companies:These are companies
owned by foreign investors or individual operating outside their country of
origin.i.e. financial operation are carried out in a developing countries.
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