Tax Planning: The Legitimacy of Tax Avoidance, the Dangers of Tax Evasion and the Role of Anti Tax Avoidance Legislations in Nigeria

Taxation is a pecuniary burden imposed on the properties, income, activities of individuals, companies and communities etc in order to generate revenue and channel same to support important projects which are beneficial to the public. Taxation is a form of levy imposed to all the residents not necessarily Nigerian Citizens alone. It’s is a civic and patriotic responsibility. It is however not a voluntary one as any resistance or failure to pay tax is considered a punishable offence.

However, it is permissible for a party to embark on tax planning to reduce or limit his tax incidence. Therefore, the law of taxation permits a taxpayer to use is skill, expertise and managerial shrewdness in order to pay a reduced tax.

The Legitimacy of Tax Avoidance and the Dangers of Tax Evasion
In the Nigerian Law of taxation, a taxpayer is entitled by sheer ingenuity to scrupulously arrange his economic, business or fiscal affairs in order to pay minimum tax. This legitimate way of reducing tax liability to the barest minimum is called a ‘Tax avoidance’.

In the case of Seven Up bottling co. Plc v. Lagos State Board Internal Revenue Nzeakor JCA held that tax avoidance is permissible unlike Tax evasion which is illegal and gives rise to penalties and in some cases imprisonments.
Also, in the case of Akinsete Sydicate Ltd v. Senior Inspector of Tax Akers Bairamian JSC held that it is a trite law that a person may use lawful means to avoid income tax; what he may not do is to evade it. What he does should be genuine- not merely to veil to high or dissemble the reality of things. People cannot contract away their tax obligation, it is not the name the income is called but the determining factor is the characteristic nature of the income.

Also, in Inland Revenue Commissioners v. Duke of Westminster Lord Tomlin stated that ‘every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax’.

Tax Avoidance is perceived inevitable. So, it is regarded as burden from which those who are subject to it and ordinarily, they will seek to escape it by any lawful means possible. In Nigeria, a party can utilize the modes of creation of settlements scheme and trusts using family income for objects of interest as loophole to minimize or escape tax liability as stated in schedule II paragraph 1 Personal Income Tax Act. There are also other artificial transactions designed to avoid or escape tax e.g declaration of trust of one’s income, creation of charities whose affairs are dominated by the founder etc.

On the other hand, tax evasion is illegal and illegitimate. Tax evasion includes failure to pay tax, reduction of tax through fraudulent tax returns, false and dishonest declarations for example under-declaration of asset or income, false assertion of non-existing dependents and fake marital status. Tax evasion is morally and Legally wrong and can procure a law suit on the defaulting party which may lead to imposition of fine or imprisonment.

In the case of Seven Up Bottling Co. Plc V. Lagos Board of Internal Revenue,7 the court of appeal held that failure to remit tax deducted from salaries, emoluments of its employees was a debt to LSBIR which is enforceable and recoverable in the court of law. The court was also emphatic that refusal to deduct withholding tax from contractors for the supply of spare part goods, services etc was unlawful, presumably tax evasion and all the non-deductions under-deduction and non-remittances are recoverable.

There are also other cases involving Tax evasion in Nigeria. In the case of Adenuga v. Ajao & Arawole, the car dealers in Order to evade tax falsified the records, receipts, hire purchase agreements in the name of four factitious persons. The High court declared the contract as illegal and unenforceable because it is calculated to defraud state government of income tax.

It is pertinent to note that it is the duty of the court to give legal albeit moral meaning to the transaction. Most times the court will go beyond the transaction to discover the real truth or concealed interest. In the case of Johnson v. Jewit, the court held that sham transactions will be disregarded and the court will not give effect to transactions which are not bonafide or which are used as cloaks to hide the real transactions.
Hence, In deciding tax cases, including avoidance and evasion of liabilities, the attitude of the court is to accept expert evidence of commercial accountancy and practice.

Anti Tax Avoidance Statutes in Nigeria Taxation Law
Anti-avoidance legislations are statutory provisions which seek to prevent an escape from liability to tax payer using artificial or fictitious transactions to dodge tax.

It can be argued that the taxes avoidance schemes have been rendered unattractive by several anti-avoidance provisions. This is pursuant to the fact that the legislators do not encourage unhealthy cleverness thereby they display some level of vigilance by plugging the loopholes which individuals, partnerships, companies etc explore and exploit in quest for tax avoidance or instinct to pay less tax.

In Nigerian laws, there are series of anti-avoidance legislations beginning with the now repealed Section 14 Income Tax Management Act (ITMA) 1961 which provides that “Where a tax authority is of the opinion that any disposition is not in fact given effect to or that, any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, the tax authority may disregard the disposition or direct that such adjustments shall be made as respects the income of an individual, an executor or a trustee, as the tax authority considers appropriate so as to counteract the reduction of liability to tax effected, or reduction which would otherwise be effected by the transaction” and reaching its crest in the newest provisions of Section 22 of Company Income Tax Act, Section 20 Capital Gains Tax Act, Section 17 of personal income tax Act which simply restated and re-enacted the repealed section variously. The Supreme Court of Nigeria has so far refused to give a clear judicial interpretation to the meaning of “artificial or fictitious transaction”.

It can be argued that the courts should not allow the use of this legislation if the taxpayer has simply carried out a straightforward and bonafide transaction, permissible by these same tax regulation laws.
However, tax authorities cannot cover the loopholes themselves but by seeking the amendment by the legislature to pass a new tax statute in the following year.

From the above it is clear that Tax avoidance is the art of winning games without actually cheating. It is carried out lawfully through the aid of artificial unusual transaction in order to minimize the amount of tax payable. While tax evasion is a deliberate, intentional and calculated understatement of one’s income or exaggeration of expenses etc which is illegal and gives rise to penalties and in some cases imprisonment.

As we have seen, it is the duty of the court to declare a transaction tax avoidance or tax evasion. So, while considering tax planning, it is advisable that taxpayers consult a tax advisor, tax attorneys or any financial advisor or expert with advanced training and knowledge of tax accounting and tax law. This is because a party needs to put into consideration the thin line between tax avoidance and tax evasion in order to avoid and escape culpability. In addition, Taxpayers should ensure that transactions done in order to avoid tax are genuine and legitimate.
Conclusively, The Nigerian Government should however endeavor that tax are levied equally. Also, they should practice lucidity, transparency and accountability in order to encourage tax remittance with the assurance that tax paid by taxpayers will be adequately utilized to fund public goods and services. Furthermore, there should be increase in strict enforcement of penalties for tax offences to ensure timely compliance amongst tax payers and reduce or deter future offenders.

About the Author

Samson Dada is a goal driven, vibrant, team oriented graduate of law from University of Calabar and completed his Law School in Abuja Campus of Nigerian Law School. He has keen interest in the practice of Corporate Law, Taxation Law, Technology Law and Policy Making in Nigeria especially concerning persons with disability. He is also a professional photographer and owns a startup NGO for the advantage of persons with disability.