AN APPRAISAL OF TAX EVASION ON FINANCIAL CRIME IN NIGERIA

(A CASE STUDY OF OYO STATE BOARD OF INTERNAL REVENUE, GOVERNMENT SECRETARIAT, AGODI, IBADAN, OYO STATE, NIGERIA.)

BY

KAYODE OLADIPUPO OLAYEMI

Research Analyst (self employed)
LOCATED IN

THE POLYTECHNIC, IBADAN

NOVEMBER, 2010

ABSTRACT Tax evasion is a problem which seemed to have defied solution, had bedeviled the Nigerian tax system right from the colonial times. While some have blamed the situation on the tax authorities for not living up to expectation with regards to tax administration, others attribute it to the unpatriotic attitude of the taxpayers. It was in the light of these contending positions that this researcher carried out a survey involving state tax authorities and individual taxpayers in Nigeria. The study sought to identify the causes of tax evasion and avoidance amongst individual taxpayers, the way through which it is perpetrated and the social and economic consequences brought about by this problem. It was found, among others, that loopholes in the tax laws, poverty and lack of adequate public enlightenment are responsible for the problem. The taxpayer

perpetrates this unpatriotic act through such means as concealment of profit and interference with the Revenue agents through bribery and corruption. The situation results in the inability of government to render essential services adequately, creation of resentment among honest taxpayers, and inequality in the society. It was recommended that tax officials should be constantly trained and re-trained on the job, a deliberate and more aggressive public enlightenment campaign be embarked upon by government and the establishment of Revenue Courts by state governments having powers to impose heavy monetary penalties and criminal sanctions.

CHAPTER ONE 1.1 INTRODUCTION

Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment - in China the punishment can be as severe as the death penalty. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment. (Allingham, and Sandmo 1972) According to The desire to uplift ones society is the first desire of every patriotic citizen. Tax payment is a demonstration of such a desire. The payment of tax is a civic duty and an imposed contribution by government on her subjects and companies to enable her finance or run public utilities and perform other social responsibilities. Taxes, thus, constitutes the principal source of government revenue. However, one of the greatest problems facing the Nigerian Tax

System is the problem of tax evasion and tax avoidance. While tax evasion is the willful and deliberate violation of the law in order to escape payment of tax which is unquestionably imposed by law of the tax jurisdiction, tax avoidance is the active means by which the taxpayer seeks to reduce or remove altogether his liability to tax without actually breaking the law. These Twin devils have created a great gulf between actual and potential revenue. The government has for the umpteenth time complained of the widespread incidence of tax avoidance and evasion in the country as companies and other taxable persons employ various tax avoidance devices to escape or minimize their taxes or deliberately employ fraudulent ways and means of evading tax altogether sometimes with the active connivance of the tax officials. As pointed out by Reynoids (1963), since tax is a principal source of government revenue, if persons are able to escape by legal or illegal means the tax to which they should logically be subject under the general scope of the tax, the theoretical equity of the tax to a large measure is lost. Tax evasion and avoidance no doubt deny any government the tax revenue due to her, which results in a gap between the potential and actual tax collections. This study is aimed at bridging this gap.

1.2

STATEMENT OF PROBLEM

Although tax evasion is a problem that faces every tax system, the Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in Nigeria. Under direct personal taxation as practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as the businessmen, contractors, professional practitioners like lawyers, doctors, accountants, architects and traders in shops among others. As observed by Ayua (1999) these persons blatantly refuse to pay tax by reporting losses every year. According to him, many of these professionals live a lifestyle inconsistent with reported income, which is usually unrealistically low for the nature of their businesses. Civil Servants and other salaried workers are the only class of people that actually pay tax in Nigeria. However, even among the salaried workers, he added, many have turned the statutory personal allowances and relief into a fertile ground for tax evasion. Almost all Nigerian taxpayer is married with four children! Similarly, despite the tax provision meant to plug loopholes through which taxable persons can minimize tax liability the

self-employed persons employ all kinds of avoidance schemes to minimise or escape tax liability and makes you wonder whether there are still any tax officials working in that capacity. Such scenarios, no doubt, say a lot about tax administration system in Nigeria both in its design and in the disposition of some taxpayers towards taxation. While it immediately presupposes that there are legal framework put in place to punish tax evaders it perhaps raises a poser on the efficiency and effectiveness of tax laws and tax administration in Nigeria. Some state governments in an effort towards solving this problem had even gone to the extent of engaging the services of tax consultants. This government effort, notwithstanding, the problem of tax evasion and avoidance still persists (Alabi, 2001). There is no doubt that revenue due any government will be reduced by the unpatriotic act of tax evaders.

1.3

PURPOSE OF THE STUDY The major focus of the study is an appraisal of tax evasion on financial crime in Nigeria. Other needs of the study are: To know the causes (reasons) of tax evasion To Identify the problems militating against tax assessment and collection To know the various ways through which tax evasion is being perpetrated To assess the economic and social effects of Tax evasion To evaluate the possible consequences of tax evasion on states tax revenue in Nigeria.

1.4

RESEARCH QUESTIONS What are the causes of tax evasion? What are the various ways through which tax evasion is being perpetrated? What are the economic and social effects of Tax evasion?

1.5

SIGNIFICANCE OF THE STUDY The impact of office automation on organizational productivity is a very important source

of study because of the following reasons:

To expand the knowledge on tax evasion so as to provide useful information to scholars, practitioners and government that would assist them in understanding the causes, effects and consequences of tax evasion and possible ways of creating environment conductive for tax administration in Nigeria. It will enable accountancy students to understand the causes, effects and the usefulness of tax the more. To the management of Oyo State Board of Internal Revenue and other States Internal Revenue Authorities in Nigeria. It is expected that management of the management of Oyo State Internal Revenue Board would be guided by the findings of Tax evasion in order to curb inequality in the society. Since this is one of the major driving force that enable government to render essential services adequately. To The Polytechnic, Ibadan for academic purpose, the study will be useful for providing knowledge for all students at all levels and lecturers. To any individual or group that may want to carry out research on similar issue in the Nigerian environment and other part of the African continent with the overall objectives of persuading tax payers (self-employed & salary earners) and organizations to be more committed in tax payment. 1.6 DELIMITATION OF THE STUDY The study will be carried out within Ibadan Metropolis with a focus on the Oyo State Board of Internal Revenue, Government Secretariat, Agodi, Ibadan, Oyo state, Nigeria. This is to enable the researcher draw relevant conclusion from the study. The study will make use of questionnaires to draw data/information from the respondents which would be tested to ensure validity and reliability. 1.7 LIMITATIONS OF THE STUDY The results will be limited to Oyo State Board of Internal Revenue, Government Secretariat, Agodi, Ibadan, Oyo state, Nigeria and other limitations are inadequate finance to carryout an effective study and the limited time given for the completion of the research work will not allow the researcher to visit other branches.

1.8

DEFINITION OF TERMS

TAX: Tax can be defined as a compulsory levy by government on goods, services, income and wealth primarily to obtain revenue. Tax Policies: represent key resource allocator between the public and private sectors in a country VAT: Value Added Tax is a consumption tax levied at each stage of the consumption chain, and is borne by the final consumer. Tax Treaties: Nigeria has a number tax treaties referred to as double taxation agreements with a number of countries, these are designed to ensure that the tax payable in Nigeria on the profits of a Nigerian company being remitted into the country are reduced by the amount of foreign Tax paid abroad and vice versa where an overseas company receives profits from Nigeria that have already been taxed in Nigeria. Capital Gains Tax: This accrues on an actual year basis and it pertains to all gains accruing to a taxpayer from the sale or lease or other transfer of proprietary rights in a chargeable interest which are subject to a capital gains tax of 10%, such chargeable assets may be corporeal or incorporeal and it does not matter that such asset is not situated in Nigeria. 1.9 HISTORICAL BACKGROUND OF OYO STATE BOARD OF INTERNAL REVENUE The Nigerian Federal Inland Revenue Service, FIRS, was created in 1943. It was carved from the erstwhile Inland Revenue Department that covered what was then the AngloPhone West Africa (including Ghana, Gambia, Sierra Leone) during the colonial era. Tax provides revenue to fund governance, ensures resource redistribution, streamlines consumption of certain goods and services, reduces inflation and generates employment. The Federal Inland Revenue Service is constitutionally empowered to collect taxes. In 1958, the Board of Inland Revenue was established under the Income Tax Ordinance of 1958. The name was later changed in 1961 when the Federal Board of Inland Revenue (FBIR) was established under Section 4 of the Companies and Income Tax Act (CITA) No. 22 of 1961. FBIR operated then as a department in the Federal Ministry of Finance. A further transformation took place in 1993 when the Finance (Miscellaneous Taxation Provisions) Act No 3 of 1993 established the Federal Inland Revenue Service FIRS as the

operational arm of FBIR. The Act also created the office of the Executive Chairman of the Board. In 2007, the Federal Inland Revenue Service Establishment Act, (2007), which granted autonomy to the service, was enacted. Board Of Internal Revenue Objectives are: To administer the personal income tax decree, 1993 and any tax or levy shall be under the care and management of the board; Formulate from time to time, proposals, for the expansion and increase of the internal sources of revenue for the State; Identify sources of revenue available in the State; Enlighten the public on the subject of taxation; Appropriately assess all sources of revenue and taxes in the State; Design an effective revenue collection and machinery and implement it; Enforce all laws relating to taxation and revenue collection; Keep proper account and records in relations to all tax and revenue collections made by the board; Monitor and co-ordinate the collections of taxes and revenue in the State by all agencies of the Government such as the Ministries, Parastatals and Public Companies; Do all such things as it may consider necessary or expedient for the assessment and collection of taxes and revenue; Ensure the effectiveness and optimum collection of all taxes and penalties due to Government under the relevant laws; Make recommendations, where appropriate to the joint tax board on tax policy, tax reform, tax legislation, tax treaties and exemptions, as may be required from time to time; and Generally exercise control over the management of the States internal revenue service on matters of policies.

CHAPTER TWO LITERATURE REVIEW

2.1 WHAT IS TAX? Tax can be defined as a compulsory levy by government on goods, services, income and wealth. Primarily to obtain revenue. In other word, it is levy or dues on the income of persons and companies. It provides definite source of revenue of person for government expenditure. It is the way by which government obtain extra money it spends from income of individual or companies. The types of taxes will have are: 9

1. Direct Tax 2. Indirect Tax Direct taxes in Nigeria consist of the following: o o o o o o Company Income Tax (CIT) Personal Income Tax (PIT) Withholding Tax (WHT) Capital Gain Tax (CGT) Capital Transfer Tax (CTT) Petroleum Profit Tax (PPT)

Indirect taxes in Nigeria consist of the following: 1. Custom Duties 2. Excise Duties 3. Value Added Tax (VAT) 2.2 TAXES IN NIGERIA Under current Nigerian law, taxation is enforced by the 3 tiers of Government, i.e. Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection) Decree, 1998. Of importance at this juncture however are tax regulations pertaining to investors both foreign and Local. The importance of tax regulations cannot be over-emphasized, as most transactions with any Ministry, department, or government agency cannot be concluded without evidence of tax clearance. i.e. a Tax Clearance Certificate certifying that all taxes due for the three immediately preceding years of assessment have been settled in full. The following are some of the relevant tax regulations in the country. 1. Value Added Tax (Vat): This was introduced by the VAT decree No. 2 of 1993, to replace the old sales tax. It is a consumption tax levied at each stage of the consumption chain, and is borne by the final consumer. It requires a taxable person upon registering with the Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% (recently increased to 10%) of all invoiced amounts of taxable goods and services. VAT paid by a business on purchases is known 10

as input tax, which is recovered from VAT charged on companys sales, known as output tax. If output exceeds input in any particular month the excess is remitted to the Federal Board Of Inland Revenue (FBIR) but where input exceeds output the taxpayer is entitled to a refund of the excess from FBIR though in practice this is not always possible. A Taxpayer however has the option of recovering excess input from excess output of a subsequent period. It should be stated at this point that recoverable input is limited to VAT on goods imported directly for resale and goods that form the stock-in-trade used for the direct production of any new product on which the output VAT is charged. 2. Capital Gains Tax: This accrues on an actual year basis and it pertains to all gains accruing to a taxpayer from the sale or lease or other transfer of proprietary rights in a chargeable interest which are subject to a capital gains tax of 10%, such chargeable assets may be corporeal or incorporeal and it does not matter that such asset is not situated in Nigeria. Where however the taxpayer is a non-resident company or individual the tax will only be levied on the amount received or brought into Nigeria. Computation of capital gains tax is done by deducting from the sum received or receivable from the cost of acquisition to the person realizing the chargeable gain plus expenditure incurred on the improvement or expenses incidental to the realization of the asset. 3. Education Tax: An education tax of 2% of assessable profits is imposed on all companies incorporated in Nigeria. This tax is viewed as a social obligation placed on all companies in ensuring that they contribute their own quota in developing educational facilities in the country. 4. Personal Income Tax: The legal basis for this tax is found in the provisions of the Personal Income Tax Decree [now Act]. 104 of 1993. Every taxpayer in Nigeria is liable to pay tax on the aggregate amount of his income whether derived from within or outside Nigeria, the salaries, wages, fees, allowances, and other gains or benefits, given or granted to an employee are chargeable to tax. The Employers of labor are deemed to be agents of the tax authority for the purposes of remitting taxes deducted from salaries due to employees. However residency of the Taxpayer determines the extent of a taxpayers liability in Nigeria. A persons place of residence for this purpose is defined as a place available for his

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domestic use in Nigeria on a relevant day, excluding hotels and rest houses. A person is deemed resident in Nigeria if he resides in Nigeria for 183 days in any 12-month period, expatriates holding residence permits are liable to tax in Nigeria even if they reside in the country for less than 183days in any 12-month period. Once residence can be established, the relevant tax authority of the territory is the tax Authority in which the taxpayer has his place of residence or principal place of business. The following are however exempted from tax: 1. Medical or Dental expenses incurred by the employee; 2. Retirement gratuities and compensation loss of office; 3. The cost of passage to or from Nigeria incurred by the employee; 4. Interest on loans for developing an owner-occupied residential house; 5. Leave allowance, which is computed as 10% of annual basic salary subject to a maximum of N7, 500 per annum. 5. Withholding Tax: Nigerian law subjects certain activities and services to Withholding Tax. This basically means that where during transactions in any of the specified activities or services, a payment is due from one person to another, the person making the payment is expected to deduct tax at the applicable rate and remit it to the relevant tax authority. This should be done not later than 30 days after the deduction. This provision can be found in sections 68 to 72 of the Personal Income Tax Decree No. 104 of 1993; Sections 60 to 64 of the Company Income Tax Act (as amended), and Section 51(a) of the Petroleum Profits Tax Act (as amended). Some of these activities and Services and their current applicable rates include:Payment Rent Construction Dividend Royalties Commission Professional Fees Technical Consultancy Fees %Corporate 10 5 10 10 10 10 10 10 %Individual/Partnership 10 5 10 5 5 5 5 5

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6. Tax Treaties: Nigeria has a number tax treaties referred to as double taxation agreements with a number of countries, these are designed to ensure that the tax payable in Nigeria on the profits of a Nigerian company being remitted into the country are reduced by the amount of foreign Tax paid abroad and vice versa where an overseas company receives profits from Nigeria that have already been taxed in Nigeria. Some of these countries include the UK, France. The Netherlands, Belgium, Canada and Pakistan. 7. Companies Income Tax: Tax is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived form brought into or received from a trade, business or investment. Also companies paying dividends to its shareholders are first obliged to pay tax on its profits at the companies tax rate. Generally in Nigeria company dividends or other company distribution whether or not of a capital nature made by a Nigerian company is liable to tax at source of 10%, however dividends paid in the form of bonus share or scrip shares to individual share holders are not subject to tax, where also a company is a shareholder in another company then such dividends are excluded from the profits of the company for the purposes of computation of the tax. 8. Nigerian Social Investment Trust Fund (NSITF): This is governed by the NSITF Decree, and requires everybody employed in a Nigerian incorporated company to contribute a certain percentage of their salary to the fund. This contribution is based on the assumption that the maximum basic salary in Nigeria is N48, 000 per annum; Expatriates are excluded from this requirement where they can show proof of a similar contribution in their home country. The rate of contributions is defined as follows, where the contributor is an employee, 2.5% of his salary subject to a maximum of N 1,200 per annum; where the contributor is an employer, 5% of basic salary subject. 2.3 THE MEANING OF TAX EVASION AND TAX AVOIDANCE Tax avoidance arises in a situation where the taxpayer arranges his financial affairs in a way that would make him pay the least possible amount of tax without infringing the legal rules. In short it is a term used to denote those various devices which have been adopted with the aim of saving tax and thus sheltering the taxpayers income from greater liability which would have been otherwise incurred (Kiabel, 2001). Ani et al (1978) had described tax avoidance as follows: the taxpayers knowing what the law is decides not to be caught by it, arranges his business in

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such a manner as to escape tax liability partially or entirely. It is a lawful trick or manipulation to evade the payment of tax. The meaning of tax avoidance is vividly captured in the case involving Ayrshire Pullman Motor Services and David M. Ritchin Vs Commissioner of Inland Revenue when the Lord President, Lord Clyde held that: No man in this country is under the smallest obligation moral or otherwise so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow and quite rightly to take every advantage, which is open to it under the taxing statutes for the purpose of depleting the taxpayers pocket. And the taxpayer is in like manner entitled to be astute to prevent so far as he honestly can the depletion of his means by the Revenue. Thus, it is clear that tax avoidance is legal or at least not illegal since one is mostly probably using the tax laws to limit his tax liability under the same laws. Examples of tax avoidance include: (i) Seeking professional advice; (ii) Reducing ones income by submitting claims for expenses in earning the income; (iii)Increasing the number of ones children (in Nigeria the maximum allowable is four); (iv)taking additional life assurance policies. Tax avoidance is thus considered to be a matter of being sensible. While the law regards tax avoidance as a legitimate game tax evasion is seen as immoral and illegal. Tax evasion is an outright, dishonest action whereby the taxpayer endeavours to reduce his tax liability through the use of illegal means. According to Farayola (1987), tax evasion is the fraudulent, dishonest, intentional distortion or concealment of facts and figures with the intention of avoiding the payment of or reducing the amount of tax otherwise payable. Tax evasion is accomplished by European Journal of Economics, Finance And Administrative Sciences - Issue 15 (2009) deliberate act of omission or commission which in themselves constitute criminal acts under the tax laws. These acts of omission or commission might include: a) failure to pay tax e.g. withholding tax; b) failure to submit returns; c) omission or misstatement of items from returns; d) claming relief (in Personal Income Tax), for example, of children that do not exist; e) understating income;

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f) documenting fictitious transactions; g) overstating expenses; h) failure to answer queries. The most common form of tax evasion in Nigeria is through failure to render tax returns to the Relevant Tax Authority. A tax evader may be charged to court for criminal offences with the consequent fines, penalties and at times imprisonment being levied on him for evading tax (Faseun 2001). And as observed by Sosanya (1981): Tax evading has become the favourite crime of the Nigerian, so popular that it makes armed robbery seem like minority interest. It has become so widespread that there now exists a cash economy of vast proportions over which the taxman has no control and which is growing at several times the rate of the national economy. No doubt, tax evasion and avoidance had robbed the Nigerian government of substantial tax revenue. According to the Nigerian Stock Exchange, 85 percent of corporate tax revenue in the country accrues from the 196 companies listed on the exchange compared to the 30,000 companies registeredwith the Corporate Affairs Commission. This is a serious indictment of the administrative machinery and capacity of the tax authorities in Nigeria.

2.4 THE PROBLEMS OF TAX EVASION IN NIGERIA a) Corruption by Tax Officials 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. (Spiro, Peter S. (2005), b) Role of Middleman It is often alleged that tax lawyers and chartered accountants help taxpayers including firms and companies in evading taxes. In the same vein, the Clearing and Forwarding agents help in evasion of Customs duties. It has been suggested that removal of human interface is a reliable solution to this problem. (Spiro, Peter S. (2005),

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c) Tax Farming Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Government leases 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 tax-payers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries. (Alam. D (1999) 2.5 WHY PEOPLE EVADE TAX IN NIGERIA The causes of tax evasion and avoidance are universal, as they are applicable in any country that tax is imposed. Some are peculiar to different areas, however. In Nigeria some of these causes as identified by Onuigbo (1986) include: The Absence of a Quid Pro Quo The average human being abhors the payment of tax. He sees taxation as a discredited imposition and evidently obnoxious. This stems mainly from the absence of a quid pro quo i.e. something of value given in return (by the Government) for the taxes paid. Taxes, it is commonly argued, should not be paid as the authority do not provide amenities which are in any way commensurate with the taxes paid. There is no guaranteed compensatory benefit. Inequitable Distribution of Amenities In many parts of Nigeria citizens are opposed to the payment of any form of taxes and rates on the ground that government had been unfair in the distribution of amenities and other good things of life. This thinking is often a root cause of most civil disturbances in parts of the country. Misuse or Mismanagement of Collections Made More often than not there are reports in the news media of how government functionaries misuse taxpayers money. Evidences of wastage of public funds abound in the form of inflated contract prices, in unexecuted but paid contracts or in the criminal acts of using diverse methods and loopholes to exhaust funds voted for ministries and governmental departments before the financial year run out. The cumulative effect thereby produced is the resolve of many honest taxpayers never to pay their due taxes again, or at most pay under compulsion.

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Remoteness of Taxpayers from the Government There is this common belief which most taxpayers have about the nature of government. The average Nigerian has an inborn bias or hatred against most government functionaries who in most cases live apart from the taxpayers. It hurts, most taxpayers would reason, for one to part with his hard earned resources for the upkeep of these (imagined) enemies. The creation of local government councils, which is supposed to bring government closer to the people had not helped matters. As argued by Kiabel (2001), a solution to the problem probably lies in the proper education and orientation of the taxpayers towards government and its functionaries. Absence of Spirit of Civic Responsibility Most Nigerians probably due to illiteracy and ignorance fail to understand that they owe certain responsibilities to government, one of which is the payment of tax. Even when the government says it is poor they would rather argue that the government should print more money to solve her problems. This lack of spirit of civic responsibility amongst the majority of Nigerians is a major cause of tax evasion in Nigeria. Some other authors have at one time or the other attributed the causes(s) of tax evasion and avoidance to various reasons. For example Orewa (1957) had earlier investigated the characteristics of evasion and found that complete evasion results from high degree of interdistrict mobility on the part of the taxpayers. According to him, due to mobility, evasion is more pronounced on the part of self-employed taxpayers who move from compound to compound at frequent intervals than it is with salary and wage earners with known and permanent address. He contended also that partial evasion may be due to inadequate accounting records maintained by traders, mistaken belief on the part of some illiterate taxpayers that only wages and salaries represent taxable income. Kiabel (2001) has argued that some businessmen do not see any reason why they should pay tax irrespective of the fabulous profits made. This is the direct display of the spirit of unpatriotism. Such people take the stand that no matter the income or revenue that was acquired during the year nothing will be paid as tax or they may prepare their accounts in such a way that a loss will be reflected. Generally tax evasion which is illegal achieves the same goal as tax avoidance. 2.6 WAYS BY WHICH TAX EVASION IS BEING PERPETRATED

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The taxpayer indulges in evasion by resorting to various abnormal practices. Some of these are acts of omission and others are acts of commission. There are various refinements to the blatant act of tax evasion which render detection difficult: secreted wealth may be siphoned off to foreign countries through smuggling activities, refuge may be sought in foreign bank accounts or in investment abroad to escape the reach of the local laws. Other forms of tax evasion include claiming of fictitious deductions, improper utilization may be made of temporary taxpayers status, fleeing the country to avoid payment of tax, failure to pay or keep records or adequate records, failure to pay over to the revenue the estimated tax; interference with the tax administration through bribery and corruption and any other unlawful means employed which seeks to with hold tax which is otherwise payable. According to Toby (1983) tax avoidance consists of manipulations of transactions by resorting to various strategies. These include setting up subsidiaries or associated companies while maintaining financial interests in the outcome of both with a view of facilitating transactions as may be advantageous from the tax point of view, arranging the transfer of losses of defunct business for the purpose of obtaining a set-off against profits of the other and establishing tax haven entities in foreign countries.

2.7 EFFECTS OF TAX EVASION ON GOVERNMENT REVENUE Tax evasion has adverse effects on government revenue. It generates investment distortion in the form of the purchase of assets exempted from tax or under-valued for tax purposes. Evasion takes the form of investment in arts collection, emigration of persons and capital. And as observed by Toby (1983) the taxpayer indulges in evasion by resorting to various practices. These practices erode moral values and build up inflationary pressures. This point can be buttressed with the fact that because of the evasion of tax, individuals and companies have a lot of money at their disposal. Companies declare higher dividends and individuals have a high take home profit. This increases the quantity of money in circulation but without a corresponding

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increase in the goods and services. This then build up what is known as inflationary trends where large money chase few goods. 2.8 PUNISHMENT FOR TAX EVASION Tax evasion is a FELONY and a very serious crime. A conviction for tax evasion can carry with it up to a five-year prison sentence and/or fines up to $100,000. Filing a false return: Prosecution for this crime is appropriate when a taxpayer has provided the government with false or misleading information on the taxpayer's tax return. In such cases, the government does not have to prove the taxpayer intended to evade tax laws. Rather, it merely must prove that the taxpayer filed a false return. Filing a false return is a felony. Punishment for this crime can consist of up to three years in prison and/or up to $100,000 in fines. Not filing a tax return at all: Failing to file a tax return is the least serious of the three tax crimes. It is a MISDEMEANOR. The consequences for being found guilty is a maximum of 1 year in prison and/or fines totaling up to $25,000 for each year a taxpayer failed to file. 2.9 POSSIBLE SOLUTIONS TO REDUCE FINANCIAL CRIME ON TAX EVASION Aguolu, (1999) identified the following as a means through which government can overcome tax evasion. They are; The administration of tax collection will be strengthened to ensure more efficient tax collection, through training of staff, awareness, campaigns & computerization. Government should continue to ensure that the tariff policy enables our local industries to be competitive. Specifically, aggressive action should be taken to block revenue leakage on high duty goods and bulk items. VAT has become a veritable source of revenue earnings for the government and therefore needs to be strengthened and expanded. To broaden the tax base and to bring the VAT administration closer to the taxpayers, new local VAT offices should be established all over the country.

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Government should also ensure fair tax administration based on the principle of derivation of tax proceeds; it is recommended that the tax law should be enacted.

CHAPTER THREE 3.0 RESEARCH METHODOLOGY

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This chapter contains explicit step by step procedures on what will be done by the researcher and how it will be carried out. It is the blue print for the study. This chapter states the source of the data, methods of data and types of data collection instruments and analysis, sampling procedure and design as well as the basic approach applied in this work 3.1 RESEARCH DESIGN

The survey research design will be used in this study. It involves a self-designed questionnaire in collecting data from the respondents. This is chosen in order to make reference to phenomena as they exist in real life and it is relatively economical in terms of time and resources. 3.2 POPULATION AND SAMPLE SIZE The population of this study will be based on 30 respondents to be drawn from the entire staff of the Oyo State Board of Internal Revenue, Government Secretariat, Agodi, Ibadan, Oyo state, Nigeria. 3.3 RESEARCH INSTRUMENT Primary and secondary sources of data will be used for this research work. Primary source of data will be through the use of questionnaire and they will be closedended questions. The questionnaire will be in two parts. Part A will deals with the Bio-data of the respondents, while part B will deals with data concerning the research hypotheses. While Secondary source of data will be various textbooks, journals and internet materials which will enable the researcher to get acquainted with the some empirically verified views of some authorities on the research problem.

3.4

METHOD OF DATA COLLECTION The main instrument to be used for this study is structured assessment questionnaire with

closed ended questions. The questionnaire will be designed carefully in line with the relevant issue or problem to be raised in the research. 21

Thereafter, it will be distributed among the staffs of the Oyo State Board of Internal Revenue, Government Secretariat, Agodi, Ibadan, and this will take me two week because of the delay one might encounter from some of staffs of the company and the time to administer the questionnaires filled. Thirty questionnaires will be served and hopefully expected to be fully recovered and then administer. 3.5 analysis. METHOD OF DATA ANALYSIS

The data collected will be analyzed through the used of simple percentage, tables and descriptive

REFERENCES Alabi, Soji (2001) Tax Planning A Paper delivered at the Workshop on Nigerian corporate and Personal Income Tax Management, Yaba, Lagos, August 15th. Ariwodola, J.A. (1998) Personal Income Taxation in Nigeria including Capital Gains Tax, Lagos, JAA Nigeria.

Alex Cobham (2005): Tax evasion, tax avoidance and development finance, Finance and Trade Policy Research Centre, Queen Elizabeth House,
University of Oxford

CHAPTER FOUR 4.0 PRESENTATION AND ANALYSIS OF DATA

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4.1

INTRODUCTION This chapter deals with the presentation and analysis of data collected during the research

work conducted. The effort here is to present the data collected from the different respondents in a more meaningful ways to the readers. Hence, each responses is presented in percentage in relation to the general or overall responses received in each particular case. This was done to raise comparison among the variables involved and the guard the heart of the researcher into proper findings. 4.2 QUESTIONNAIRE RESULTS As formerly stated in chapter three, the questionnaires sent to the staff of Dansa Foods Limited were all collected back with the following statistics of respondents. Table 1: Questionnaire Administered and Returned Number of Questionna ires Distributed 30 Field Survey The table one above shows that 30 questionnaires were distributed among the sampled staff in University of Ibadan. However, the responses receive was 26 representing 87% of the total questionnaires distributed. The rest four questionnaires were also received back but they are not fill. The statistics reported in this chapter were all based on the above responses and interviews conducted. Number of Percent Responses age of Received Respon ses 26 87%

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Table 2: Personal Data Of The Respondent On Sex Variables Male Female Total Field Survey Numbers of the responses Received 20 6 26 Percentage 77 23 100

From the above table 2, the total of male who responded to the questionnaires were 20(77%) while 6(23%) represent female.

Table 3: Age Distribution Of The Respondents Variables 21-30yrs 31-40yrs 41yrs & above Total Field Survey Numbers of the responses Received 21 3 2 26 Percentage 81 12 7 100

In the table 3 above, it is revealed that majority of the respondents aged 21-30yrs filled 21[81%] of the questionnaires compare to aged 31-40yrs that filled 3[12%], while aged 41yrs above filled 2[7%].

Table 4: Marital Status Of The Respondents Variables Single Married Divorced Total Field Survey Numbers of the responses Received 18 8 26 Percentage 69 31 100

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The above table 4 shows single at 18[69%], married at 8[31%] and 0% for respondents who were divorced.

Table 5:Educational Background of the Respondents Variables ND HND/BSc Professional Total Field Survey Numbers of the responses Received 11 12 3 26 Percentage 42 43 12 100

Only 11(42%) of the total possess National Diploma (ND), 12(46%) possess HND/BSc, While 3(12%) possess professional qualification in addition. Table 6: Length of Services Variables Below 5yrs 5-10yrs 11yrs & above Total Field Survey Numbers of the responses Received 2 15 9 26 Percentage 8 58 34 100

Table 6 shows 2[8%] are below 5yrs, 15[58%] are below 5-10yrs while 9[34%] of the respondents have been in the organisation for more than 11yrs. Table 7: Position Head Of The Respondents Variables Management staff Senior staff Junior staff Numbers of the responses Received 2 13 11 Percentage 69 31 -

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Total Field Survey

26

100

The above table shows that 2[8%] were at management level 13[50%] were senior staff while 11[42%] were junior staff of University of Ibadan.

SECTION B 4.3 4.3.1 DATA ANALYSIS AND INTERPRETATION Hypothesis One Ho:- Lack of good internal control is not a major cause of fraud in educational institution using University of Ibadan as a case study. Hi:- Lack of good internal control is a major cause of fraud in educational institution using University of Ibadan as a case study. Question 10 & 11 in the questionnaire reveal answers to the above hypothesis one. Table 8: Question 10:Lack of Good internal control leads to fraud perpetration. Variables Strongly Agree Agree Undecided Disagree Strongly disagree Total Field Survey Numbers of the responses Received 20 4 2 26 Percentage 77 15 8 100

From the above table 8, it is revealed that 20(77%) of the respondents which is the highest were of the opinion that lack of good internal control leads to fraud perpetration. 4(15%) of the respondents agreed to the opinion while 2(8%) disagree with the opinion.

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With the oral interview made with some of the respondents, it was deduced that there is no specific system on ground that will ensures all types of checks and balances for both operational and financial as expected of the institution. Table 9: Question 11:Lack of attractive pay packages leads to fraud perpetration. Variables Strongly Agree Agree Undecided Disagree Strongly disagree Total Field Survey Numbers of the responses Received 26 26 Percentage 100 100

The above table 9 depicts that, 26(100%) which represent the total sample size of the respondents strongly agreed on the fact that Lack of attractive pay packages leads to fraud perpetration. Some of the respondents claimed that prompt and attractive pay packages will enable average lecturers to live above poverty level. Hence, he or she will shun the temptation to defraud his/her employer. One of the respondents suggested that, there should be maintenance of a rewarding workmen compensation scheme. This will encourage hardworking, discipline of staff and improve the standard of living of such lecturer or professor in question.

4.3.2

Hypothesis Two Ho: - Establishment of effective internal control department has negative impact on efficiency of Educational Institutions Hi: - Establishment of effective internal control department has positive impact on efficiency of Educational Institutions

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Question 12 in the questionnaire reveals answer to the above hypothesis two. Table 10: Question 12:Effedtive internal audit department helps to guard against fraud in educational institutions Variables Strongly Agree Agree Undecided Disagree Strongly disagree Total Field Survey Numbers of the responses Received 23 3 26 Percentage 88 12 100

From the above analysis in table 10, it was deduced that 23(88%) of the respondents which is the majority gave their consent that effective internal audit department helps to guard against fraud in educational institution. The remaining 3(12%) of the respondents sampled also gave their support on the opinion. With the help of the oral interview, one of the respondents suggested that educational institutions should try as much as possible to have an effective internal audit department. This will be headed by a qualified accountant and the accountant should be responsible to the Vice chancellor of the institution or higher authority in the institution. Some respondents say management by example, should be the watch word of every staff, be it lecturer, professor, or management staff of the institution. Every one should comply with the laid down policies and procedures in the performance of any of their function.

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4.3.3

Hypothesis Three Ho: - Educational institution with good internal control system cannot prevent the menace of fraud Hi: - Educational institution with good internal control system can prevent the menace of fraud

Question 15 in the questionnaire reveals answer to the above hypothesis two. Table 11: Question 15: Educational institution with good internal control system can prevent the menace of fraud Variables Strongly Agree Agree Undecided Disagree Strongly disagree Total Field Survey Numbers of the responses Received 26 26 Percentage 100

The above table 11 revealed that 26(100%) which represent the total sample size strongly agreed on the fact that educational institution with good internal control system can prevent the menace of fraud. The researcher also deduced from the personal interview made with some of the subjects that, it is the responsibility of the management to installed good internal control system. Other said that, keeping of adequate records, putting operating procedures manual in writing, observing the attitude of the staff in audit department towards work and their spending habit whether amount spent is commensurate with the come earned etc. if the aforementioned measures are strictly adhered to, the ever increasing menaces of fraud, which has ruined many Nigerian educational institution financially, will be drastically reduced to its barest minimum and eventually eradicated.

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4.3 DISCUSSION OF FINDINGS The empirical results indicate that accountants performed crucial roles in local government administration. The results of questions 7 & 8 of hypothesis one revealed that 16 (76%) of the respondents which is the highest were of the opinion that accountants are primary contributors to national building and in question 8, 21(100%) which represent the total sample size of the respondents strongly agreed on the fact that it is the duty of an accountant to safeguard local government. assets against loss, mismanagement, misappropriation and theft.. With the help of the oral interview, some of the respondent claimed that Accountants have crucial roles in development and national building. Once they discharge their responsibility with integrity and accuracy, there will be growth and improvement in the standard of living. One of the accountant says, Part of my duty is to safeguard and protect national assets against loss, mismanagement, misappropriation and theft and I will be very happy if The Game of Politics among the public officers stop and allow us to practice our profession independently. From the available information gathered by the researcher, it is very cleared that accountant in local government are not allow to discharge their obligation effectively and efficiently due to party politics and Godfatherism which often prevented them from working for the development and improvement of their areas. Sometimes, there is mismanagement of fund for which the council is not punished. Therefore, the researcher ignore null hypothesis and accepted alternative hypothesis which says that, role of accountants in local government enhance national development The results of questions 10 & 11 of hypothesis two revealed that 16 (76%) which represent majority of the respondents claimed that poor revenue administration among the stakeholders hinder the growth and development of local government and in question 11, 21 (100%) strongly agreed on the fact that Inadequate Statutory allocation from federation account is one of the problem of local government accounting system. During the oral interview, one of the respondents says that, the effective management of the finance of the local government authorities in Nigeria is often affected by shortage and sometime by total lack of resources. With the help of the oral interview, Some respondents say that local government authority usually incurred a lots of capital expenditure and this is usually settle out of recurrent

30

fund. The result of such settlement is that there is either no or little money available to meet a minimum acceptable level of recurrent expenditure. One of the subjects suggested that qualified accountant should be employed to oversee and give advice on financial issues in the local government authorities. Therefore, the researcher ignore null hypothesis and accepted alternative hypothesis which says that, financial problem hindered the growth and development of the local government. The results of questions 12 & 15 of hypothesis three revealed that 15(71%) which represent majority of the respondents claimed that the quality of financial officer in the local government determine the quality of the accounting system and in question 15, 20 (95%) of the respondents strongly agreed to the fact that corrupt finance officers constitute a problem in the local government system. During the oral interview, one of the respondents opined that, quality of financial officer is a problem to the accounting system in the local government. The son of the soil syndrome and neglecting of professionalism is the order of the day. They prefer employing inexperience and unexposed staff who cannot render meaningful service to the local government, there employment is based on political ground, for monetary reward and on connection basis. Mediocre who cannot manage effectively are even worse compare to educated people who are inexperience in accounting practice and procedures. One the subjects advise that the government to always employ staff base on qualification not with connection to politics or personal interest. Internal and external auditors should be allowed to perform their duties independently. From the analysis above the researcher could conclude that, the quality of the finance officer determine the quality of the accounting system. Therefore, the researcher ignore null hypothesis and accepted alternative hypothesis.

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS SUMMARY

31

The research work has been able to reveal that the end total of tax evasion is less revenue to the taxing authority. It is an undesirable phenomenon because it tends to shift the burden on the less fortunate members of the community. It is convincing now that Tax evasion said to be partial or total bad when a taxpayer under-declares his income for tax purposes and total evasion of income tax occurs when a taxpayer who is already qualified to pay tax refuses to get his name registered in the tax roll. During the cause of the research, it is cleared that tax evasion of income tax is an illegal activity and it is difficult to obtain in any country. In the words of M.C. Taylor, it is not very different from trying to determine the consumption of Indian hemp or the degree of illegal gambling. The only known research on tax evasion in Nigeria was made by G.Oka Orewa several years ago. He deposed that evasion is more pronounced on the part of self-employed taxpayers viz market women, businessmen, and professionals (the very people who enjoy government infrastructures) who move from place to place at frequent intervals, than it is for salary and wage earners with known and fixed addresses. Understandably, also, there is much less evasion on the part of taxpayers who pay their tax in instalments. In view of the aforementioned, it is irresistible to say that evasion of the income tax is a serious problem in Nigeria, more so, as there appears to be a big gap between actual and potential income tax collections by the various levels of government. Finally, in the course of the research it was made known that the criminal act of tax evasion is perpetrated in a number of ways. These include among others: (a) Unbearable high tax rates which make evasion more attractive and economical; (b) Lack of faith in the ability of the government to use the money well; (c) Total ignorance of the law; (d) Absence of any visible benefit accruing to the taxpayers; (e) The inefficiency of tax administration which gives room for tax evasion; (f) The ridiculously low penalties prescribed in the Tax Laws for late payment or non-payment of tax; and (g) Outright unwillingness to contribute towards the upkeep of ones society.

5.2 CONCLUSION

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Tax evasion and avoidance is a very serious societal problem that is causing much concern and major set back on revenue collection in Nigeria. From all indications it is now clear that if government engages in a complete re-organization of the tax administrative machineries, the twin problems of tax evasion and avoidance will be reduced to a tolerable limit. It is equally important for the various state governments to make frantic efforts aimed at educating the tax illiterates of their civic responsibilities. Such enlightenment on tax evasion and avoidance will go a long way to reduce the states over dependence on federal allocation. It is hoped that if the measures prescribed in this study are implemented, it will go some way in reducing the problem of tax evasion and avoidance to reasonable dimensions.

COMMENDATIONS For the various State Governments to meet their revenue targets especially now that the services of tax consultants have been discontinued it would be appropriate to take a look at the factors responsible for the incidence of tax evasion and avoidance since a check on these factors will go a long way in reducing if not eradicating the problem. In the light of this, the following recommendations are made: 1. Government should embark upon other means of publicity such as radio messages, television advertisement, post bills as well as the use of town criers to inform taxpayers of changes in tax legislation and need for compliance. 2. The tax authorities should properly review and evaluate the assessment and collection procedures so as to encourage compliance by the taxpayers. The usual practice of reprinting parts of the tax laws and sending same to the taxpayers expecting that they would understand is not encouraging since these laws are written in legal jargons or terms that are not easily understood. Moreover, tax forms should be made less complex. Vast improvement can be made by improving the design of the forms. 3. Suitable personnel should be recruited and Revenue personnel generally trained and retrained to cope with the demands of the job. Staff should also be motivated through good salary package to insulate them from fraud and other corrupt practices. 4. The setting up of Revenue Courts should be embraced by the various state governments. These Courts should be made to impose heavy monetary penalties and criminal sanctions. 33

5. The handling of tax clearance certificates should be well decentralized such that neither the assessor nor the collector can issue tax clearance certificates. The Audit Unit of the Authority should be strengthened to always audit tax remittance by collectors at all levels. This measure will go a long way to curb corrupt practices among tax officials. 6. A legislation compelling banks to inform the tax authorities, on request, of any income standing in the account of any taxable person (especially the self-employed taxpayers) should be put in place by the various state governments. 7. Government should endeavour to provide social amenities to all nooks and crannies of the state (not just the state capitals alone), provide employment opportunities to all by the judicious use of tax proceeds. In this way all will feel belong thereby encouraging voluntary compliance. 8. A census of the taxable population should be conducted throughout the various states. This will now update the tax register so that at any given point in time the tax office can give details of taxable adults and businesses thus reducing the incidence of tax evasion. 9. Since majority of the people are poor tax evasion becomes inevitable. Government should therefore aggressively tackle the inflationary trend and also ensure that the poor pay very minimal tax. (10) The issuance of national identity card should be accelerated so that it will be used to identify those who have not fulfilled their civic duties. Finally, it is my considered view that the social evil known as tax evasion should be attacked in all its ramifications if we are to have any meaningful tax administration in the country. BIBLIOGRAPHY Ayua, I.A. (1999) The Nigerian Tax Law, Ibadan Spectrum Law Publishing. Alabi, Soji (2001) Tax Planning A Paper delivered at the Workshop on Nigerian corporate and Personal Income Tax Management, Yaba, Lagos, August 15th. Ariwodola, J.A. (1998) Personal Income Taxation in Nigeria including Capital Gains Tax, Lagos, JAA Nigeria. Aguolu, Osita (1999) Taxation and Tax Management in Nigeria, Enugu, Meridian Associates. Baiyewu, F.A.(2000) Nigerian Taxation: A Practical Approach Egbe Kogi; Bhoti International Publishing Ltd. 34

Faseun L. A.(2001) Tax Planning Lagos Tax the Newsletter of CITN-Lagos District Society Vol. No.1 Farayole, G.O(1987) Guide to Nigerian Taxes Lagos All Crowns Nig. Ltd. Kiabel, B.D. (2001) Personal Income Tax in Nigeria Owerri, Springfield Publishers. Orewa, G.O. (1957) Taxation in Western Nigeria London Oxford University Press. Ogunedele E.A. (1999) Elements of Taxation Lagos, Libri Services Nig. Ltd. Onuigbo, O. (1986) Banking and Finance for Professional Examinations Aba Yonkee Standard Press Ltd Personal Income Tax Decree No.104, 1993. Reynolds, L.G. (1963) Government Finance and Economic Analysis Heineman Publications. Sosanya, S.O.A. (1981) Taxation Reform in Nigeria. Toby, R. (1983) The Theory and Practice of Income Tax Macmillan Press Ltd.

THE POLYTECHNIC, IBADAN

Department of Accountancy P.M.B 22, U.I Post Office

August, 2010 Tunde O. O Undergraduate Student The Polytechnic, Ibadan P.M.B 22, U.I Post Office tunde2009@yahoo.com Dear Participant, I am undergraduate student of the above named institution. I am conducting a research on the topic: AN APPRAI SAL OF TAX EVASION ON FINANCIAL CRIME IN NIGERIA (A CASE STUDY OF OYO STATE INLAND REVENUE, IWO RD, IBADAN), I therefore solicit for full cooperation in answering all the questions to the best of your knowledge and 35

ability. It is honestly assured that this study is only for academic purpose, and it shall be treated in strict confidence for the above purpose. Thank you for your time. Your information is extremely valuable to this study. Sincerely, TUNDE O. O Undergraduate Student.

QUESTIONNAIRE
SECTION A
DEMOGRAPHIC DATA MARK ( ) WHERE APPLICABLE. 1. Sex: 2. Age: 3. Marital Status: 4. Educational Ground: 5. Length of Service: 6. Position Head: Male 21-30yrs Single WASSEC Below 5yrs Management level Female 31-40yrs Married HND/BSc 5-10 yrs Senior Professional 11yrs & Above Junior 41yrs above

SECTION B Research Question One 7. High Tax rate is one the reason why people evade tax Strongly Agree Agree 36

Undecided Disagree Strongly Disagree 8. Lack of adequate tax incentives lead to tax evasion Strongly Agree Agree Undecided Disagree Strongly Disagree 9. Lack of public enlightenment campaign resulted to tax evasion Strongly Agree Agree Undecided Disagree Strongly Disagree Research Question Two 10. Tax evasion is being perpetrated by organization through Concealment of profits Strongly Agree Agree Undecided Disagree Strongly Disagree 11. Organizations evade tax by their Failure to keep adequate records Strongly Agree Agree Undecided Disagree Strongly Disagree 12. Claiming of fictitious deductions is one of the ways through which organization evade tax. Strongly Agree Agree Undecided Disagree Strongly Disagree Research Question Three 13. The consequence of not paying tax is that government find it difficult in the provision of social services. 37

Strongly Agree Agree Undecided Disagree Strongly Disagree 14. Tax evasion leads to low revenue. Strongly Agree Agree Undecided Disagree Strongly Disagree 15. Tax evasion leads to Inequality in the society Strongly Agree Agree Undecided Disagree Strongly Disagree

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