There is a general understanding that contributing to society through taxes is essential. Taxes are the primary source of revenue for the government to fund public services, infrastructure, and social welfare programs.
The expectation is simple: if you earn income, you contribute. However, people often find ways to avoid or completely evade their tax obligations.
Imagine a small business owner who works long hours, keeps proper records, and pays her taxes, while a large corporation uses accountants and lawyers to legally reduce its tax liabilities, sometimes paying less than the small business owner. Scenarios like this arouse public frustration and question the fairness of the tax system. It also shows how individuals and businesses experience taxes differently.
This article explores the concepts of tax evasion and avoidance, their distinctions, legal implications, and how to legally minimize your tax liability. It focuses on:
- Tax evasion and tax avoidance distinguished
- Legal implication/consequences of tax evasion and tax avoidance
Table of contents
What is the difference between Tax Evasion and Tax Avoidance
Tax Avoidance
Tax avoidance is the use of legal methods to minimize the amount of tax owed by an individual or business. It involves utilizing strategies allowed by law to reduce tax liability. This includes allowable deductions defined as expenses that are wholly, exclusively, necessarily, and reasonably incurred in generating income, as outlined in the Personal Income Tax Act (Third Schedule C, PART II).
Although lawful, abuse of these strategies can make the practice illegal. Common methods of tax avoidance include:
- Maximizing deductions and credits: Utilizing government deductions such as for business expenses, charitable donations, and pension contributions.
- Investing in tax-sheltered accounts: Using Pension Retirement Savings Accounts (PRSAs) to defer or reduce taxes.
- Utilizing tax shelters and incentives: Taking advantage of tax holidays, exemptions, and accelerated depreciation offered by the Nigerian government.
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Tax Evasion
Tax evasion is the deliberate act of not complying with tax laws, such as concealing income or assets to avoid paying taxes. It is a criminal offense under the Federal Inland Revenue Service (FIRS) Act and the Finance Act.
In the case of 7Up Bottling Co. Plc v. Lagos State Internal Revenue Board (2000), the Court of Appeal held that failing to remit taxes deducted from salaries was a debt to LSBIR, enforceable in court. Not deducting withholding tax from contractors was deemed unlawful and recoverable.
Common methods of tax evasion include:
- Under-reporting income
- Claiming false deductions
- Falsifying documents to support false expense claims
- Using foreign bank accounts
- Concealing assets
- Failing to file tax returns
Legal Implications/Consequences
While tax avoidance can be legal if within the bounds of the law, tax evasion is a criminal offense punishable under Section 40 of the FIRS (Establishment) Act. Consequences of tax evasion include:
- Financial penalties imposed by FIRS
- Imprisonment
- Inability to secure financing
- Negative impact on the economy due to reduced government revenue for public services and infrastructure
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Conclusion
Tax avoidance and tax evasion both reduce taxes, but they are fundamentally different. Tax avoidance is legal when done within the law using deductions and incentives. Anything beyond the law is illegal.
Tax evasion, on the other hand, is unlawful and includes actions like falsifying income or refusing to pay taxes, with penalties such as fines or jail time. Understanding the distinction helps businesses and individuals reduce taxes legally while avoiding penalties.
Disclaimer: This publication is for general guidance and does not constitute professional advice. Please seek specific legal counsel before acting on this information.
For specific legal advice, contact us:
Email: info@tcorporatelegaladvisory.com
Tel: 08062348867, 09080119975, 09080119980
Written by:
OGHENEYOMA E. IBUJE LL.B, BL
NWOKOCHA ANNASTECIA CHIDINMA LL.B
T CORPORATE LEGAL ADVISORY
