ALL YOU NEED TO KNOW ABOUT DOUBLE TAXATION IN NIGERIA – The burden and invention of taxation, right from the word go has always been an important part of governance and administration from the word go.
Taxation itself is as old as civilization itself, as soon as it became inevitable that there had to be a means of compensation for goods bought and services rendered. The idea evolved over the years until discrepancies and methods of making it better and making it entrench equality in terms of distribution of wealth made it popular.
Since then, taxing has been the major source of livelihood of governments for funding of projects, maintenance of government assets and social amenities, as well as certain business ventures governments involve in. The offence of not paying tax as at when due is called tax evasion, and it carries stiff penalties which differ in severity from country to country, ranging from damaging prison sentences to capital punishment.
Table of Contents
- 1 WHY EXACTLY MUST A CITIZEN PAY TAX?
- 2 WHAT ARE THE QUALITIES TO LOOK FOR IN A GOOD TAX SYSTEM?
- 3 Tax enforcement machinery
- 4 Double Taxation in Nigeria
WHY EXACTLY MUST A CITIZEN PAY TAX?
1. Taxes are critical to the operation and function of the federal government, which provides constitutional functions such as maintaining a standing military. Congressionally mandated programs, which allow for the provision of disaster relief, general health and national human service, education and health programs are accomplished mainly due to federal tax collection.
2. Taxes help local government councils as well. Local governmental units deliver services to its residents from its collection of local property, income and sales taxes. Much of the revenue derived from these taxes are used for police and fire protection, building schools, maintaining local roads, and protecting citizens against local health emergencies and neighborhood crime.
3. State governments use taxes to deliver public services, assisting farmers with agricultural issues and managing a uniform state court system to coordinate local court systems. Tax collection also gives states the ability to provide social services to economically distressed and mentally disabled citizens and their families.
WHAT ARE THE QUALITIES TO LOOK FOR IN A GOOD TAX SYSTEM?
Taxes usually are the levied proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public need. From the above definition it is critical to note that taxes are contributions to a common pool by the people for the use of the people. Government all over the world is in need of taxes in order to sustain its relevance and to provide for the needs of its citizenry.
A tax system is for the most part, expected to be fair and non-discriminatory. For a tax system to meet these requirements, it must have the following attributes.
1. It must be neutral – A Neutral tax system must be unbiased across types of economic activities, and not overly penalize work in favour of leisure, nor tax income used for saving and investment more heavily than income used for consumption.
2. It should be all shades of Convenient – A good tax system should be convenient in terms of time and mode of payment to the taxpayer.
3. There should be a good deal of administrative efficiency – The process of levying and collecting taxes must be administratively efficient, transparent and economical without any distortion.
4. There must be a good deal of visibility – A very large segment of the population must be keenly aware that government and governance costs money. The government expenditure should be held to levels at which its benefits match its costs. A good view of the dividends of the taxpayers money should be made available to the populace. This is a critical factor in most developing countries (including Nigeria) where the citizenry believe that tax revenues are not being judiciously administered.
5. A good taxing system must exhibit fairness – the rich should be made to pay a higher share of their income than the poor. There should be even a level of protection for poor citizens by giving them some form of exemption.
6. A good tax system should be simple – A tax system should be easy for the government to administer and enforce, and be easy and comfortable for taxpayers to comply with. There should be clear definition of income and elimination of multiple layers of tax would create a system that is much simpler and easier to administer, enforce and comply with. These are critical issues in Nigeria tax systems that require urgent attention. Our tax laws are old and complex, giving room for varied interpretations and applications.
7. A Good tax system should be Productive – A tax system should be such that the aim of bringing in revenue for the government is not defeated by any means. Since tax payment involves the outflow of money or money’s worth from the treasury of taxpayers, some taxpayers have adopted many strategies to evade tax.
Tax evasion is defined as “the wilful attempt to defeat or circumvent the tax law in order to legally reduce one’s tax liability”. Tax evasion is punishable by both civil and criminal penalties.
Apart from tax evasion, people also reduce their burden by way of tax avoidance. Tax avoidance on the order hand, is defined as “the act of taking advantage of legally available tax-planning opportunities in order to minimize one’s tax liability. While tax evasion is criminal, tax avoidance is legal. There have been cases that have gone through the courts and rightly argued to support this fact.
Tax enforcement machinery
In order to encourage compliance taxpayers to continue to comply, and bring non compliance taxpayers into the tax net, to increase tax base and revenue, governments all over the world have put in place some compliance strategies backed by appropriate legislations. The constitution recognizes these extant laws in helping to enforce tax remittance and also penalties in case of a default:
Section 26(1) of the Federal Inland Revenue Service Establishment Act (FIRSEA) 26(1) gives the Service power to call for returns, books, documents and information.
FIRSEA 27 – Gives additional power to the Service to call for further returns and payment of tax due.
FIRSEA 28 – Gives the Service power to require every bank to provide quarterly returns indicating:-
(a) In the cases of an individual, all transaction involving the sum of N5,000,000 and above
(b) In the case of a body corporate, all transactions involving the sum of N10,000,000 and above, the names and address of all customers of the bank connected with the transactions and deliver the returns to the Service.
(c) Section 28 (3) – Provides sanction to any bank that contravenes above provisions.
FIRSEA 29 – Gives power to access lands, buildings, books and documents.
FIRSEA 32 – Gives power of addition for non-payment of tax and enforcement of payment.
FIRSEA 33 – Tax Investigation; this section empowers the Service to employ special purpose Tax officers to assist any relevant law enforcement agency in the investigation of any offence under this Act.
FIRSEA 47 – Gives the Service powers to prosecute any of the offences under this Act subject to the powers of the Attorney – General of the Federation.
Double Taxation in Nigeria
Double Taxation is an occurrence where the income from the same source is taxed twice before translating into net income.
This corporate phenomenon occurs because company income is taxed at the corporate level and taxed again when distributed to shareholders through dividends. In other words, this is a tax policy where the government taxes income when the corporation receives it and taxes the same income again when it is passed on to the owners of the corporation.
As the corporation generates a profit, it pays income taxes at the corporate level. These profits sit in retained earnings until the corporation decides to distribute some of them to the shareholders in the form of a dividend. The dividends given to the shareholders are then taxed as personal income to the individuals. Thus, the profits from the corporation are taxed twice. Double taxation happens commonly with C-corporations.
A C-corporation is a fictitious legal entity that is created to run a business by common ownership. In other words, one or more people get together and create a C-corporation by creating ownership shares. The corporation itself is nothing more than a legal entity. The corporation can own assets and have liabilities separate from its owners– the shareholders. This is one of the great advantages C-corporations have over Sole proprietorship and Partnerships. The C-corporation’s liabilities cannot pass onto the owners.