THE EFFECTS OF TAX EVASION AND AVOIDANCE ON NIGERIA’S ECONOMY

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 CHAPTER ONE

INTRODUCTION

1.1 Background

Taxation is a financial matter and fulfilling tax obligations is considered a civic duty. It involves the

imposition of a financial burden by the government on individuals, firms, and companies. Broadly

defined, tax refers to any contribution mandated by the government from individuals and companies

for the provision of facilities or services by the state. It is not a voluntary payment or donation but a

mandatory contribution enforced by legislative authorities.

According to Osita (2004:1), taxation is the compulsory extraction by the government, through its

various agencies, of income, capital, or consumption from its subjects, encompassing salaries,

business profits, interest, dividends, commission regularities, rent, and more.

Taxes and their systems are integral to government revenue generation. As Brautigam (2008) notes,

taxes underpin a state's capacity to achieve its objectives, influence state-society relations, and

shape the balance between accumulation and redistribution, defining the social character of states.

Taxation establishes the ability to provide security, meet basic needs, foster economic development,

and build legitimacy for accountable and representative governance.

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An essential aspect of any tax system is its administration (Naiyeju, 2010). Bahi and Bird (2008)

emphasize the critical role of tax administration, asserting that no tax is better than its

administration. Unfortunately, many countries experience weak tax administration marked by

extensive evasion, corruption, and coercion, with significant portions of the informal economy

escaping taxation (Brautigani, Fjelftand, and Moore, 2008).

A nation's tax system mirrors its communal values and the values of those in power (Ross, 2007). In

democratic nations like Nigeria, where the public influences the tax system, choices made reflect

the desired community. In contrast, non-democratic nations may have tax systems shaped by those

in power to redistribute resources or influence economic behavior.

The Federal Inland Revenue Services (FIRS) emphasizes in its 2009 National Tax Policy report that

sustainable development, meeting present needs without compromising the ability of future

generations, depends on a tax system capable of generating revenue stably (Aguolu, 1999). Recent

economic shifts have highlighted taxation as a crucial and sustainable income source (FIRS, 2009).

Tax is paramount among financial economic expeditions for developing countries, surpassing loans,

grants, and other receipts. Despite its benefits, tax evasion and avoidance persist, impacting

government revenue. Aronomole and Oluwalayode (2006:39) define tax avoidance as legally

reducing tax liabilities, while tax evasion is a deliberate, illegal attempt to avoid tax payments.
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Every form of taxation comprises a base (object or measure of income/wealth) and a rate

(percentage taken off the tax base). The revenue generated supports the provision of social goods

and services, aiming for equal accessibility. However, tax evasion and avoidance, coupled with a

poor tax collection system and government's failure to prosecute tax avoidance, hinder the effective

execution of development projects outlined in budgets. The focus on oil revenue, neglecting taxes

and agriculture, further compounds the revenue generation challenge faced by various levels of

government in Nigeria.

1.2 STATEMENT OF THE PROBLEM

It has been noted that the tax system in Nigeria has come to play a significant role, as a major

source of revenue to the federal government by way of imposing tax on taxpayers and it is for them

to pay up the tax.

The act of evading and avoiding tax by most registered companies and some individuals has

however affected the revenue base of the government, especially in providing essential services in

the society. People naturally prefer to reduce their tax liabilities by deliberately overstating their

expenses and make false entries and fictions in their books of account. Thus, their act, however,

causes a tremendous reduction in the revenue accruable to the government which eventually shrinks

revenue to the treasure of the government.

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The inability of the revenue board to collect a substantial amount of money from tax is as a result of

evasion and avoidance of tax. This research work examines the problems facing the revenue

department in collecting taxes and levies under their jurisdiction with a view to identifying

possibilities at minimizing or even eradicating tax evasion and avoidance.

1.3 RESEARCH QUESTION

For this research work to be effective it pleases the researcher to ask the following question

1. To what extent does tax evasion and avoidance affect Nigeria’s economy?

2. What are the possible effects of tax evasion and avoidance on the economic

development of the country?

3. To what extent do tax evasion and avoidance affect government internally generated

revenue?

1.4 OBJECTIVE OF THE STUDY

The main objective of the study is to assess the effect of tax evasion and avoidance on Nigeria’s

economy.

1. To ascertain the extent tax evasion and avoidance affect Nigeria’s economy.

2. To know the possible effects of tax evasion and avoidance on the economic development of

the country.

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 3. To find out the extent tax evasion and avoidance affect government internally generated

revenue.

1.5 STATEMENT OF HYPOTHESES

The following hypothesis were stated in Null form

HO1 There is no relationship to the extent tax evasion and avoidance affect Nigeria’s

economy.

H02 There is no possible effects of tax evasion and avoidance on the economic

development of the country.

HO3 There is no extent to which tax evasion and avoidance affect government internally

generated revenue.

1.6 SCOPE OF THE STUDY

Since no single research can validly cover all areas of the topic the researcher tends that thrust of

this project will be limited within the scope of how taxpayers’ performance on tax is influenced by

the choice of its tax system.

The study will assess the impact of tax evasion and tax avoidance on Nigeria’s Economy and how

they affect revenue generation, economic growth, and development, as well as how to curtail and

reduce the level of evasion and avoidance in the tax system. It will examine the consequences of tax

evasion on individuals and organizations that are into the acts of tax evasion and avoidance.

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The study will assist policymakers in developing policies that encourage the payment of taxes and

also serve as a piece of first-hand information to other students embarking on this study in the

future.

1.7 SIGNIFICANCE OF THE STUDY

This research work would be relevant to various tax authorities; the Federal Board of Inland

Revenue, the Local Government revenue committee as well as their tax officials who are

responsible to collect tax on individual or corporate bodies. It gives them insight on how to improve

the tax administration.

The research would also help professional bodies like the Chartered Institute of Taxation of Nigeria

and the Institute of Chartered Accountants of Nigeria as well as their members to see the areas of

deficiency in the collections and call for improvement in tax revenue.

This research would also be relevant to future researchers and the dents of accounting, economics,

business administration, and other social and management sciences as well as the legislation which

will also benefit immensely from this research because it will form the basis of tax policy

formation, implementation, and administration.

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1.8 LIMITATION OF THE STUDY

It is not unusual for researchers to encounter some difficulties in a course at their research and these

may include.

i. Finance: This is always a major limitation in a study of this nature, since the individual

may not have enough money to carry out all the necessary research.

ii. Inadequate data: There are areas where data is available but which the researcher

cannot lay hands on because the relevant information is sometimes termed confidential

and unavailable to outsiders.

iii. Lack of co-operation: By some of the respondents to whom he administered certain

copies of his questionnaire and vocal interview.

iv. Delay in giving back some of the copies of the questionnaires for some of the

respondents.

1.9 DEFINITION OF TERMS

In order to aid understanding of this research work by the user, special terms used in this study are

defined,

Tax: this is a compulsory contribution imposed by the government on individual and corporate

bodies for the use of the government to provide facilities or services in the nation.

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Tax evasion: this is the attitude adopted by taxpayers to deliberately misrepresent the true state

of their affairs to the tax authorities or includes dishonest tax reports such as declaring less

income, profit, or gains to escape tax liability (wholly or partially) by breaking the law.

Tax avoidance: this is a legal way by which a taxpayer reduces his tax liabilities.

Tax liability: this is the amount that is borne by the taxpayer

PAYE (pay as you earn): this type of tax is based on the earning of the taxpayer.

Tax laws: these are acts decrees or regulations guiding the assessment and collection of taxes in

the country.

State inland revenue: the body responsible for the collection of tax at the state level.

Federal inland revenue: the body responsible for the collection of tax at the federal level

Revenue: the amount of money realized by an individual or group or company.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter entail the conceptual framework, review of literature, empirical studies and theoretical

framework.

2.2. Conceptual framework

2.2.0 Tax Evasion and Avoidance

Tax evasion and avoidance are a worldwide phenomenon. The problem is especially acute in

transition and developing economies, since they do not have an appropriate infrastructure in place

to collect taxes (McGee and Tyler, 2006:1). Tax avoidance is the legal arrangement of the

taxpayer’s affairs in order to minimize the tax liability, whereas tax evasion is illegal. Sometimes,

however, the borderline between avoidance and evasion can become blurred, a fact that is

evidenced by the huge body of anti-avoidance legislation and the development of case law in this

area (Nightingale, 2003:44).

2.2.1 Tax evasion

Tax evasion is a deliberate violation of legislation with the aim of avoiding tax liability. It involves

tactics such as understating income, exaggerating expenses, making false claims for allowances, or
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failing to disclose taxable events. Due to its illicit nature, accurately measuring the true extent of tax

evasion is challenging. Nonetheless, it tends to be more prevalent when the tax system is perceived

as unfair or when rates are considered confiscatory (Nightingale, 2003:44).

Being illegal, tax evasion can lead to prosecution, though criminal charges are typically pursued by

authorities only in cases involving substantial lost revenue. Many minor instances of tax evasion

that are discovered by revenue agencies are often resolved outside of court. The most common form

of tax evasion in Nigeria is the failure to submit tax returns to the Relevant Tax Authority.

Offenders may face criminal charges, resulting in fines, penalties, and sometimes imprisonment for

evading taxes (Faseun, 2001).

As noted by Sosanya (1981), tax evasion has become a prevalent crime in Nigeria, overshadowing

even armed robbery in popularity. The widespread nature of tax evasion has given rise to a

substantial cash economy beyond the taxman's control, growing at a rate surpassing that of the

national economy. Undoubtedly, tax evasion and avoidance have significantly deprived the

Nigerian government of crucial tax revenue.

An alarming revelation from the Nigerian Stock Exchange indicates that 85 percent of corporate tax

revenue in the country is derived from the 257 companies listed on the exchange, contrasting

sharply with the 30,000 companies registered with the Corporate Affairs Commission. This stark

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contrast raises serious concerns about the administrative machinery and capacity of tax authorities

in Nigeria. 2.2.2 Determinants of Tax Evasion

In the standard approach to tax evasion a risk-averse individual chooses either the amount or the

share of income to be concealed so as to maximize his or her expected utility of income,

considering i. The probability of detection, ii. The penalty tax rate applied when tax evasion has

been detected, iii. The marginal tax rate, and iv. The level of true income All theoretical studies

conclude that both the probability of detection and the penalty tax rate will negatively affect

underreporting of income (Hennemann 1996: 162). That is, if taxpayers believe the probability of

detection is low they will tend to underreport. In addition, if the penalty tax rate applied when tax

evasion has been detected is low again taxpayers might tend to underreport. When underreporting is

measured by the absolute amount of income concealed, a risk-averse individual experiencing an

increase in his or her true income will underreport more.

2.2.3 Tax Avoidance

A tax such as VAT can be avoided simply by not buying the taxed good or services. The

arrangement of an individual’s affairs so as to mitigate the liability to tax is tax avoidance, and

provided that the taxpayer acts within the framework of the law, tax avoidance is legal. However,

where the activity is within the letter of the law but outside the sprite of the law, the distinction

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between avoidance and evasion may become blurred (Nightingale 2003:46). Many form of tax

avoidance are merely tax planning opportunities that exist in the legislation for reducing the liability

to tax, for example, choosing the most tax efficient savings and investments, or making sure that all

available relief are used to their full advantage. However, loopholes in the legislation also create

opportunities for tax avoidance. However, once loopholes have been exploited, the revenue reacts

by introducing legislations to close those particular loopholes. The increasing body of anti-

avoidance legislation merely makes the tax system more complicated, detracting from the cannon of

simplicity even though it has been suggested that ‘an economy breaths through its loopholes’. The

tax avoidance industry grew to enormous proportions during the 1970s as high rates of tax mate the

cost elaborate avoidance schemes worthwhile, supporting the view that ‘the existence of wide

spread avoidance is evidence that the system, not the taxpayer, stand in need of radical reform.

General anti-avoidance rules have been tried in Australia, New Zealand and Canada with little

success, which would indicate that targeted legislation may be more desirable. However, the policy

makers are faced with the dilemma of how wide or narrow anti-avoidance legislation should be; too

narrow and it may fail in its objectives, too wide and it may well be applied to situations for which

it was not intended. Whatever steps are taken to counter tax avoidance the principles of certainty of

taxation would require a definition of legitimate tax planning which may be difficult to frame as

‘the boundaries move with public sentiment’ with developing financial techniques and with the

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introduction of new statutory relief. Tax law will always have to address this equation and to

determine where the line will be drawn. (ibid: 47)

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 taxpayer’s income from greater liability which would have been otherwise

incurred (Kiabel, 2001). Ani (1983) had described tax avoidance as follows: the taxpayers knowing

what the law is decide not to be caught by it, arranges his business in such a manner as to escape tax

liability partially or entirely. It is a lawful trick or manipulation to evade the payment of tax.

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:

Seeking professional advice; reducing one’s income by submitting claims for expenses in earning

the income: increasing the number of one’s children (in Nigeria the maximum allowable is four)

and 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,

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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 deliberate act

of omission or commission which in them constitutes criminal acts under the tax laws. These acts of

omission or commission might include: failure to pay tax e.g. withholding tax; failure to submit

returns; omission or misstatement of items from returns; claiming relief (in Personal Income Tax),

for example, of children that do not exist; understating income; documenting fictitious transactions;

overstating expenses; failure to answer queries (Aguolu, 1999).

2.3 Nigerian Tax System

“The Nigeria political environment embraces the federal system of governance; hence her fiscal

operations adhere to the same principle which has severe consequences on the tax management

system in the country (Odusola, 2017). Government’s fiscal policy is based on the three-tiered tax

structure i.e. the Federal, State and Local Governments, each of which has different tax jurisdictions

(Enahoro and Olabisi 2012). They further state that in 2002, almost 40 different taxes and levies are

distributed among all three levels of government. ”

“Odusola (2017) opined that tax system in Nigeria is characterized by avoidable complexity,

distortion and largely inequitable tax laws that have limited application in the informal sector that

dominates the economy. According to Abubakar (2018), the Nigerian tax system has experienced

remarkable variations in recent times. The tax system is the process of taxation which involve sets

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of rules, regulations and procedures with the organs of administration intermingling with one

another to generate fund for government (Agbetunde 2017). The Nigerian tax system is of multi

activities which include tax administration tax laws, and tax policies (Adesola, 2014). Under current

Nigerian law, taxation is enforced by the three tiers of Government, that is. Federal Government,

State Government, and Local Government with each tier of Government having its sphere clearly

writing out in the Taxes and Levies (approved list for Collection) Act, 1998 (Abubakar, 2018).

Based on the structure of Nigerian Tax system for revenue generation. ”

Naiyeju, (2015) and Odusola, (2017) opined that the system is lopsided, and dominated by oil

revenue. They further said that the most veritable tax handles are under the control of the federal

government while the lower tiers are responsible for the less buoyant sources, meaning that the

federal government collects tax from corporate bodies while state and local governments’ tax

individuals. In their work, the federal government on the average accounts for ninety per cent of the

total tax revenue collected annually but, only accounts for about seventy per cent of total

government expenditure. ”

“Generally, the tax system of Nigeria comprises of the tax policy, tax laws and tax administration as

observed by Akintoye (2016). The effective administration of existing tax laws will lead to efficient

harnessing of tax resources in Nigeria according to Okauru (2014).Inefficient tax administration

over the years has been identified as the reason for low tax revenue yield, as opined by Garde

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(2004), who posited that, dismal tax collection is reflective of tax administration performance and

public service in Nigeria. Various reforms to position tax as major revenue earner has not produced

the expected result. (Ola 2017), Azubike (2015), submitted that, the ever-increasing needs of

governments across the three tiers of government to provide infrastructures and quality services

requires tax reforms that is an on-going process and changes according to the dynamics of the

society. Historically, taxes have been used as policy instruments to achieve some set objectives

such as raising revenue for public expenditure or redistribution of wealth or sectorial allocation of

resources. In the opinion of Azubike (2018), Governments need to raise revenues to enable them to

discharge their obligations to provide funding for infrastructure, education and public health, and in

some cases, there is still much to do to reduce the significant public deficits which persist.

However, in a world which has now truly embraced globalization, some governments also see a

need to put in place tax systems which are seen to be efficient, can help to attract investment, and in

turn can help foster economic growth. A sensible business tax system is not just about attractive tax

rates but also tax rules which are simple and easy to comply with. ”

“The central objectives of Nigeria tax system is the appropriate utilization of revenue for the

common good and enhancement of the people’s well-being. The presidential committee on national

tax policy (2008) cited in Azubike, (2015), stated that the central objectives of Nigeria tax policy

are; contribute to the wellbeing of all Nigerians directly through improved policy formulations and

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to enhance the wellbeing of the populace indirectly through the appropriate utilization of tax

revenue. Further objectives include;”

1. Generate stable revenue resources needed by government to accomplish laudable projects

and or investment for the benefit of the people.

2. Encourage economic growth and development.

3. Provide economic stabilization.

4. To pursue fairness and distribute equity.

5. Correction of market failure and imperfections.

6. To meet these objectives, Nigeria requires a highly efficient tax administrative system. The

current efforts at repositioning tax as the major revenue earner in Nigeria, has not yielded

the desired result, therefore, this study is needed to add to the body of knowledge on the

subject matter.

2.3.1 Relevant Tax Authorities

i. Joint Tax Board

ii. The Federal Board of Inland Revenue,

2.3.2 The Federal Inland Revenue Service Board (FIRSB)

“The Board was first established under Section 3 of the repealed Income Tax Administration

Ordinance 1958 and amended by subsequent Acts and Decrees. The Finance (Miscellaneous

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taxation provisions) (Amendment) Decree No.3 of 1993 provided for an operational arm to be

known as the Federal Inland Revenue Service. The board administers federally collected tax

revenue through the executive arm known as the Federal Inland Revenue Service. They administers

taxes such as Value Added Tax(VAT), Company Income Tax (CIT), Education Tax (EDT) ,Capital

Gains tax (CGT),Withholding tax (WHT) and Petroleum Profits Tax(PPT). (Ojo, 2017). ”

Composition

i. An Executive Chairman who shall be a person within the service experienced in taxation to

be appointed by the President.

ii. The Directors and Heads of Departments of the service.

iii. The Officer from time to time holding or acting in the post of Director with responsibility

for planning, research and statistics matters in the Federal Ministry of Finance.

iv. A member of the Board of the National Revenue Mobilization, Allocation and Fiscal

Commission.

v. A member from the Nigeria National Petroleum Corporation, not lower in rank than an

Executive Director.

vi. A Director from the National Planning Commission.

vii. A Director from the Department of Customs and Excise.

viii. The Registrar-General of the Corporate Affairs Commission (CAC).

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 ix. The Legal Adviser who shall be an ex-officio member of the Board.

Duties

i. Advising the Federal Government through the Minister of Finance on tax matters which

include any amendment to the existing law.

ii. Assessment and collection of company’s income tax.

iii. Issuing instructions on the financial aspects of assessment including interpretation on

income tax Acts.

iv. Reviewing and approving the strategic plans of the service.

v. Employ and determine the terms and conditions of service including disciplinary measures

of the employees of the service.

vi. Do such other things, which in its opinion are necessary to ensure the efficient performance

of the functions of the service under the Act.

2.4 Tax Policy Reforms and Institutional Development

“The need to address the problem of low tax returns motivated the Federal government to embark

on a number of reforms to existing tax laws. According to Alii (2016). the objectives of tax reforms

in Nigeria include: to bridge the gap between the national development needs and the funding of the

needs; to ensure taxation, as a fiscal policy instrument, to achieving improved service delivery to

the public; to improve on the level of tax derivable from non-oil activities, vis-a- vis revenue from

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oil activities; efforts at constantly reviewing the tax laws to reduce/manage tax evasion and

avoidance; and to improve the tax administration to make it more responsive, reliable, skillful and

taxpayers friendly and to achieve other fiscal objectives. ”

2.5 Federal Government Collection Taxes in Nigeria

“Buba (2017) accentuate the fact that the development of the private sector which is the main

engine for national development growth and wealth creation requires large investment in areas like

infrastructure, energy, and power. Investment of this magnitude can only come from government.

In order to enhance the level of in com e of the poorer section s of the society, sufficient investment

is also required in sectors like education, health and others that can generate employment. The

government can successfully implement all these projects if only it can raise the required revenue

whose major source is tax. According to Olawunmi & Ayinla (2017), policy guidance represents

the objective of economic policy.

2.6 REVIEW OF LITERATURE.

2.6.1 TAX EVASION AND THE ECONOMY.

Tax evasion and avoidance exert a detrimental impact on government revenue. Avoidance

introduces investment distortions, such as acquiring tax-exempt assets or undervaluing assets for

tax purposes (Klabel and Nwokah, 2009). Avoidance can take various forms, including investments

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in art collections, emigration of individuals and capital. As observed by Toby (1983), tax evasion

practices erode moral values and contribute to inflationary pressures. This is evident as individuals

and companies, with extra money from tax evasion, declare higher dividends and enjoy increased

take-home profits, leading to inflationary trends where excess money competes for limited goods

(Toby, 1983).

Tax evasion, being a prevalent economic crime, poses a significant and growing problem globally.

In the United States, the Internal Revenue Service estimates the tax gap (unpaid federal income

taxes) to be between $83 billion and $93 billion in 1987, with a steady annual growth rate

exceeding 10 percent over two decades (Internal Revenue Service, 1990). Estimates for 1991 put

the tax gap at over $111 billion (Internal Revenue Service, 1993). Similar challenges are observed

in other countries (Tanzi, 1982; Feige, 1989).

The consequences of tax evasion are far-reaching. It diminishes government tax revenues,

impacting the provision of public goods and services, distorts resource allocation, disrupts income

distribution, fosters feelings of unfair treatment by the government, and undermines respect for the

law.

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Mittone's (2006) theoretical work introduced a game theory perspective to tax evasion, portraying it

as a decision-making process akin to buying a lottery ticket. The taxpayer weighs the benefits and

drawbacks of paying taxes, aiming to maximize personal benefit. Taxes, as the primary source of

funding for public goods, play a crucial role in maintaining law and order and supporting

infrastructure. However, in the face of declining revenue, increasing expenditures, and fiscal

constraints, raising revenue remains a critical function of taxes.

Tax policies traditionally adhere to principles such as neutrality, efficiency, certainty and simplicity,

efficacy and fairness, and flexibility. These principles guide the development of taxing systems,

ensuring that taxes are levied consistently across businesses while accommodating unique

circumstances. A neutral tax system avoids favoring or disadvantaging specific economic activities,

contributing to efficiency and optimal resource allocation. Simplicity in tax systems reduces

compliance costs for businesses and administrative expenses for the government.

The enforceability of the tax system is vital for efficiency, affecting tax collection and

administration. Flexibility is crucial to adapting to new technologies and industries, ensuring that

the tax structure evolves with changing revenue needs. Equity considerations involve horizontal

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equity, where individuals in the same tax bracket pay the same rate, and vertical equity, where

wealthier taxpayers contribute a larger share in relation to their income.

Tax evasion remains a challenge for all tax systems, and in Africa, corruption exacerbates the issue.

Direct personal taxation in Africa faces difficulties in assessing and collecting taxes from the self-

employed, leading to widespread tax avoidance. Inconsistent reporting, lavish spending inconsistent

with reported income, and a prevalence of corruption contribute to tax evasion challenges.

Empirical studies support the negative impact of tax evasion on economic growth. Onyeka and

Nwankwo (2016) found a significant negative effect of tax evasion on the growth of the Nigerian

economy. Mansur (2016) identified factors like tax system, income, and education levels that

positively relate to tax evasion. Sylvester (2016) concluded that tax evasion and avoidance

contribute to reduced government tax revenue in Nigeria.

Obafemi (2014) highlighted the negative effects of tax evasion and avoidance on economic growth

and development in Nigeria. The study emphasized the need for good governance to encourage

voluntary tax compliance. These findings collectively underscore the critical role of effective tax

policies, administration, and governance in addressing the challenges posed by tax evasion and

avoidance.

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Imam, Gulani & Baba (2014) had a study to assess the view of tax authority and self employed

persons in the state. The study used both primary and secondary sources. Respondents were

sampled from the state through the use of purposive and convenience sampling methods and to

whom questionnaires were administered and responses were subjected to statistical analysis using

SPSS version 20 and hypothesis tested using chi-square method. The study revealed significant

evidence that taxpayers did not file tax returns to government, and good tax strategy could

significantly promote voluntary taxpayer compliance in the state. The study recommended that

government should consider public relations, tax education, tax consultation, guidance and

counseling, enforcement of penalty provision for errant taxpayers and training and work condition

for tax authority staff as part of its strategy for improving taxpayer compliance in the state.

2.8 Strategies of tax avoidance

Tax avoidance involves legal methods used by corporations and individuals to minimize their tax

liabilities within the boundaries of the tax law. While tax avoidance is not illegal, it can sometimes

involve exploiting loopholes or using complex financial structures to reduce tax payments. Here are

some common tax avoidance strategies used by corporations and individuals:

1. Transfer Pricing: Multinational corporations often engage in transfer pricing, where they

manipulate the prices of goods, services, or intellectual property transferred between their

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 subsidiaries in different countries. This allows them to shift profits to jurisdictions with

lower tax rates, reducing their overall tax burden in higher-tax countries.

2. Tax Havens and Offshore Accounts: Corporations and wealthy individuals may establish

subsidiaries or accounts in countries with low or zero tax rates, known as tax havens. They

can route income, royalties, or capital gains through these jurisdictions to benefit from

reduced taxation.

3. Shell Companies and Special Purpose Vehicles (SPVs): These entities are often set up for

specific transactions or investments and can be used to move profits, assets, or debts in a

way that minimizes tax liabilities.

4. Hybrid Mismatches: Taking advantage of differences in tax treatment between different

countries, entities may structure financial instruments or transactions in a way that leads to

double deductions or deductions without corresponding income inclusion, effectively

reducing taxable income.

5. Debt Shifting: Corporations might manipulate their financial structure to shift debt to high-

tax jurisdictions, where the interest payments on the debt can be deducted from taxable

income, thus reducing their tax liability.

6. Use of Tax Credits and Incentives: Corporations can leverage tax credits, deductions, and

incentives offered by governments to lower their tax obligations. These credits and

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 incentives are often intended to promote specific activities, such as research and

development, renewable energy investments, or job creation.

7. Artificial Loss Creation: Creating artificial losses through transactions such as loss-making

deals or investments, which can then be offset against taxable income in order to lower the

overall tax liability.

8. Complex Financial Instruments: Corporations may employ complex financial

instruments, like derivatives or structured financial products, to manage their income

recognition timing and reduce their tax liabilities in specific years.

9. Income Deferral: Delaying the recognition of income or accelerating expenses to different

tax years can lead to lower current tax liabilities, though it might result in higher taxes in the

future.

10. Real Estate Investment Trusts (REITs): REITs are investment vehicles that receive

favorable tax treatment in many jurisdictions. Corporations or individuals can invest in real

estate through REITs to benefit from tax advantages

2.9 Theoretical Framework

A lot of theories have been propounded by so many researchers to study taxation, but this study

reviewed and adopted the ability to pay, the benefit, and equal distribution theories because of their

high level of relevance to the current study.

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2.9.1 Ability to Pay Theory

This theory says that taxation should be levied in accordance with an individual’s ability to pay. It

says that public spending should come from “him that hath” instead of “him that hath not”

(Anthony & Bridget , 2009).. The theory originated from the sixteenth century, the ability-to-pay

principle was scientifically extended by the Swiss philosopher Jean Jacques Rousseau (1712-1778),

the French political economist Jean- Baptiste Say (1767-1832) and the English economist John

Stuart Mill (1806-1873). This is indeed the foundation of ‘progressive tax,’ as `the tax rate

increases by the increase of the tax base. This theory is indeed the most equitable tax system, and

has been widely used in industrialized economies. The usual and most supported justification of

ability to pay is on basis of sacrifice. The payment of taxes is viewed as a deprivation to the

taxpayer because he surrendered money to the government which he would have used for his own

personal use. However, there is no solid approach for the measurement of the fairness of sacrifice in

this theory, as it can be measured in absolute, proportional or marginal terms. Thus, equal sacrifice

can be measured as: Each taxpayer surrenders the same absolute degree of utility that she or he

obtains from her or his income; Each sacrifice the same proportion of utility she or he obtains from

her or his income; Each gives up the same utility for the last unit of income; respectively as cited in

(Adebisi & Gbegi, 2013).

28
The Benefit Theory

According to Anthony & Bridget , (2009), individuals may be required to submit their taxes in

proportion to the utility being enjoyed from the services provided by the government. This should

be based on the postulation that there is an exchange relationship between the taxpayer and the

government. Government deliberates some benefits to the taxpayers by providing different services

and other so-call social goods. Moreover, this theory professes and advocates that equity or fairness

in taxation stresses that an individual would be required to submit a tax in proportion to the welfare

he receives in return from the services provided by the government. Despite the theory is seen as

interchange relationship between taxpayer and the government, a lot of difficulties were identified

in applying the theory. The major problems confronting this principle of utility or benefit approach

is how to quantify and measure the enjoyed benefit by taxpayers from the services provided by the

government. For example, on which scale taxpayer benefit would be measured for enjoying

national security and education, maintaining law and order and other social infrastructure-all

provided by government. Furthermore, various expenditures incurred by government in rendering

services, their benefits are indivisible which course the expenditures also not possible to be divided.

This could only show that people are always encouraged by paying taxes to the government for the

continuity of the community prosperity. However, the theory can only be really applied in a

situation where the beneficiaries are easily and clearly traceable. For instance, it can be applied to

29
the road taxes collected from owners of vehicles. Also principle of benefit approach can be applied

to the workers who have a network of social security programs. Therefore, this principle can only

render restricted solution to the issue of equity and fairness in the domain of taxation as cited in

(Gurama, Mansur & Pantamee, 2015).

30
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter entails the procedures and methods adopted in the study. It consists of the research

design population of the study, sample and sampling techniques, the sources of data collection, the

administration of questionnaire and techniques for data analysis.

3.2 Research Design

According to Izedonmi (2005) a research design specifies the methods and procedures used to

acquire the information needed for the research. The research design adopted in this study is survey

design in order to give insight into the research. It is opted for because it uncovers data, integrate

and brings out inter relationship among variables.

3.3 Population and Sample of the Study

Parastatals in Edo State constitute the population of the study. A total of one hundred respondents

shall randomly be sampled from UBTH in Edo state. The sample procedure adopted in the study

was convenience sampling method, reason for that is because of the ease and accessibility of the

research to obtain information from respondents.

31
3.4 Sources of Data

In generating data, the primary source of data is employed through the administration of

questionnaires and in this study the questionnaire is the instrument used in obtaining data from

respondent.

The questionnaire will be streamlined into two part A and B. The part A of the questionnaire

will deal with respondent social characteristics, part B of the questionnaire will be based on the

variables in the research objectives of the study.

3.5. Z-Test

The Z-test is a statistical tool that enables the researcher estimate the proportion possessing a

particular trait of interest. It is used where the sample size of the study is very large. In testing the

hypotheses of a study, the Z-test for population proportion would be adopted because of the large

sample size used as stated earlier in the study.

The formula for Z-test is shown below:

p−P0
Z=

√ p.q
n

Where P0 = hypothesized proportion P0 = 0.5

P= Proportion of respondents with affirmative response

32
 x
P=
n

n = Sample size

x = Respondents with affirmative response

Decision Rule

The null hypothesis would be accepted if the calculated Z-value is less than the table Z-

value but if the calculated Z-value is greater than the table Z-value, the null hypothesis would be

rejected while the alternative hypothesis would be accepted.

33
 QUESTIONAIRE

Department of Accounting
University of Benin,
Benin Study Centre

Dear Respondent,

REQUEST FOR YOUR COOPERATION IN COMPLETING A QUESTIONAIRE.

I am an undergraduate student undergoing B.Sc Taxation programme, undertaking a research work

on ‘the impact of tax evasion and avoidance in the Nigeria economy”. I wish to appeal to you to

assist this study by taking a few minutes to fill this questionnaire.

Yours faithfully,

Njoku Joel Chibuzor

Researcher

Please tick (√) or fill where appropriate.

Sex: Male ( ), Female ( ).

Age: 25 - 35 ( ), 36 - 45 ( ), 46 - 55 ( ), 56 and above ( ).

Marital Status: Married ( ) Single ( )

Educational Qualification: B.Sc/HND ( ) M.Sc ( ) PhD

34
 SECTION B:

PLEASE TICK ( ) AS APPROPRIATE USING THE FOLLOWING KEY

SA =STRONGLY AGREE, A =AGREE, U =UNDECIDED, D =DISAGREE,

SD =STRONGLY DISAGREE

S/N Effects of tax evasion and avoidance on the economic SD D U A SA

Section A development of the country
1 Potential positive and negative economic implications of tax
avoidance for a country. How might it influence resource
allocation, investment decisions, and overall economic growth
2 Do you believe that stronger tax regulations and international
cooperation can effectively address the challenges posed by
aggressive tax avoidance
3 Do you believe that public awareness campaigns and
educational efforts could help reduce instances of tax evasion
4 Does tax avoidance differ from tax evasion in terms of legality
and ethical considerations
Section B The impact of tax evasion and avoidance on a government's
internally generated revenue:
1 Tax evasion and avoidance contribute to the reduction of the
government's internally generated revenue
There are methods and strategies individuals and businesses
2 use to evade taxes and avoid paying their full tax liabilities
3 The loss of revenue due to tax evasion and avoidance affect a
government's ability to fund essential public services such as
healthcare, education, and infrastructure development
4 Reforms from government could effectively combat tax
evasion and avoidance and thereby enhance its internally
generated revenue?

35
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION OF RESULT

4.1 Introduction
This chapter contains the presentation, analysis and interpretation of the data collected for the

purpose of this research work. Consequently, it entails the application of statistical technique to

provide the basis for the testing of the research hypotheses raised earlier at the introductory section

of the study. It is a vital part of any research work since it forms the basis for recommendations and

conclusion at the end of the research. The preliminary analysis of the data is evaluated using

responses from questionnaires analyses.

Table 4.1: Analysis of responses to question 1; Potential positive and negative economic
implications of tax avoidance for a country. How might it influence resource allocation,
investment decisions, and overall economic growth.
Cumulative
Frequency Percent Percent Percent
STRONGLY
27 76.5 76.5 76.5
DISAGREE
DISAGREE 14 21 21 97.5
UNDECIDED 7 9.09 9.09 106.59
AGREE 16 18 18 124.59
STRONGLY AGREE 13 35 35 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

36
The table above shows that about 35% strongly agree that potential positive and negative economic
implications of tax avoidance for a country might influence resource allocation, investment
decisions, and overall economic growth while about 76.5% strongly disagree.
Table 4.2: Analysis of responses to question 2 Do you believe that stronger tax regulations
and international cooperation can effectively address the challenges posed by aggressive tax
avoidance

Cumulative
Frequency Percent Percent Percent
STRONGLY
11 14.3 14.3 14.3
DISAGREE
DISAGREE 11 14.3 14.3 28.6
UNDECIDED 9 12 12 40.6
AGREE 31 40.2 40.2 60.1
STRONGLY AGREE 15 19.5 19.5 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

The table above shows that about 19.5 % strongly agree that stronger tax regulations and
international cooperation can effectively address the challenges posed by aggressive tax avoidance
while about 14.3% strongly disagree.

37
Table 4.3: Analysis of responses to question 3; Do you believe that public awareness
campaigns and educational efforts could help reduce instances of tax evasion
Cumulative
Frequency Percent Percent Percent
STRONGLY
7 9.09 9.09 9.09
DISAGREE
DISAGREE 4 5.19 5.19 14.28
UNDECIDED 9 12 12 40.6
AGREE 17 22 22 60.1
STRONGLY AGREE 40 52 52 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)
The table above shows that about 52% strongly agree that public awareness campaigns and
educational efforts could help reduce instances of tax evasion while about 9.09% strongly disagree.

Table 4.4: Analysis of responses to question 4 Does tax avoidance differ from tax evasion in
terms of legality and ethical considerations

Cumulative
Frequency Percent Percent Percent
STRONGLY
13 17 17 14.3
DISAGREE
DISAGREE 8 10.3 10.3 28.6
UNDECIDED 4 5 5 40.6
AGREE 19 25 25 60.1
STRONGLY AGREE 33 43 43 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

The table above shows that about 43% strongly agree that tax avoidance differ from tax evasion in
terms of legality and ethical considerations while about 17% strongly disagree.
38
Table 4.5: Analysis of responses to question 5
Tax evasion and avoidance contribute to the reduction of the government's internally
generated revenue
Cumulative
Frequency Percent Percent Percent
STRONGLY
3 3.8 3.8 14.3
DISAGREE
DISAGREE 5 8 8 28.6
UNDECIDED 2 2.6 2.6 40.6
AGREE 12 16 16 60.1
STRONGLY AGREE 55 71.4 71.4 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)
The table above shows that about 71.4% strongly agree that tax evasion and avoidance contribute to
the reduction of the government's internally generated revenue
while about 3.8% strongly disagree.

Table 4.6: Analysis of responses to question 6 There are methods and strategies individuals
and businesses use to evade taxes and avoid paying their full tax liabilities
Cumulative
Frequency Percent Percent Percent
STRONGLY
6 7.8 7.8 14.3
DISAGREE
DISAGREE 13 16.8 16.8 28.6
UNDECIDED 12 15.5 15.5 40.6
AGREE 29 37.5 37.5 60.1
STRONGLY AGREE 17 22 22 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

39
The table above shows that about 22% strongly agree that there are methods and strategies
individuals and businesses use to evade taxes and avoid paying their full tax liabilities while about
7.8% strongly disagree.
Table 4.7: Analysis of responses to question 7; The loss of revenue due to tax evasion and

avoidance affect a government's ability to fund essential public services such as healthcare,

education, and infrastructure development

Cumulative
Frequency Percent Percent Percent
STRONGLY
14 18 18 14.3
DISAGREE
DISAGREE 12 15.5 15.5 28.6
UNDECIDED 11 14.3 14.3 40.6
AGREE 15 19.4 19.4 60.1
STRONGLY AGREE 25 32.4 32.4 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

The table above shows that about 32.4% strongly agree that the loss of revenue due to tax evasion

and avoidance affect a government's ability to fund essential public services such as healthcare,

education, and infrastructure development while about 18% strongly disagree.

40
Table 4.8: Analysis of responses to question 8; Reforms from government could effectively
combat tax evasion and avoidance and thereby enhance its internally generated revenue?
Cumulative
Frequency Percent Percent Percent
STRONGLY
15 19.4 19.4 14.3
DISAGREE
DISAGREE 10 13 13 28.6
UNDECIDED 11 14.3 14.3 40.6
AGREE 31 40.2 40.2 60.1
STRONGLY AGREE 10 13 13 100.0
Total 77 100.0 100.0
Source: Field Survey (2023)

The table above shows that about 13% strongly agree reforms from government could effectively
combat tax evasion and avoidance and thereby enhance its internally generated revenue while about
19.4% strongly disagree.

On the basis of the overall statistical significance of the model as indicated by the Z-statistics, it

was observed that the overall model was statistically significant since the calculated Z- value of

55.9 was greater than the critical T-value at 5% level of significance. This shows that there exist a

significant linear relationship between the dependent variable and all the explanatory variables

taken together.

HO1
H02.

41
4.2 TEST OF HYPOTHESES
The hypotheses of the study were tested using data generated from the field work. The z-test

was used in testing the hypotheses at 5% level of significance under the two-tailed test.

Hypothesis 1 There is no relationship to the extent tax evasion and avoidance affect Nigeria’s
economy.
The result showed that enforcing tax compliance with a calculated z-value of 7.93 is greater than

the critical t-value of 2.0 at 5% level of significance. Therefore, we reject the null hypothesis and

accept the alternative hypothesis which states that there is relationship between enforcing tax

compliance.

Hypothesis 2

HO: There is no possible effects of tax evasion and avoidance on the economic development of

the country

The result showed that there is no relationship between cross border transactions and digital

economy with a calculated z-value of 3.87 is greater than the critical t-value of 2.0 at 5% level of

significance. Therefore, we reject the null hypothesis and accept the alternative hypothesis which

states that there is a positive relationship between cross border transactions and digital economy.

42
Hypothesis 3

H03.There is no extent to which tax evasion and avoidance affect government internally generated

revenue

The result showed that the size and growth of the digital economy, including e-commerce, digital

services, and online advertising affects the collection of taxes with a calculated z-value of 7.93 is

greater than the critical t-value of 2.0 at 5% level of significance. Therefore, we reject the null

hypothesis and accept the alternative hypothesis which states that there is relationship between

them.

43
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This study examined the effect of tax evasion and avoidance on Nigeria’s economy. Tax evasion

and avoidance lead to substantial revenue shortfalls for the Nigerian government. This reduces the

government's capacity to fund essential public services and infrastructure development, hindering

economic growth and poverty reduction efforts.

5.2 Summary of Findings

The specific focus of this study is to examine the effect of tax evasion and avoidance on Nigeria’s

economy, the estimation provided the following results:

1. Tax evasion and avoidance affect Nigeria’s economy.

2. Tax evasion and avoidance on the economic development of the country.

3. Tax evasion and avoidance affect government internally generated revenue.

5.3 Conclusion

In conclusion, this study highlights the urgent need for Nigeria to tackle tax evasion and avoidance

as integral components of its economic and fiscal policy agenda. By doing so, the government can

not only boost its revenue collection but also create a fairer, more equitable, and conducive

environment for economic growth and prosperity for all its citizens.

44
5.4 Recommendation

From the above findings, the study makes the following recommendations:

 Launch public education campaigns to raise awareness about the importance of paying taxes

and the negative consequences of tax evasion.

 Promote a culture of tax compliance and responsibility.

 Review and update corporate tax laws to close loopholes and ensure multinational corporations

pay their fair share of taxes in Nigeria.

 Consider adopting transfer pricing regulations in line with international best practices.

 Offer tax incentives and benefits to businesses and individuals who voluntarily comply with tax

regulations.

 Consider amnesty programs that allow tax evaders to come forward, pay their dues, and avoid

criminal prosecution.

45
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