On 24 April, 2008, American movie star, Wesley Snipes, was convicted and sentenced to 3 years in prison for failing to file income tax returns. This sent shock waves across the Hollywood community as other movie stars and celebrities scampered to review their tax records and ensure up-to-date compliance in order to avoid a similar fate.
Since then, many other celebrities and super stars have had similar run-ins with the tax authorities. The famous singer, Lauryn Hill, served a 3-month jail term in 2013 while Joseph Cartagena, "Fat Joe", also served a 4-month jail term in the same year for tax related offences. More recently, professional football super stars, Lionel Messi and Christiano Ronalda were the focus of various tax investigations. When ii was resolved, Messi paid €12 million and got a 24-month suspended sentence, while Ronaldo paid €17million and got a 2-year suspended sentence. There is a lot to learn from the experiences of these stars.
How the tax environment is changing
Although such high-profile tax cases are not common in Nigeria, it is safe to say that the tax environment is changing very fast. Tax compliance has indeed become a very important issue as a result of government's renewed focus on taxation.
Due to paucity of funds across all levels of governments, taxation has become the only sustainable way of growing government revenue. The traditional reliance on revenue from natural resources is not sustainable as it is clearly inadequate and subject to many factors outside government's control. Nigeria's tax to GDP ratio of about 6% is quite low and indicates that a significant portion of the economic activities in the country is not captured within the tax net. The tax authorities realize this and have been ramping up efforts to increase tax collection. This is evident in the increased aggressiveness in enforcement and public enlightenment campaigns.
In terms of availability of information, the Nigerian tax authorities now have an unprecedented level of data on the economic activities of Nigerians. In 2017, the Federal Ministry of Finance commissioned a data mining project ("Project Lighthouse") to obtain relevant information to profile potential tax payers. Data was gathered from various sources such as Bank Verification Number, Land Registry, Forex applications, Nigerian Customs, vehicle registration registry, Corporate Affairs Commission etc. This enabled them to extract actionable intelligence which can be used in prosecuting defaulting taxpayer.
It is hoped that an increase in tax collection will help to strengthen the social contract between Nigerians and the government. As reflected in other countries, tax payers are more likely to hold public officials accountable for public funds where the citizens are directly responsible for funding government spending through payment of their taxes.
International efforts to improve transparency
The international community is concerned about the low level of transparency in the international financial systems. This situation has encouraged the flow of illicit funds which is a key enabler for corruption, terrorism and other international crimes.
Taxation is a veritable tool for tracking the flow of funds and encouraging transparency. It helps in increasing accountability in the international financial systems. In view of this, the international community, through The World Bank and IMF, is pushing developing economies, such as Nigeria, to improve their tax administration systems and processes in order to bring in more tax payers into the tax net. There are ongoing partnerships, trainings and other capacity enhancement programs funded by these institutions to improve tax administration in developing countries.
For instance, the new global standard on Automatic Exchange of Information (AEOI) was put in place to reduce the incidence of tax evasion. It provides for the exchange of financial information between tax authorities in different jurisdictions. Countries who sign up to the AEOI will send and receive financial information each year, without any specific request. This will help uncover more tax defaulters and assist governments in recovering lost tax revenue. It will also strengthen the drive to increase co-operation among tax administrations and enhance their effectiveness in addressing international tax evasion. As Nigeria has signed up to this initiative, the level of information that will become available through this arrangement will be staggering.
The traditional tax havens are coming under attack from the Organization for Economic Co-operation and Development (OECD).
There is a concerted effort to discourage the practice and lift the veil of secrecy associated with such jurisdictions. Also, incidents such as the leak of Panama papers, where documents containing personal financial information of wealthy individuals were stolen from a Panamanian law firm, were released by anonymous sources, is an indication of the opposition to tax heavens .
The United Kingdom also implemented the "Unexplained Wealth Orders" (UWO), effective January 2018. Under UWO, the UK courts can approve forfeiture of property (worth at least £50,000) where there are reasonable grounds to suspect that the sources of income are insufficient to obtain such property. The Order can be obtained for properties purchased prior to the establishment of the law and there is an 1mp11ea presumption of guilt. Hence, the onus of proof is on the individual. There is a concern that as all these efforts are going on, legitimately earned income may be caught up in the process and where the individual is unable to demonstrate the source of income, the asset may be lost.
How does it impact you?
The income tax returns is a reliable way of demonstrating the income and net worth of an individual. Based on the law, all income earned by every tax payer, whether taxable or otherwise is expected to be declared in the annual tax filings. Any portion of the total income not liable to tax will be exempted in computing the tax payable but all should be declared. What this means is that a review of all income tax returns filed by an individual for prior periods should give a very reasonable indication of the sources of income and the net worth of the individual. This is a very effective way of defending any income related query and resolving potential disputes on assets.
This also means that the consequence of non-compliance with taxes may not be limited to potential penalties and interests on outstanding tax liabilities. Assets acquired through years of hard work can actually be at risk if the individual is unable to demonstrate the sources of income with proper documentation. Where an individual, who correctly declares the income in the annual tax returns, is confronted with a UWO action, the tax returns will be an effective defense.
To encourage defaulting tax payers to regularize their tax records, the Federal Government launched a tax amnesty program, Voluntary Assets and Income Declaration Scheme (VAIDS) which ended in June 2018. The program extended clemency from interests and penalties and also gave assurance that tax defaulters will not face criminal prosecution for any tax offences.
Although the program has ended, there is still a need for high net worth individuals, and corporate entities, to continually review their tax practices to ensure adequate compliance. They are encouraged to take on the challenge of organizing their tax affairs so that it can meet the requirements of the changing tax environment.
Originally published in Business Day, October 2, 2018
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