[i]TAXES, GUINEA PIGS AND NOAH'S ARK: A LEGAL AND TAX EVALUATION OF
ISSUES IN THE LAGOS STATE LAND USE CHARGE LAW NO.11 OF 2001
BY
PROFESSOR
M.T. ABDULRAZAQ*
“Noah must have taken into the Ark two taxes, one male and one
female. And did they multiply bountifully?
Next to guinea pigs taxes must have been the most prolific animals”
- Will
Rogers.
INTRODUCTION:
Property
taxation in Nigeria is not new. Indeed
there are records of its enforcement since 1915 by virtue of the Assessment Act
of 1915 and subsequently the Assessment and Rating Act, Cap.16 of 1956. The natural question to ask therefore is why
is there so much resentment of the newly introduced property tax? Permit me to make some preliminary remarks
and observations of the law.
(1) The Land Use
Charge Law No. 11 of Lagos State which came into force on the 22nd day of June
2001 as a law to make provision for the consolidation of all Property and Land
based rates and charges payable under the Land Rate Law, the Neighbourhood
Improvement Charge Law and Tenement Rates Law in Lagos State into a new Land
Based Charge to be called Property Land Use Charge has not only become topical
but dangerously controversial and in some respects a curb on fundamental human
rights by inadvertently limiting the
freedom of speech in Section 19 which states that any person who:-
a)
Incites another person
to refuse to pay any rate under this law on or before the day on which it is
payable; or
b)
Incites or assists any
person to misrepresent in any way his chargeable capacity commits an offence
and shall be liable on conviction to a maximum fine of One Hundred Thousand
Niara only (N100, 000) or to an
imprisonment for a period of three (3) months or both.
In other words,
if this paper does not go down well with the Lagos State Government I could be held liable under section 19
for inciting readers to refuse to pay any rate under this
law. Also the conditions of Appeal under section 15
which provides that An Appeal shall not lie unless:-
a)
notice is given in the
prescribed manner to the Commissioner for Finance:
b)
the prescribed fee is
paid to the Assessment Appeal Tribunal;
c)
in the case of a person
aggrieved with his property assessment: -
i.
50% of the amount of the
assessed Land Use Charge being disputed is deposited directly into the State
Government Assessment Appeal Account which shall be maintained by the
Commissioner for Finance at a designated Bank.
ii.
the appellant has produced
to the Tribunal the receipt for the payment of the amount from the bank and
such receipt has been confirmed by the Commissioner for Finance as valid.
is an
infringement and monetary restriction on the right of enforcement of one's
fundamental human right.
(2) The other
issue I am concerned with as a lawyer, is why the business community should not
be estopped morally from any form
of further complaint about this
law. The reason being that by virtue of
the Notice issued by the Lagos State Government and signed by the Honourable
Commissioner for Information and Strategy and released in the Guardian
Newspaper of Friday November 30,2001, the government claimed that it
had consulted, deliberated and heard representation from members of the follows
bodies:
- Nigeria Employers Consultative Association (NECA)
- Manufacturers' Association of Nigeria (MAN)
- Lagos Chamber of Commerce & Industries (LCCI)
- Victoria Island/Ikoyi Residents Association (VIRRA)
This
consultation made with the above bodies and explanations from Government
Representatives we are told culminated in agreement of the following by the
Lagos State Government that the chargeable properties be classified and the
applicable rates be reduced as follows:
- Owner-Occupied Property – 0.15% per annum of the Assessed Property Value;
- Owner-Occupier Pensioner's Property Exempted from Land Use Charge, but liable to whichever is applicable of Tenement Rate, Ground Rent or Neighbourhood Improvement Charge.
- Industrial Premises of Manufacturing Concerns – 0.5% per annum of the Assessed Property Value
- Commercial Property (Rented for Residential Purposes - 0.65% per annum of the Assessed Property Value.
- Commercial Property (used by occupier for Business Purposes) – 1.75% per annum of the assessed Property Value.
- Family Compounds Exempted from Land Use Charge, but liable to Tenement Rate at the last assessed amount, increased only by 25% of that amount.
The bodies
consulted would need to explain to us why after such an agreement they should
be heard to complain about the Land Use Charge Law.
(3) The
Honourable Commissioner for Information and Strategy in his release of the same
November 30, 2001 stated that:
"In the other words, once
the Land Use Charge is levied on a property, all other
property based taxes, rates or levies in Lagos State will cease to
apply to that property"
.
If this is the
intention of the Lagos State Government then the law itself does not support
this assertion in Section 22 which states that:
On and from the date when Land Use
Charge is levied on a property in accordance with this Law, the provisions of the
Assessment Law, Land Rates Law, Neighbourhood Improvement Charge Law and
Tenement Rates Law and any amendments made pursuant thereto shall cease to
apply to that property.
In other words,
until the Land Use Charge Law is levied then the other Laws would continue to
apply this assertion is also supported by the exemption granted owner-occupier
pensioner as stated above. The drafting
of this law is suspect as there is no
“Explanatory Note” expressly repealing the “other Laws”. What is the Honourable Attorney-General and
Commissioner for Justice saying about this potential for “double taxation”?
(4) What
are the required qualifications of
members of the Assessment Appeal Tribunal?
All that the Law states in Section 12 is that: -
- The Governor shall establish an
Assessment Appeal Tribunal which shall consist of not less than fifteen
members;
- The Governor shall appoint one of
the members of the Tribunal as its Chairman.
- A minimum of three members shall
constitute a panel of the Tribunal.
4. Members of the Tribunal
shall hold office for such period as may be prescribed by the Governor and
shall be paid such allowances as the Governor may, from time to time determine
(5) Why has the introduction of the Land Use Charge Law generated so
much heat especially amongst the business community? The first reason would seem to be the lack
of credibility on the part of the Lagos State Government. All businesses require a credible and stable
atmosphere to operate. The process for
the introduction of this law began with the Property Identification Exercise
(PIE) in which people were led to believe that it was for other purposes than
for the introduction of any monetary charge. The second reason, and this is not
restricted to the business community alone is the dangerous political and
ethnic feeling that since most properties and businesses are owned by non
Lagosians, the law is simply targeted at a takeover of these properties by
virtue of Section 20(2) which provides that:
If
payment is not made after 135 calendar days, the property on which the Land Use
Charge is payable shall be liable to receivership by the State or its appointed
agent until all outstanding taxes, penalties and administrative charges are
paid.
The third, reason and this is not restricted to the Lagos State
Government alone is the lack of proper understanding of the definition,
objectives, functions and criteria as well as the basis of business taxation
especially as the land use charge is largely called and tagged is Property
Taxation”. So, what are the definitions,
objectives, functions, criteria and basis of business taxation?
DEFINITIONS OF
TAX:
Owing to the
federal and written structure of the Nigerian constitution,1
there has been the need for Nigerian law to formulate a definition of taxation. The Oxford English Dictionary defines a tax
as “a compulsory contribution to the support of government levied on person,
property, income, commodities, transactions etc. now at a fixed rate mostly
proportionate to the amount on which the contribution is levied.” This when, stripped off its limited view as
to the purpose of taxation, its irrelevant description of the tax base and its
undue stress on proportionate as opposed to progressive taxation, tells us very
little, beyond that taxes are compulsory.
To this criterion one may add that taxes are imposed under the authority
of the legislature, that they are levied by a public body and that they are
intended for public purposes.2
These criteria
become clearer when distinguishing a tax
from a charge for a government service as the Canadian courts have had
to do. In the first place if the payment
is a charge for a government service, some service must be provided directly to
the individual.3 There is a substantial difference between
paying a bridge toll and paying a tax to be used for defence of one’s
country. Secondly the charge must be
related to the service given, and not varied according to the person’s ability
to pay or to some other criterion such as the value of his property.4
Thirdly, it is no objection that a charge may result in a profit
provided only that the profit is a reasonable one.5 On this basis the proposed increase in
energy prices not to keep the books balanced but as a fiscal device to restrain
domestic consumption gives those charges some of the characteristic of a tax.6
On these tests a
purchase at fair market price of some goods from a privatised industry would
give rise to a charge for services not a tax.
However for an economists that payment would have to be broken down and
the profit element extracted since to an economist a tax is “ any leakage from
the circular flow of income into the public sector, excepting loan transactions
and direct payments for publicly produced goods and services up to the cost of
producing those goods and services”.7 Such tests, however” meaningful and
comprehensive”, have had no part in the legal definition of tax.
Another problem
concerns NSITF contributions. So long as
these could be regarded simply as compulsory insurance payments, they could be
regarded as the price of a benefit purchased directly but compulsorily from the
state, although the compulsory element might have turned such payments into
taxes. However now that payments are
graduated in a way which does not relate directly to the graduation in benefit,
they must be treated as taxes.8
A subtler
problem is the difference between a fine and a tax, particularly when
government motives on such matters as cigarette smoking are; to say the least,
ambiguous. It could appear that there is no difference between a
fixed rate of fine and a tax but the power of the court to vary the normal fine and to enjoin
against continued breach9 marks off the breach of the criminal law from
the carrying on a taxable activity. Fines or penalties imposed to regulate an
activity are more complex; penalties imposed to encourage prompt compliance
with filing or other requirements are really more in the nature of late filing
charges or interest charges than fines.10
OBJECTIVES AND
FUNCTIONS:
(a) The classical
function of the tax system is the raising of the revenue to meet government
expenditure. Nothing in this function
dictates any particular form of tax.
Alternatively government might
commandeer resources or print money or even borrow it, but taxation is either
more efficient or more just than each of these. 11 The government expenditure which requires to
be met is either the provision of services which the private sector cannot provide such as defence, law
and order or the provision of services which the state feels are better
provided by itself such as health services and education – often
called public
goods.12
Whether in practice taxes are raised to meet expenditure or vice versa
is a nice but worrying question.13
(b) In modern
times great emphasis has come to be placed on the objective of redistribution
of wealth. This has two quite distinct
forms. The first is the doctrine that
taxation should be based on ability to pay and is summarised by the cliché that
the greatest burdens should be borne by the broadest backs. The second form presupposes that the present
distribution14 is unjust and concludes
that this should therefore be undone, an idea wrapped up in the dictum that the
rich should be taxed until the pips squeak. This second principle sees
confiscation as a legitimate objective of taxation.
(c) The third objective is the management of the
economy. The role of tax changes in
altering the level of demand is now accepted although of course other
mechanisms such as credit control useful devices in stabilising the
economy. At present greater emphasis is
placed on monetary measures.15
However the tax
system is more than a matter of economies.
It has been described as the most pervasive and privileged exercise of
State power. It determines the
directions in which people may become wealthy by determining the directions in
which they may not. It is therefore
impossible to regard taxes as merely a means of obtaining revenue.16
The tax system
may also be used for much more specific purposes, such as discouraging the use
of alcohol or the purchase of cigarettes.
The tax system thus becomes a legal maid of all work.
CRITERIA
Two hundred and
twenty years ago Adam Smith in The Wealth of
Nations set out certain “canons of taxation”,. These have been the subject of some elaboration but are still recognisable in the
criteria used by economists judging a tax system.17 Conflict between these criteria is
inevitable.
(a) Equity.
Equity is traditionally divided into two sorts: horizontal equity, which
means that those in equal circumstances should pay an equal amount of tax, and
vertical equity which means that those
in unequal circumstances should pay different amounts of tax. The reason why equity is regarded as
important is partly an inherent view that it is right and proper in the same
way that equality before the law is right and proper, and partly the view that,
if a system is believed to be fair and equal, taxpayers will be more willing to
cooperate with it. However the statement
that equity is important does nothing to help us to determine what
circumstances are equal and what unequal.18 Equity may be satisfied by a proportional
system just as much as by a progressive system of taxation. In assessing how equitable a system is attention
must be paid to the whole range of taxes and benefits.
(b) Neutrality.19
A tax is neutral if it avoids distortions of the market. A selective tax, such as the high import duty
on motor vehicles tax, is not neutral, since it encourages the consumer to
spend his money on another item rather than on a car. Other illustrations would be a comparison of
the taxation of a company with that of a partnership, or the taxation of
profits earned within with those earned outside Nigeria. The Nigerian tax system has many rules which
break the principle of neutrality. Worse
there are many technical rules which make significant tax differences according
to which of two or more methods is adopted to achieve a given result.20
(c) Certainty. Certainty means first that the scope of the
tax should be clear. Penumbral areas cause resentment amongst taxpayers cast
into the darkness and undermine the principle of equity, besides increasing the
cost of the system. It means next the certainty that the tax can and will be
enforced. A tax that is easily evaded
causes resentment and often a decline in taxpayers morality. It means also that the State will be correctly to predict how much tax is gathered
in and so perhaps the effect of tax.
(d) Administrative
efficiency. Only those who regard the duty of the tax system as being to
confiscate wealth in order to provide employment would be happy with a tax
whose administration costs exceeded the tax yield. There is the further problem of compliance
costs21.
A good tax structure
must take into account many factors; the effects on economic incentives; its
fairness as between persons of similar taxable capacity; its effects upon
distribution between rich and poor; whether it is compatible with desirable
international economic relations and its simplicity, ease of understanding and
absence of excessive administration costs.22
THE BASIS OF
BUSINESS TAXATION:
The necessary
question posed is whether businesses
especially corporate bodies should be made the targets of revenue
generation ? The answer is that a tax is needed to prevent the companies from
becoming simply receptacles for the convenient storage and accumulation of
income free of tax; although the eventual distribution will be taxable, that
liability might be avoided by the device of a sale of the shares thus realising
a capital gain.23 Thus a tax on companies is needed to protect
the individual income tax. Other reasons
may be the idea that taxing companies is politically more acceptable then
taxing individuals, as being less personal, and because companies occupy so
important a place in the economy that governments cannot afford not to tax
them.24
THE INCIDENCE OF
BUSINESS TAX AND CHARGES.
Who then
actually bears the burden of business taxes and charges? We can readily identify three main groups who
bear the burden of these taxes and charges.
One is the
people who supply entrepreneurship. A
second is the people who supply capital to these businesses. This group overlaps somewhat with the first. We might argue that by choosing to support
these operations rather than others at a time when their potential was not
recognised these individuals were themselves supplying entrepreneurship as well
as capital. The third group of people
who share the burden are those who buy goods and services which are produced by
these businesses and for whom the government should be naturally concerned as
its electorate.
THE BASIS FOR
THE LAND USE CHARGE LAW.
What then is the
Lagos State Government's basis in introducing these charges? The first is that
which they say themselves and the second is that which we can safely speculate.
In the release
in the Guardian of November 30, 2001 the Government explained the basis
for the law. According to them
“The Land Use Charge Law represents a major step
taken by Lagos State Government to generate the resources that are necessary to
develop the state. Since its inception
the Government had realised the urgent need to bring the State up to acceptable
world standards even in the face of rapidly increasing population and rapidly
decaying infrastructure. In this regard
, it is necessary to note that Lagos is classified by the United Nations as the
6th largest mega city in the world.
Its estimated population of 15 million people grows at the rate of 5.33%
per annum and is expected heat 25 million by the year 2015.
With
this staggering figures and projections, the heavy strain on the State's
resources becomes readily appreciable.
This strain is however seriously complicated by the absurdly low level
and quality of infrastructures, which has been left to decay since the Federal
Government moved its capital to Abuja in 1991.
In spite of the above state problems and
challenges, the current administration in Lagos State has never relented in its
efforts to make the best of available resources and to raise the standard of
living and infrastructure in the state.
In this connection, the State Government's efforts in the areas of road
construction and rehabilitation, efficient waste disposal, provision of potable
water, traffic monitoring and electric power generation are evident. Furthermore, the State Government has
distinguished itself in the areas of health delivery, administration of
justice, provision, provision of employment, construction of modern schooling
building, clearing of drainages and several other key development projects,
which are to numerous to mention here.
The sustenance, refinement and expansion
of all these programmes obviously require very heavy monetary inputs to which
residents of the State must contribute.
In addition, it should be emphasized that the efforts of this
administration are so planned as to constitute a solid foundation for future
development programmes of the State. In
other words, the investment which we are called upon to make today are going to
yield better life to residents of Lagos for many years to come”.
The second basis
is the need to generate adequate revenue.
The need for generating adequate revenue from internal sources by our
State Governments has become increasingly critical since their main sources of
revenue – statutory allocation from the Federation Account – has shrunk within
the last few years. The shrinkage of the
statutory allocation is explained partly by relative decline in the petroleum
revenue of the economy and partly also by the variation in the revenue
allocation formula which generally reduced the proportionate share of
states. Despite the downward shift in
the revenue path of the government, there has been increased spending in order
to meet their various socio-economic responsibilities to their people. The consequences of this behaviour is that
all State Governments have been faced by the problem of seeking various new
local or internal sources of raising their revenue levels.
The issue here
is that unless this law is managed as an enterprise whatever may be the basis
it would result in very low yield for Lagos State. A successful enterprise requires:
i.
proper conceptualisation and
hence proper formulation of goals and targets
ii.
identification of the necessary
inputs,
iii.
adequate management of the
available inputs and resources and hence
iv.
managerial abilities to do
this.
Each of these
factors contributes individually and collectively to make an enterprise
successful.
This also means
that unless the enterprise of revenue generation is properly conceived so that
each factor is well identified and adequately related to one another there
would be great difficulty in achieving the objectives of generating revenue. It is often thought that spending more money
to increase revenue would tantamount to waste of resources. Hence, most
governments spend very little to improve the tax system, for instance., An evidence from our studies of tax structure
and administration in Nigeria reveals that less than one kobo in Naira is spent
by the Federal Government to administer non-oil tax in the country. That is to say, less than one kobo is
expended for every one Naira realised from revenue from non-oil tax, and if we
add the petroleum tax, the amount expended becomes remarkably
insignificant. This is an illustration
to show the extent to which revenue generation is conceived as an enterprise in
Nigeria.
AVOIDANCE,
EVASION, MITIGATION AND PLANNING:
We
now come to an issue that should be of concern to most businesses in
respect of the Land Use Charge Law and
that is what we do to minimise our liabilities in respect of this law? First we need to understand the importance of
evasion and avoidance.
IMPORTANCE OF
TAX EVASION AND AVOIDANCE
The importance
of tax evasion and avoidance for present purposes is threefold. First, from the wider perspective it is not
possible to assess the effectiveness of a tax system unless it can be seen what
degree of evasion and avoidance is practised and permitted by the system. Thus, to have a rule that trading profits of
charities are not exempt from tax is one thing; to learn that this is routinely
avoided by having a separate trading company which assigns its profits to its
charitable owners makes the rule look less fierce. Secondly, while legislation to counter
evasion and avoidance can be among the most complex in our tax code, it can
also be among the simplest. Thirdly, from the legal perspective, the case-law on evasion and
avoidance tell us much about the problems posed by legislation and statutory
purpose.
DEFINITION OF
TAX EVASION AND AVOIDANCE
Politicians, tax
officials and practitioners spend a lot of time and energy on the problem of
tax evasion and avoidance. No one seems
to have a very precise idea of what is meant by the term,25 avoidance but it is to be distinguished
from evasion, which is illegal. If two
people marry in order to reduce their tax burden they are practising tax
avoidance; if they tell the Revenue that they are married when they are not,
they are guilty of tax evasion, and may well be prosecuted. There is also an important distinction
between a scheme under which no liability
to tax arises (tax avoidance) and one under which a charge arises but
the tax cannot be collected.26 The latter may be evasion and subject to
penalty. Other terms used in
discussion-and in case –law- are tax mitigation and tax planning, which may be
seen as subsets of tax avoidance or as independent categories, depending on the
context in which one finds oneself, they are all, however to be distinguished
from tax evasion.
Unfortunately, tax
evasion itself has developed a number of “frayed edges”. Thus, it is sometimes used to cover all cases
of non-compliance even though non-compliance27 may
be deliberate or
accidental and may give rise to penalties under tax legislation, prosecution
under criminal law, or both. Evasion may
even result from taking a position on tax legislation which is later shown to
be incorrect.28 If these are all examples of evasion, its
greatest cause may be not fraud or greed, but the complexity of the tax
legislation; the category, instead of being one of the undoubted opprobrium,
can become a matter of judicial hindsight.
It is such considerations which encourage those who believe in a low
rate, broad-based tax system, with few opportunities for tax saving.
Tax
mitigation 29 is distinguished from tax avoidance because judges, when
dealing with a provision turning on the presence of tax avoidance, invented the
term “mitigation” in order to mark off transactions which would not be caught
by the provision.30 In this context therefore tax mitigation and
tax avoidance are mutually exclusive.
Today, tax avoidance arises where the taxpayer reduces a liability to
tax without incurring the economic consequences that is intended to be suffered
by any taxpayer qualifying for such reduction in that liability.31
Tax mitigation arises where the taxpayer takes advantage of a fiscally
attractive option afforded by the tax legislation, and genuinely suffers the
economic consequences that is intended
to be suffered by those taking advantage of the option. There are therefore two elements; economic
consequences and legislative intent. The
first element asserts that there should be some genuine economic consequences,
while the second enables the court, on a case-by-case basis, to control which
consequences will qualify. Today, a
couple marrying to reduce tax would be treated as examples of tax mitigation.
The problem with tax mitigation is that while it provides a coherent
reason for saying, in a particular case, that the facts do not amount to
avoidance, and so do not trigger the application of some rule, it does not
provide a clear way of telling whether those particular facts fall one side of
the line or the other – it can be a conclusion, not a test, and so restates the
problem rather then solves it.32 Thus, why is it that that there were no
“genuine economic consequences” in the leading avoidance case of Akinsete Syndicate v. Senior
Inspector of Taxes33
Tax planning is
what all sensible people do in order to reduce their tax liabilities. The boundary between tax avoidance and tax
planning is shadowy at best; what matters is the boundary between successful
and unsuccessful tax planning. Tax planning is best understood by reference to
the words “who”, “what”, “when” and “where”.34
- “who” : tax planning may involve the careful selection of the particular taxpayers who will, for example, receive the income or realise a loss; thus, it may be another member of the family with little other income or relief, or a subsidiary of a company.
- What”: with care; it may also be possible to influence the type of receipt, whether capital or income, or one type of income rather than another, e.g. employment income or business income.
- “When”: timing is also important; and paying attention to timing may enable the taxpayer to postpone a liability to tax, for example by taking advantage of a deferral rule, or to avoid being caught by an artificial tax rule which forbids for example, the carrying back of an unused capital loss.
- “where”: location is important since placing income or assets outside the taxing jurisdiction may mean no liability to Nigerian tax, or no liability until income is remitted to Nigeria The downside of this is that liability may be incurred under the foreign tax system. However, the foreign tax system may be different to the Nigerian system, and the exploitation of gaps between tax system is the forte of the international tax specialist.
Before leaving
this topic one should note that while there has been much legislative (and
occasional judicial) activity to prevent a person from converting income into
capital, there has been none to stop conversion in the opposite direction.
PROPERTY
TAXATION:
In economics the
term “property” is often used to mean “anything yielding an income to the
owner”. Property taxation, therefore, is
the imposition of compulsory levy on a property whether real or personal hence
the base is property. “Property Taxes” for the purpose of this paper will then
be defined as general and recurring levies to owners or users of property,
based on the capital value or the annual rental value of the assets or on other
methods of valuation that may be adopted. 35
LEGAL BASIS
OF PROPERTY TAXATION:
Property taxation in Nigeria has always
been a local tax handled by the Local Government Councils under the name tenement rate. However, the decision about the structure and
design of the tax is taken by the State Governments. The present enabling law which gives the
Lagos State Government jurisdiction over property taxation is the Land Use
Charge Law 2001 which is a Law to make provision for the Consolidation of all
Property and land Based Rates and Charges payable under the Land Rates Law, the
Neighbourhood Improvement Charge Law and Tenement Rates Law in Lagos State into
a new Land Based Charge, to be called Property Land Use Charge, to make
provision for
the levying and
collection of the charge and for connected purposes.
The law further
provides for non-compliance with the law, obstruction of officials and damage
to property identification plaques in section 18, which states that:
Any person
who:
a)
refuses or neglects to
comply with any provision of this Law
when required to do so by the property identification officer or an assessor;
b)
prevents, hinders, or
obstructs any property identification
officer or an assessor in the course of his lawful duty;
c)
removes from or damages
or destroys a property identification plaque on any property or building;
commits an offence and shall be liable on summary conviction to a maximum fine
of One Hundred Thousand Naira only (N100,000)
or to a term of imprisonment for a period of three (3) months or both.
Also Section
19 states that:
Any person
who:
a)
incites another person
to refuse to pay any rate under this Law on or before the day on which it is
payable; or
b)
incites or assists any
person to misrepresent in any way his chargeable capacity commits an offence
and shall be liable on conviction to a maximum fine of One Hundred Thousand
Naira only (N100, 000) or to an
imprisonment for a period of three (3) month or both.
Section 20 (1) provides that where a person who has received a Land
Use Charge Demand Notice fails to pay the amount within the period specified on
the notice, the charge payable shall be increased by the following percentage:
a)
between 45 calendar days
and 75 calendar days – 25%
b)
between 75 calendar days
and 105 calendar days – 50%
c)
between 105 calendar
days and 135 calendar days – 100%
Section 20
(2) provides that if payments is not
made after 135 calendar days, the property on which the Land Use Charge is
payable shall be liable to receivership by the State or its appointed agent
until all outstanding taxes, penalties and administrative charges are
paid.
The question to
ponder over is why would any person in the face of these stiff penalties want
to evade the tax?
REASONS FOR TAX
EVASION:
Tackling of the
problem of tax evasion requires at least some understanding of the factors
underlying the individual's decision to pay or evade his taxes. Existing empirical research indicates that
while government sanctions may play a role in this decision, tax payer
attitudes towards the tax system and tax payers norms may also be
important. This suggests that tax policy
directed toward evasion is simply a matter of arriving at the right combination
of penalties and enforcement activities subject of course to financial constraints
on the level of enforcement activities and political and ethical constrains on
the type of enforcement activities and the acceptable level of penalties.362
However,
empirical research suggests that the choice between compliance and evasion is a
complex one. Cross-national survey
research carried out in European Countries, including Britain indicates that
positive attitude of tax payers towards the tax system and negative attitude
toward tax offenders can make an important contribution to the level of
compliance within a nation.373 Field experimental research undertaken in the
United States suggests that taxpayer norms are an important factor underling
the choice between evasion and compliance and that normative appeals may be
more effective than threats in inducing compliance.38
Other researches
seem to confirm this pattern.39 Survey results from a small sample of
households in Ohio, United States, indicate that while the threat of detection
is a factor inducing tax compliance, attitude toward the tax system
particularly concerning the equity or fairness of the system are
important. In general, there appears to
be a positive relationship between tax evasion and the perceived inequity of
the tax system. Furthermore, tax evasion
by an individual was also found to be positively related to the number of his
friends and colleagues whom he perceived as evading their taxes. Given that the behaviour of friends and
colleagues can affect an individual's norms, this result suggests the
importance of norms in affecting tax payer behaviour. Therefore, the choice between tax compliance
and evasion appears to arise not only out of an assessment of penalties and the
likelihood of detection, but out of a complex set of attitude and norms.
Although, there
has been no empirical study on the taxpayer attitudes to Property Tax evasion
carried out in Nigeria other studies which touches on Property Taxation
indicate several reasons likely to be responsible for property tax evasion in
the country. These reasons range from
social, economic and political to religious.
They include:40
(1)
PROPERTY AND
ABILITY-TO-PAY PRINCIPLE
The defence of
property taxation has been on the assumption that the man with more value
property can afford to pay a higher tax.
It is then argued that there is a crude correlation between the amount
of buildings (or real property) that any individual owns and the amount of total wealth that he possesses. However, this assumption is not supported by
recent investigations. Most of the
buildings now in existence were erected
many years ago when the owners actually, had the ability in an era when wealth
was the principal index of ability to pay and when the principal form of wealth
was land and buildings. Today some
classes of intangible property (bonds, stocks, shares etc.) are major sources
of income. Furthermore, many of the
buildings are either too old or the owners themselves have become impoverished
to possess any taxpaying capacity. The
situation is worse in cases where the buildings are not yielding any economic
rent to afford the owners the wherewithal with which to pay.
It is also
argued that property tax is a negation of the theory of ability to pay because
the systems of valuation do not invariably reflect the true and correct value
of the tenements subject to the tax. For
example, two superficial impression of having the same value. But their sizes and other conveniences
provided in them are necessary factors to be taken into account in order to
determine their true value for the purpose of differentiating the property tax
on them. This is usually not done how
then can one justify the tax on the score of ability to pay? For instance, in Lagos State, the rent fixed
a few years ago is still being applied in determining the gross annual value of
tenements. An area (e.g. Mushin) which used to command less rent some years ago
now commands nearly as much rent as that being paid in areas formerly regarded
as high-rent zones.(e.g. Ebute-Metta, Yaba, Surulere). In order to reflect the true taxpaying
ability of the owners there is the urgent need to bring the rent schedule
up-to-date.
(2) PROPERTY TAX AND BENEFIT PRINCIPLE:
Benefits
received may not be a proper gauge with which to measure the amount of support
that a government may expect from its tax payers. But even if benefits were a proper gauge, the
possession of property would not be a very defensible measure of benefits. To justify property taxation on this
theoretical basis is therefore unacceptable.
In the first
place, for many governmental services supported wholly or partially by property
taxation, no clear accounting of benefits can be made. Does a building in Victoria Island of Lagos
enjoy the same “refuse collection and disposal” services as another whose worth
is the same but situated at Ijesha-Tedo or Agege. Furthermore, in most places there are not
enough amenities viz; good access road, street lightings, water supply to
mention a few on which difference or property taxation as a benefit-based tax
could be supported.
(3) DISINCENTIVE EFFECTS OF PROPERTY TAXATION:
Higher rates
often serve as disincentive to citizens to build modern houses of durable and
permanent structure especially where the rate-able value is based partly on the
structure of the buildings. It is also
further argued that directly or indirectly, the property tax in no small way
contributes to the present high cost of shelter.
(4) REGRESSIVITY
Some element of
regressivity in the taxation of property sometimes occur as a result of the
various systems of classification and valuation adopted. Regressivity may also occur where the owner
of more valuable property is more influential in the community and with the
assessor than are the poorer neighbours.
Furthermore, when property tax is related to income, a further cause of
regressivity appears. This is because,
the ratio of housing expenditure to income decreases quite substantially as
income grows larger
METHODS OF PROPERTY TAX EVASION
This could take
place in a number of ways but some of it are by way of additions to structure
which are not always reported to the Local Council or the appropriate agencies
of government until they are detected; and where they are detected the owners
of such building usually post-date the actual time the expansion or additions
were effected in order to evade part of their rate liabilities. Furthermore, where the residential address of
a landlord changes, the appropriate agency is not notified of such a change.
Another common
practice, especially in Lagos is for buildings to be occupied ever before certificates
of occupancy are issued. If the practice is not detected, the owner of
the building is assessed to property rate only from the time the certificate of
occupancy is granted.
PROPERTY TAX
PLANNING:
The
opportunities for tax planning are contained in section 7 which provides
that: The following properties shall be exempt from payment of Land Use Charge:-
(1) (a) a
property owned and occupied by a religious body and used exclusively for
public worship or religious
education;
(b) cemeteries and burial grounds
(c) a recognised and registered institution or
educational institute certified by the
Commissioner for
Finance to be non-profit making;
(d) property used as public library;
(e ) any property specifically exempted by the
Executive Governor by notice
published
in the State
Government Official Gazette
(f) all palaces of recognized Obas and Chiefs in
the State.
(2) The Commissioner for Finance may, by notice
published in the State Government
Official Gazette grant partial relief for a property that is:
a)
occupied by a non-profit making
organization and used solely for community games, sports, athletics or
recreation for the benefit of the general public;
b)
used for a charitable or
benevolent purpose for the benefit of the general public and owned by the State
Government, Local Government, Federal Government or a non-profit making
organization.
First, to ensure
an exemption under section 7, careful drafting of the memorandum of association
of the company will be needed. Thus the
objects of the company should be so drawn as to restrict the company to objects
which are within the exemption.
Secondly, it should be noted that paragraph (1)(a) applies only where
the activity is of a public character.
Paragraph (2)(a) which relates to sporting activities must also show the
elements of charity and sufficient public character. Paragraph 2(b) cannot be enforced against the
Federal Government in any manner by virtue of the Shell Petroleum Development
Company of Nigeria v. Burutu Local Government Council (2000)
N.R.L.R.I. The case also held that any
provision in a law made by a State legislature providing for assessment of any
property not coming within privately owned houses or tenement is ultra vires,
null and. void.
CONCLUSION:
In conclusion,
certain basic principles needs to be restated:
(i) Every tax payer is entitled to arrange his
affairs so that his taxes shall be as low as
possible; he is not bound to choose that
pattern which will best pay the government.41
(ii) Over and over again the courts have said
that, there is nothing sinister in so arranging
one's affairs so as to keep taxes as low
as possible. Everybody does so, rich or
poor,
and all do right; for nobody owes any
public duty to pay more than the law demands.
Taxes are enforced exactions, not
voluntary contributions. To demand more
in the
name of morals is mere cant.42
(iii) The right
resulting from a legal transaction, otherwise valid, are not different
vis-à-vis taxation, because it has been
undertaken to escape taxation. That is
doctrine
essential to industry and commerce in a
society like our own, in which, and as far as
possible, businesses always shaped in the
form best suited to keep down taxes. It
is
not the presence of an accompanying
motive to escape taxation that is ever decisive,
but the absence of any motive which
brings the transaction within those which the
(statutory) definition normally
includes.43
The structure of
revenue-generation in Nigeria though
seems diversified is still skewed against businesses. Some States introduce new taxes or levies
because it is done in other States
without making adequate planning and preparation for the taxes. The effect is that more taxes are introduced
with no additional revenue generated.
Diversification of the revenue structure is important for stability of revenues. However, the manner by which various revenue
sources are introduced without really capturing those sections of the paying or
consuming group hitherto unaffected weakens the revenue generating
enterprise. When a new source of revenue
is being introduced it must aim at generating additional revenue not only from
the existing group but more importantly from those people who had been evading
payments under the existing sources .
Otherwise the introduction of a new revenue compounds the problem of the
revenue generating authorities and thereby reduces their efficiency or increase
their inefficiency further.
So, what is the
way forward.? As a lawyer and taxation
practitioner I would presently not offer any suggestions, at least not public,
for fear offending the incitement provisions of the Land Use Charge Law.
I however offer
by way of consolation at least to stem
present worries, an adaptation of the contents of Matthew 6:25,34 to
the effect that:
“I
tell you therefore do, not worry about your taxes, levies and charges. Is the
totality and survival of your business not more important? Do not worry therefore, in view of tomorrow,
for tomorrow will have its own anxieties.
Each day’s peculiar troubles are sufficient for it. After all, ‘qui
sera sera’ – whatever will be will be.
* Prof. M.T. Abdulrazaq,
LL.B. Ph.D (ABU), LL.M.(Lond.) B.L., FCIB, FCTI
Professor of Applied Taxation and former Registrar/Chief
Executive,Chartered Institute of Taxation of Nigeria.
This paper was first delivered at the MDS (Division of UAC of Nigeria
PLC) Business Luncheon held
on Thursday 13th December 2001 held at the Club, Sheraton
Hotels and Towers, Ikeja, Lagos
1 See Tiley (1981) Revenue
Law (Batterworths) pp.3, 4,5,6
2 Duff J, in Lawson v.
Interior Tree, Fruit and Vegetable Committee of Direction (1931) SCR 357
(Can)
3 Duff C.J. in Reference
re Tax on Foreign Legation and High
Commissioner’s Residence (1943)
SCR 208 (Can.) Note the refusal of Lord Cairns to use the presumption of
a strict interpretation of tax
Law
. when considering tolls: Pryce v. Monmouthshire Canal and Rly
Companies
(1879) 4 App.Cas 197 at 202; See Congreve v Home Office (1978) GB
629, (1976) 1 All ER 697.
4 Montgomery J. in Societe
Centrale D'Hypotheques v. Cite de Quebec
(1961) QLR 661, see also
Water rates and Daymond v. South West Authority (1976) AC 609,
(1976) All ER 39.
5 Minister of Justice v
Levis )1919) AC 505 (PC Can).
6 See Sabine, British
Budgets in Peace and War. P.163 and R.C. Canada, Study 24, pp.1-10
7 Allan, Theory of Taxation
p.24
8 They are not taxes for
parliamentary purposes: McKintosh in Taxation Policy, p.138 Metal Industries
Ltd. v. S.T. Harle (Owners) (1962) SLT 114 held employer’s
contribution to be taxes.
9 A-G v Harris
(1961) 1 QB 74, (1960)2 All ER 207; See also Fairfax v. Federal Comr of
Taxation
(1965) 14 ATD 135 at 143.
10 See Abdulrazaq, M.T.
(1993) Nigerian Tax Offences and Penalties (Batay)
11 R.C. Canada (1966) vol.
2.pp.2-7
12 Allen op.cit. p.16
13 See Diamond Public
Expenditure in Practice (1975) p.66 cited by Morgan, over Taxation by
Inflation (1977) p.59
14 The problems of
determining the present distribution is difficult; See Royal Commission on
Distribution of Income and Wealth, Atkinson, Unequal Shares (1972) and
Polanyi and Wood,
How Much Inequality (1974)
15 For an instructive debate
see Friedman and Heller Monetary v. Fiscal Policy (1969)
16 Groves, 1948 Nat. Tax Jo.
Vol.1 p.23
17 Among other books see
Prest and Barr Public Finance, Shoup, Public Finance and Musgrave
Public Finance in Theory and Practice.
18 Vertical Equity means
graduated or disproportional taxation …. And the moment you abandon ..
the cardinal principle of exacting from all individuals the same
proportion of their income or their
property, you are at sea without rudder or compass and there is no
amount of injustice or folly
you may not commit “ … McCulloch. A Treatise on the principles and
practical Influence of
Taxation and the Funding System (1863) p.145.
19 Groves, 1948 1 Nat Tax Jo.
P.18, and Bracewell Milness (1976) BTR110
20 See Abdulrazaq, M.T.
(1993) Principles and Practice of Nigerian Tax Planning and Management
(Batay)
21 See Sandford, Hidden
Costs (1973)
22 P.23
23 One counter would be to
take all income, in the widest economic sense and so including unrealised
capital appreciation, and impute it to the shareholders.
24 E.g. Blough, 10 Law and
Contemporary Problems (1943) pp.108 and 110
25 See IFS Tax Law Review
Committee (TLRC), Report on Avoidance (November 1997), 2.
26 See Comments of Brightman
J. In Roome v. Edwards (1979) STC.546,561-5 (removed from bound
volume- see (1979) BTR 261), See also the comments of Templeman 1.1 in IRC
v. Stype Investment
Ltd. (1982)
STC.625, 637. See Tiley (2000) Revenue Law (Hart Publishing) pp.85, 86,
87
27 On causes of
non-compliance, See Cooper (1994) 50 Tax Law Review 35.
28 E.g. the scope of TA 1998,
s.145 in relation to shadow direction in R.v. Allen (1999) STC 846.
29 See, e.g. Lord Templeman
in Ensign Tankers (Leasing) Ltd. V. Stokes (Inspector of Taxes) 1992) 1
AC 655, 676-7, (1992) STC 226,240-1 64, TC 617, 741-2 and Lord Goff at
681, 244-5 and 746-7.
30 e.g. Lord Templeman in Commr
of Inland Revenue v. Challenge Corporation (1987) AC 155, 167-8
(1986) STC 548, 554-5, PC (New Zealand)
31 IRC v Willoughby (1997)
STC 995.
32 For a rare attempt to
take matters, further, see Rosenberg (1988)
87 Michigan LR 365-497, arguing
that avoidance arises because the tax system uses a transactional rather
than economic basis to
determine income. As such, avoidance arises if a taxpayer's tax
return understates income when
computed on an economic basis, unless the taxpayer's behaviour
corresponds with statutory policy
goals of statutory provision
underlying that understatement.
33 I.N.T.C. 109
34 For a more sophisticated
(US) account, see Stiglitz, Economics of the Public Sector (3nd edn. Norton,
(1988), ch.24; see also Cooper's analysis of tax shelters in (1985) Columbia LR 657. See also Tiley
(2000) Revenue Law op.cit.
35 S.A. Rabiu (1991) Property
Taxation: Problems and Prospects. Tax Law and Tax Administration in
Nigeria (NIALS) pp.179,183,184,186,187
36 Spicer, M.W. and
Lundstedt, S.B. (1976), Understanding Tax Evasion. Public Finance No.2. Vol.31,
Spicer, M.W. (1975), New Approaches to the Problem of Tax Evasion, B.T.R.
pp.152, 154
37 Strumpel, B. (1969),
Contribution of Survey Research to Public Finance. Quantitative Analysis In
Public Finance. Edited by Alan Peacock, New York, and P.26.
Vol.34, pp.274-299.
39 Spicer, M.W. (1974), A
Behavioural Model of Income Tax Evasion.
Ohio State University.
Unpublished dissertation.
40 S.A. Rabiu (1991) op. cit
pp.183, 184
41 Helvering v. Gregory
293 U.S. 465 (1935); Akinsete Syndicate v Senior Inspector of Taxes
43 Commissioner or
Internal Revenue v. National Carbide Corporations 167 Fed. 2nd 304
(1948); Nasr v.
Federal Board of Inland Revenue (1964) N. Comm. L.R.93 S.C.N.
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