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1.1   Background of the Study

The principles of tax avoidance is no recent invention as the tales of Malta’s hate relationship with taxation are numerous and date back to the seventeenth century to the extent that it is said that some Maltese males became clerics exclusively to benefit from a tax exemption. The whole argument centers on the question posed ‘Is there anything wrong with tax avoidance?’ and the logical answer is ‘no’ as it is no criminal offence to make an effort to legitimately pay the least possible tax. This situation is similar to the decision that a person takes to invest his money in the best possible manner. This paper shall discuss these issues with the help of case law both from the local and UK scenarios. To put the subject in perspective it is important to distinguish between the concepts of tax avoidance, tax evasion, and tax mitigation. Tax avoidance concerns arrangements that reduce tax liability in a manner contrary to the intention of parliament. Tax evasion is rather different, as it is a criminal offence normally constituting a dishonest submission of a tax return involving undeclared income. Tax mitigation reduces tax liability without tax avoidance.

Tax is one of the sources of Government Revenue. It is a strong social and economic tool of the government in regulating the economy and maintaining health social life of the citizens. Tax can be defined as a compulsory payment by individual and companies to the state to enable her attain the National goals/objectives. Tax is a non-punitive but compulsory levy by the Government on properties and income of individuals and corporations within the territory. The money raised there of constitutes part of sources of finance for general government expenditure in the economy. According to Aguei (1983) tax is the transfer of resources from the private to the public sector in order to accomplish some of the Nation’s Economic and Social Goals. It is levy imposed by the government on the income profit or wealth of an individual, partnership and corporate organization. Tax is therefore the system whereby individual are assessed and the final collection of the money for and on behalf of the government. It is machinery through which Income Earner is obliged to pay a fraction of his income to the government.

Economic growth can be said to be an increase in a country’s productive capacity, as measured by comparing gross national product (GNP) in a year with the GNP in the previous year. Increase in the capital stock, advances in technology, and improvement in the quality and level of literacy are considered to be the principal causes of economic growth. In recent years, the idea of sustainable development has brought in additional factors such as environmentally sound processes that must be taken into account in growing an economy.

The hall mark of technological advancement, economic growth, social satisfaction, the people’s needs and value to the society center exclusively within the ambit of taxation. Also the increasing impact government is making in economic development is such that it requires substantial financial assistance from every individual in the society. This phenomenon therefore presupposes a qualitative and practical approach to a good system of base administration and collection. Admittedly, negative, attitudes of the populace, especially in the payment of tax have resulted in tax evasion and tax avoidance. Tax evasion is capable of pulling down a well-organized government. While, tax avoidance may simply be defined as the reduction or minimization of a person’s tax liability by carefully arranging one’s affairs in such a way as to take advantage of loopholes in the tax taw provisions, it is the intentional act of a tax payer to pay less than what he ought to pay to the tax authority. It is legal. In the course of examining the attitude of the courts and the legislature towards tax avoidance, Wheat-craft (year) observed that “tax avoidance is an art of winning games without actually cheating; thereby beating the internal revenue and the Government to their own game”. Similarly in Ire v. Duke of Westminster, Lord Tomlin observed in respect of tax avoidance that: “Everyman is entitled, if he can to order his affairs so that the tax attaching under the appropriate act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax”.

Therefore; irrespective of the generally held opinion that tax avoidance is unpatriotic and anti-social, it is clear that it is not a moral or legal issue unless the legislature expressly prohibits it. No doubt, tax evasion and avoidance had robbed the Nigerian government of substantial tax revenue. According to the Nigeria Stock Exchange, 85 percent of corporate tax revenue in the country accrues from the 196 companies listed on the exchange compared to the 30, 000 companies registered with corporate Affairs Commission. This is a serious indictment on the administrative machinery and capacity of the tax authorities in Nigeria. There are many causes for tax avoidance. In order to develop methods and instruments for fighting tax avoidance, it is very important to establish a broad understanding of the different causes underlying these problems.

The political, economic, and social development of any country depends on the amount of revenue generated for the provision of infrastructure in that given country. However, one means of generating the amount of revenue for providing the needed infrastructure is through a well-structured tax system. Azubike (2009) revealed that tax is a major player in every society of the world. The taxation is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. Taxation offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. Nzotta (2007) opines that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments. This is why Odusola (2006) stated that in Nigeria, the government’s fiscal power is divided into three-tiered tax structure between the federal, state, and local governments, each of which has different tax jurisdictions. The system is lopsided and dominated by oil revenue. He further argues that over the past two decades oil revenue has accounted for at least 70% of the revenue, thus indicating that traditional tax revenue has never assumed a strong role in the country’s management of fiscal policy. Instead of transforming the existing revenue base, fiscal management has merely transited from one primary product-based revenue to another, making the economy susceptible to fluctuations of the international market.

However, one of the major functions of any government especially developing countries such as Nigeria is the provision of infrastructural services such as electricity, pipe-borne water, hospitals, schools, good roads and as well as ensure a rise in per capita income, poverty alleviation to mention a few. For these services to be adequately provided, government should have enough revenue to finance them.  The task of financing these enormous responsibilities is one of the major problems facing the government.  Based on the limited resources of government, there is need to carry the citizens (governed) along hence the imposition of tax on all taxable individuals and companies to augment government financial position.  To this end, government have always enacted various tax laws and reformed existing ones to stand the taste of time.  They include:  Income Tax Management Act (ITMA), Companies Income Tax Decree (CIID), Joint Tax Board (JIB) etc.

1.2    Statement of the Study

The problem of tax avoidance is not a surprising, unknown phenomenon. However, the growing extent of offshore wealth, which despite the financial crisis has grown at a rate of 28% in the last five years, is alarming. Although tax avoidance is a problem that faces every tax system, the Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in Nigeria. Under direct personal income taxation as practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as the businessmen, contractors, professional practitioners as observe by Ayua (1998), where persons bluntly refused to pay by reporting losses every year. According to him, many of this Professionals like lawyers, doctors, accountants, architects and traders in shops among others. Many of these professionals live a lifestyle inconsistent with reported income, which is usually unrealistically low for the nature of their businesses.


The main objective of this research work is to examine the effect of tax avoidance on the economic growth and development in Nigeria. The other specific objectives are:

i.   To ascertain if there is a relationship between tax avoidance and economic development in Nigeria. 

ii. To determine the effect of tax avoidance on economic development in Nigeria.

Research Hypotheses

In an effort to discover the effect of tax avoidance and evasion on economic development in Nigeria; the following hypotheses are postulated to enable toe researcher have good focus on the study:

i.  H0: There is no significant relationship between tax avoidance and economic development in Nigeria.

ii.  Ho: Tax avoidance has no significant effect on economic development in Nigeria