1.1 Background to the Study

Taxes are a fundamental revenue source for governments the world over. They represent a recognized compulsory contribution by individuals and corporate entities towards governance, development and maintenance of physical infrastructure as well as a tool of bridging income inequities. They are also a means by which the social contract between the State and the citizenry is being nourished and facilitated (Christensen & Murphy, 2004). Taxes also happen to be the most important, sustainable and predictable source of public finance for almost all countries (Action Aid, 2013). Thus properly harnessing amounts collected via taxes is a major concern for governments.

In assessing the extent to which a country has harnessed and financed its economy through taxation, an often used measure is the tax to GDP ratio. Scholars have however noted that the tax to GDP ratio for the developing world as a whole is relatively low when compared to what obtains in the developed economies. For instance, according to Fuest and Riedel (2009) the tax to GDP ratio for developing economies was on average approximately 12-15% as at 2005. Conversely, for the developed economies, the average for the same year was quoted as approximately 35%; a figure more than twice what obtained in the developing climes. More recent reports show some improvement in the ratio but given the potential the region has for increased tax revenue, the improvement has not been found to be impressive. For instance, a report by the International Tax Compact, ITC (2010), noted that while tax revenues in Organization for Economic Cooperation and Development (OECD) countries amounted to almost 36% of gross national income in 2007, the share in selected developing regions was estimated to be around 23% for Africa (in 2007) and 17.5% for Latin America (in 2004).

Specifically focusing on Nigeria, as at January 2014, tax revenue to GDP ratio stood at 20% (Premium Times, 2014). However with the rebasing of Nigeria‟s GDP in 2014, which saw the country‟s GDP increase from N42.3 trillion to N80.3 trillion, making Nigeria Africa‟s largest economy, Nigeria‟s tax revenue to GDP ratio fell from 20 % to 12 %. Out of the said 12 %, only 4% was attributable to non-oil revenue. This led to a call by the then Minister of finance on the need for the taxing authorities to redouble their revenue generation efforts (Premium Times, 2014). This call by the minister as well as the assertion by Oxfam (2014) that widening income disparities are the second greatest worldwide risk in 2014, underscore the need to look deeper into the various sources of development finance, especially taxation. The highly volatile nature of oil revenue- which the Nigerian economy depends on to a large extent should, arguably, also serve as an added impetus towards looking for ways to better harness other revenue sources such as taxes.

In exploring how to better harness tax revenues, it has been documented world over that, two major activities; perpetrated by both individuals and corporations, have continued to represent a great threat to amounts of revenue collected through taxes. In addition, the said issues feature prominently in equity and efficiency related discourse. The duo of issues are tax evasion and tax avoidance. While both are aspects of tax non-compliance, the delineating feature between the two lies in the fact that tax evasion is deemed out rightly illegal while by definition tax avoidance is not. However notwithstanding the delineating line between the two, in advanced economies, the duo have been given serious consideration by their governments, through the relevant agencies. Furthermore, the two issues have sparked much research; ranging from investigating their determinants- both for individuals and for corporations examinations of the attendant consequences engendered by their continued flourish.