Fiscal policy measures in Africa have been largely driven by the need to promote such macroeconomic objectives as raising revenue to finance rapid economic growth of their economies, generating employment, maintaining price level and exchange rates stability and balance of payments equilibrium. To achieve these objectives one of the ways of dealing with taxation problems is to deal with harmful taxes practices. The two harmful practices that readily come to mind is tax evasion and avoidance. A decline in price of oil in recent years has led to a decrease in the funds available for distribution to the Federal Government and to the State Governments. The need for state and local governments to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the part of state and local governments and even the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources (Aimurie, 2012). Aguolu (2004) states that though taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from taxation, however, taxation is the most important source of revenue to the government, from the point of view of certainty, and consistency of taxation.

Aguolu (2004) further mentioned that taxation is hence the most important source of revenue to the government. Owing to the inherent power of the government to impose taxes, the government is assured at all times of its tax revenue no matter the circumstances. Tax evasion in general refers to illegal practices to escape from taxation. To this end, taxable income, profits liable to tax or other taxable activities are concealed, the amount and/or the source of income are misrepresented, or tax reducing factors such as deductions, exemptions or credits are deliberately overstated (see Alm and Vazquez, 2001 and Chiumya, 2006). Tax evasion can occur as an isolated incident within activities that are – in other aspects – legal. Or tax evasion occurs in the informal economy where the whole activity takes place in an informal manner – this means the business is not only evading tax payments but is also not registered as formal enterprise at all. Tax avoidance, in contrast, takes place within the legal context of the tax system that is individuals or firms take advantage of the tax code and exploit “loopholes”, i.e. engage in activities that are legal but run counter to the purpose of the tax law. Usually, tax avoidance encompasses special activities with the sole purpose to reduce tax liabilities.

An example for tax avoidance is strategic tax planning where financial affairs are arranged such in order to minimize tax liabilities by e.g. using tax deductions and taking advantage of tax credits. Tax evasion and its sister tax avoidance are key fundamental problems of tax administration in a developing country like Nigeria. All forms axes in Nigeria are to some extent avoided or evaded because the administrative machinery to ensure effectiveness is weak. As a result of the diversities and complexity in human nature and activities, no tax, law can capture everything hence; loophole will exist and can only be reduced or eliminated through policy reforms. Thus, besides generating public revenues, strengthening tax systems in developing countries is equally important from a governance or state-building perspective. Thirdly, revenue raising systems typically include the entire population, thereby exhibiting a direct effect on the poor and their household income. Designing a tax system in a pro-poor way can e.g. be achieved by including a re-distributive component.

All in all, collecting a sufficient amount of revenues is essential for a country to fund pro-poor programs, built effective government institutions and strengthen democratic structures, stimulate sustainable economic growth and reach national and international development goals. To reach these goals it is, however, essential that the tax system is implemented the way it was designed. Thus, counterproductive activities like tax evasion and avoidance practices, that undermine the intentions of the system, need to be reduced. Despite the emphasis on the importance of taxation and the efforts made at improving its efficiency, citizens’ aversion to taxes have remained a problem that most tax authorities have to grapple with. This is because individuals will always look for a means –legal or otherwise–to reduce or even completely avoid paying taxes. This result in heavy revenue losses to governments and ultimately aects their ability to meet their obligations.


Over the years, revenue derived from taxes has been very low and no physical development actually took place, hence the impact on the poor is not being felt. It is the view of many people that the loss of revenue caused by widespread tax evasion and tax avoidance in Nigeria is due to inefficient and inept tax administration. Omorogiuwa (1981) has opined that ineffective tax administration is the main factor responsible for large scale tax evasion in Nigeria. Philips (1973) corroborates this view when he states that tax evasion is due principally to administrative ineffectiveness Nigeria is losing billions of Naira every year to illicit financial tax fraud as individuals and corporate firms engage in fraudulent tax schemes aimed at avoiding tax payments to some of the developing countries, impeding development projects and denying poor people access to crucial services. The primary way which money flows out of these countries is through tax offset. In its simplest form this entails three steps.

Firstly, a corporation working in a developing country sets up a subsidiary in a tax haven. Secondly, they sell their product at an artificially low price to this subsidiary – enabling them to declare minimal profits and consequently pay very little tax to the government of the developing country. Thirdly, their subsidiary in the tax haven sells the product at the market price – for comparatively huge profits coupled with a low tax rate (or none at all). In other words, corporations are manipulating prices to pay minimal taxes.

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