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Corporate tax shield or fraud?

Insight from Nigeria

Corporate tax
shield or fraud?

Abel Ebeh Ezeoha

Department of Banking and Finance, Ebonyi State University,
Abakaliki, Nigeria, and

Ebele Ogamba
Department of Banking and Finance, University of Nigeria, Enugu, Nigeria
Abstract
Purpose The purpose of this paper is to establish whether inefficiency in a tax system and the
likely difficulty in resolving tax matters can reduce the appeal for tax shield as incentive for debt
financing, and by so doing exacerbate the cases of tax fraud.
Design/methodology/approach A review approach/theoretical approach is adopted in the paper,
where, in addition to reviewing literature on the relationship between tax incentives and corporate
financing, the paper examines the structure of the Nigerian tax system, the gaps, and some pending
tax cases involving foreign firms in Nigeria. Based on some theoretical judgments, efforts were made
to link the rising cases of tax frauds to the dwindling appeal for tax shield as an incentive for the use
of debt.
Findings The study reveals that, as in the case of Nigeria, an environment of multiple tax system
reduces incentives to pay tax or for voluntary compliance; that the exclusion of crucial non-debt tax
shelters such as depreciation, heightens pressure on the use of debt-based tax shelters; and that
controversies on deductibility make it difficult to distinguish between criminal and civil proceedings
in tax cases.
Research limitations/implications The paper is only theoretical. The number of cases captured
is very limited. However, the issue of tax frauds among corporate entities in the country remains very
popular.
Originality/value The paper is the first to examine the likelihood of an inefficient tax
environment to reduce the appeal of tax shield as an incentive to debt financing.
Keywords Tax havens, Fraud, Law, Debt financing, Nigeria, Corporate taxation
Paper type Research paper

Introduction
The influence of tax on corporate management decisions remains very encompassing.
Tax affects the level and combination of financing sources a firm can explore. It is also
a major determinant of a firms choice of investment projects and destinations
(Palomba, 2002). Dividend policies, which constitute one of the strategic functions of
financial management, are determined by the rate at which dividend income and
capital gains are taxed. According to Graham (2001), tax affects capital structure
decisions, including the choice of debt, equity, leasing, and other financing instruments
play a role in corporate risk management; and affect the form and timing of
compensation and pension policies of a firm. Due to its diminishing impact on
corporate earnings, tax payment is of very important concerns to managers. In
addition to finding out how to minimize the impact of tax payment on firm value,
corporate managers also concern themselves with the fiscal objectives of governments
in countries where they operate. This explains why value maximizing managers
normally lay strategic emphasis on the application of tax shelter instruments such as
debt, depreciation, research and development, corporate arms giving, and so on.
Essentially, debt financing provides some widely acclaimed premises for tax
shelters. According to theoretical postulations, debt has enormous tax-shield capacity

International Journal of Law and

Management
Vol. 52 No. 1, 2010
pp. 5-20
# Emerald Group Publishing Limited
1754-243X
DOI 10.1108/17542431011018516

IJLMA
52,1

because of its conventional interest deductibility. Arguments surrounding the trade-off

theory, for instance, is that corporate managers mitigate the impact of tax by balancing
the level of bankruptcy risks inherent in debt financing with the tax-shield benefits
arising therefrom (Faulkender and Petersen, 2006; Drobetz and Fix, 2003; Frank and
Goyal, 2003).
Nevertheless, the use of debt is dependent on the access to the markets for long-term
finances. The extent at which a firm can optimize the tax-shield advantages arising
from the use of debt is also determined by the efficiency of the prevailing tax system.
Where, as in some developing countries, access to the financial markets is limited and
where the tax systems are beset by a good degree of inefficiencies, the use of debt as a
means of mitigating the effects of tax payment on earnings of the firm might be legally
challenging. Under such economic environment and where the burden of tax payment
is so severe on firms, the practice of tax shielding might give way to tax fraud. This
would result to some sort of adverse selection, with genuine investors making way to
fraudulent investors that are capable of manipulating their tax structures to survive
unfriendly tax environment.
Against what obtains in developed economies, tax manipulation and frauds are
common features of the tax systems in most developing economies in Africa. In the
case of Nigeria, for example, the prevalence of corruption and general lack of the
requisite fiscal capacity have severally resulted to situations where firms collude with
tax authorities to cheat government. In this amplified by Abati (2009) in the following
expression:
Tax officials double as consultants to whoever wants to evade tax; they help them to
compromise the books and they collect a handsome fee for their services. Second, companies
are reluctant to remit taxes, and nobody is wielding the big stick.

Under this situation, it becomes very doubtful the genuine interest of firms on the
acclaimed tax-shield benefits. Based on the foregoing premises, this paper therefore
argues that in an economic environment where tax fraud cases are rampant and where
offenders usually go unpunished, the tax shield may give way to tax fraud, and the
whole theoretical arguments on the strategic influence of debt as a tax-shield tool may
be questionable. The rest of the paper is organized as follows.
The strategic use of tax in corporate decisions
The relationship between tax and corporate financing constitutes one of the key
strategic issues in business management. This is so because of the decreasing effects of
tax payment on corporate earnings. As a result, firms tend to make strategic changes
in their financing patterns in response to tax law changes. The presence of different
kinds of tax, also, is found to be a significant source of imperfection in most capital
structure theories. In effect, the relevance of corporate income tax as a determinant of
firms financial structure lies in the fact that with tax, interest payments are deductible
just as other operating expenses (Van Horne, 2004; Diamond, 1994). Bolten and Conn
(1981, p. 594) argue along this line that the major advantage of long-term debt as a source
of funds is its relatively low after-tax cost of capital. Most importantly, also, the
variations in capital structure of firms operating in different countries have more been
attributed to both macroeconomic and fiscal policy differentials among countries (Alami,
2005; Tanzi and Zee, 2000). Tax policies are also used by domestic governments to
moderate investment flows (King, 1977, p. 87).

There are some contradictions among previous studies concerning whether or not
the acclaimed tax-shield advantage arising from debt financing is of any significant
essence in corporate financing decisions. Some authors like Booth et al. (2001) and
Mutenheri and Green (2002) found the existence of very significant and positive
relationship between the level of tax benefits and debt uses. Hussain and Nivorozhkin
(1997), however, established that the relationship is negative and non-significant.
Among those in support of the positive relationship, Van Horne (1998, p. 260) confirms
that the greater the amount of debt, the greater the value of the firm, all things being
equal. In line with the position of Barclay et al. (1999, p. 217), since increasing the
amount of a firms debt liabilities is likely to lower its expected tax obligation that
would have otherwise deflated the level of net profit, the arising tax shield should have
the potential of increasing after-tax cash flow of the firm. Among the major contenders
of this hypothesis is Myers (1999) who argues that the expected realizable value of
future interest tax shields actually decreases as the amount of debts in the capital
structure increases. In which case, firms may not continue to borrow just because they
want to take advantage of tax shields from debt financing.
Outside the basic assumptions upon which the tax-shield hypothesis is premised,
there are practical challenges facing a firm in its bid to take stand on the size and
structure of financing patterns. First, debt has the tendency of exposing the firm to
high risk of bankruptcy. In accordance with the static trade-off theory of capital
structure, for instance, firms can only borrow up to the point where the tax benefit
from an extra amount of debt is exactly equal to the cost that comes from increased
probability of financial distress (Ross et al., 2000, p. 504). Similarly, the degree of
contribution of tax shields to corporate value would depend on the size of the difference
between expected realizable tax shield on additional dollar of promised future interest
payment and extra tax paid by investors on interest versus equity income (Myers,
1999, p. 209). The fact that corporate profitability suffers volatility problems makes tax
savings associated with the use of debt very uncertain (Van Horne, 2004, p. 262). For
instance, where the reported income is consistently low, the tax shield on debt is
reduced or even eliminated. Similarly, the extent to which a company benefits from
interest tax shields depends on whether it has other tax shields such as investment tax
credit, depreciation, or tax loss carry forwards (Barclay et al., 1999; Myers, 1999). These
non-interest tax shelters, according to Bathala and Carlson (1995, p. 57), sometimes
serve as substitutes for interest tax deductions. Firms that have more of the noninterest tax shelters may decide to downplay the use of debt financing in their capital
structure.
The non-interest tax-shield hypothesis has equally generated its own wide research
interests. Among authors that have subjected this to some baseline empirical tests are
Mat Nor and Ariffin (2006), Du and Dai (2004), Schoubben and Van Hulle (2004),
Titman and Wessels (1988), and Bradley et al. (1984). The results from most of these
studies tend to suggest that non-interest tax shelters are positively correlated with debt
ratios, implying that the more the availability of such shelters to a firm, the more the
preference for debt financing. It follows therefore that firms can sort for corporate
value maximization either by optimizing present value of their tax shields from debt
financing or present value of its non-debt tax shields. Nevertheless, as earlier pointed
out, a tax system that is vulnerable to frauds and evasion might provide another
crucial, but less investigated, way of reducing corporate tax burdens that is tax
frauds. Firms with poor corporate governance standing can indeed collude with tax
officials to dodge tax payments or to tamper with the size of it tax liabilities. The

Corporate tax
shield or fraud?

IJLMA
52,1

growing number of reported tax frauds, involving large-scale companies in Nigeria,

makes the review of a Nigerian case a very useful one in this regard.
The Nigerian corporate tax environment
In addition to the case of political stability, the prevailing tax system is one of the other
major factors that make a nation investment friendly or hostile. A priori, tax heavens,
and tax friendly environment tend to have better appeal to most investors. This is so
because, as stated above, tax has a decreasing effect on the level of income accruing to
corporate owners. This explains why in every economy, tax practices are held as both a
fiscal matter and a legal matter. It is a fiscal matter because is constitutes an important
source of revenue to the government. On the other hand, its legal relevance lies in the
fact that the practice is governed by a set of laws and policies whose breaches in most
countries constitute an act of sabotage to public interests. For a tax system to be
efficient enough there should be reasonable congruence in both the fiscal and the legal
structures governing its operations. Where the existing governance structures are not
strong enough to support the fiscal need to raise enough revenue for government, the
tendency for tax payers to resort to defaults or avoidance will be high.
The tax system in Nigeria reflects the above scenario. There are not just widespread
cases of tax frauds (as illustrated in the latter part of this paper), but there are also
serious issues relating to multiplicities and conflicts in sharing fiscal jurisdictions
among the federal government, the 36 state governments, and the 774 local
government areas in the country. In addition to incessant squabbles among the three
tiers and the acclaimed dominance of the federal government, the issue of overlapping
jurisdictions is common with intra-governmental agencies and departments. Double
taxation is also a very common phenomenon (Akindele et al., 2002; Anyanwu, 1999).
The issue of multiple or double taxation has made it morally difficult to differentiate
the actions of some defaulting local and international companies as either amounting
to tax avoidance or absolute evasion. It has along this line been identified that the
arguments commonly adduced by the aggrieved persons and organizations are
imposition of too many taxes and that many state taxes especially those imposed on
companies, are often a duplication of taxes already levied by another tier of
government or by the same Government but under different names (Sani, 2005). It is
also this ground that explains why most of the companies continuously get involved in
one legal tussle or the other, with the government, as to how much accruing as tax from
their operations[1]. It is important to note that the problem is not just about
multiplicities of taxes occasion by overlapping tax jurisdictions, but also the issue of
imposition of illegal taxes by the alleged agents of the different tiers of government
including the use of such crude means like mounting of road blocks against motorists
(Sani, 2005). It was for instance against this backdrop that the Taxes and Levies Act of
1998 prescribed an imprisonment term of three years or N50,000 fine for anybody
found mounting a road block for the purpose of collecting any tax or levy. Enforcement
of the provisions of the Taxes and Levies (Approved List for Collection) Act No. 21 of
1998, which was meant to address the problem of fiscal legality and double taxation, is
marred by the overzealousness of state and local governments to raise internal revenue
from the few available revenue rights as well as the duplications of levels of
government. The implication is that for a journey of 100 km, for example, a commercial
truck driver conveying certain goods may have to cross about five states, and over 50
local government areas. For each of the areas crossed, he would be required to pay

some set of taxes like sanitation tax, fire service levy, state development levy,
enterprise identification fee, sales tax, road taxes, etc.
As is the practice in most other parts of the world, private income constitutes a major
basis for tax administration in Nigeria. The emphases of the tax laws, in this regard, are
in two folds the personal income of individuals and the corporate income of business
organizations. The Personal Income Tax Act 104 of 1993 is the administrative tool for
taxing incomes attributable to private citizens and individuals[2]. The Act provides that
every taxpayer in Nigeria is liable to pay tax on the aggregate amount of his income
whether derived from within or outside Nigeria the salaries, wages, fees, allowances,
and other gains or benefits, given or granted to an employee are chargeable to tax. On
the other hand, the Company Income Tax Act of 1990 provides especially for the
charging of 30 percent in each year of assessment the profits of any company operating
in the country. The latter focuses only on income attributable to corporations or any other
forms of registered business organization. As part of the corporate tax structure,
companies registered in Nigeria are also mandated, via the Education Tax Act of 1993, to
pay 2 percent of their assessable profits into a fund called Education Tax Fund (ETF).
Another kind of income-related tax worth mentioning is the Capital Gains Tax, which
accrues on an actual year basis to all gains accruing to a taxpayer (either an individual or
a corporation) from the sale or lease or other transfer of proprietary rights in a chargeable
interest, which are subject to a capital gains tax of 10 percent (Capital Gains Tax Act of
1967). The assets covered by the Act can be tangible or intangible, irrespective of
whether they are situated in Nigeria or overseas[3].
The practice of the company income tax and the petroleum profit tax is worth
special mention here.
The company income tax
Among the other types of tax mentioned, the company income tax has the widest direct
impact on key corporate decisions. Uniquely, the corporate income tax law discriminates
according to whether a company is locally owned or foreign owned. Section 1(1) and 2(2),
respectively, provide that companies that are owned by Nigerian are taxed on their
worldwide income, whereas those that are foreign owned are taxed only on that portion of
income that are attributable to business operations carried on in Nigeria. Similarly, the
classical approach to corporate taxation is applicable in the country, whereby charges are
made to tax companys income as it arises and latter on individual dividends to
shareholders. It is this practice, according to the Chartered Institute of Taxation of Nigeria
(2002) that heightens the issue of double taxation in the country. After the payment of
income tax of 30 percent from its accruing annual profit, shareholders of the affected
company are also liable to pay 10 percent on any share of dividends allotted to them from
the same profit. Another feature of the corporate income tax practice in Nigeria is the
scope of taxable income. In this regard, Section 8 of the Company Income Tax Act
provides for two major categories of chargeable income trading profits, which allow for
deductibility of expenses and other operational costs arising from the business, and
investment income, which does not allow for any deductibility and includes interests,
rents, premiums, discounts, annuities, dividends, fees, dues, charges, and allowances for
services rendered.
The petroleum profit tax
Tax administration in the oil sector of the economy is governed by the Petroleum Profit
Tax Act of 1959[4]. Companies that operate in the petroleum sector of the economy,

Corporate tax
shield or fraud?

IJLMA
52,1

10

though exempted from the company income tax, are charged a tax rate as high as 85
percent on all profits arising from petroleum operations in the country. According to
the Section 9(1) of the Petroleum Profits Tax Act, the calculation of profits is based on
petroleum operations of the affected company within each accounting period, include:
proceeds of sale of chargeable oil sold by the company during that accounting year;
value of all chargeable oil disposed of by the company during that accounting period;
value of all chargeable natural gas in that accounting period as determined in
accordance with the 4th schedule to the Act; and all income of the company for that
period incidental to and arising from one or more of its petroleum operations. Similarly,
according to Sections 10 and 14 of the Act, adjusted profits are arrived at by deducting
outgoings and expenses which are wholly, exclusively and necessarily incurred within
or outside Nigeria, and the cost of transportation of chargeable oil, from the value of
profits.
Treatment of deductions, in the case of oil companies, is restricted to expenses
outlined in Section 13 and 15 of the Act. Section 15 specifically empowers the board to
disallow the deduction of expenses of transactions it considers being artificial,
fictitious or not sufficiently independent from the petroleum operations of the company
involved. To minimize the abuse of the wide range of deductibility required to be made
before arriving at the taxable profit of an oil company operating in Nigeria, Section
20(3) of the Act also places a ceiling on the level of such deductions. As a benchmark
for estimating allowable deductions, the Act stipulates that the amount of chargeable
tax shall be at least 15 percent of the tax that would have been chargeable if no
deductions were made from the assessable profits.
Notwithstanding these legal provisions, issues relating to what constitutes
deductible expenses for tax purposes have generated lots of controversies between the
Federal Inland Revenue Service and firms operating in Nigeria. This is evidently
demonstrated in the case between Shell Petroleum v. Federal Board of Inland Revenue.
In 1973 the Federal Board of Inland Revenue (FBIR) disallowed the deduction of certain
expenses claimed (currency exchange losses, Central Bank of Nigeria commissions and
educational scholarship expenses) by Shell Petroleum Development Company of
Nigeria Limited. Dissatisfied with the FBIRs ruling, Shell Petroleum sued the former at
the Federal High Court. The case was later dragged to the Federal Court of Appeal,
which ruled in favor of FBIR that the expenses were not deductible. Questioning the
verdict of the Appeal Court, Shell Petroleum took the court to the Supreme Court; and
finally in 1996 the Supreme Court ruled that if there is a statutory or contractual
obligation to incur an expense then such an expense is deductible even where it is not
directly related to the taxpayers petroleum operations[5]. Since in the instant case
statutory obligations existed, the Supreme Court held, reversing the Court of Appeal,
that Shell was entitled to deduct all three categories of expenses. Although the
Supreme Court ruling has continued to form judicial precedence for similar cases since
1996, the issue of tax-deductible expenses remains part of the most controversial issues
in the countrys tax administration.
Other taxes payable by firms operating in Nigeria
Outside the three tax classes the personal income tax, the corporate income tax, and
the petroleum profit tax, firms are required to make payments for other forms of taxes
as provided for by the following enabling laws: Education Tax Act of 1993; Capital
Gains Act of 1990; Customs and Excise Management Act of 1990; Minerals and Mining
Act of 1999; Stamp Duties Act of 1990; Taxes and Levies (Approved List for Collection)

Act of 1998. Among these, the value added tax (VAT) is worth special mentioning. VAT
is an expenditure-related tax; and is governed by the Value Added Tax Act of 1993.
The Act replaces the Sales Tax Decree of 1986, and imposes a flat Vat rate of 5 percent
on all eligible goods and services. As argued by the Federal Government of Nigeria
(1992), the adoption and practice of VAT in Nigeria is primarily to broaden the revenue
tax base; shift taxation toward consumption rather than savings; reduce the
dependence on oil revenue and encourage investments in the non-oil export sectors.
The Education Tax Act, on its own, requires all incorporated companies to pay 2
percent of their assessable profits into an ETF. By implication, Section 1(2) of the Act
specifically states that the tax is chargeable on the assessable profits of a company
registered in Nigeria. In line with the arguments of Odusola (2006), the introduction of
this tax has added to the list of multiple taxes that eats away at the profit margins of
companies.
The model of corporate tax shelters in Nigeria
Generally, the fiscal practices of most countries allow companies to make certain cash
and non-cashed deductions before arising at taxable profits. It is these deductions that
are referred to as tax shields or tax shelters. In the case of Nigeria, these deductions
include the conventional debt tax shields and non-debt tax shields. The main items of
debt tax shields, as provided by Section 20 of the Company Income Tax Act comprise
of any sum payable by way of interests on any money borrowed or employed in the
course of the business. Companies scrabble to enhance debt tax shields for several
reasons, including the fact that such incentives help in enhancing firm value (Van
Horne, 1998, p. 260; Barclay et al., 1999, p. 217). Essentially also, tax shield preserves
corporate value due to its capacity to enhance the amount of residual incomes. It is as
result of this that most tax laws make explicit provisions for tax deductibility of the
interest payments on long-term debts.
On the other hand, the classes of non-debt related tax shields allowable by the
Nigerian tax laws are expenditure on repair or assets used in acquiring income, any
outlay of expenses during the year including salaries, wages, and other remuneration
paid to the senior staff and executives, provisions for bad and doubtful debts, any
recoveries being treated as income when received, and so on. Section 21 equally
prescribes that for the purpose of ascertaining the profit or loss of any company for any
period from any source chargeable with tax, there shall be deducted (of 10 percent of
the total profits of that company) the amount of reserve made out of the profits of that
period by the company for research and development. Although operational costs and
expenses are not conventionally treated as tax shelters, they can be used to shield
taxable profits accruing to a firm. This is especially the case in countries with poor
corporate governance practice, where expropriation of cash flows may be prevalent
(Lemmon and Lins, 2003). This happens, for instance, when remunerations are
discriminatorily paid across domestic and foreign workers (Attiyyah, 1996; Graham
et al., 2004); or where subsidiaries negotiate procurement/service contracts at
exorbitant rates with the parent companies (Graham and Tucker, 2006).
A unique feature of the tax-shield practice in Nigeria is the exclusion of depreciation
as one of the deductible non-cash expenses for the purposes of computing taxable
income; and the rather unusual recommendation of capital allowances. Section 27(1)
provides for the deduction of items relating to capital allowances; and Schedule 2 of the
Act prescribes procedure for the treatment of capital allowance to include the
serialization of the deductions into an initial allowance, writing down allowances, and

Corporate tax
shield or fraud?

11

IJLMA
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12

a balancing allowance. Essentially also, the rates of capital allowances vary according
to the kind of assets in question. Table I clearly illustrates these variations.
Notwithstanding the acceptance of capital allowance, the non-inclusion of depreciation
has an inherent implication of infusing pressure on the countrys market for investment
finances. This is so because, under the practice in Nigeria, companies that sort for
means of managing the tax liabilities would pushed more to find means of
manipulating the debt tax shields.
The exclusion of depreciation as a non-debt tax shield in Nigeria leaves a lot of
issues unexplained in the investment and financing behaviors of firms operating in the
country. Okafor (1983, p. 62), for instance, has along this line raised a question as to
whether an investor gets as much tax shield as he could have enjoyed were
depreciation to be a tax-allowable expense. He argues in response that where the
annual depreciation charge is more than the corresponding capital allowance and
where the latter is tax-deductible in lieu of depreciation, the affected firm is being
forced to pay extra tax on the difference. The results of studies such as DeAngelo and
Masulis (1980), Bathala and Carlson (1995), and Du and Dai (2004) which amplified the
strategic nature of non-debt tax shelters, constitute strong illustrations of how the
unavailability of such incentives could cause distortions in financing and investment
decisions. The following section examines some of the gaps currently inherent in the
tax laws and practices.
Gaps in the corporate tax laws and practices in Nigeria
Notwithstanding the existence of numerous corporate tax laws in Nigeria, reform
emphases seem to center on how to attract more money to the government and the tax
authorities than on the overall efficiency of tax practice. In its present form, the system
is beseeched by gross inefficiency, frauds and corruption (see, for instance, Odusola,
2006). While instances of the general inefficiency have been well documented by the
Chartered Institute of Taxation of Nigeria (CITN)[6], the celebrated cases involving
some prominent oil multinational companies and airline operators in the country show

Table I.
Capital allowances for
different classes of
assets

Building (industrial and non-industrial)

Mining
Plant
Agriculture production
Others
Furniture and fittings
Motor vehicles
Public transport
Others
Plantation equipment
Housing estate
Ranching and plantation
Research and development
Source: CITA of 1990 (as amended), Schedule 2

Initial allowances
(rate percent)

Annual allowances
(rate percent)

15
95

10
Nil

95
50
25

Nil
25
20

95
50
95
50
30
95

Nil
25
Nil
25
50
Nil

clearly the specific impact of corruption and fraud in the corporate tax practice in the
country. In the assessment of the Chartered Institute of Taxation of Nigeria, 2002, p. 14)
Any pretence that the Nigerian system is perfect must quickly fall down on its face. There can
be no doubt that personal and companies income tax administration in Nigeria today does
not measure up to appropriate standards. Even if we apply the good old test of equity,
certainty, convenience and administrative efficiency, Nigeria will score less than a pass mark.
The bulk of personal income tax yield comes from employees whose salaries are deducted at
source, whereas the self-employed make the most money. Due to inadequate monitoring,
persons in the latter group manage to evade tax.

The body equally has noted that the major reasons for administrative inefficiency in the
tax system can be anchored on factors such as generally low literacy level, poor record
keeping habits, inadequate tax officials to cover the field, prevalence of frauds, badly
remunerated and corrupt tax officials, as well as the general claim that the Nigerian
government is perceived by the potential tax payers as corrupt and selfish lot, to whom
money should not ever be voluntarily given. While the prevalence of frauds and
corruption on both the sides of government and the tax payers is not contestable[7], the
claim about literacy level and poor record keeping does not make strong case. This is
so be, at 69.1 percent, Nigeria has one of highest adult literacy levels in the Sub-Saharan
African region (UNDP, 2008). Again, whereas poor record keeping is acceptable at the
level of the informal business groups in the country, such cannot be the case among
quoted companies and multinational firms. For the latter, high level collusions among
auditing (or accounting) firms, public tax authorities and corporate tax payers to
manipulate accounting documents practically makes mace of that excuse[8].
Some of the problems in the tax system, as identified earlier, are also attributable to
the multiplicities of taxes and the difficulties in meeting up with the tax demands of
different tiers of government. Arguing along this line, Akomolede (2004) demonstrates
that
The burden of the different types of property tax or levies that is being paid by property owners in
Lagos today is such that with time, it will lead to a disincentive to property acquisition or
development. For example, to perfect your title if you buy land or house in Lagos State you will be
required to part with about 35 percent of the cost or value of the property! There are: 10 percent
Capital Gains Tax (CGT); 15 percent Stamp duty and 5 percent Registration Fees! [. . .] There is a
withholding tax of 10 percent on rent if the property is let. There are development charges, ground
rents, tenement rates and neighborhood improvement rates [. . .] . There is also the death duty or
probate tax, which has made it impossible for many siblings to inherit their parents property.

The above problems join to raise some suspicions on the level of distortions caused by
the inefficiency of the tax system on corporate decisions in Nigeria. This is especially
so considering the enormity of empirical claims that financing and investment
decisions are dependent on the level of efficiency in a domestic tax system and practice.
The outcome is that some of the corporations that operate in the country seem to be
taking advantage of the volatile tax environment to sort for other unconventional
means of managing their respective tax liabilities, including direct evasion and
avoidance, offer of bribes to tax officials to reduce accruing tax liabilities of
companies[9]. There are at present series of documented tax-related frauds involving
both local and multinational companies in the country. A very significant one that is
ranging is the one that involves Halliburton, a US firm, paying US$2.5 million as bribes
to Nigerian officials in order to secure a favorable tax assessment. Table II presents
some of the vivid cases of corporate tax frauds in the country.

Corporate tax
shield or fraud?

13

IJLMA
52,1

Yeara
2007

Corporation
involved
Exxon Mobil
Nigeria

14

Shell Nigeria

2005

Chevron
Nigeria

Halliburton
Lufthansa
Airlines
Bristow
Helicopter
Nigerian
Accountants

Nature of allegation
(a) Tax revenue loss to the Nigerian
government due to Exxon Mobils frauds
in the implementation oil production
sharing contract with the government
(b) Criminal summon by a Nigerian
High Court to some taxes due to Akwa
Ibom State government due for the
past 15 years from Exxon Mobile
(Akwa Ibom State is the
host state for majority of Exxon
Mobil operating facilities in Nigeria)
(a) Tax evasion due to controversial
production sharing contact with the
Nigerian government
(b) Collaborated with minister of state
for petroleum, Edmund Dakorun to
avoid paying tax
(a) Series of unpaid taxes due from oil
exploitation and exploration activities
in Nigeria
(b) Diversion of tax revenue through dividends
(c) Tax evasion through claims to
unmerited capital allowance due from
fictitious qualifying capital expenditures
(d) Tax evasion through claims to unmerited
tax credits, in the forms of
Reserve Additional Bonus and Intangible
Drilling Cost
(e) Conspiracy and bribing of tax authority
to reduce tax liability
Payment of bribes to Nigerian officials in
order to secure a favorable tax assessment
Tax evasion due to non-registration with
the Corporate Affairs Commission
Brining of Nigerian tax officials in
exchange for reduced employment taxes
Bribes received by accountants and audit
firms to conspire and manipulate records
for tax and tax-related frauds

Amount
involved
(US$)

Judicial
status

1 billion

Yet to
be resolved

27 million

Yet to be
resolved

1.9 billion

Yet to be
resolved

3.2 billion

10 billion
75 million

Yet to be
resolved

190 million
222 million

96 million

423,000

Yet to be
resolved
Yet to be
resolved
Yet to be
resolved

2.3 billion

Yet to be
resolved

2.5 million
500 million

Table II.
Major reported corporate Note: aImplies year in which the tax fraud allegation was made official
Sources: London Financial Times (2008); Guardian Newspaper [Nigeria] (2008); Tax Justice for
tax-related frauds
Africa (2006)
in Nigeria

As reported in the table, over US$20.1 billion tax-related frauds involving just six
multinational firms and the accounting/auditing firms in Nigeria were allegedly
recorded, between 2005 and 2008. The cases of Halliburton, Shell, and Chevron are
worth special mentioning due to the widespread international controversies they have

so far generated. In the case involving Halliburton, as contained in a report by the Tax
Justice For Africa (2006), under investigation by the Nigerian Economic and Financial
Crimes Commission, a US oil services company (Halliburton) admitted that its officials
had paid bribes amounting to US$2.4 million to tax officials in return for favorable tax
treatment worth more than US$14 million. The report also goes on to indicate that
Halliburton is also under investigation for making illegal payments amounting to
around US$180 million to offshore accounts belonging to Sani Abacha in return for
contracts to build a natural gas plant in Nigeria (Tax Justice for Africa, 2006). Also in
August 2006, the Federal House of Representatives Committee on Petroleum
Resources ordered Chevron Nigerian Limited to pay US$492 million in settlement for
additional taxes arising from tax evasion. In the same year, after extensive denial and
litigations, Shell Petroleum Development Corporation was forced to settle a disputed
tax liability amounting to US$17.8 million owned to the federal Inland Revenue of
Nigeria. Given the high level of inefficiency also in the countrys judicial system,
proving and prosecuting these cases have remained overwhelmingly tasking to the
Nigerian government. Whereas the US government, for instance, has successfully
prosecuted the Halliburton and Wilbros cases and indicted individuals involved[10],
the Nigerian judiciary is still battling to establish merits in most of the cases[11].
Although the existing tax laws have enormous criminal and civil provisions contained
therein, they do not seem to have any clear demarcation of where one stops and the
other begins (Abdulrazaq, 2007) a factor that has joined to increase the difficulty in
judicial resolutions of tax cases. Under this confusion, retained lawyers representing
their corporate clients on tax matters simply focus on lobbying and drafting to convert
tax offences to civil matters, where their clients would merely be required to pay fines
or the arrears of tax owed[12]. This explains why several tax cases, where corporate
tax payers are indicted, just ended with the payment of fines or the arrears of tax owed.
The case of Wilbros (a subsidiary of Houston-based Wilbros Group Inc.)[13], where
its former executive pleaded guilty, before Judge Sim Lake of the US District Court for
the Southern District of Texas, to conspiring to bribe some Federal Government
officials of Nigeria with more than $6 million in violation of the Foreign Corrupt
Practices Act (FCPA) is very revealing of the prevalent high degree of collusion in the
Nigerian tax administration. Jason Edward Steph, who was General Manager of WIISs
operations in Nigeria between 2002 and April 2005 admitted that in late 2003 he, a
senior executive officer in charge of WGIs international business, two purported
consultants working for WII, and certain Nigeria-based employees of a major German
engineering and construction company, agreed to make a series of corrupt payments
totalling more than $6 million to the Nigerian National Petroleum Corporation, the
ruling Peoples Democratic Party and a senior member of the then federal government
cabinet (Aliyu, 2007). Despite the publicity attracted by the case of SEC v. Brown in the
United States, a leading local newspaper in Nigeria (Vanguard) has consistently
reported that since the US authorities commenced their investigations, the Nigerian
authorities including the Economic and Financial Crimes Commission and the
government in particular have chosen to remain silent; and that personnel of the NNPC
and its subsidiary NAPIMS who were at the helm of affairs when these bribes were
allegedly offered have since been promoted to higher responsibility within the system
(Aliyu, 2007).
Ironically, the fact that the Nigerian government is yet to come to real terms with the
growing distortions in the tax system has some negative consequences on both the
people of Nigeria and genuine investors. Due to increasing reliance on oil revenue since

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independence in 1960, government has utterly overlooked the need for a tax reform
that would meet international standard. Tax authorities, accountants, auditors, and
corporate managers all collude to take advantage of loopholes in the system. The fact
that more and more companies are getting caught in tax fraudulent acts portrays three
important and challenging issues in the Nigeria corporate environment, namely the
continuing loss of confidence in the governance structure of both public and private
socio-political institutions in the country; the setting in of Adverse Selection in the
Countrys Investment Flows with the likelihood of genuine investors giving way to
fraudulent investors; the taking over of tax frauds (from the conventional tax shelters)
as a common tool for managing corporate tax liabilities.
Conclusion
Theoretical postulations that tax influences the choice of corporate finance and
investment decisions are all embracing. However, the legality of strategies adopted by
firms to mitigate the impact of tax burdens on profitability and value depends on
whether the tax system is efficient or inefficient. Evidence, from this paper, reveals that
the fiscal structure and the tax laws in Nigeria are not strong enough to surety the
revenue diversification goals of the government; and does not provide the necessary
incentives that encourage voluntary compliance by tax payers. As a result of the high
level of distortions in the tax system, companies have resorted to a gradual shift in
strategy, from the use of the conventional debt and non-debt tax shields to some illegal
means of shielding tax liabilities. Such illegal means come mostly in the form of frauds
and collusions between tax authorities and the companies operating in the country.
The case of firms operating in the oil sector of the countrys economy constitutes good
description of how high tax rates, lack of corporate patriotism, and public sector
corruption force multinationals to seek for solitude in the use of illegal tax shelters.
While taking advantage of the volatility in the governance structures in Nigeria, some
of the multinationals operating in the country have been caught in the web of high
profile bribes and collusions.
Specifically, the paper establishes that an environment of multiple tax system
reduces incentives to pay tax or for voluntary compliance; that the exclusion of crucial
non-debt tax shelters such as depreciation, heightens pressure on the use of debt-based
tax shelters; and that controversies on deductibility make it difficult to distinguish
between criminal and civil proceedings in tax cases. It therefore recommends that
except the structural deficiencies in the tax system are resolved, government will
continue to be the worst of, through the huge annual loss of tax revenues; and that
there is no better time to rethink the entire tax system and practices in the country than
now. Such reform efforts must include empowering the judiciary in the execution of
economic and commercial legal cases; evolving stiffer laws that would criminalize the
collaboration of accounting and auditing firms in tax and investment related frauds;
resolving the pending problems of multiple taxation; and clarifying issues affecting
deductible cum non-deductible items of expenditures for tax purposes.
Notes
1. Prevalent among such recent cases that have generated a lot of legal controversies are,
for example, Akwa Ibom State Government v. Mobil Producing Nigeria Unlimited and
five of its executive directors over tax evasion (Suit No. REU/2959/2006).
2. The practice of withholding tax system in Nigeria allows employers, both in the public
and private sector of the economy, to serve as collection agents, on behalf of

3.

4.

5.
6.
7.

8.

9.

10.

11.

12.

government, for the personal income taxes from workers under their employments
(Nnadi and Akpomi, 2008).
Classes of assets excluded from capital gains tax in the country are a disposed asset,
which is a tangible moveable asset valued at N1,000 or less; capital gains accruing to
religious, charitable, educational, cooperative organizations, and trade unions; assets
for private use, life insurance policies, stocks, shares, and government securities;
capital gains arising from the acquisition of company shares through a merger or
takeover (provided that no cash was paid for the acquired shares) (see Sections 27 to 42
of the Capital Gains Act).
This legal instrument has since its enactment in 1959 gone through series of
amendments. Presently, its legal citation is the Petroleum Profits Tax Act (PPTA) CAP
P13 LFN 2004.
Shell Petroleum Development Co Ltd v. Federal Board of Inland Revenue (1996) 8 NWLT
(Pt. 466) 256 at 285.
The CITN is a profession body chartered by law to regulate and oversee the activities
of tax practitioners in the country.
See for instance Dike (2003) and the Transparency International Report (for various
years), which has it that Nigeria as a country has swung between the position of
second and sixth most corrupt country in the world between year 2001 and 2008.
In November 2008, for instance, a petition was forwarded to the Economic and
Financial Crimes Commission, against the Chairman of the Federal Inland Revenue
Services (along side with the officials of the Central Bank of Nigeria), over an allegation
that the latter was involved in serious case of looting and criminal diversion of $360
million having within the same period remitted the sum of $131 million out of the
sum of $491, 509,203 being amount of tax revenue collected from Chevron Group
(accessed at www.nairaland.com/nigeria/topic-201640.0.html#msg3155584 on 3 July
2009).
Writing on the status of foreign firms in Nigeria, The Guardian [Nigeria] Newspaper
writes in its April 29, 2009 editorial that It is sad that many foreign companies in
Nigeria are accustomed to flouting Nigerian laws and abusing our patronage.
Somehow the impression is being created that in this country anything goes and that
anyone with the means can subvert the system and position himself above our laws.
The Halliburton scandal is not the first of its kind. Geo-Jaja and Mangum (2000) report
several cases involving large US MNCs (in the likes of General Electric, Exxon, and
Lockheed) found to have been engaged in bribes to secure tax deferrals, to obtain
licenses or to get permission to import materials or human resources, or for other
favors; and a disclosure to SEC by more than 450 US firms by early 1980s of having
been involved in illegal or questionable payments abroad, totaling more than $1 billion,
to foreign government officials.
Generally, the weakness of the judicial system extends beyond prosecuting tax
offences. Ezeoha and Ayigor (2009), for instance, collaborate the view that it is quite
difficult to facilitate debt resolution, especially as it affects the foreclosure of collaterals,
amidst a very inefficient judicial system. (see also Collier, 1996).
The promulgation of the Federal Inland Revenue Establishment Act 2007, gave room
for the establishment of Tax Appeal Tribunals to provide for efficient resolution of all
tax-related disputes in the country. The Act grants tax payers with the opportunity for
redress if dissatisfied with their assessments; and the opportunity to appeal the
decisions of the tax authorities at the Federal High Court, Appeal and Supreme Courts.
With the general high level of inefficiency in the countrys judicial system, the 2007 Act
rather than aid resolution of tax disputes has helped to lengthen the periods it takes to
reach definite judicial resolutions.

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13. Full details of the case can be found at: www.sec.gov/litigation/complaints/2006/

comp19832.pdf

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Corresponding author
Abel Ebeh Ezeoha can be contacted at: aezeoha@yahoo.co.uk

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