CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND TO THE STUDY
Taxation is considered a veritable source of revenue for financing developmental as well as people oriented programs in virtually all countries, irrespective of whether they are classified as developed or developing economies. History has however shown that individuals often exhibit one form of tax reduction behavior or the other, with series of arguments on the legal, economic and moral consequences of these acts. Tax evasion and tax avoidance reduce government revenues. This has a significant detrimental effect on the provision of infrastructures, public services and public utilities. Multinational companies (MNCs) in the oil, gas, and manufacturing sectors have used various tax schemes, ranging from off-shore intermediary companies to claiming recharges, royalties or technical fees and under-reporting of profit, to avoid paying tax in Nigeria. Stimulated majorly by increased profitability, and intense competition and pressure to increase earnings, capitalist enterprises constantly seek new ways of boosting their earnings by developing complex structures and novel ways of increasing their profits by exploiting ambiguities in the law.
The evidence shows that tax havens and offshore financial centres, shaped by globalisation, are major structures facilitating the anti-social tax practices of MNCs. Tax evasion is an unlawful practice which has the effect of reducing the government revenues needed for the provision of infrastructures, and for public services and public utilities. Tax avoidance, while not regarded by some as being unlawful, has the same effect. Both practices are motivated by different factors and involve a wide range of different mechanisms (Mo, 2003). They are amajor feature of national and international fiscal policy and of the global capitalist economy. These tax practices are not the prerogative of developed economies, but are also encountered in developing countries; and huge sums of money are lost to government coffers by such practices, Unlike tax evasion, tax avoidance is considered by some scholars to be a lawful activity. However, despite disagreement about whether tax avoidance is an unlawful activity, both practices have negative consequences and effects (Cobham, 2005; Kirchler et al., 2003) and have, similar impacts on fiscal revenues, Through tax havens and offshore financial centres it has been estimated that $1 trillion a year of ‘dirty’ money flows into the global banking system, one half of which comes from developing countries and transition economies. Although public opinion perceives that localised corruption in developing countries is the key cause of global poverty, sixty tax havens and the banking sectors of London and New York have much more to account for. While the World Bank estimates that corruption by government officials costs developing countries a significant US$30 billion a year – this is only 3% of the US$900 billion of public funds lost through tax evasion schemes and other illicit practices by multinational companies.