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Tax Evasion and Tax Avoidance

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Tax evasion in Zambia

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PROGRAMME : BSc Accounting COURSE NAME : Principles of Taxation (AFIN 208) STUDENT NUMBER : AFIN 10205 ASSSIGNMENT : One (1) LECTURER : Mr. Lubinda Namiluko DUE DATE : 11 March 2013UNILUS 2013




1Tax Evasion Vs Tax Avoidance


Tax Haven

5Tax Avoidance Implications on the Zambian Economy

7Capital Allowances Impact on Corporate Tax


8Case Study - Zambia Sugar Newspaper Article




All Governments require payments of money from its resident persons in order for it to meet public expenditure on the provisions of public goods and services such as education, health, road network infrastructure, defence and so on.

Though there are several ways in which Governments raise revenues such as through donor funding, privitisation of state owned enterprises, issuance of government bonds and treasury bills, to mention but a few, most Governments rely on taxation and without taxes to fund its activities, they would be non-existent.

A tax may be defined as a compulsory levy on income or gains of a person resident in a particular country and taxation may be defined as the process of raising revenue for central government through levies and gains of resident persons. (Anon, 2012, p.4)

A resident person includes an individual or persons other than individuals, such as companies.Operation of a tax system requires rules and regulations. The rules and regulations form part of the tax law. Statutes or Acts of parliament make it legal for taxes to be levied on resident persons. (Anon, 2012, p.9)

Thus, all resident persons are under an obligation to adhere to these rules and regulations failure to which the law will be enforced. In Zambia, the main statutes include the Zambia Revenue Act, the Income Tax Act, the Value Added Tax Act and the Customs and Excise Act.The Zambia Revenue Authority (ZRA) is a corporate body, established in April 1994 under the 1993 Act of Parliament. It is an authority entrusted with the responsibility of collecting revenue on behalf of the Government under the supervision of the Ministry of Finance and National Planning. ZRA was created to redress the serious shortfall in the much needed tax revenues as a result of non-adherence by resident persons and thus, reduce dependency on donor funding to support basic necessities. The goal of ZRA is to maximize tax compliance and increase domestic revenue yield in Zambia by instituting a fair, efficient and effective tax regime. /(Anon, 2012, p.11) -1-

It is the view of this presentation that all the issues relating to the case study of an article published in the Times of Zambia newspaper dated February 2013 entitled Zambia Sugar siphons KR 374m report relate to the principles of taxation, thus, in an effort to answer the questions at hand, the following will be discussed.

a) The differences between tax evasion and tax avoidance, clearly indicating the causes of each scheme.

b) What is meant by a tax haven.

c) Implications of tax avoidance schemes on the Zambian economy.

d) The impact of capital allowances on corporate tax.

(a) Tax Evasion Vs Tax AvoidanceThe difference between tax avoidance and tax evasion is the thickness of a prison wall. (Denis Healy, the Economist, Volume 354, p 186. [online] Available at: http.//en.wikipedia.org/wiki/Denis-Healy [Accessed 22 February 2013]) Tax evasionis the general term for efforts by individuals,corporations,trustsand other entities to evadetaxesby illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability and includes in particular dishonest tax reporting, such as declaring less income, profits or gains than actually earned or overstating deductions. ([online] Available at: http.//en.wikipedia.org/wiki/Tax_evasion [Accessed 22 February 2013])

Income tax evasion appears to be positively influenced by the tax rate, the unemployment rate, the level of income and dissatisfaction with government. High rates of tax, attracts a greater incentive to defraud the government. -2-

Ten countries with the largest absolute levels of tax evasion. It is estimated that global tax evasion amounts to 5 percent of the global economy. ([online] Available at: http.//en.wikipedia.org/wiki/File:Countries_With_Largest_Tax_Evasion_Amount_v3.jpg [Accessed 22 February 2013])The following is a list of some of the tax evasion schemes.

Evasion of customs duty importers evade tax by under-invoicing, misdecleration of quantity and product description. Smuggling resorts to total evasion of customs duty since the products are not routed through an authorised customs port, and therefore are not subjected to declaration and payment of duties and taxes.

Evasion of Value Added Tax (VAT) producers who collect VAT from consumers may evade tax by under-reporting the amount of sales. Corruption by tax officials corrupt tax officials cooperate with tax payers who intend to evade tax. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe.-3-Tax avoidance, on the other hand, is the legal utilization of the tax regime to one's own advantage to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms oftax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system, though such characterisation of tax avoidance is suspect, given that avoidance operates lawfully, within self-creating systems.([online] Available at: http.//en.wikipedia.org/wiki/Tax_avoidance[Accessed 22 February 2013])For example, if we consider two businesses, each of which have a particular asset (in this case, a piece of real estate) that is worth far more than its purchase price.

Business One sells the property and underreports its gain. In this instance, tax is legally due. Business One has engaged intax evasion, which is criminal.

Business Two consults with a tax advisor and discovers that it can structure the sale as a "like-kind exchange" for other real estate that it can use. In this instance, no tax is due because no sale has taken place. Business Two has engaged intax avoidance, which is completely within the law. ([online] Available at: http.//en.wikipedia.org/wiki/Tax_noncompliance [Accessed 22 February 2013])Evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed. Whatever the case, both practices result in Government loss of substantial amounts of tax revenue.

In our case study, an international movement, ActionAid, has accused Zambia Sugar Plc, a private limited company that produces sugar for both local and international consumption, of siphoning substantial amounts of money by way of tax avoidance. In the article, I have noted, with great concern, that the terms evasion and avoidance are used almost interchangeably.Whilst ActionAid is accusing Zambia Sugar Plc of tax avoidance, the sugar company is denying categorically of evading tax. In my opinion, the sugar company may indeed not be evading tax but is definitely avoiding it. In the said article, ActionAid revealed the following tax avoidance schemes by the sugar company. -4- Payment of millions of dollars in management fees to an Irish company, an action which has cost Government loss in tax revenue. Paying an export agency commission to its sister company registered in Mauritius where companies where taxed almost nothingMany multinational companies in Zambia avoid tax by movement of monies out of Zambia into tax havens as a way of reducing taxable profits. On page 4 of the Post newspaper dated 13 February 2013, Ngandu Magande, Zambias longest-serving finance minister, also noted that multinational companies are avoiding taxes by inflating their operational costs through the involvement of many foreign firms in transactions. He further noted that the management fees the sugar company is paying to a foreign country could be avoided because there is capacity locally. In the same article a University of Zambia lecturer, Dr. Mathias Mpande, says any deliberate act inimical to the countries treasury should be stopped because it is not morally right. Once a tax avoidance arrangement becomes common, it is almost always stopped by legislation within a few years. If something commonly done is contrary to the intention of Parliament, it is only to be expected that Parliament will stop it.

So that which is commonly done and not stopped is not likely to be contrary to the intention of Parliament. It follows that tax reduction arrangements which have been carried on for a long time are unlikely to constitute tax avoidance. ([online] Available at: http.//en.wikipedia.org/wiki/Tax_noncompliance [Accessed 22 February 2013])The question we should be asking ourselves is whether or not our government is doing anything about this scourge. (b) Tax HavenAtax havenis a state, country or territory where certaintaxesare levied at a low rate or not at all.Individuals and/or corporate entities can find it attractive to establishshell subsidiariesor move themselves to areas with reduced or nil taxation levels. -5-There are several definitions of tax havens.The Economisthas tentatively adopted the description by Geoffrey Colin Powell (former economic adviser toJersey): What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage intax avoidance. According to other definitions the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.

There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of theirparent companyin the host country and employing some of the local population.Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies. ([online] Available at: http.//en.wikipedia.org/wiki/Tax [Accessed 22 February 2013])The ActionAid report in our case study has likened Mauritius and the Netherlands to tax havens where Zambia Sugar Plc transfers millions of Kwacha out of Zambia in order to reduce its taxable profits. ActionAid Zambia Country Director, Pamela Chisanga, said the sugar company shuffled its ownership between tax havens of Ireland, Netherlands and Mauritius in which it reduced withholding tax it pays in Zambia. In Mauritius, companies are taxed at a meagre 3% as compared to 15% to 35% in Zambia. Many industrialised countries claim that tax havens act unfairly by reducingtax revenuewhich would otherwise be theirs.-6-(c) Implications of Tax Avoidance Schemes on the Zambian Economy

Zambia, like many other developing countries, relies much on its tax revenues and in as much as tax avoidance may be legal it impacts negatively on the economy. The much needed tax revenue to fight poverty, fund education, health and infrastructure development is affected. The ActionAid report talks about how losses from Zambia Sugar Plc as a result of tax avoidance could put an extra 48,000 children in schools. An educated and healthy nation with good infrastructure leads a road to a first class economy at a much faster rate than is the case. (d) Impact of Capital Allowances on Corporate TaxThe principal tax paid by companies is called corporation tax. This is a tax which is imposed by most governments on the trading profits of business entities liable for corporation tax. The profits are assessable for corporation tax using corporate tax rates fixed in the Budget, presented by Parliament at the beginning of a financial year. In Zambia corporate tax rates range from 15% to 35% depending on which business sector the company belongs.Corporation tax is assessable on the profit calculated after certain adjustments have been made to the net profit. For example, depreciation provision on fixed assets is the accounting figure used when arriving at the net profit but is not allowed when calculating corporation tax. It is reversed when calculating the taxable profits and replaced by capital allowances. As a result, taxable profit assessed in any year is normally not the same as the net profit for the year as shown in the profit and loss account.

Capital allowances are a form of tax relief given on capital expenditure. That is, expenditure incurred on the acquisition of fixed assets or expenditure incurred on making improvements to fixed assets used by the business. You can claim capital allowances for what your business spends on certain assets that it owns and uses in the business, provided certain conditions are met. You cannot claim capital allowances for the cost of things that your business buys and sells as part of its trade. Instead, you will need to include these items in business expenses when youwork out your trading profits. Below are examples of some types of expenditure that a business may be able to claim capital allowances.-7- Equipment that you own and use in your business - tools, machinery, office equipment, computers, vehicles, pieces of plant and factory equipment may qualify for plant and machinery allowances as long as it is used in the business.

Capital expenditure on research and development - including equipment used for research and developmentIf the Research and Development (R&D) relates to the trade that your business carries on, and meets other conditions, it may qualify for R&D Allowances.

Gifts of equipment to charity - donation of used assets that have qualified for Plant or Machinery Allowances to a qualifying charity or Community Amateur Sports Club, you may be able to claim plant and machinery allowances on any left over written down value.

Renovating business premises - capital expenditure on the renovation of business premises in designated 'disadvantaged areas' may qualify for the Business Premises Renovation Allowance.

Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax. The corporation tax which would have been payable during a financial year is reduced substantially by the capital allowance given on capital expenditure. Apart from externalising huge amounts of money into tax havens, Zambia Sugar Plc pays little or no corporation tax for several years now due to capital allowances on capital expenditure on plant and machinery as part of their expansion program.


In this presentation, we have briefly looked at the role and purpose of taxation in most governments and paying particular attention to Zambia with reference to Zambia Sugar Plc as our case study following a report by ActionAid, an international non-governmental organisation (see attached newspaper article). We have highlighted the difference between tax evasion and tax avoidance clearly indicating the causes of each scheme and demonstrated how these schemes are threatening government revenues in Zambia resulting in robbing the country of billions of kwacha which could go a long way in alleviating poverty, education, better infrastructure, better-8-health services and good roads so that the poor Zambians have a better life. In addition, we now have an idea of what tax havens are and further some incentive governments give (capital allowance) as a relief on capital expenditure by corporate bodies and individuals, and the impact the allowance has on corporate tax. It is the view of this presentation that if we are to develop as a nation authorities such as Zambia Revenue Authority, Bank of Zambia and the Ministry Finance and National Planning should play their role by putting stringent measures to ensure that tax avoidance is curbed. Multinational firms such as Zambia Sugar Plc, Glencore-owned Mopani Coppermines, Zambian Breweries Plc and many others, must declare correct and equitable taxes to the government. -9-

-10-Bibliography1. Wood, F. and Sangster, A., 2005, Business Accounting (10th ed) Essex: Pearson Education Limited 2. Anon, 2012, Zambia Institute of Chartered Accountants (ZICA) Taxation Study Manual London: BPP Learning Media Ltd3. Rosen, Harvey S. Taxation. Microsoft R Student 2009 [DVD], Redmond, WA: Microsoft Corporation, 2008.

4. http://en.wikipidia.org/wiki/Taxation [Accessed 22 February 2013]) 5. Banda, J., 2013. Zambia Sugar siphons KR374m report. Times of Zambia

6. Chanda, G., 2013. Magande explains how multinationals avoid taxes. The Post, 13 Feb. p4