Taxation and the anti-corruption fight under the rule of law, by Ade Ipaye


I n t r o d u c t i o n

The concept of the rule of law has become particularly popular in everyday discourse in Nigeria today – among lawyers and non-lawyers alike. I am yet to see a day of newspaper reporting in recent times in which the concept fails to get a mention. This is because it has a double-edged connotation capable of animating different groups relying on the same concept to advance diametrically opposed views. It is therefore common to find, for example, those who applaud this Administration’s anti-corruption campaign as being in line with the rule of law and yet find those who claim the campaign violates the rule of law.

The rule of law idea involves a system of governance based on non-arbitrary rules, as opposed to one based on the power or whims of an absolute ruler. It is deeply linked to the principle of natural justice whose attributes include the law of reason, rightness and truth and also involves accountability and fairness in the protection and vindication of rights and the prevention and punishment of wrongs. Rule of Law assumes the existence of effective and legitimate institutions to administer the law as well as to guarantee personal security and public order. In particular, it connotes that no one is above the law and that all persons, institutions and entities, both public and private, are accountable to laws publicly promulgated, equally enforced and independently adjudicated and a Constitution which guarantees human rights.

Many will agree that at the time this Administration was sworn in, corruption had reached astronomical levels in our polity. Had Benjamin Franklin been alive in Nigeria in May 2015, I believe he would have replaced ‘taxes’ with ‘corruption’ in his list of life’s certainties. For want of a better term, this was certainly a case of ‘double jeopardy’ for Nigeria, in the context of our underdevelopment.

There are very interesting, and perhaps unexpected, linkages between taxation, democracy, rule of law and corruption. To start with, absence of a functional tax structure has been shown to be a major cause of government-citizen disengagement. In consequence, it makes ample room for corruption. Take the case of Nigeria, where there has been what we can describe as chronic overreliance on natural resource exploitation. For several decades, governments could get on quite nicely without bothering the people with taxes. As the logic goes, when government is not taking much from the direct earnings of the populace on a regular basis, accountability of public officers become very weak and the people become tolerant, or simply do not pay much attention, to corruption. You might then hear a citizen say “It is oil money that is being embezzled, not my money.”

In the circumstance, government could “simply reticulate oil revenues through personal spending by corrupt leaders, wasteful expenses and salaries (dispensed much like patronage to an over-bloated public workforce), all of which virtually displace large scale spending on infrastructure and other endeavours that could have diversified and grown the economy.’  This condition exacerbates the much talked about Dutch Disease, whereby increase in one sector (petroleum), force a decline in other sectors (manufacturing, agriculture, etc). In the wake of an oil boom or commodities market surge, the country’s currency appreciates, its exports become very costly and its imports become cheap. This eventually lures the populace to an overreliance on imported goods, until the day of reckoning comes.

We have seen it all in Nigeria. Corruption drained the country’s scarce resources and channelled same into many unproductive ventures, such as wasteful spending on foreign food and luxury goods. On account of this, past governments failed to utilise our revenues to provide much-needed infrastructure and develop human capacity. As the former United Nations Secretary General, Kofi Annan, once said, “Corruption hurts the poor disproportionately by diverting funds intended for development, undermining a government’s ability to provide basic services, feeding inequality and injustice, and discouraging foreign investment and aid.” Corruption in Nigeria has also led to widespread unemployment, inequitable distribution of wealth, and the corrosion of societal morality. In a nutshell, it has subverted the common good for private gain.

Secondly, weal institutions and poor law enforcement structures have made it easy to evade taxes. This ability to evade taxes with ease contributed further to the drain on resources, further impeding many social and infrastructural investments that could have taken place for the good of the nation. Thus the ratio of Tax to GDP ratio of Nigeria (i.e., the ratio of tax collected, compared to national gross domestic product) is a stark indicator of our economy’s resilience (or lack of it). The estimate for Nigeria falls between 6 and 7%, whereas it comes up to an average of 40% in Europe, 32.2 in Canada, 26.9% in the USA, 22% in China, 18.9% in the Gambia and 20.8% in Ghana.

According to the Joint Tax Board, only about 10 million people are registered for Personal Income Tax in all the States of the Federation (including FCT). Out of this, 4.6 million (or 46% are in Lagos State). If you now juxtapose that against the 77 million workforce which the Nigerian Bureau of Statistics has declared to be in existence in Nigeria, you can clearly see how far down we are and how a sharp decline in the price and volume of our exported crude oil can be so devastating to the economy.

C o r r u p t i o n   a n d   T a x a t i o n

The tax system itself is riddled with corruption. According to a 2010 United Nations Economic Commission for Africa (UNECA) report, corruption in the tax system is one of the worst forms of corruption in African states. The report found that “the combination of tax evading individuals and companies and corrupt tax officials are a major drain on the revenues of many African countries”. As far back as 2005, over 50% of households surveyed in Nigeria for the African Governance Report said that tax officials demand bribes. In 2009, the African Governance Report, focusing on a different theme, concluded that despite the rise in international oil prices, government revenue fell as a percentage of GDP in Nigeria.

In a 2016 PricewaterhouseCoopers (PwC) Research on the Impact of Corruption on Nigeria’s Economy, it was found that the rich pay a lower proportion of their income in tax. There are many scholars whose research have tended to show that corruption has a significant negative impact on tax revenues and in a 1998 International Monetary Fund (IMF) study, strong statistical evidence that an increase in the level of corruption lowers the tax revenue-GDP ratio was found. Accordingly, the IMF concluded that efforts to reduce corruption should increase tax revenues significantly. The PwC report also concluded that countries with higher corruption are associated with lower tax revenue as a percentage of GDP.

Corruption in the tax system also acts as a major hindrance to sustainable economic growth in another sense. It is known to deter well-meaning and capable long-term investors from investing in the country, thereby killing industries before they become viable. In this sense, corruption leads to the erosion of the future tax revenue base of a country, thereby impacting future tax revenue collection.

In a 2005 paper jointly authored by Axel Dreher and Thomas Herzfeld, the two German scholars reached the conclusion that countries with a higher level of corruption tend to have larger informal or shadow economies in which a greater number of people fall outside the tax net. On the other hand, it has also been argued that a high tax rate can potentially induce more corruption in an economy by incentivising tax evasion. In Nigeria, we additionally have the peculiar situation where citizens refuse to pay tax out of fear that government officials will corruptly enrich themselves by embezzling public funds, including tax revenues. This presents a catch-22 situation where a government perceived to be corrupt is first expected to deliver on social and infrastructural development without access to tax revenues needed to achieve same.

In the immediate post-military era in Lagos State, significant effort was first put into demonstrating that taxpayers’ money would be put to good use. Hence, successive governments in the State focused on doing what every government should do – that is, building roads and bridges, connecting homes to water sources, improving the means of transport, building schools and hospitals and so on. These projects were not cheap and would not have been sustainable had the State chosen to rely solely on its federal allocation. However, by seeking initially to build trust, the State was eventually able to get a relatively higher proportion of residents to start paying taxes.

I daresay that in order to address corruption in tax administration, this Administration must seek to enthrone the rule of law. There must first be an understanding that tax evasion and stealing from government coffers by public officials are punishable crimes. Secondly, every citizen, no matter how highly placed in society, must believe that there is a reasonable prospect of being punished for committing these crimes. Thirdly, citizens must be given access to information about the uses to which their taxes have been put. And fourthly, government should begin to use tax administration positively to detect and deter corruption.

C o n c l u s i o n

In modern systems, tax administration is increasingly being used, not only in enforcing tax laws, but also for the detection of possible crimes, including corruption and other economic crimes. The rationale is quite simple. Tax examiners are often highly trained forensic accountants or auditors or financial investigators with an ability to follow money trails, whether legal or illegal. They are therefore well-placed to detect and report unexplained increases in wealth or suspicious transactions that could constitute a bribe.

Furthermore, the proceeds of corruption are also, quite invariably, subject of tax evasion, and this correlation can help in law enforcement. In most cases, wealth acquired illegally would not have been subjected to tax, even though it is not tax exempt. Thus, even where illegality is difficult to prove, tax evasion and money laundering are usually easy (The famous Chicago drug baron, Al Capone (Alphonse Gabriel) was convicted of tax evasion and sentenced to 11 years imprisonment even when it was difficult to prove his drug dealing and other criminal activities). This demonstrates the potentials of taxation as a means of checking corruption.

Many are of the view that a multiagency approach to fighting tax and financial crimes, including corruption, is the best recourse for a government seeking to make corruption more difficult to hide. I am in support of this position. With greater cooperation between tax collection and anti-corruption agencies, tax examiners and inspectors can be placed in a better position to report suspicious activities to the relevant agency to take further action. This extension of the mandate of tax collection agencies must however be preceded by proper training to uphold the rule of law and prevent unwarranted violations of citizens’ rights.


Being keynote address delivered at a dinner/lecture to mark the conferment of the rank of Senior Advocate of Nigeria (SAN) on Mr. Chijioke Okoli held at the Shell Hall, Muson Centre, Lagos on December 2, 2016

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