CRITICAL ANALYSIS OF
THE COMPLIANCE WITH TAXES BY PARTIES TO REAL PROPERTY TRANSACTIONS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Issues of tax compliance have been a challenge
for the successive government in Nigeria including various taxes on real estate
property transaction. There are various taxes that apply to real estate or real
property transactions in Nigeria. The common public representation or
perception that there are no real property or real estate taxes in Nigeria is
not correct. Some of the common taxes that apply to real property transactions
in Nigeria include the company’s income tax, value added tax, capital gains tax
and stamp duties tax. Any income with the resulting profit earned by any person
from such income, whether such a person is a corporation or an individual, from
a property transaction, is liable to the payment of tax. Where the income
earner is a corporation, the corporate tax rate in Nigeria is thirty per cent
(30%) of the annual profit of the corporation; and where the income earner from
a property transaction is an individual or a registered business enterprise or
partnership, the graduated tax rate is twenty-four per cent (24%) for individuals
earning N3,200,000 and above, per annum (Nwosu, 2004).
In addition to paying Companies Income Tax, incorporated
corporations in Nigeria, engaged in any commercial activity, including real
estate or real property transactions from which they make a profit, are liable
to pay two per cent (2%) of such profit as Education tax to the Education Trust
Fund. This Tax is collected on behalf of the Education Trust Fund by the
Federal Inland
Revenue Service (“FIRS”). All goods and services
in Nigeria, including goods and services utilized in the real estate industry,
are liable to be invoiced and to the payment of Value Added Tax (“VAT”) at the
rate of five per cent (5%) of the value of such real estate goods and services.
The Capital Gains Tax Act provides that any time an asset, including a real
estate asset, whether situated in Nigeria or outside of Nigeria, is disposed
off by a Nigerian tax payer, and a gain is derived as a result of such
disposal, the resulting gain or profit shall be liableto a ten per cent (10%)
Capital Gains Tax (“CGT”) less such allowable expenditures that were utilised
to enhance or preserve or defend the title to the asset.
However, gains arising from the disposal of an individual’s
principal private residence for another person’s principal private residence
are exempted from the provisions of the Capital Gains Tax Act. Also exempted
from CGT are commercial motor vehicles and personal Gifts from which no
monetary gain is derived.
The Stamp Duties Act requires that all written instruments,
including instances where any property or interest in property is or are
transferred or leased to any person, must be stamped.
Generally, Stamp Duties is charged at the rate
of 75 kobo for every N200 of the consideration of certain real estate
transactions like mortgages, while for conveyances or the transfer or sale of
real property, the stamp duties rate is 75kobo for every N50. The Stamp
Duties rate for lease and rental agreements is
16kobo for every N200 of the consideration of the lease or rental agreement.
Any written document that is not stamped is not
allowed to be received in any judicial proceeding in Nigeria until the stamp
duty and the resulting penalty for the nonpayment of the stamp duty is paid. There
are fines and other penalties for any failure to pay stamp duties on any
written instrument that is not exempted from the payment of stamp duty.
A
real estate transaction is the
process whereby rights in a unit of property (or designated real estate) is
transferred between two or more parties, e.g. in case of conveyance one party
being the seller(s) and the other being the buyer(s). It can often be quite
complicated due to the complexity of the property rights being transferred, the
amount of money being exchanged, and government regulations. Conventions and
requirements also vary considerably among different countries of the world and
among smaller legal entities. Tax refers to a “compulsory levy
by a public authority for which nothing is received directly in return” (James
and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory
contribution, imposed by government, and while taxpayers may receive nothing
identifiable in return for their contribution, they nevertheless have the
benefit of living in a relatively educated, healthy and safe society”. She
further explains that taxation is part of the price to be paid for an organized
society and identified six reasons for taxation to include provision of public
goods, redistribution of income and wealth, promotion of social and economic
welfare, economic stability and harmonization and regulation. Compliance with
these taxes by parties to real property transactions in Nigeria has not been
studied, but general tax compliance in Nigeria is low except when enforced.
According to the traditional model of tax
compliance by Allingham and Sandmo (1972), taxpayers choose how much income to
report on their tax returns by solving a standard expected utility-maximization
problem that trade off the tax savings from underreporting true income against
the risk of audit and penalties for detected non compliance. (Allingham and
Sandmo, 1972).
Therefore, a more appropriate definition of
compliance could include the degree of willingness with tax laws and
administration that can be achieved without the immediate threat or actual
application of enforcement activity. Tax compliance may be viewed in terms of
tax avoidance and evasion. The two are conventionally distinguished in terms of
legality, with avoidance referring to legal measures to reduce tax liability
and evasion as illegal measures.
1.2 STATEMENT OF THE PROBLEM
The subject of taxation has received considerable
intellectual and theoretical attention in the literature. Taxation is one of
the most volatile subjects in governance both in the developing and developed
nations. Low tax compliance is a matter of serious concern in many developing
countries especially on real property transactions in Nigeria. This has limited the capacity of government to
raise revenue for developmental purposes (Torgler, 2003). This implies that the
higher the revenue, the more likely government will put in place developmental
plans for the enhancement of the living standard of the people. The researcher
is providing a critical analysis of the compliance with taxes by parties to
real property transaction in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To
examine tax compliance by parties to real estate transactions in Nigeria.
2. To
identify the factors determining tax compliance in Nigeria.
3. To
identify ways to ensure tax compliance by parties to real property transaction
in Nigeria.
1.4 RESEARCH QUESTIONS
1. What
is the level of tax compliance by parties to real estate transactions in
Nigeria?
2. What
are the factors determining tax compliance in Nigeria?
3. What
are the ways to ensure tax compliance by parties to real property transaction
in Nigeria?
1.6 SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
1. The
outcome of this study will enlighten the general public, government of Nigeria
and policy makers on the level of compliance with taxes by parties to real
property transactions in Nigeria with a view of finding a lasting solution to
issues of non compliance with tax.
2. This
research will also serve as a resource base to other scholars and researchers
interested in carrying out further research in this field subsequently, if
applied will go to an extent to provide new explanation to the topic.
1.7 SCOPE/LIMITATIONS OF THE STUDY
This
study on the critical analysis of the compliance with taxes by parties to real
property transaction in Nigeria will cover
LIMITATION OF STUDY
1. Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire and
interview).
2. Time constraint– The researcher will simultaneously engage in this study
with other academic work. This consequently will cut down on the time devoted
for the research work.
REFERENCES
Alm,
J., B., Jackson, R. & McKee, M. (1992). Estimating the determinants of
taxpayer compliance with experimental data, National Tax Journal. 45:
107-115.
James,
M. and Nobes, T. (1992). A fairness approach to income tax evasion. Journal
of Public Economic. 52, 345-362
Nwosu,
K. (2004). Aggressive tax planning: Differentiating those playing the game from
those who don‟t. Journal of Economic Psychology. 25,
285-303.
Torgler,
B. (2003). Theory and empirical analysis of tax compliance, Basel: University
of Basel.