MULTINATIONALS ARE NOTORIOUS FOR TAX EVASION. DO YOU AGREE?

Introduction

In order to understand the depth of this discourse which is to confirm or dispel the assertion

that multinational companies are notorious for tax evasion it is pertinent to understand the

fundamental or basic concepts with regard to what the essence of a multinational company is

all about, to determine whether the governance structure of its host countries that fosters the

perpetration of such acts; the imperative of taxation as it is obtainable for such corporations

and the veracity of the assertion that there is a deliberate recourse to tax evasion by

identifying specific instances of tax evasion. This paper is therefore broken down into several

sections: What is a multinational company? What is tax evasion? How does the governance

structure foster such practice? Examples of tax evasion in Nigeria, analysis of the current

situation and it concludes with a summary of the discourse.

What is a multinational company?

The acceleration and intensification of interaction and integration among the people,

companies, and government of different nations as we see today is an integral part of the

course of human history. This exponential growth in various activities and aspirations with

increasing integration of the global human community has the role of Multinational

corporations as one of its key drivers which have in recent decades come into full view with

all its benefits and destructive power.

Multinational Corporations (MNCs) which are interchangeably referred to as Multinational

Enterprises (MNEs), Transnational Corporations (TNCs), and Transnational Enterprises

(TNEs), is “an enterprise that engages in foreign direct investment and that owns or controls

value-added activities in more than one country.”1 There are a number of ways of assessing

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the degree of multinationality of a specific firm. For example, firms are considered to be

multinational if “first, they have foreign affiliates or subsidiaries in more than one foreign

country; second, they operate in a wide variety of countries around the globe; third, the

proportion of assets, revenues, or profits accounted for by overseas operations relative to total

assets, revenues, or profits is high; fourth, their employees, stockholders, owners, and

managers are from many different countries; and lastly, their overseas operations are much

more ambitious than just sales offices, including a full range of manufacturing and research

and development activities.”2

In, “1994, for example, there were 37,000 multinational parent firms controlling over 200,000

foreign affiliates. By 2006, there were 78,000 MNCs with 780,000 overseas affiliates.

Multinational corporations are among the world’s largest firms. In 2006, the top 50

multinationals had revenues of over $80 billion. The revenues of each of the top ten

multinational corporations in 2006 were over $168 billion, more than the gross domestic

product (GDP) of at least 140 countries.”3

The governance structure of countries

It is pertinent to clarify that tax evasion and avoidance practices are not the prerogative of

developing countries, but are also encountered in developed economies; and huge sums of

money are lost to government coffers by such practices. However, it is the contention of this

study that the challenge of tax evasion and avoidance is much more prevalent in developing

countries because of the lack of good governance which allows the multinationals to often

outsmart them. The governance structure comprises the mechanisms, processes and

institutions through which citizens and groups articulate their interests, exercise their legal

rights, meet their obligations and mediate their differences. This “governance structure is in

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the area of economic, political and administrative. Economic governance includes decision-

making processes that affect a country's economic activities and its relationships with other

economies. It clearly has major implications for equity, social justice and enhancement of the

quality of life. Political governance is the process of decision-making to formulate policy and

the ability or will to enforce such policies. Administrative governance is the system of policy

implementation which is prone and vulnerable to manipulation.”4

With the developed countries having all the above structure and the will for enforceability of

its policies and laws there still is the preponderance of tax evasion. The quest for profit

maximization compels the multinational to engage in this nefarious activity despite the fact

that almost all them originate from the developed countries. The issue of tax evasion is in the

front burner in these countries as they continuously witness a down turn in their tax income

from the multinational corporations. The developing countries strive to attract foreign direct

investments (FDI) hoping that knowledge brought in by MNCs will spill over to domestic

industries and increase their productivity. These direct gains can be higher real wages, lower

prices or higher taxes. In contrast, however, the governance structure of these countries

makes it easy for multinational corporations with little or no regard for the social and

economic well-being of the countries in which they operate, are forcing local firms out of

business, rather than forcing them to become more efficient. This challenge of tax evasion

though a global trend is much more prevalent in developing countries where the exercise of

economic, political and administrative authority to manage a country's affairs at all levels is

very poor.

They tend to have “economies dependent on the developed countries and are generally

characterized as poor with unstable governments and having high rates of population growth,

illiteracy, disease and also the prevalence of very large foreign debt.”5

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From the above analysis, apart from being wealthier than some countries put together, the

domestic financial markets in these countries have not been developed and do not have

appropriate laws in place to enable domestic financial institutions to stand up to foreign

competition. The administrative setup, judicial systems, and law-enforcing agencies generally

cannot guarantee the social discipline and political stability that are necessary in order to

support a growth-friendly atmosphere. In the apparent absence of good governance, the

possibilities of unethical conduct, the prevalence of poverty, availability of abundant natural

resources and cheap labour have made western multinationals to consider the African

continent as the “last frontier for investment” among the emerging markets in the world and a

veritable area for foreign direct investment. This absence of credible governance structure

and effective competition, have led Multinational corporations to operate with impunity in

many Third World countries.

What is tax evasion?

The problem of tax avoidance and evasion is one of the greatest problems confronting most

countries of the world. There has been a silent agreement from many quarters that there is a

tax gap between the actual tax collected and potential tax collections and this seems to be a

problem that every tax system faces.

Taxation is defined here as “the process by which government compulsorily transfers

resources from private to public sector.”6 or rather “taxation is a system used by governments

to obtain money from people and organizations.”7 On the other hand tax evasion can be

defined as contravention of the tax law whereby a person who derives a taxable income either

pays no tax or pays less tax than he would otherwise be bound to pay. Tax evasion also

includes the failure to make a return of taxable income or the failure to disclose in a return the

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true amount of income derived. The definition presented by the Canadian Department of

National Revenue, is quite comprehensive and all encompassing, it states that “tax evasion is

the commission or omission of an act knowingly with intent to deceive so that the tax

reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit

such an offence. This may be accomplished by the deliberate omission of revenue, the

fraudulent claiming of expenses or allowances, and the deliberate misrepresentation,

concealment or withholding of material facts.”8

It is apt at this point to delineate the difference between tax avoidance and tax evasion which

for all intent and purposes have a thin line demarcating both terms. Tax avoidance involves

the use of non-criminal modes of conduct by taxpayers in order to minimise or avoid tax

liability. According to Komisar, the use of the term ‘avoid’ rather than ‘evade’ is a legal

nicety which occurs when the wealthy and powerful use their power to legalise the non-

payment of taxes and to constrain the enforcement agencies from conducting justifiable

investigation and prosecution. Simply put tax avoidance is ‘the art of dodging tax without

actually breaking the law.”9Tax avoidance is legal while tax evasion is illegal, though there

are those who argue against this simplification because of they feel that it is ethically wrong.

By and large, the consequences of corporate tax avoidance and evasion are the same: fewer

contributions from business and a larger burden on workers and consumers, or just less

government funds to run states on.

Types of tax evasion

There are several reported methods of tax evasion which include tax minimisation strategies

ranging from transfer pricing to the creation of special purpose vehicles or nominal transfer of

headquarters to tax havens; under-reporting; bribery of tax officials; refusal to pay; lobbying

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of governments to reduce tax liability or effective incidence of tax system; lobbying by

multinationals of ‘home’ country governments to pressure ‘host’ country governments to the

same effect; or lobbying via international institutions (IMF, World Bank, WTO) to achieve

similar effects.

Others include: “non registration for taxes; refusal to file returns; refusal to pay assessed

taxes; over/under invoicing; fictitious loans; understatement of activities; claim of fictitious

expenses and assets; under-declaration of income; non – remittance of WHT and VAT

deducted at source; late remittance of WHT & VAT; deliberate claiming of tax credits to

which claimant know they were not entitled; suppression of turnover; inflation of expenses

higher than normal; concealment of offshore businesses and income; reporting non – existent

assets to claim capital allowances; intentional failure to deduct or withhold tax from payments

to contractors/suppliers, etc; deliberate refusal of banks to remit tax funds to central bank on

one flimsy excuse or the other; falsification of security documents such as tax clearance

certificate, tax receipts, withholding tax credit notes, official stamps, VAT certificates, etc;”10

Tax evasion and avoidance have been taken to its extreme by the steadily growing number of

tax havens. Their low taxes and thin financial regulatory regimes attract not only wealthy

individuals but also multinational corporations that use them as shelters from corporate

taxation. There are at least 73 countries and territories that fit the classification of a tax haven

and half of them have been established within the last 25 years. Out of which 47 are in

developed countries in Europe, America and the Caribbean, and 39 are British dependencies

or protectorates. They are sovereign states, colonial territories and parts of sovereign states

that enjoy partial autonomy. As the raison d’etre of tax havens is their secrecy, it is hard to

estimate the scale of tax income lost due to them. One study showed that the taxes not paid

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on the returns made on such funds amounted to more than US$ 250 billion a year. 11Another

study set a conservative estimate of the revenue losses due to tax havens for developing

countries at US$ 50 billion annually – the equivalent of the annual aid flows to these

countries or six times the estimated annual costs of achieving universal primary education.12

The challenges combating tax evasion in Nigeria include absence of a national data base and

the ineffectiveness of the PIN number which was supposed to serve as a taxpayer

identification number; inadequate tax education; advancement in technology and

globalization; cash based Nigerian economy; poor record keeping, underground economy;

sophistication in tax planning schemes especially among the Multinational companies, etc.

Examples of tax evasion

The fight against tax evasion is one of the great challenges of fiscal management especially in

Nigeria where there are several instances where the multinationals deliberately defy the

authorities request for appropriate taxes. The specific samples are drawn from the extensive

work done by scholars and reports in this regard. Multinational oil companies in Nigeria have

been investigated and prosecuted for non-compliance with accounting standards and frauds

and tax evasion and the evidence of the above predatory enterprise culture of multinational

oil companies in Nigeria and some other multinational companies operating abound in the

country. There are several cases involving Shell Petroleum Development Company (SPDC),

the largest oil producing company in Nigeria, which has been referred to as a “Veritable”

State in the State of Nigeria.”13Its exploration arm SNEPCo, was investigated in 2006, “by

the House of Representatives Committee on Petroleum Resources and found to have

collaborated with the then Nigerian Minister of State for Petroleum, Edmund Daukoru, to

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violate the Nigerian laws and regulations by defrauding Nigerians a total sum of $3.2billion

tax underpayment”14

A report of the committee set up by the government of Nigeria in late 2007, to determine

whether any revenue opportunities have been lost by Nigeria in the implementation of the

Production Sharing Contracts (PSCs) for the two deep-offshore oil fields at Bonga and Erha,

also implicated the second largest producer of oil in Nigeria, Exxon Mobil Nigeria in huge

tax avoidance According to the report submitted to the President of Nigeria, Mobil is to

immediately pay about US$1billion to the coffers of the Nigerian Federal Inland Revenue

Service (FIRS).”15

Akwa Ibom State government instituted legal action against Mobil Producing Nigeria

Unlimited and five of its executive directors over tax evasion on October 31, 2006 in suit No.

REU/2959/2006. The action was filed against Mobil Producing in the State’s Revenue Court,

accusing Mobil of evading payment of taxes totalling more than N4.1billion

(US$27,123,076). In the suit filed before a revenue court in Uyo, the Akwa Ibom State

capital, and presided over by Magistrate Benet Ilalumo, Mobil was accused of withholding

from the state government income tax from 1998 to 2003. The offence, according to the

charge, was punishable under Section 86(1) of the Personal Income Tax Act of 1993.

Amongst other things, the defendants were alleged to have made incorrect returns with wrong

information on the incomes of their workers from 1998 to 2003, thereby contravening Section

87 of the Act.”16

In a related case it was reported that Chevron Nigeria Limited, “has been indicted for tax

evasion and the mainstream news media compromised the ethics of the press by not

publishing the scandalous impunity of Chevron and other multinational oil companies in

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Nigeria.”17 It was one of the most complex and sinister webs of corporate deception and the

exploitation of a joint venture scheme and related tax law was spelled out in an allegation

filed in August 2004 by the Economic Financial Crimes Commission (EFCC) of Nigeria

against Chevron Nigeria Limited (CNL) and its associated companies. The allegation related

to the use of petroleum profit accounting technology (such as fictitious qualifying capital

expenditure, reserve additional bonus (RAB), and intangible drilling costs (IDC)) to avoid the

payments of petroleum profit tax (PPT) payable in Nigeria. When the allegations of anti-

social tax practices were made against CNL, ABZ Integrated Ltd. (a firm of chartered

accountants and tax practitioners) was appointed as consultant to the EFCC to investigate

CNL’s involvement in the alleged tax evasion schemes. The examination of CNL’s books

and records by ABZ Integrated Ltd., revealed that CNL had evaded approximately $2.7

billion in tax (by way of designated tax evasion schemes and the manipulation of accounts)

leading to accumulated penalties of $8.1 billion.”17 The House Committee on Petroleum

Resources (HCPR) therefore concluded that CNL had claimed unmerited tax credits in excess

of the $52.815 million alleged. The HCPR Report of 2006 shows that CNL’s associated

companies (i.e., Chevron Oil Co. Nig. Ltd. (COCNL) and Texaco Overseas (Nigeria)

Petroleum Company Unlimited (TOPCON)) were used to duplicate and replicate a RAB

grant of $43 million to commit a tax fraud of $113 million. CNL was said to have over-

inflated pension costs by $139,341,690 in order to gain a cost. Chevron was in 1998 and

1999, alleged to have diverted US$75million government tax through dividends. Chevron

evaded tax through claims to unmerited capital allowance, based on fictitious qualifying

capital expenditure by US$190million. Chevron evaded tax through claims to unmerited tax

credits, such as Reserve Additional Bonus and Intangible Drilling Cost (IDC) by

US$222million. Through conspiracy with the Nigerian tax officials, Chevron was assessed to

lower amount of tax than expected by US96million.”18

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The case of Halliburton is worthy of mention in that the officials publicly admitted in the

United States that its Nigerian arm in 2006 paid bribes worth $2.4 million dollars to tax

official in return for favourable tax rebate worth more than 14 million dollars in tax.”19

Halliburton is one of the world’s largest providers of products and services to the energy

industry, with global revenue of $18.3 billion for the year 2008. This case involved a tax

scheme whereby a MNC was able to establish affiliates incorporated in a particular

jurisdiction in order to shelter foreign-source income, thereby enabling that income to benefit

from a lower tax rate. Thus, the tax officials in Delta State had caused the government to lose

$793,940 in PAYE tax for 2002 and 2003, and $325,440 payable to tax officials. In Lagos

State, the government lost $80,000 in 2002, an unknown amount for 2003, and $97,860 to tax

officials as bribe. As a consequence, Lagos State was able to collect only $121,700 from the

negotiated sum of $545,000, Halliburton West Africa Ltd.”20

The Minister of Aviation has recently accused some foreign airline operators in Nigeria of

defrauding the country to the tune of a whopping US$500million. Lufthansa makes 60 per

cent of its international profit from the Nigerian route and that it was only fair if the company

pays what is due to the Nigerian people and economy.”21 In 2003 and 2004, another

multinational company in Nigeria, Bristow Helicopters was implicated in the bribing of tax

officials to the tune of US$423,000; in exchange for reduced employment taxes.”21 Bristow’s

wholly owned United States subsidiary, AirLog International Ltd (AirLog), through its

Nigerian affiliate, Pan African Airlines Nigeria Ltd. (PAAN), was implicated in evading the

payment of PAYE. Bristow has three affiliates in Nigeria. AirLog owns a 40 per cent stake in

PAAN. 49 per cent of Bristow Aviation is owned by Bristow, and Bristow Aviation owns 40

per cent of Bristow Nigeria the complex structure that allows for tax evasion. This case

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shows how PAAN devised a tax evasion plan involving the interface between its company

executives and Nigerian Internal Revenue officials in Delta State and Lagos State, the two

states where PAAN operated. PAAN and Bristow Nigeria under-reported their employees’

payroll expenses, which involved deliberately claiming a deduction which it knew it was not

entitled to and which was perpetrated by means of inducements (bribes) made to tax officials.

Poor internal controls and the complex corporate structure of the Bristow Group enabled the

tax fraud and the illegal payments to tax officials to go undetected.”21

While accountants and tax professionals are not expected to condone tax evasion by their

clients and are expected to promote transparency and accountability and devise techniques for

detecting tax fraud, it has been shown that some professionals do, in fact, use their expertise

to facilitate both tax avoidance and tax evasion practices. It has been proven that tax

revenues cannot be evaded or avoided without the involvement of accountants, lawyers and

bankers offshore tax havens, which provide secrecy and low regulation, are key vehicles for

the movement of ‘hot’ money”22

ANALYSES

The examples shown above clearly indicts the world’s multinationals, a majority of which

originate in the largest economies, as the one that are by far most adept in exploiting and

abusing national tax systems. Due to their total size they can force many governments and

authorities to grant them special tax breaks or use many techniques to hedge on paying

appropriate taxes, and by reason of their international scope they can shift around their

revenue, profits, losses, and debt as they please.

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The corporate world has become better and better at avoiding and evading taxes in recent

years. Through a range of on-shore and off-shore operations, multinational corporations are

sheltering profits and plainly exploiting tax laws and systems. Some of this is legal, other

aspects and parts are illegal. The issue is now high on the political agenda though not as it

ought to be, the aggressive use of all kinds of tools, instruments and measures to dodge taxes

is a growing concern. Besides lobbying law makers to continuously enact tax concessions, it

seems clear that many corporations have become more efficient at avoiding and evading.

Thanks to the growing sophistication and diversification of financial products and services,

companies have plenty of lawful means by which to escape their responsibilities to contribute

to society’s needs.

With developments linked to globalisation, multinationals have found it even easier to take

advantage of their ability to break themselves into many entities on paper, and treat

completely phoney, non-existent transactions among those entities as if they really happened.

And thus, as they typically operate in many jurisdictions through multiple subsidiaries, they

have plenty of opportunities to move profits away from where they are earned and into places

where they will not be taxed.

They are stimulated by profitability, and intense competition and pressure to increase

earnings, so these 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. Recent findings also suggest that the local business elite and local professionals are

key actors in facilitating these anti-social tax practices in Nigeria for their own financial gain.

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These MNC practices also shift the tax burden to less mobile capital and less well-off

citizens, and thereby undermine the Nigerian social fabric.”23

The reason for the prevalence of tax evasion in third world countries is corruption. There are

corrupt tax officials who collude or cooperate with the tax payers who intend to evade taxes.

When they detect an instance of evasion, they refrain from reporting in return for illegal

gratification or bribe. Corruption by tax officials is a serious problem for the tax

administration in a huge number of underdeveloped countries.

The existence of tax havens and offshore finance centres are part of the sophistication in tax

planning schemes especially among the Multinational companies. Tax havens have been seen

to heighten inequality and poverty, corrodes democracy, distorts markets, and undermines

financial and other regulation as well as curbing economic growth, accelerating capital flight

from poor countries, and promoting corruption and crime around the world. These activities

are sustained and supported by the banking secrecy laws in international finance that hinders

criminal investigation and fosters criminality. The multinational companies with their

extensive influence are not open about their financial affairs and refuse to publish data where

they operate their businesses even when summoned to do so.24

Conclusion

In more recent times, multinational corporations have grown in power and visibility in the

public domain where indeed, they are viewed with increased suspicion given their perceived

lack of concern for the economic well-being of particular geographic regions and the

impression that multinationals are gaining power in relation to national government agencies,

international trade federations and organizations, and local, national labour organizations.

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While no one doubts the economic success and pervasiveness of multinational corporations,

their motives and actions have been called into question worldwide.

In sum, the evidence from the cases examined above has implicated MNCs in adopting a

variety of tax avoidance and tax evasion schemes through, inter alia, under-reporting their

taxable profits and manipulating their accounting reports. The cases show that one of the

problems lies in the difficulty of being able to distinguish tax evasion from tax avoidance

because of the thin line that separates the two concepts. It has been argued that, tax avoidance

(which is legal, but possibly unethical) may turn to evasion when it is challenged in court or

through investigation, as was shown in the cases involving Chevron Nigeria and the

Halliburton group. In the cases examined, the activities in Nigeria of MNCs were influenced

by the growth of globalisation and by the use of offshore financial structures and tax havens

for the purpose of shifting profits out of Nigeria.

Although MNCs have been the subject of litigation by the Nigerian State and the Nigerian

Federal Inland Revenue Services, which have implicated and indicted MNCs for perpetrating

allegedly fraudulent tax practices in Nigeria, some MNCs operating in Nigeria have taken

(and continue to take) advantage of Nigeria’s volatile tax environment in order to manage

their tax liabilities. They have done so with the collaboration of the Nigerian elite and

Nigerian tax officials and also accounting and taxation professionals.

It is incontrovertible that multinationals are guilty of tax evasion and this requires a stringent

fiscal management of the tax laws which should be strengthened to deal with the unethical

and anti-social role played by MNCs in Nigeria. Thus, practical steps should be taken to

correct the structural defects in the tax legislation, as complexities leave room for dispute

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about the intention of the law as written and for creative attempts to find arrangements that

fall within the letter, even if not in the spirit, of the law. When assessing the fall in corporate

taxes and the risks it poses to our societies, the otherwise important question of legality can

take a backseat to the pragmatic question of how much tax is avoided and evaded. At the end

of the day, if there is a legal loophole, it should be fixed; if there are corporate delinquents,

they should be punished.

Endnotes

1. The Multinational Corporation and Global Governance, www.indiana.edu/~ipe/ spero04 . pdf .

2. Dunning, John H. Multinational Enterprises and the Global Economy (Reading, Mass.: Addison-Wesley, 1992), 3.

3. World Bank’s 2006 National GDP figures http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf. Accessed on 15 august 2011.

4. Governance for sustainable human development, A UNDP policy document, http://mirror.undp.org/magnet/policy/chapter1.htm Accessed on 15 august 2011.

5. Encyclopaedia of World Geography, London: Facts on File, 2005. http://www.nationsonline.org/oneworld/third_world_countries.htm. Accessed on 15 august 2011.

6. M.J. Graetz & D.H. Schenk, Federal Income Taxation, Principles and Policies, 4th ed. 2001.

7. Encyclopedia.com/searchpool.asp?target=%22taxation22. Accessed on 15 august 2011.

8. Owolabi M Bakre, Looting by the Ruling Elites, Multinational Corporations and the Accountants: The Genesis of Indebtedness, Poverty and Underdevelopment of Nigeria. http//.www.bakre2006.pdf. Accessed on 15 august 2011.

9. Flesch MC. Tax avoidance: the attitude of the courts and the legislature. Current Legal Problems 1968; 21:215–38.

10. Teju Somorin, Tax Evasion in Africa: Kinds of Evasion, How to Control it the Nigerian Experience. http//.www.unpan/043343.pdf. Accessed on 15 August 2011.

11. Tax Justice Network. Global tax justice: a task for Nordic co-operation; 2006. http://blogi.kaapeli.fi/tjnnordic/doc/Mission Statement/index html, Accessed on 15 August 2011.

12. London Financial Times, May 23, 2008. 13. Daily Independent, August 24, 2006; This Day, August 24, 2006; Daily Sun,

August 24, 2006). 14. London Financial Times, May 23, 2008, Guardian, May 21, 2008.15. Daily Independent, August 24, 2006

16. Nigeria: Mobil Sued Over Tax Evasion

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http://www.polarisinstitute.org/nigeria_mobil_sued_over_tax_evasion

17. Is The Nigerian Government Scared of Multinational Oil Companies? http://nigeriantimes.blogspot.com/2011/08/is-nigerian-government-scared-of.html

18. In ABZ Report, 2005, CHEVRON in $10.8 billion Tax Fraud in Nigeria http://nigeriantimes.blogspot.com/2005/08/chevron-in-18-billion-tax-fraud-in.html

19. Tax justice for Africa 200620. Vanguard, 25 July 2005.21. ibid22. This Day, December 5, 2006.23. The Nigerian Security and Exchange Commission Report, 2007. 24. Olatunde J. Otusanya, The Role of Multinational Companies in Tax Evasion and

Tax Avoidance: The Case of Nigeria. http://www.citulike.org/user/dsogge/author/otusanya:OJ

25. Ibid

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