PREVENTION OF INCOME AND PROFIT-SHIFTING TO TAX HAVEN COUNTRIES IN NIGERIA

Abstract

The integration of international trade and economy from various technological advancements in transportation and communication resulted in globalisation of the world economy. Globalisation, in turn, freed the erstwhile geographical and territorial limitations and boundaries in international trade and business activities. This allowed companies to extend their business activities and operations by establishing subsidiaries in countries other than where they are headquartered. The geographical boundary between a company located in one country and its subsidiary located in another country makes it possible for cross-border international transfer of goods and services to occur in transactions between the company and its subsidiary. The basic economic objectives of every company are to reduce tax payment and increase the profit and wealth of their shareholders. This is a legal obligation which every company owes their shareholders. Therefore, as rational economic actors, companies exploit various ways to achieve these economic objectives to promote their success as well as the interest of their shareholders. The major strategy usually employ by companies to achieve these economic objectives is to avoid tax payment by shifting their incomes or profits from high tax jurisdictions/countries to low or no tax jurisdictions/countries. This is mostly achieved by over-invoicing/pricing of transaction for the purpose of shifting income or profit. These low or no tax jurisdictions/countries are referred to as tax haven countries which normally use sovereign legislative powers to preserve the secrecy of financial transactions of companies and provide light regulations and levy low or no tax on the incomes or profits of companies. This often attracts companies seeking to set up shell corporations for the purpose of shifting income from high tax jurisdictions to tax haven countries where their incomes and profits will not be subjected to taxation. The implication is that companies nowadays avoid paying tax in countries where income or profit is earned. It is believed that capital flight arising from incomes and profits shifting activities of companies has devastating effects on the economy of developing countries including Nigeria. The Organisation for Economic Co-operation and Development (OECD) in its 2014 Report noted that illicit financial flow arising from income and profit-shifting activities strip resources from developing countries that could be used to finance much-needed public and social services such as health and education and that also weakens the financial systems and the economic potential of developing countries. It is observed that income and profit-shifting activities can have a negative impact on the economic, social and political objectives of the governments who are in need of tax revenue to provide public welfare for their citizens and to redistribute wealth in the society to ensure socio-economic development of their countries. Therefore, to secure the much-needed revenue in this regard, governments will have to put in place regulation to prevent their tax bases from being eroded through the tax avoidance scheme of income and profit-shifting to tax haven countries. In the light of the foregoing, the article examines the fundamental features of tax haven countries and the magnitude of revenue loss arising from income and profit-shifting to tax haven countries. The article also considers the negative effects of income and profit-shifting on the economy of developing countries, its regulations in Nigeria as well as its international regulations. The article makes series of recommendations to prevent companies from shifting their incomes and profits out of Nigeria to tax haven countries