CRITICAL ANALYSIS OF THE COMPLIANCE WITH TAXES BY PARTIES TO REAL PROPERTY TRANSACTIONS IN NIGERIA
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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.
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.