Inheritance and estate taxes are the two sides of the same coin. These are payable when someone inherits assets. The estate tax is paid by the estate of the deceased even before the estate is distributed to the beneficiaries. It is the balance of the estate that is distributed. When the beneficiary receives her inheritance, she is then expected to pay inheritance tax. People who die intestate (without a will), subject their estates to higher estate taxes, with estate tax on cash balances in bank accounts reaching up to 30 per cent of the balance. Some people try to avoid inheritance and estate taxes by giving their assets to the beneficiaries before they die, but they have to pay gift tax. If you receive gifts from one person, valued above a certain threshold, within a specified period of time, you are liable to pay gift tax on the amount above the gift ceiling. Gift taxes are significantly lower than the combined value of estate tax and inheritance tax, so gift tax is still preferred by many taxpayers.
Indirect taxes like VAT and service tax and paid through the providers of the service/ product. The producer is charged VAT by the Inland Revenue Service and the producer promptly adds the full VAT amount to the pricing of the service/ product when selling to the end user. Stamp duty is paid to the national postal service (hence the term – stamp duty) through different collection agents depending on the type of transaction. Law courts collect stamp duties to validate legal documents and affidavits, whilst banks collect stamp duties for various services including bank deposits.
The Customs Service collects customs and excise duties. Customs duty is direct whilst excise duty is indirect. As individuals, we pay customs duties on personal use items that we import into the country e.g., cars, jewelry, artwork etc. Excise duty is indirect and is collected like VAT. The producer adds the full value of the excise duty is charged by Customs to the pricing of the product when selling to the end user. Excisable goods include alcoholic beverages and tobacco products.
With this long catalog of taxes, it is no wonder that many taxpayers try to avoid paying taxes. Whilst tax avoidance is legal, tax evasion is illegal and attracts jail terms in many jurisdictions. What is the difference? In the first part of this article, we talked about allowances, deductions, and taxable income. Tax avoidance involves finding ways to legally increase one’s allowances and deductions, and consequently, reduce taxable income. Tax evasion on the other hand, involves concealing taxable income from tax authorities, so that one’s tax liability can be reduced. Of course, we know that any form of concealment is suspicious.
This is why tax havens are very unpopular with Western governments. Their citizens conceal their taxable income by registering shell companies and moving their businesses to these havens. Countries lose a lot of tax revenue as a result; therefore, they are using various sanctions to coerce the governments of these tax haven countries into conformity with global best practices.
Do you report all your non-salary incomes in your tax declarations? Countries with poor tax cultures, inadequate financial reporting infrastructure, and inefficient tax administration systems tend to lose a lot of tax revenue. Taxable incomes that should generate taxes like capital gains tax or inheritance tax go undetected. Landlords collect rents annually and never report the incomes. Investors buy and trade crypto currencies without any trace. Nigeria for instance has a tax to GDP ratio below eight per cent. South Africa and Egypt, the second and third largest economies in Africa have average tax to GDP ratios of 30 per cent and 20 per cent respectively. The ratio is 25 per cent in the United States of America, 33 per cent in the United Kingdom, and 40 per cent in Norway. With a tax to GDP ratio below eight per cent, no wonder the government thinks borrowing is the only viable way to supplement crude oil revenue. However, if its national and sub-national governments improved collection systems of all the taxes due to them, they would generate more revenue to fund their infrastructure and social expenses. Taxation is certainly better than a future burdened with heavy indebtedness and debt service. Nigeria’s federal government is currently using 66 kobo from every Naira earned for debt service. This is before the new debts planned for 2022.
Tax payment is enlightened self-interest. No doubt, we should explore and exploit every legal means of tax avoidance. We can prioritize zero-tax investments like treasury bills. But we should always pay what the laws demand. By paying our taxes as and when due, we are investing in our country and safe guarding our posterity. Happy investing.
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