Tax avoidance in banking institutions: an analysis of the top seven Nigerian banks

Published date03 February 2022
Date03 February 2022
Subject MatterAccounting & finance,Financial risk/company failure,Financial crime
AuthorDada Folorunso,Mark Eshwar Lokanan
Tax avoidance in banking
institutions: an analysis of the
top seven Nigerian banks
Dada Folorunso and Mark Eshwar Lokanan
Faculty of Management, Royal Roads University, Victoria, Canada
Purpose The purpose of thispaper is to review the quantum and magnitude of tax avoidancein Nigerias
top seven banks by using recognizedtax avoidance proxies of the Generally Accepted Accounting Principles
(GAAP) and the InternationalFinancial Reporting Standard (IFRS) effective tax rate (ETR) and book-taxgap
analysisfor the appraisal.
Design/methodology/approach Data for the paper came from the annual reports of the banks
between 2011 and 2019. The individual banks tax data was analyzed for trends and then consolidated to
establish the average percentages and the exact amount of the tax the banks evaded each year and
cumulatively over the review period. The data were then matched with analytics of the drivers of tax
avoidance in the reconciliation statement to highlight essential tax planning items and strategies being
exploitedby each bank in the pursuit of aggressive taxavoidance behavior.
Findings F-test comparingthe aggregate means (all banks) for tax evasion proxies of ETR andthe book-
tax gap was conducted at a 95% condence interval. The results of this paper indicate no signicant
difference between the means obtained, thus afrming that the same pattern of tax evasion was consistent
among the banks for the years reviewed.
Originality/value The ndings of this paper highlight the tax avoidance behavior of the referenced
banks, identify weaknessesin the corporate tax planning policy pursued and serve to alertpolicymakers of
the need to strengthen the laws and block loopholes that provide rooms for unrestrained tax avoidance
behaviorin the bankingsector.
Keywords Nigeria, Earnings management, Banks, Tax avoidance, Effective tax rate
Paper type Research paper
Taxation is one of the most frequently discussed global issues today. Every country relies
on levies charged on the economicactivities of corporations, rms and individuals operating
in its territory or local economyto generate revenue for various developmental interventions
falling within the bounds of the scal policy actionsof a responsible government. Therefore,
it is incumbent on all economically activecitizens and corporations to seek to pay and remit
taxes consistent with revenue earnings in the local economy in support of government
developmental efforts. While the usefulness of tax revenue in the development of every
economy is evident, many individuals, rms and corporations still strive to either outright
evade taxes or circumvent the laws in a bid to pay lower amounts. While the direction of
global tax reform and discussionhas focused on cross-border tax evasion and the avoidance
practices of multinational companies operating in different jurisdictions across the globe,
little attention has been devoted to tax issues affecting large corporations that are tax-
resident entitiesin local economies.
The situation is much the same in Nigeria. Tax research focusing on reviewing tax
planning activities (involving avoidance) of banking institutions in Nigeria is not so
Tax avoidance
in banking
Journalof Financial Crime
Vol.30 No. 1, 2023
pp. 167-204
© Emerald Publishing Limited
DOI 10.1108/JFC-11-2021-0238
The current issue and full text archive of this journal is available on Emerald Insight at:
common. This practice may be caused by the difculty in understandingthe complexity of
bank reporting vis-a-vis the tax strategies underlying bank operations. Tax evasion is
dened as deliberate misrepresentation, concealment or under-disclosureof taxable revenue
or assets in contravention of the extant tax law. In contrast, tax avoidance covers any act
that takes advantage of loopholes in the provisions of the tax laws with the intention of
reducing due liability (Easter,2016, as cited by the Canada Revenue Agency). Tax planning
(avoidance) usually forms the basis of the strategies and complex structures operated by
corporations in a bid to pay the minimum amount of taxes through circumvention of the
provision of the law to achieveefcient tax payment and optimize protability.
The banking subsector is the second largest by market capitalization of all sectors listed
on the oor of the Nigerian Stock exchange. Thus,the sector has evolved over time through
various reforms, mergers and acquisitions and through recapitalization and technology
transformation. While the Nigerian banking institutions have continuously posted stellar
growth and performance in the past decade, tax payments from the sector have not been
consistent with the magnitudeof prot declared based on effective tax rate (ETR) and book-
tax gap disclosures in their published nancial statements. Using selected banking
institutions as a case study, this research paperseeks to assess the quantum and magnitude
of tax avoidance in these institutions, identify the drivers of tax avoidance proxies
indicating avoidance behavior, highlight theweaknesses in current corporate tax planning
efforts and strategies, provide alternate tax planning recommendations to the banks and
suggest policy actionsto scal authorities for stemming regulatory abuse.
The paper reviewed the quantum and magnitude of tax avoidance in a selection of
Nigerias top banking institutions over nine years by using recognized tax avoidance
proxies of the Generally Accepted Accounting Principles (GAAP)/the International
Financial Reporting Standard (IFRS) ETR and book-tax gap analysis for the appraisal. To
achieve this, yearly ETRs were compared with statutory tax rates. The absolutevolume of
actual tax expense was reviewedvis-a-vis divergence from expected statutory tax payments
to identify the book-tax gap and the key drivers of tax planning strategy (indicative in the
proxies) pursued by institutions. The various extracted data were analyzed using
descriptive statistics to identify prominent drivers of tax planning and trends, highlight
divergence and conducta comparative review of these proxies.
Signicance of the study
This study is signicant in that ithighlights tax avoidance practices and tax underpayment
by Nigerian banking institutions over the years, despite the signicant growth and
protability recorded at the same time. This study also highlights current weaknesses in
exploited tax policy and exemption instruments, which ordinarily might have been well
intended but are now abused by banking institutionsin their tax planning schemes and are
being used to massively erode tax bases and deprivethe government of due tax revenue for
development spending. These outcomes alone are an indication that the policy might have
outlived its usefulness. Furthermore, given that the instrument (Companies Income Tax-
Exemption of Bonds and Short Term Securities-Order, 2011) granting tax exemptions on
bonds and other short-term nancialinstruments that serve as the core of the tax avoidance
strategy pursued by banks will be expiring in 2021, this study will encourage Nigerian
banking institutions to assess the sustainability of their current tax-planning strategies and
alert policymakersto the need to correct such policy mistakes and block all known loopholes
facilitating such revenueleakage. The paper will explore the following questions:
RQ1. What is the aggregate magnitude of tax avoidance and the pattern of tax
avoidance behaviorin the select banking institutions?
RQ2. What is the key driver of the low effective tax rate posted by the identied
Nigerian bankinginstitutions?
The rst part of the research questionwas answered with the computation of data on the tax
proxies of ETRs and book-tax gap numbers, including trend analysis. The second part of
the rst research question was answered with the aid of an analysis of variance (the
ANOVA of the aggregate means and F-statistics at 95% signicant levels) on both ETRs
and book-tax gap metrics. Thus, an established pattern of tax avoidance behavior was
identied as sustainedthroughout the years reviewed.
The paper used descriptive statistics and trend analysis on the values, frequency and
impact of every item in the tax reconciliation statement driving divergence between the
probable statutorytax and the actual GAAP tax expense incurred. This approachhighlights
the strategies deployed by the banks to erode the tax bases and recordlow ETRs and large
book-tax gaps achieved year on year. In doing so, the volume, frequency and percentage
were identied forthe impact of each tax planning item on tax base erosion.
Literature review
Income tax expense is one of the largest items in the income statement of corporations
(Serocki and Callaghan, 2012). According to Perez (2012), a tax disclosure statement is a
valuable source for assessing the true nancial healthof companies, for uncovering hidden
liabilities and for investigating the nature and extent of aggressive tax planning efforts
embarked upon by corporations. Information disclosed in a tax reconciliation statement
presents a means for assessing the qualityof earnings declared by corporations.
Traditionally, tax researchers recognize GAAP/IFRS ETRs, cash ETRs, book-tax gap,
permanent difference and temporary difference indicators as proxies of tax avoidance. De
Simone et al. (2020) conducted research testing the relative powers of these proxies in
measuring tax avoidance. They found that when rms are not accruing reserves for
uncertain tax benets, GAAP/IFRS ETRs are more effective in detecting uncertain and
permanent tax avoidance. The adoption of GAAP/IFRS ETR proxies in detecting
permanent tax avoidance(the exempt income item) is validated by the positionof De Simone
et al. (2020). According to De Simone et al. (2020), the accretion of unrecognized tax benet
reserves did not feature in the tax strategies or books of the samples reviewed, which
subsequently removed the possibility of having unsuitable ETR for tax avoidance
assessment. Drake, Hamilton and Lusch (2020) afrmed the use of the ETR as a proxy for
tax avoidance measurements across rms and time-space. He found a signicant effect of
the valuation allowance adjustment on GAAP ETRs. Drake et al. (2020)also noted that the
valuation allowance seldom moderately released the rate of reduction in a domestic rms
ETR and that not all GAAP ETR reductions indicated tax avoidance (tax planning). De
Simone et al. (2016), however, opined that no single proxyis sufcient for the measurement
of corporate tax avoidance and believed that proxies more easily detect permanent tax
avoidance than the temporaryplanning strategies that are implicit in deferred tax.
Evans (2019) analyzed the ETR, its reconciliation and the impact of various
reconciliation items on the ETR movement. Evans (2019) found that temporary and
permanent difference, deductible temporary difference, taxable temporary difference, the
permanent difference in relationto deferred tax assets and liabilities and various permanent
and temporary tax planning strategies are usually pursued by corporations. Despite the
focus on tax avoidance, Evans(2019) study highlighted why FASB Accounting Standard
Tax avoidance
in banking

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