Techniques for Tax Savings

          Though tax saving techniques have no set limit, some of the commonly applied method of achieving tax saving include dividend policy, choice of employee compensation scheme, accounting method, tax ordinance etc.

          Dividend policy can be used to erode company tax liability company can gain tax saving by retaining their earnings rather than distributing them as new capital where the earnings are reinvested in a profitable venture the value of shareholder stock will be increased. This increased stock value is not taxed until the shares are sold. Therefore, if the shares are never sold, income tax may be entirely avoided. However, to prevent companies from withholding their profits indefinitely. Section 17 of CITA (1979) empowers the board (FBIR) to treat undistributed profits as distributed. To do this, the board must prove to avoid tax.

          Instead of paying cash dividends, a company may distribute stock dividends. When cash is paid it is included in the shareholders income and taxed. But the receipt of stock dividends by shareholders is not taxable. Further shareholders may sell the new shares received by way of stock dividends to satisfy the need for cash and pay 10% tax as capital gain. It therefore follows that a good dividend policy will result in reduced tax liability.

          Tax savings can also be achieved through a good choice of accounting method, from the angle of taxation, the most desirable accounting method is one that minimizes or postpones income tax payments. Tax postponement is desirable where the tax is constant or tax rate of lower in the later year than in the earlier years or even if the tax rate increases. The earnings form the postponed taxable income when reinvested is higher than the increase in tax liability.

          Inventory valuation could be done either by last-in-first-out (LIFO), First-in-last-out (FIFO) or weighed average method. LIFO give smaller profits in period, this makes more stable tax base over the business circle than does FIFO. As such LIFO ensures a continually smaller tax base under conditions of sustained inflation, automatically excluding inflation gain from tax Musgrave (1989).

          Another means by which informed tax payer reduced their tax liability is tax avoidance. Tax avoidance is seen by many as an evil and that it should be eradicated, but expert see it is an endeavour by the tax payers to reduce their tax liability by taking advantage of the specific provision of the tax laws.

          Adesola (1998) saw no harm in tax avoidance. He further said: that it reduce government revenue generation. He however, attributed tax avoidance to high rate and regulatory complexity in the Nigeria tax system. The National Accountant (1996) inspite of Sasanya’s position says that tax avoidance is not seen as a xrime. Infact “tax avoidance is legal, albeit, form government’s point of view undesirable” (Sloaman, 1994).

          In the researchers’ opinion, tax avoidance is not justified because it reduces the Nation’s revenue. This government should equip its officers with the requisite technical skills to prevent tax avoidance. In line with position, Sasanya suggested that the system, in Nigeria should be reviewed in order to close the loopholes that aid tax avoidance. The National Accountant (1996) with tax avoidance says, there may be a risk because of the thin line between tax avoidance and tax evasion.

          Bearing this in mind, one may employ compensation scheme as a means of tax savings.

          Under the pension scheme, a sum of money is invested during the employee’s active years to pay them after retirement, where the fund is administered by a trustee such as the National Provident Fund (NPF) or an insurance company. The corporation is allowed to deduct these payments for tax purpose. On the other hand, the employee does not pay tax on this compensation until after his retirement, when he would shifted to a lower tax bracket (Haygen, 1990).

          In the case of deferred compensation, employees on a high tax bracket may require their salaries to be spread over a period of years instead of receiving full payment now that their tax is high.

          Lastly, under stock options, company employees are allowed to purchase shares in companies where the are employed. They have an option to purchase the shares of such company when the price of its stock increase. The employee does not receive any taxable income either when the option is received or exercised.

          Any gain arising from the transaction (i.e. capital gain) on becomes taxable when the stock is disposed).