How far can the various tax reforms go? This simple but innocuous question has been agitating the minds of discerning Nigerians.
It is, however, instructive to note that some of the tax reforms initiated under the President Muhammadu Buhari-led administration, according to analysts, have had far-reaching implications and sometimes unpleasant consequences on the socio-economic life of the populace.
Crux of the matter
According to government sources, over 19 million Nigerians paid into federal or state coffers. A World Bank report in that year put the country’s economically active population at 65 million – so even with rising numbers of taxpayers in recent years, that is still less than 30% paying tax.
The government has been going after individuals that it believes are liable for tax and have not been paying.
However, many Nigerians will be reluctant to pay taxes because of concerns the money raised may be siphoned off instead of being spent on health, education and other public services.
But a UN report this year showed that in 2018, Nigeria’s estimated VAT gap – the shortfall between potential and actual VAT collections – was one of the largest in Africa.
Comparative analysis of global tax regime
Many other developing countries have a low tax-to-GDP ratio and recent data indicates that about 60 countries fall below the 15% threshold.
Bernardin Akitoby, an assistant director in the IMF, says a typical advanced country has a tax to GDP ratio of around 40%.
According to Akitoby, there is no one-size-fits-all solution to increase the tax take – but there are a few lessons that can be drawn from countries that have been successful in the past. Specifically, he said a tax reform must show a clear political mandate to tackle low levels of tax payment by providing a simpler tax system with a limited number of rates and exemptions using taxes on goods and services
The IMF says more comprehensive tax reform in Nigeria could help increase the tax-to-GDP ratio by about eight percentage points.
Meanwhile, the World Bank Group, which tracks the ease of doing business in different countries, published its 2019 Doing Business Report (the Report) in October 2018, ranked Nigeria at 146 out of 190 countries on the ease of doing business index, a drop from 145 ranking for the year 2018.
However, on the ease of paying taxes, Nigeria recorded an improvement from 171 in 2018 to 157 in 2019. The World Bank uses a slightly different measurement of tax take, which does not include most social security payments.
This puts Nigeria’s tax-to-GDP ratio in 2016 lower at just 3.4%. In 2017, the ratio did improve to 4.8%, according to figures provided to us by the Nigerian authorities.
Successive tax reforms under Buhari administration
As mentioned earlier, the VAIDS, which was originally introduced in July 2017, was extended till 30 June 2018. According to the Chairman of the FIRS, the Scheme generated about ¦ 54 billion in paid taxes. Upon conclusion of the VAIDS, the FIRS undertook an exercise to track non-compliant taxpayers with an annual banking turnover of ¦ 1 billion and above. This exercise accounted for about ¦ 21 billion additional taxes.
The Federal Government also launched the VOARS in October 2018 offering a 12-month window allowing taxpayers with undisclosed offshore assets and incomes within the past 30 years to voluntarily declare the assets and pay the corresponding taxes on such assets/incomes. However, since the introduction of the Scheme in October 2018, there has been little or no evidence of enforcement on the part of the government nor eagerness on the part of taxpayers to participate in the Scheme. It would appear that the Scheme seems to be have been targeted at clamping down on corrupt practices rather than tax compliance. Moreover, those targeted under the VOARS should have already been covered under the concluded VAIDS.
The House of Representatives in January 2018 passed the Petroleum Industry Governance Bill (PIGB); almost 8 months after the Senate passed the Bill on 25 May 2017. The Bill was subsequently forwarded to the President for assent within the course of the year. However, the President withheld his assent for constitutional and legal reasons.
The Federal Government of Nigeria also released the Income Tax (Country by Country Reporting) Regulations, 2018 (the CbC Regulations) giving effect to the Country-by-Country Multilateral Competent Authority Agreement signed on 27 January 2016 and ratified on 3 August 2016.
The CbC Regulations which was published in an official gazette dated 8 January 2018 requires Multinational Enterprises (MNEs) headquartered in Nigeria that meets the specified threshold of global revenue to provide tax authorities with information about the MNEs’ global activities, profits, and taxes. This is to better assess international tax avoidance risks; improve transparency in the tax practices of the MNEs, and prevent tax evasion or avoidance through base erosion and profit shifting.
Similarly, the FIRS released the revised Income Tax (Transfer Pricing) Regulations 2018 (the TP Regulations) which ushered in a Transfer Pricing (TP) specific penalty regime. The TP Regulations repeals the Income Tax (Transfer Pricing) Regulations No. 1 2012 (the 2012 Regulations) and has an effective date of 12 March 2018.
Making a case for tax reform
In the view of many observers, the Federal Government Executive Order to commence the Voluntary Assets and Income Declaration Scheme remains a game-changer as far as tax reform in the country is concerned.
While x-raying Nigeria’s tax and fiscal outlook for 2019 in comparison with the previous year, the trio of Olaleye Adebiyi, Joshua Bamfo and Ogochukwu Isiadinso, noted that the high tax revenue drive in the year 2018 was evidenced by the extension of the Voluntary Assets and Income Declaration Scheme (VAIDS), the introduction of the Voluntary Offshore Assets Regularisation Scheme (VOARS), the release of the revised Income Tax (Transfer Pricing) Regulations 2018 (the Regulations), amongst other major activities in the year.
They further observed that as part of the Federal Inland Revenue Service’s (FIRS) collection efforts in the year, banks were appointed as agents for collection of tax from taxpayers that were considered to be in default of tax payments and their bank accounts were frozen for this purpose. These developments were mainly due to the dip in global oil prices and the revenue shortages, which encouraged the government to push towards diversification of the economy and improvement of Nigeria’s tax to Gross Domestic Product (GDP) ratio.
While many doubted the political will of the administration of President Muhammadu Buhari to fully implement the tax amnesty program, with the benefit of hindsight, the tax amnesty program, which started on July 1, 2017, came to an end on June 30 2018 after offering a 12 -month window of opportunity for taxpayers to regularise their tax liabilities has been applauded as a good reform indeed.
During the period of the implementation of the tax amnesty programs, the Federal Inland Revenue Services under the leadership of the Executive Chairman, Mr. Babatunde Fowler, also implemented reforms aimed at improving the level of voluntary compliance.
Before the commencement of the current administration, Nigeria’s tax system was unable to effectively achieve its objective of ensuring voluntary compliance due to lack of a robust framework for the taxation of the informal sector and high net worth individuals, thus limiting the revenue base and creating inequality.
In a bid to address these challenges, the FIRS came up with various technology-driven initiatives aimed at increasing the number of taxpayers, and reducing taxpayers’ burden by making tax payment more convenient.
Speaking on the development, Fowler noted that the service had intensified its tax compliance strategies through collaboration with public and private sector organizations.
For instance, he said the FIRS had issued letters to all commercial banks in the country requesting for a list of companies, partnerships, and enterprises with a banking turnover of N10bn and above. This initiative, he noted, was aimed at ascertaining those that were compliant with the tax laws and those that had yet to fully comply. He said so far, non-compliant organizations had paid about N21.75bn in taxes to the coffers of the government through the initiative.
Fowler said, “FIRS initiated a tax amnesty program in 2016 which attracted over 3,000 applications for waiver of interest and penalty.
“The program resulted in the payment and collection of over N68bn out of about N96.2bn liability established from the exercise. Waiver of penalty and interest were granted to ease the tax burden and cost of enforcement on affected taxpayers.
“FIRS wrote to all commercial banks in May 2018, requesting for a list of companies, partnerships, and enterprises with a banking turnover of N10bn and above. This activity is aimed at ascertaining those companies that are compliant with the tax laws and those that are not compliant. So far, non-compliant organization have paid about N21.75bn.
“FIRS also wrote to all commercial banks in October 2018, requesting a list of companies, partnerships and enterprises with a banking turnover of N10bn and above. This activity is aimed at ascertaining those companies that are compliant with the tax laws and those that are not compliant. The information is currently being reviewed.”
Echoing similar sentiments, Kenneth Erikume a Partner and head of tax reporting and strategy at PwC Nigeria and West Market Area, noted that innovation from tax authorities and application of latent laws in the year will have far-reaching implications on the economy.
While noting that more focus on taxation of property and non-essentials, he advised companies to revisit their tax strategy and redesign their approach to managing taxes to be more transparent and compliant.
Tax receipts for 2018 and 2019 projection
The FIRS recorded a total tax revenue collection of about ¦ 5.32 trillion in 2018. The oil component of the ¦ 5.32 trillion was ¦ 2.467 trillion (46.38%), while the non-oil component was ¦ 2.852 trillion (53.62%). The FIRS has a revenue target of ¦ 8 trillion for 2019.
A peep into FG’s tax strategy
While commenting on the Federal Government’s strategic priority areas at the second Lagos Business School Breakfast Club event held in Abuja, recently, the Minister of Finance, Budget & National Planning, Mrs. Zainab Shamsuna Ahmed explained that ta reforms was at the centre of the programmes being tinkered with to drive the required socio-economic growth and development of the country.
Specifically, she emphasized on the tax laws and other fiscal reform agenda including enhancing the ease of doing business through proposed tax reforms for SMEs, and the insurance sub-sector, while explaining the plans to align Nigeria’s tax laws with international tax developments.
Besides, the minister explained that social inclusion is prioritized through the N500b Social Investment Programme which would be continued. She highlighted the increased investment in critical infrastructure which will be achieved through the Presidential Infrastructure Development Fund; the Road Infrastructure Tax Credit Scheme, which is an incentive for private sector investment in roads and bridges; and the Family Homes Ltd, which would be deploying N20bn investment in 500,000 homes & create 1.5m jobs