Taxing Nigeria’s Fledgling Economy: Between Tax Penetration and Economic Recovery

Monday, December 03, 2018/12:43AM/Deloitte

Nigeria has rolled out another tax amnesty scheme.  Backed by Presidential Executive Order No 8 signed on 8 October 2018, Voluntary Offshore Assets Regularization Scheme (VOARS) became the latest effort at combating money laundering and tax evasion.

For the next twelve months, all persons and entities that hold offshore assets and generate offshore income but for which appropriate Nigeria taxes have not been paid could take the opportunity to declare those assets and income with a one-time payment of 35% of the asset value.  The Scheme, which will be operated through a Swiss-based intermediary sovereign advisory services provides immunity from prosecution for tax offences and penalties in exchange for voluntary disclosure and a one-off payment.

With the number of initiatives aimed at deepening tax penetration, combating illicit financial flows and raising revenues, the country seems to be forging ahead in dealing with the serious revenue challenge that is plaguing the country’s fledgeling economy.

From year to year, the implementation of the budget has not only been impacted by delays in the signing of the budget but by limited revenues.  The 2017 budget implementation report released by the Budget Office of the Federation showed an acute revenue shortage.  Gross oil revenue stood at N4.084 trillion representing 23.43% below budget.  The shortfall in gross non-oil revenue for 2017 was 34.46% as the country only generated N2.791 trillion.

According to the Budget Office, the net distributable revenue shared by the three tiers of government in 2017 after cost deductions was N4.944 trillion, representing a shortfall of 41.92%.  With limited revenue, the country is said to be spending over 60% of its revenue on debt servicing.  An Assistant Director in the Fiscal Affairs Department of IMF was quoted to have put Nigeria’s debt to revenue ratio at 63%.  There’s therefore an understandable pressure on the need to grow non-oil tax revenues.

To raise the country’s tax revenues from the current 6% of GDP to the dream of 20% will require a complete rethinking of the taxation ideology.  There’s definitely no magic wand that could deliver the ambitious 20% target overnight, it requires a holistic review of the entire tax system.  What the country has seen so far in the area of taxation are short-term measures that have helped within the limits of the underlining philosophy. But truth must be told, the taxation landscape in Nigeria is changing. Tax has become a buzzword and efforts are ongoing to change the country’s poor tax-paying culture.

It has been widely publicized that Nigeria had just about 14 million tax-registered individuals and had only recently made a quantum leap by raising the number to 19 million.  Also, prior to the aggressive chase during the Voluntary Asset and Income Declaration Scheme (VAIDS) which led to the increase of 5 million registered taxpayers, only 214 persons paid up to N20m annual income tax and that 96% of that number are in paid employment.  The list of tax-registered corporate entities shows similar depressing realities.

Beyond the attitude issue, Nigeria’s Tax system was hitherto bedevilled by a myriad of other challenges that partly explain the country’s predicament. These challenges include multiplicity of taxes (and levies), use of aggressive and unorthodox methods for tax collection, insufficient use of technology in tax administration, limited inter-agency cooperation and lack of a comprehensive database of eligible taxpayers.   The regulatory framework itself is a major headache as tax legislations are largely out of sync with modern business realities.

One of the commendable steps taken towards reshaping Nigeria’s taxation system is the revision of the National Tax Policy which was approved by the Federal Executive Council in February 2017. The 15-page document is a reader-friendly articulation of what the ideal system of taxation in Nigeria should be. But it is what it is – tax policy without any force of law.  The much-needed regulatory reform that should have followed to herald the birth of a new tax order is still a dream that we hope will be birthed in the future.

While the country awaits a comprehensive reform of the regulatory framework for taxation, some steps have been taken to tweak the current regulations and make them more adaptable to current business realities. The Federal Government set up a National Tax Policy Implementation Committee for the review of tax laws and submission of proposals for tax reforms.  While the Committee’s work appears to be ongoing, some of its recommendations are receiving attention.

Following the Committee’s recommendations, in June 2018, the Federal Executive Council approved Executive Orders to effect changes in the Value Added Tax Act and Excise Duties Act.  The VAT (Modification) Order exempts public transport services, leases and rental of residential property and life insurance premiums from VAT. Also, the Review of Goods Liable to Excise Duties and Applicable Rates Order provides legislative backing for approved changes in the rates and bases for levying excise duties on alcoholic beverages and tobacco, amongst others.  The changes were earlier communicated via a circular issued by the Minister of Finance, which became effective on 4 June 2018.

Efforts at bringing taxable individuals and organisation into the tax net led to the launch of a tax amnesty scheme through Voluntary Assets and Income Declaration Scheme (VAIDS) that lasted for one year up till 30 June 2018.  The scheme which was initially approved for a period of nine months was extended for a further three months following repeated plea by taxpayers and tax advisors; happily the Government listened and granted three months extension.  Some took advantage of the scheme to regularize their tax defaults and benefited from waiver of interests and penalties while others sat on the fence as they either doubted the ability of the tax authorities to find them out or were unwilling to turn themselves over for fear of the after-effect of being known by the taxman.

Nigeria is also leveraging the benefits of global collaboration by signing various multilateral and bilateral tax agreements. The country signed the Multilateral Convention to implement tax treaty related measures for the prevention of Base Erosion and Profit Shifting (BEPS) and also signed a Multilateral Agreement for Automatic Exchange of Country-by-Country Reports which culminated in the release of country-by-country Regulations in June 2018.  Multinational Groups, whose ultimate parent entities or constituent entities are tax resident in Nigeria are required to submit Country-by-Country report no later than 12 months after the last day of the Group’s year-end. The rule also requires notification before the end of the reporting year whether the Nigerian entity is the ultimate parent or surrogate parent entity. Where the Nigerian Entity is neither the ultimate parent company nor the surrogate parent entity, the tax authority must still be notified as to the identity and tax residence of the ultimate parent, who shall be the reporting entity.

Multinationals are now expected to render annual returns to tax authorities which discloses, amongst others, information on revenue, capital and asset employed, headcount, economic activities, profits and related taxes paid in all jurisdictions where they operate. The tax authorities with improved information are now better equipped to assess international tax avoidance risks with significant penalties for failing to report or for provision of false information. An eligible multinational company that fails or delays to file country-by-country report as and when due is liable to a penalty of N10m for the first month of default and N1m for every month the default continues.

Also, a revised Transfer Pricing Regulation came into effect from March 2018 and the updates are the first since the introduction of Transfer Pricing in 2012. The Regulations aim at increased compliance and are in line with the guidelines published by the Organisation for Economic Co-operation and Development (OECD) in July 2017. One striking feature of the revised rule is the significant increase in penalties for various infractions. For example, penalties for failing to file either of transfer pricing declaration form or disclosure form or documentation form has been increased to N10m for the first month of default and N10,000 for every day the default continues. This was formerly N25, 000 for the first month and N5,000 for each month the failure continues.  For failing to file disclosure or documentation form, the penalty may be as high as 1% of the value of the controlled transaction (if this is higher than the N10m fixed penalty) in addition to the daily penalty for continuing default.

The combined effect of automatic exchange of information, country-by-country reporting and transfer pricing creates a greater burden of transparency in tax reporting for multinational companies and curtails their ability to short-change the government. Multinationals that fail to comply with these regulations will incur significant penalties in addition to making good any amount of underpaid taxes and attendant reputational damage.

The last two years have also witnessed an expansion of the country’s bilateral tax treaty network to about two dozen including those awaiting ratification. (Tax treaties with Republic of Korea, Mauritius, Qatar, Sweden, Singapore and the United Arab Emirates are among those awaiting ratification).  In January 2018, the President assented to the Double Taxation Agreements with Spain. The agreement between Nigeria and Spain had been awaiting ratification by the legislature for about nine years. At the sub-regional level, Nigeria concluded the negotiation of Double Taxation Agreements with the Republic of Ghana and the Republic of Cameroon in July 2018 and August 2018 respectively.

From the administrative end, Federal Inland Revenue Service (FIRS) and its counterparts at the State level have been busy chasing tax defaulters by different ways and means including pasting of non-compliance stickers and issuing public notices on different aspects of tax administration. While FIRS continued the endless cycle of tax audits and investigations and flexed its muscle by distraining properties of alleged tax defaulters, the Revenue Mobilization Allocation and Fiscal Commission gave many banks a tough chase by auditing their withholding tax remittances. In its drive to increase tax revenue generation and curb what it termed non-reporting of income, FIRS raised assessments on many companies based on the alleged value of properties. FIRS pushed a nudge further and sent jitters down the spine of many taxpayers by authorizing banks to freeze bank accounts of alleged tax defaulters with a view to forcing them to regularize their tax position.

In August 2018, FIRS sent notices to taxpayers inviting them for the reconciliation of withholding tax (WHT) credit position with possible risk of forfeiture by those who fail to show up or prove their entitlement. The reconciliation of backlog of WHT credit is necessitated by the automation of tax payments which should help to alleviate the pains that taxpayers have experienced due to manual records of tax payments and the attendant nightmarish experience.

Going forward, it is expected that taxpayers will no longer have to provide physical evidence for claim of tax credits as tax accounts gets automatically credited on a real time basis. FIRS has made commendable improvements in automating some key aspects of tax administration, even though the typical teething problems and infrastructural challenges had hindered its effectiveness.  Electronic tax services were introduced to enable online registration, payment, receipting, filing and processing of tax clearance certificate. This is commendable and contributing to ease the difficulties in tax compliance.

The State Internal Revenue Services are not allowing themselves to be beaten on this aggressive revenue drive. For example, Lagos State Internal Revenue Service released a barrage of public notices, about a dozen of them, over a period of two months. These notices touched on different aspects of tax rules, some of which are either grey or perceived to have been abused by taxpayers in the past. While some aspects of these notices provide clarity, others were considered provocative and beyond the reach of its powers.  The Lagos State Government also released a revised Land Use Charge Law in 2018 that faced expected complaints and eventual revision.  The controversies over the legality of States to impose consumption tax remains.  A Federal High Court nullified the consumption tax imposed by Kano State Government on goods and services consumed within the States and issued a perpetual injunction against the State Government from implementing the tax.  The jury is still out on the controversies with respect to Stamp Duties.

While the drive for revenue generation remains a task that must be undertaken, striking a delicate balance with the overall fragility of the economy remains a major consideration.  Separating tax defaulters that require an aggressive chase from those who are the proverbial goose laying the golden egg is critical.

Taxpayers are excited at the news of the reconstitution of the Tax Appeal Tribunal situated in each of the six geopolitical zones and additional ones in Lagos and Abuja. With the appointment of commissioners for the tribunals, it is expected that taxpayers would seek legal redress whenever the position of tax authorities are seen to be at variance with the law. Overall, making the business environment friendly and conducive is as critical as taxation itself. Some aspects of the reforms steps taken to remove bottlenecks in tax administration as championed by the Presidential Enabling Business Environment Council (PEBEC) lifted the country up in the World Bank’s Paying Taxes 2018 ranking from 182 to 171. With the additional efforts that have been invested after the last ranking, expectations are high that the country would achieve additional improved ranking in the 2019 report.

While the government’s efforts at deepening tax penetration are commendable, a delicate balance need be struck with the fledgeling state of Nigeria’s economy. The country has exited recession but the economy remains vulnerable with weak growth. Policies and actions of government at this delicate state should signal a commitment to encouraging investment and enticing investors. In climes where the potency of taxation as a fiscal policy instrument is well understood, the current state of the economy would have triggered the lowering of direct tax rates and counter-balanced with a possible increase in indirect tax rates. With increased disposal income, additional spending is ploughed back into the economy to complement government expansionary policy thereby keeping the economy reflated and booming. Only a thriving economy can produce higher taxes. It is right to collect taxes, but right timing is perhaps more critical to achieving the desired objective for economic prosperity.

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