Nigeria Economy | |
Nigeria Economy | |
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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.
Related News
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provides Clarification on recent Tax Developments at a Stakeholder Meeting
2. Federal Inland
Revenue Service Releases Country by Country Notification Form
3. Nigeria Releases
Revised Transfer Pricing Regulation
4. MTN Says Nigeria Is
Seeking to Recover $2 Billion in Back Taxes
5. FIRS Publishes
Nigeria’s Revised Transfer Pricing Regulations
6. Are We Jumping The
Tax Gun? FIRS Freezing Order Explained
7. FIRS Appoints Banks
As Agents Of Collection Of Outstanding Taxes From Tax Defaulters’ Accounts