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Nigeria: A Nation Pauperised by Tax Evasion

Taxes & Tariffs	3102 VIEWS
Taxes & Tariffs
3102 VIEWS

Monday, July 01, 2019 10:00AM / NESG Fiscal Policy Commission

In 2017, the World Economic Forum (WEF) ranked Nigeria 125 out of 137 countries in its Global Competitiveness Report. The WEF survey found that Nigeria’s potential for structural change was impeded by inadequate investment in infrastructure, technology, higher education and innovation. Nigeria has long depended on oil as its economic mainstay with paltry attempts at diversification over the years. But a recent Bloomberg report finds that this one-source revenue base is unsustainable. Moreover, Nigeria is yet to regain its economic bearings following the 2014 crash in global oil prices.

Experts find a viable alternative in the non-oil sector and available statistics from the Federal Inland Revenue Service (FIRS) justify this. At a tax-related interactive session with the Manufacturers Association of Nigeria (MAN) held in February, FIRS Chairman Babatunde Fowler disclosed that the non-oil sector outpaced the oil sector with a significant 54% contribution to the N5.32 trillion revenue generated in 2018. “Moving the government’s revenue away from oil dominated foreign earnings to more predictable sources have the potential to accelerate the country’s economic growth,” he said.

But making the switch is not as easy as it sounds, thanks to Nigeria’s abysmal tax compliance levels. Fowler reinforced this when he argued that most businesses in the country charge customers Value Added Tax (VAT) for products supplied or services rendered but do not remit same to the government as statutorily required. As such, government lacks the incentive to deliver on capital projects that will fast-track the economic growth collectively envisaged.

A Legacy of Tax Evasion

In 2014, then Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, disclosed that 65% of companies in Nigeria had declined to forward their tax returns and a whopping 75% were not in the FIRS tax net.

During the FIRS Stakeholders Engagement Forum organised in Lagos at the time, she maintained that the much vaunted case for economic diversification would gain little traction without a steady pipeline of alternative income sources such as taxation: “We have engaged in a process of increasing our non-oil taxes. Every Nigerian wants to see us depend less on oil, and more on the other resources of the economy.”

But by 2015, the situation was no different. Chairman of the Edo State Internal Revenue Service (EIRS) argued that 80% of taxable Nigerians had no Tax Identification Number (TIN) and were therefore out of the tax net. At the Annual Tax Conference (ATC) organised by the Chartered Institute of Taxation (CITN) in Abuja at the time, he reportedly said this state of affairs was denying Nigeria lots of revenue that could ordinarily be invested in economic development.

“When you calculate the tax income revenues Nigeria ought to have made and deduct it from the amount realised, we will all understand Nigeria is missing much,” he said.

Year 2017 saw only 214 people in populous Nigeria paying taxes above N20 million. During a parley focused on economic growth jointly organised by the Nigerian Stock Exchange (NSE) and Bloomberg, then Minister of Finance Kemi Adeosun emphasised that Nigeria’s infrastructural deficit could only be addressed through a national culture of consistent tax payment: “We have just 40 million active tax payers out of an estimated 69.9 million…and of that 40 million, majority are PAYE, those who have their taxes deducted at source.” She disclosed the government’s plans to recruit 7,500 community tax officers tasked with educating the citizenry about the significance of tax compliance.

If statistics from 2018 are anything to go by, Ms Adeosun’s community engagement did little more than skim the surface. FIRS disclosed that over 6,772 billionaires do not pay tax. This category of individuals have between N1billion and N5 billion in their accounts, but no Tax Identification Number (TIN) with which they can file the statutory percentage of tax returns on their income.

Implications

Tax is a mandatory financial charge imposed upon taxpayers by government to fund various forms of public expenditure. In the Nigerian environment, citizens are expected to pay several taxes such as Companies Income Tax, Withholding Tax, Value Added Tax, Petroleum Profits Tax, Personal Income Tax, Capital Gains Tax and Tertiary Education Tax, among others. Taxes payable to the Federal Government are administered by the FIRS, while the State Boards of Internal Revenue (SBIRs) are tasked with administering levies for the state governments and the local governments do same through their respective councils. While citizens are expected to pay their taxes, government is in turn tasked with providing social amenities from tax revenue such as mass transit systems, public housing schemes, subsidised education and healthcare delivery, among others.

In Nigeria where tax evasion has become second nature, the direct implication is that government is not able to generate enough revenue to fulfil its statutory obligations to the citizenry. Earlier this year, the Socio-Economic Rights and Accountability Project (SERAP) released a report indicating that the failure of the Nigerian government to enforce Capital Gains Tax on over $8 billion oil and gas assets sold to Nigerian entities fuels poverty, underdevelopment and inequality in the country. Unsurprisingly, the nation woke up to a Forbes report last month which ranked Nigeria the world’s sixth most miserable country.

At a tax forum in 2017, Vice President Yemi Osinbajo linked high-wire corruption to tax evasion. This implies that when citizens pay their taxes, they have the moral right to hold government accountable if social amenities are not made available as and when due. But this is not the case in Nigeria, where Osinbajo argued that 96% of citizens are only tax compliant because their taxes are deducted at source under the Pay As You Earn (PAYE) system, while just 4% comply under Direct Assessment.

“Taxation is immensely important to national development as a key source of sustainable revenue and an indicator of economic wellbeing,” argued Taiwo Oyedele, Head of Tax and Regulatory Services, PwC Nigeria, in his recent article on taxation. He added that compared to other sources of sustainable revenue, tax revenues can be relatively predictable and governments are able to plan with a greater amount of certainty than reliance on natural resources.

Intervention

In 2017, the President Muhammadu Buhari administration launched the Voluntary Assets and Income Declaration Scheme (VAIDS) in a bid to include more Nigerians in the tax net. The initiative saw the setting up of tax clinics to offer free service, consultation and legal representation for defaulting companies wishing to voluntarily file their tax returns.

As of June last year, the federal government announced it had realised a total of N30 billion from the initiative, which spanned July 1, 2017 to June 30, 2018. FIRS boss Fowler said one of the outcomes was the growth of the national taxpayer database from under 14 million pre-2016 to over 19 million in 2018.

Meanwhile, the dividends of the 11-month scheme have been greeted with reservations from some quarters. Some experts argue that it is one thing to achieve a measure of tax compliance when incentives such as amnesty from accrued interest, investigation or tax audit were provided, and quite another to replicate the same feat now that the VAIDS initiative has been concluded.

Collaboration

Policy analyst, Kenneth Amaeshi insists there is a need for government-citizen engagement to drive a more sustainable culture of tax compliance in Nigeria. In an article titled ‘Tax Accountability Matters’, he argues that citizens have a very poor perception of tax accountability by the government which translates to low tax morale, even in the face of very stiff penalties for default.

He says: “…although the government agencies – especially the Federal Inland Revenues Services (FIRS) – have invested a lot in aggressive compliance infrastructure, there have been some minor progress; however, tax revenues are still very much sub-optimal….Tax enforcement infrastructure needs to be complemented by enhanced tax morale. Otherwise pursuing one and not the other comes across as a futile effort at clapping with one hand. Unfortunately, most governments in Africa seem to be in this trap.”

With the prospects of a fresh four-year term in office, now is the best time for the President Buhari administration to galvanize tax compliance with new initiatives that will strike the right chord with the citizenry. If the generality of Nigerians are confident that their taxes will translate to tangible social amenities, there should be little incentive for tax evasion in the long run.