Nigeria: Leveraging reforms for efficient tax administration, revenue generation
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes,” one of the founding fathers of the United States, Benjamin Franklin, said in a letter to a French physicist and member of the American Philosophical Society, Jean-Baptiste Le Roy, as far back as 1789.
Franklin was not the first or the only philosopher that likened taxes to death in his allusion to the former’s inevitability as a tool of public administration. Before his writing, both Daniel Dafoe and Christopher Bullock, English writer and performer respectively, used the famous phrase – ‘death and taxes’ – in symbolic terms.
Humanity has evolved and undergone a series of transformations since those legends admitted that taxes are in the same basket with death in the measure of their certainty. Yet, their submission has not diminished in its relevance a bit. Rather, countries have codified taxation as a matter of obligation, making its evasion a criminal offence.
Taxes are a primary source of revenue to many countries and sub-national political entities, a reason some economic literature used the word and public revenue interchangeably. And it is a big deal for many advanced economies, which cannot survive without it.
For instance, in 2020, the tax-to-gross domestic product (GDP) ratio of the United States was 25.5 per cent or $5.34 trillion. That is, the United States’ tax revenue was over three times larger than the GDP of all the sub-Saharan African (SSA) countries. Interestingly, the population of SSA is over three times that of the United States. Of course, tax efficiency is as old as modern America. Before 2000, its tax-to-GDP ratio was even much higher, inching close to 30 per cent.
Tax revenue is a matter of life and death across the developed world. The average tax-to-GDP ratio of members of the Organisation for Economic Co-operation and Development (OECD), of which the U.S. is a member, in the same 2020 was 33.5 per cent. Most European countries’ taxes-to-GDP ratios were in the region of 30 – 40 per cent tax before COVID-19, which forced many economies to adopt novel and conventional fiscal incentives to support businesses and households.
SSA, in recent years, has been putting in some work to catch up with the rest of the world. Two years ago, South Africa recorded 28 per cent while Lesotho, Namibia and a few other countries were also around 30 per cent. Sadly, Nigeria, according to the global ranking, sat at the bottom with 3.6 per cent tax revenue in proportion to GDP in 2020 when its peers were doing 25 per cent and above.
Clearly, Nigeria burrows with Middle East countries such as Oman, Qatar, Saudi Arabia, Kuwait and Libya, which historically, fund their public expenditures with oil windfalls. But a few of the traditional oil-producing countries are gradually reviewing an indifferent attitude to tax, as the future of the hydrocarbon market appears increasingly uncertain. Nigerian public officials, too, have long admitted that tax is the most sustainable source of public revenue and reforms were required to make it serve the common good.
Currently, the country’s tax-to-GDP ratio is six per cent, one of the lowest in Africa.
However, the Executive Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami, said the figure captures only federal taxes while excluding those of the sub-national units. Yet, he admitted, just as the Minister of Finance, Budget and National Planning, Zainab Ahmed, that poor revenue profile and not overspending, is a major challenge affecting the country.
Oftentimes, the advocacy for an efficient tax system is deflated with the obvious leakages and wastes in the public sector. While it is equally necessary to plug the holes, even the strongest critics of government’s indiscretion admit that the country’s current low revenue profile undermines the task of meeting rising infrastructure and social needs.
While demand for responsiveness increases, oil, which arrogates to itself the traditional source of Nigeria’s public financing and mainstay of the economy, is fraught with many uncertainties. Also, the anaemic growth of the country’s economy has been attributed to the vagaries of the hydrocarbon market.
The uncertainty in the oil market, are red lights flashing on the dashboard of the country’s economy. When oil prices rise, the economy moves slowly only to slump at the slightest shock in demand, which happens regularly – a jinx Dr. Chiwuike Uba, a development economist, said must be broken to reboot the economy.
Public officials had long agreed that the public finance system, indeed, needs a rebooting. But over the years, the promised reforms that would bring about a new transparent and efficient revenue mobilisation process had been, at best, a step forward and two backwards. This had made it impossible to replicate what has come to be known in some circles as the Lagos miracle – an efficient and responsive revenue mobilsation system.
But the Finance Act 2021, Prof. Ken Ife, a trade expert said is a rare attempt at giving the country a new tax administration culture. Ife noted that the Finance Act would boost trade and support fiscal stability, which is needed to achieve sustainable growth.
Ife said: “The thrust of the Act is automation, modernisation and the use of technology to improve Federal Inland Revenue Service (FIRS) operation. The reason Lagos State is efficient in internally generated revenue (IGR) is that the human interface is reduced to the barest minimum. People can log in to a portal and do self-assessments.
“In the case of FIRS, the more technology is involved, the fewer pain businesses face. That will speed up revenue collection, bring credibility to the way people are treated and widen the participation of people and businesses in the revenue collection.”
The ECOWAS consultant added that modes one and two of service delivery – services provided by companies registered and those who come in to render services – are well addressed by the Act. This, according to him, has addressed a major grey area in the existing law.
A section of the Act submits that “non-resident companies liable to tax on profits arising from providing digital goods or services to Nigerian customers under the Significant Economic Presence (SEP) Rule may be assessed on a fair and reasonable percentage of their turnover if there is no assessable profit” for taxation purposes.
The Act also provides for a capital gain tax (CGT) in which the disposal of stocks and shares in Nigerian companies for aggregate proceeds amounting to N100 million or more in any period of 12 consecutive months attracts CGT of 10 per cent except where the proceeds are reinvested within the same year of assessment. Investment experts have described the provision as another disincentive to investors.
But Ife said investors, including foreigners, are “more interested in transparency, consistency and fairness” as they pay taxes everywhere in the world. He said Nigerians demand a competitive and transparent tax regime rather than kicking against payment entirely. He argued that “undefined and unclarified” territory hurts business much more than clearly documented taxes.
On how the Act impacts the private sector performances and improves the ease of doing business, the economist stressed: “The major challenge is how many processes they go through and how much time they spend just to pay their taxes. How many times do you have to go to FIRS just to pay your taxes? Sometimes, you need to visit different agencies to reconcile payments and get tax clearance. Sometimes, you need to deal with different individuals, which could be difficult when the system is not automated. The ongoing automation will reduce all these.”
Speaking at the Chartered Institute of Bankers (CIBN) Economic Outlook last week, Chief Executive of B. Adedipe Associates Limited, Dr. Biodun Adedipe, the country would be better off with the new taxes if they are channelled to specific areas on national needs where their impacts could be reasonably measured.
Fiscal Policy Partner and Africa Tax Leader of PwC, Taiwo Oyedele, told The Guardian that the changes go beyond revenue generation to reforms in the tax system such as reaffirming FIRS as the primary tax agency of the Federal Government. He, however, said “broader fiscal reforms” are necessary to address fiscal deficits.
According to the new Act, it is an offence, punishable by a fine of N10 million, imprisonment or both, for any other agency of the Federal Government to carry out the function of assessment, collection or enforcement of the tax. By the law, other agencies of the Federal Government report cases requiring tax investigation, enforcement or compliance to FIRS for necessary action. Ife said the emerging coordination would make the business of tax administration more seamless.
Perhaps, the new Finance Act comes in handy – at a time the country needs to de-risk its revenue from the volatility of crude and on the heels of FIRS’ transformation programme. Last year, the management set up the Intelligence, Strategic Data Mining and Analysis Department (ISDMA) to deploy analytical tools to analyse data mined by TaxPro Max.
Following the Finance Act 2020, which armed it with the power to deploy technology in tax administration, FIRS had deployed Tax-Pro Max, a homemade solution to register taxpayers, receive filings and receive payments. The technology launched last year is considered a revolutionary move as it seeks to cut off middlemen from tax filing processes to make the process easier and faster.