Nigeria: What Does The New Treasury Single Account (TSA) Hold For Tax?

Last Updated: 13 October 2015
Article by Taiwo Oyedele

We have not passed that subtle line between childhood and adulthood until we move from the passive voice to the active voice—that is, until we have stopped saying "It got lost," and say, "I lost it." - Sydney J. Harris

TSA should provide some transparency around unspent budgetary allocations which should be carried forward automatically to another year. I have always wondered why we have low budget executions (sometime 60% or less) and yet we begin every budget year on the basis of zero revenue.

What is TSA?

Imagine a rich businessman who has 28 wives and 542 children altogether a family of 571 each managing a division or unit of the business empire. Some of the units are income generating while others are mere cost centres but all are meant to work together for the benefit of the family.

Each unit manager is authorised to spend money based on pre-approval by the family head. For some reasons each unit prefers to keep their monies separate. By implication some divisions have to borrow to keep their operations running even as others may have cash surpluses not immediately required. Incidentally it costs far more to borrow than you get from savings thereby unnecessarily increasing the family's debt and related costs. It is even more painful knowing that some of the units end up borrowing the same excess funds kept with the moneylenders by other units.

The family head therefore directed all units to henceforth keep all their funds in a central account so that he can have a view of all revenue and expenses and so that there may be less need to borrow externally going forward.

Well, the rich businessman is Nigeria. The wives are the ministries; the children are the various departments and agencies while the central account is the Treasury Single Account (TSA) which is a way of unifying various government bank accounts to give a consolidated view of government cash resources. There are obviously too many ministries, departments and agencies (MDAs) which must be streamlined but that is a topic for another day. In the current year, total cost of debt service is N1 trillion which is about one-third of the federal government revenue before borrowing. Nobody needs a soothsayer to know that this is dysfunctional and unsustainable therefore someone has to take responsibility for fixing it.

How does TSA operate?

For TSA to work effectively there must be daily clearing of and consolidation of cash balances into the central account even where the MDA's accounts are already held at the CBN such as the FIRS. Some may argue that it is necessary to separate the cash transactions of each MDA for control and reporting purposes; however this objective can be achieved through proper accounting rather than by holding cash in separate bank accounts. In any case, the various bank accounts held by MDAs in commercial banks do not necessarily have to be closed, but they must be operated as Zero-Balance Accounts where any closing balance must be swept to TSA at the Central Bank of Nigeria (CBN) on a daily basis to give government a consolidated cash position.

TSA can therefore cover all funds including earmark and extra-budgetary accounts or even funds held in trust by government. To make this work, accounting systems must be robust and capable of accurately distinguishing trust assets in the TSA. This is not different from what a private company operating in many states or even internationally will do to consolidate its funds rather than fragment them by divisions or sub-entities. Hence, a company will only borrow externally if and only if its overall cash position is negative rather than when a division has a deficit even though others may have surpluses. I should quickly point out that TSA is not a new concept; it has been adopted for decades in many countries both in the developed world such as the United States, UK, France and developing economies like India and Indonesia.

Are there exceptions and what role should commercial banks play?

Organisations where government is only a shareholder and public corporations that are providing commercial rather than social services should be excluded to avoid hampering their operations given the level of bureaucracy in government. Examples include organisations such as AMCON, Federal Mortgage Bank, and the Sovereign Wealth Fund.

The adoption of TSA will involve retail banking which can still be performed by commercial banks such as collection of taxes/levies and disbursements of funds such as payment of salaries to civil servants.

Different models of TSA have various levels of commercial bank involvement ranging from France where there is no involvement whatsoever to the UK where there is significant involvement of commercial banks to Peru where the TSA is actually managed by a commercial bank rather than the central bank.

Therefore, the impact on banks will depend on the model adopted and the policy response of the CBN. The CBN recently reduced the cash reserve ratio - CRR (the portion of cash deposits a commercial bank must keep with the CBN) from 31% to 25% resulting in cash injection of about N740 billion according to the Bankers' Committee. Not long ago (Q1 2014) the CRR on government deposits was as high as 75% and as low as 12% on private sector deposits which meant banks only effectively had 25% of government deposits but 88% of private deposits at their disposal. This means the CBN currently has more room to cushion the impact by further reducing the CRR on private sector deposit to ensure that overall liquidity in the system remains largely unchanged. A lower monetary policy rate should also be considered to ensure that cost of borrowing does not increase for banks with consequences for businesses and individuals.

What are the potential benefits and challenges?

With the adoption of TSA, government will borrow less and therefore the debt servicing cost should reduce drastically to probably less than half of the current level. It is also likely that a lot of funds previously unaccounted for will be uncovered. Kaduna state for instance discovered as much as N24 billion recently through adoption of TSA.

Government may perhaps pay less in banking fees. For instance the fees payable to banks for revenue collection services could be based on a unit price per transaction instead of being linked to the turnover value of transactions. A bank does not necessarily expend more resources to collect say a N10 billion single payment than it does to process a N10 million single transaction. It is therefore not necessary to pay a commission or percentage of revenue collected.

One major issue in the past was that many banks delayed the remittance of revenue collected on behalf of government in order to temporarily trade with the money at the expense of government. Some MDAs also trade with government funds often for personal gains to the detriment of budget execution and timely payment to beneficiaries such as pensioners. It is therefore expected that these sharp practices will stop and there should be prompt release of funds for projects. If contractors are paid on time then the need for them to borrow at high interest rates will be reduced and hence result in overall lower cost of public projects, better budget performance and prompt project completion.

One of the objectives of TSA should be to eliminate or shorten any delay in payments. Good international practice has been to automate the payment processes, and adopt an electronic payment system, with direct payments to the bank accounts of contractors or beneficiaries. But for this to work MDAs must take cash flow planning and revenue/cost projections more seriously to ensure effective cash management.

TSA should also provide some transparency around unspent budgetary allocation which can be carried forward to another year. I have always wondered why we have low budget executions (sometime 60% or less) and yet we begin every budget year on the basis of zero revenue.

It is not all rosy though. There may be some legal barriers to full implementation of TSA.While S162 of the Constitution regarding maintenance of Federation Account provides a broad legal framework it does not address the operational details. Some MDAs have financial autonomy granted to them by legislation including powers to maintain a fund from which to pay expenses and even to invest surplus funds and maintain a reserve.

Some MDAs generate revenue in various foreign currencies and TSA should also cater for them especially dealing with exchange difference accounting in their respective annual reports given that the means of establishing exchange differences at the end of the period by translating closing foreign currency balances may no longer be applicable.

States and local governments should also be encouraged to adopt TSA so that monthly federation account allocations can be paid directly into their TSAs held at the CBN thereby making it easier for the government to manage liquidity in the system.

Are there potential tax implications?

If tax collection fees are negotiated based on transactions rather than value of revenue collected, then cost of tax collection will go down for the tax authorities from over 5% currently in some cases to a ratio closer to the 1% international benchmark. It will also ensure that gross revenue collection and commissions are separately accounted for rather than the net revenue approach which does not promote transparency.

Given that interest on government bonds and treasury bills are tax free, tax revenue should increase to the extent that banks will be compelled to lend to the private sector which is mostly taxable. Unfortunately banks' reported profits may go down especially in the short term while their taxes will increase. The impact will be partially offset by the excess dividend tax which banks currently pay whenever they distribute their exempt profits as dividends to shareholders.

Also, TSA should facilitate transparent reporting of tax revenue and pave the way for tax offsetting and faster payment of refunds. It should be possible for taxpayers to use excess payments or refunds in one tax area (say withholding tax or VAT) to pay other taxes such as corporate income tax, CGT and so on as this is merely an accounting issue which can be dealt with within TSA configuration.

There should be enhanced fiscal federalism as TSA transit accounts may be necessary for tax revenues that are centrally collected but are to be shared by the different levels of government such as VAT. It should in fact be possible to automatically allocate monies to states and local governments on a real time basis rather than on a monthly basis.

TSA should lead to better fiscal and monetary policy coordination as better transparency is achieved through reconciliation of fiscal and banking data, which in turn improves the quality of fiscal information.

It may be necessary to introduce codes within TSA to provide required geographical and organisational information for taxes where derivation is one of the factors for revenue sharing.

TSA should prevent delays in reconciling taxpayers' accounts which historically has been the case where taxes paid by companies are not remitted promptly to tax authorities or the authorities do not have visibility on collections to update taxpayers' records. This leads to delays in obtaining tax credits or even tax clearance certificates.

Each day, all banks involved in revenue collection should remit taxes collected to the tax authorities' accounts linked to TSA and provide information to the tax authorities to update taxpayers' records.

Hopefully once the ongoing implementation of electronic tax filing system is fully implemented, this process should happen automatically with little or no human intervention.

What is the way forward?

Overall the adoption of TSA should be positive for the economy in general and also the tax system in particular. The appropriate authorities will have to now embrace transparency and accountability more than ever before.

To cushion the liquidity impact on the financial system, an orderly migration of cash balances from the commercial bank accounts to the TSA should be considered, and complemented with monetary policy measures. Also the legal framework should be reviewed and amended where necessary while training should be provided to relevant staff of CBN andMDAs to ensure efficient implementation.

Tax authorities should use the opportunity to start presenting robust tax revenue reporting to include tax collection by tax types, industry sectors, states, number of taxpayers, demography, tax credits, unpaid refunds, value of tax incentives granted, and so on. The FIRS and Joint Tax Board should fast-track the implementation of their e-filing projects which should help ultimately in ensuring that instant credits are granted to taxpayers for remittances to TSA via commercial banks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Taiwo Oyedele
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