Nigeria: The Changing Tax Landscape And Potential Costs Of Non-Compliance

Last Updated: 5 November 2018
Article by Chinedu Ezomike

On 24 April, 2008, American movie star, Wesley Snipes, was convicted and sentenced to 3 years in prison for failing to file income tax  returns. This sent shock waves across the Hollywood community as other movie stars and celebrities  scampered to review their tax records and ensure up-to-date compliance in order to avoid a similar  fate.

Since then, many other celebrities and super stars have had similar run-ins with the tax  authorities. The famous singer, Lauryn Hill, served a 3-month jail term in 2013 while Joseph  Cartagena, "Fat Joe", also served a 4-month jail term in the same year for tax related offences. More recently, professional football  super stars, Lionel Messi and Christiano Ronalda were the focus of various tax investigations. When  ii was resolved, Messi paid €12 million and got a 24-month suspended sentence, while Ronaldo paid €17million and got a 2-year suspended sentence. There is a lot to learn from the experiences of  these stars.

How the tax environment is changing

Although such high-profile tax cases are not common in Nigeria, it is safe to say that the tax  environment is changing very fast. Tax compliance has indeed become a very important issue as a  result of government's renewed focus on taxation.

Due to paucity of funds across all levels of governments, taxation has become the only sustainable  way of growing government revenue. The traditional reliance on revenue from natural resources is  not sustainable as it is clearly inadequate and subject to  many factors outside government's control. Nigeria's  tax to GDP ratio of about 6% is quite low and indicates that a significant portion of the economic  activities in the country is not captured within the tax net. The tax authorities realize this and  have been ramping up efforts to increase tax collection. This is evident in the increased  aggressiveness in enforcement and public enlightenment campaigns.

In terms of availability of information, the Nigerian tax authorities now have an unprecedented level of data on the economic activities of  Nigerians. In 2017, the Federal Ministry of Finance commissioned a data mining project ("Project  Lighthouse") to obtain relevant information to profile potential tax  payers. Data was gathered from various sources such as Bank Verification Number, Land Registry,  Forex applications, Nigerian Customs, vehicle registration registry, Corporate Affairs Commission  etc. This enabled them to extract actionable intelligence which can be used in prosecuting  defaulting taxpayer.

It is hoped that an increase in tax collection will help to strengthen the social contract between  Nigerians and the government.  As reflected in other countries, tax payers are more likely to hold  public officials accountable for public funds where the citizens are directly responsible for  funding government spending through payment of their taxes.

International efforts to improve transparency

The international community is concerned about the low level of transparency in the international  financial systems. This situation has encouraged the flow of illicit funds which is a key enabler  for corruption, terrorism and other international crimes.

Taxation is a veritable tool for tracking the flow of funds and encouraging transparency. It helps  in increasing accountability in the international financial systems. In view of  this, the  international community, through The World Bank and IMF, is pushing developing economies, such as  Nigeria, to improve their tax administration systems and processes in order to bring in more tax  payers into the tax net. There are ongoing partnerships, trainings and other capacity enhancement  programs funded by these institutions to improve tax administration in developing countries.

For instance, the new global standard on Automatic Exchange of Information (AEOI) was put in place  to reduce the incidence of tax evasion. It provides for the exchange of financial information  between tax authorities in different jurisdictions. Countries who sign up to the AEOI will send and receive financial information each year, without  any specific  request. This will help uncover more tax defaulters and assist governments in recovering lost tax revenue. It will also strengthen  the drive to increase co-operation among tax administrations and enhance their effectiveness in  addressing international tax evasion. As Nigeria has signed up to this initiative, the level of  information that will become available through this arrangement will be staggering.

The traditional tax havens are coming under attack from the Organization for Economic Co-operation  and Development (OECD).

There is a concerted effort to discourage the practice and lift the veil of secrecy associated with  such jurisdictions. Also, incidents such as the leak of Panama papers, where documents containing personal financial information of wealthy individuals were stolen from a Panamanian law  firm, were released by anonymous sources, is an indication of the opposition to tax heavens .

The United Kingdom also implemented the "Unexplained Wealth Orders" (UWO), effective January 2018.  Under UWO, the UK courts can approve forfeiture of property (worth at least £50,000) where there are reasonable grounds to suspect that the sources of income are insufficient  to obtain such property. The Order can be obtained for properties purchased prior to the  establishment of the law and there is an 1mp11ea presumption of guilt. Hence, the onus of proof is on the individual. There is a concern that as all these efforts are going on, legitimately earned  income may be caught up in the process and where the individual is unable to demonstrate the source of income, the asset  may be lost.

How does it impact you?

The income tax returns is a reliable way of demonstrating the income and net worth of an  individual. Based on the law, all income earned by every tax payer, whether taxable or otherwise is  expected to be declared in the annual tax filings. Any portion of the total income not liable to  tax will be exempted in computing the tax payable but all should be declared. What this means is  that a review of all income tax returns filed by an individual for prior periods should give a very reasonable  indication of the sources of income and the net worth of the individual. This is a very effective  way of defending any income related query and resolving potential disputes on assets.

This also means that the consequence  of non-compliance with taxes may not be limited to potential penalties and interests on outstanding tax liabilities. Assets acquired  through years of hard work can actually be at risk if the individual is unable to demonstrate the  sources of income with proper documentation. Where an individual, who correctly declares the income  in the annual tax returns, is confronted with a UWO action, the tax returns will be an effective  defense.

To encourage defaulting tax payers to regularize their tax records, the Federal Government launched  a tax amnesty program, Voluntary Assets and Income Declaration Scheme (VAIDS) which ended in June  2018. The program extended clemency from interests and penalties and also gave assurance that tax  defaulters will not face criminal prosecution for any tax offences.

Although the program has ended, there is  still a need for high net worth individuals, and corporate entities, to continually review their tax practices to ensure adequate compliance. They are encouraged to take on the challenge of organizing their tax affairs so that it can meet the requirements of the changing tax environment.

Originally published in Business Day, October 2, 2018

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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