Introduction
The Nigerian Federal Tax Authority, called the Federal Inland Revenue Service (FIRS), recently announced that Nigeria's tax-to-GDP ratio as at the end of 2021 was 10.86%. This was a significant improvement from the 6% often touted before now. The lower figure did not include the tax revenue generated by the states and local governments in Nigeria. It is important to state that Nigeria operates a federal system but with multiple tax authorities unlike the system in other countries. Each of the thirty-six (36) states in Nigeria, together with the Federal Capital Territory, has its own internal revenue service, which is independent of the FIRS.
Though the 10.86% tax-to-GDP ratio is an improvement on the previous performance, it is still small relative to countries of comparable economic size. It is, therefore, not strange that the current government has fixed a target of 18% to be achieved by 2025. The understanding is that Nigeria must be able to deliver at least a tax-to-GDP ratio of 15% to be able to provide the basic services such as road infrastructure, uninterrupted power, affordable healthcare, education, and public safety. Unfortunately, due to insufficient tax revenue, Nigeria has been relying on borrowings, a strategy that has proved to be risky and unreliable. As of the time of this report, Nigeria's debt to GDP ratio is about 37%, which is close to the 40% self-imposed limit. It is, therefore, not rocket science why Nigeria must enhance its tax to GDP ratio especially in a period when revenues from oil have been declining significantly.
In recognition of the revenue challenge facing the country, the President appointed a Special Adviser with focus on Revenue. He also inaugurated the Presidential Committee on Fiscal Policy saddled with the sole responsibility of improving the country's revenue profile and achieving the 18% tax-to-GDP ratio within 3 years.
Current Challenges of the Nigerian Tax System
There is no doubt that taxes are the most stable and reliable source of state revenue. However, we are yet to tap the full potential in Nigeria due to the challenges that we are currently facing. These challenges include the following:
- Poor governance – There is a positive correlation between governance and tax collection. Where governance is good, tax collection would be high. However, in Nigeria, there is poor accountability for the taxes collected to the extent that taxpayers provide the basic services they need themselves. So, they do not see any compelling reason to pay taxes though paying taxes is not a quid pro quo. The Fiscal Responsibility Act is meant to make government fiscally responsible through the transparency of its processes and accountability to the citizens on public revenue and expenditure management. However, this is the case.
- Transparent tax administration – The focus of tax administration is more on tax collection rather than helping taxpayers become more compliant. The approach to tax audits and investigations does not reflect healthy scepticism. Rather, the approach is more like taxpayers have not been diligent in their tax affairs. Consequently, there must be back duty tax assessment at all costs. In a situation where the audit does not yield any additional tax or result in tax refund, the tax auditors will unnecessarily stall such audit.
- Ineffective tax policies – Nigeria has a National Tax Policy that defines the underlying principles of an effective tax system. However, those principles are not adhered consistently to.
- Fragmented database - There has been significant revenue leakage because there is no alignment of the various databases in the country. Moreover, there is little or no system for the exchange of information among the various tax authorities as they tend to work independently of one another.
- Inadequate framework for that taxation of the informal sector and high net worth individuals – In other countries, revenues from personal income tax are higher than corporate tax. However, the reverse is the case in Nigeria. The country is yet to implement an effective system for bringing the informal sector into the tax net. The issue of high-net-worth individuals is a separate discussion as the various tax authorities lack the will and the authority to ensure that these people pay the right amount of taxes.
- Inadequate capacity of tax authorities – Some tax authorities do not have sufficient capacity to perform their duties and responsibilities. So, tax audits and investigations tend to drag for months and sometimes years.
- Use of unconventional methods for tax collection – this is common with local government officials. Sometimes, local government officials mount roadblocks to force taxpayers to pay that may have not basis in law.
- Multiple taxation - This has been a common phenomenon given the desire by the various states to grow their internally generated revenue since allocation form the centre has significantly reduced.
- Lack of professionalism by Tax Intermediaries – Some tax intermediaries often encourage their clients to do the wrong thing. It is important that tax intermediaries subscribe to codes of responsible tax practice to guard against abuse of the tax system.
Way Forward
For Nigeria to achieve sustainable development through taxation, we must adopt a comprehensive approach. However, it is imperative that we mainstream good governance into tax reforms. This is extremely important to promote voluntary compliance. The other things that must happen include the following:
a) Deployment of technology - Technology continues to evolve, shape, and transform how we conduct business. Covid -19 has also completely shaped the way transactions are consummated. Of course, there is the rise of e-commerce and big data. Consequently, efficient deployment of technology by tax authorities has become a prerequisite. With the increasing use of data, how can tax authorities draw insight from data without deployment of data analytics tools? How can tax authorities perform the audit of e-transactions without the right technology tools? The traditional tools of tax audits and investigations used to monitor tax compliance are backward-looking and no longer as effective as they used to be. The major focus now is to how to make tax just happen.
Tax authorities must learn to do more with less and increasingly reduce the gap between the payment of tax and a taxable event. The only way this can be possible is through technology. Technology will make tax authorities to focus on providing value adding services to taxpayers and helping to reduce cost of compliance as tax returns and payments can easily be made online. Technology can also help to make tax authorities less visible through compliance by design as is the case with the Pay-As-You-Earn (PAYE) system. This way, payment of tax will just happen naturally.
Available research has shown that technology has helped tax authorities to increase tax collections, reduce payment risk and enhance voluntary compliance. However, it is important that its deployment is done in such a way that it will not crease unnecessary burden for taxpayers. Therefore, the successful deployment of technology will depend on periodic stakeholders' engagements and acting on their feedback. It is also important that the technology deployed be user friendly and value-adding.
b) Shift focus to Indirect Taxes – One of the cardinal principles of taxation is that the cost of collection must be low relative to the revenue generated. The cost of collection of indirect taxes is lower compared to that of direct taxes. Consequently, focus must shift to indirect taxes. However, tax authorities must put in place appropriate controls and measures to ensure that the taxes collected by qualifying taxpayers are remitted as and when due. In other words, taxpayers saddled with the responsibility of collecting these taxes must remit within a reasonable time to reduce tax debt and payment risk. It is, therefore, important that tax authorities deploy an online real time payment gateway system to sweep the taxes collected directly to the treasury accounts immediately. This will require interconnection between the taxpayer accounting system and that of the tax authorities. Since payment of taxes must be a seamless experience, tax authorities must pay attention to data protection, safety, and confidentiality to provide the necessary assurance to taxpayers.
c) Convergence of Tax Rates – Tax laws and related administrative processes should be simple, clear, and easy to understand. In other words, ambiguities should be reduced to the barest minimum. One of the causes of disputes between tax authorities, taxpayers and tax intermediaries relates to what constitutes income and capital gains. Though there are binding precedents and, of course, barges of trade that can help resolve this ambiguity, it is not as simple as that in some cases. There are times when it is difficult to agree on whether a particular item of income should be subject to income tax or capital gains. Currently, capital gains are taxed at 10% while companies income tax rate is 30%. This differential in the tax rates has created room for abuse of the tax codes. Most times, this issue is resolved by the court, and this can take an inordinate amount of time. To eliminate this controversy, Nigeria may consider harmonising the tax rates for income tax and capital gains.
d) Structured Tax incentives – Undoubtedly, availability of tax incentives is one of the factors that potential investors consider when investing in a particular country. It is, therefore, understandable why many countries, Nigeria Inclusive, are paying attention to this. Unfortunately, the desire to attract investments has led to the introduction of tax incentives that may be considered redundant. In other words, potential investors may still make the investment even if the incentives were not available. Also, in some cases, there is no sunset provision in the enabling law for the incentives. Consequently, the unchecked commitment to provide tax incentives by African countries has led to the race to the bottom where the countries themselves are the poorer for it.
It is, therefore, important that Nigeria review its tax laws for incentives that may be deemed redundant and eliminate them from the tax laws. In addition, the effectiveness of every incentive must be subject to periodic review to determine whether it must be continued. Nigeria must also use tax amnesty programs in a smart manner unlike what we did with Voluntary Assets and Income Declaration Scheme (VAIDS) and Voluntary Offshore Assets Regularisation Scheme (VOARS), which could be regarded as total failure.
e) Appropriate Institutional Structure
It is important that we strengthen the capacity and the capability of the various tax authorities. Therefore, capacity development programs must be implemented to enhance the skills and knowledge of tax officials and they must be well schooled in leading practices in tax administration, processes, and tax risk management. The focus of Government should not be on short term enhancement of tax receipts but creating institutions that can endure and continue to enhance their capacity to grow tax revenues beyond the tenure of the current administration.
There is the ongoing debate whether having a single tax authority or integrated revenue collection agency like in the UK and the US may be a solution to the perennial revenue leakage in Nigeria. While there is merit in this argument, the key concern is whether we can achieve this in Nigeria given the lack of trust among the various levels of government? Can we effectively integrate customs/excise with Tax? Would the state governors want to give up their control of their internal revenue agencies? Can't we achieve better collaboration and effective sharing of information while still maintaining the current decentralised structure? These and other issues must be evaluated and discussed before a decision can be taken on whether to implement an integrated tax administration.
Conclusion
There is no doubt that Nigeria is facing a revenue challenge. Maximising the country's tax potential is, therefore, a no brainer. There are challenges in tax administration and policy that we need to address. The sooner we address these issues, the better for the country. It is encouraging that the present administration is fully aware of these issues and has decided to place the reform of the Nigerian tax system on the front burner. Hopefully, the Committee entrusted with this will deliver on its mandate and the Government will have the political will to implement their recommendations, which may include the suggestions discussed i this write-up.
We cannot over-emphasize the importance of good governance if we want to promote voluntary compliance and grow the tax-to-GDP ratio to 18% by 2025. Tax authorities must cultivate the culture of treating taxpayers as clients and exhibit healthy scepticism when it comes to tax audits and investigations. It is also important that we implement effective anti-corruption measures and internal controls by reducing human intervention in tax administration as much as possible.
2025 is less than 3 years away. Only time will tell whether the country will achieve the 18% tax-to-GDP target by that time!
References
- Increasing Tax Revenue – Adewale Ajayi, KPMG Nigerian Tax Jornal, 1 February, 2018.
- What makes a successful tax amnesty program – Adewale Ajayi, Bloomberg Tax, 30 July, 2018
- Reforming Nigeria's Tax Incentive Program – Adewale Ajayi, BusinessDay 26 November 2022
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.