ARTICLE
11 January 2024

Unaccounted Taxes In Nigeria: The Hidden Drain On The Economy

KN
KPMG Nigeria

Contributor

KPMG Nigeria is a member firm of KPMG International. We provide Audit, Advisory and Tax & Regulatory services, across various industries, to national and multinational companies. Our purpose is to inspire confidence and empower change. We have a relentless focus on delivering quality and excellent service to clients. We, therefore, provide insights and innovative ideas to clients to help them achieve their corporate objectives.
Nigeria, often referred to as the "Giant of Africa" boasts vast resources, a large and increasingly growing population, and a dynamic economy.
Nigeria Tax

Introduction

Nigeria, often referred to as the "Giant of Africa" boasts vast resources, a large and increasingly growing population, and a dynamic economy. Yet, despite its potential for prosperity, the country grapples with significant challenges, one of which is the issue of unaccounted taxes and other Government revenue. These unaccounted or call it, underreported taxes represent a hidden drain on Nigeria's economy, hindering its growth, development, and the provision of essential public services. Indeed, it may well be that Nigeria does not have a low tax to GDP as being postulated, where the unaccounted taxes were brought into the Government coffers. In this article, I shall delve into the issue of unaccounted taxes in Nigeria, its causes, consequences, and potential solutions.

The Tax to GDP Conundrum

Over the year, Nigeria's tax-to-GDP ratio has been estimated at 6% by the National Bureau of Statistics. However, in a recent collaborative effort between the Federal Inland Revenue Service, the Federal Ministry of Finance, and the National Bureau of Statistics, an adjustment has been made to the measurement of the tax-to-GDP ratio in Nigeria. The new figures are revised and updated to reflect better data sources and improved estimation using the Organisation for Economic Co-operation and Development (OECD) manual. The OECD manual/approach is an improvement over the System of National Accounts (SNA 2008) classification of taxes which had hitherto been used. The revised computation considered wider coverage of data at the Federal, State, and Local Government levels, and revenue items not previously included in the computations, particularly, relevant revenue collected by other agencies of government. At the end of 2021, the tax-to-GDP ratio stood at 10.86% compared to an estimated 6% previously reported.

The FIRS has indicated the government's ambition to elevate the country's tax-to-GDP ratio from 10.86% to 18% without increasing the prevailing tax rates. While this is a laudable target, it remains unclear how it would be achieved. One consideration may be to formalize some of the 'unofficial taxes' charged and collected by non-state actors/unauthorized agents. According to research by the International Centre for Investigative Reporting (ICIR) in 2021, non-tax actors (Agberos; an informal term referring to an individual, often a ruffian, responsible for collecting fares, charges, tolls, and various types of levies in and around motor parks.) in Lagos state generated approximately N123 billion yearly, more cash than 35 states in Nigeria generated annually1, at the time. This figure is also higher than the aggregate of other taxation income of N114,878,456,0002 (excluding PAYE income) generated by Lagos state in 2021. The investigation by ICIR further states that there is no record of the funds going to the Lagos State Government's account as there are several pointers that it ends up in private pockets. Unfortunately, the ICIR has not made a distinction between the actual levies and the association dues, which ordinarily should not be remitted to the Government even if the activities of these non-tax actors were to be formalized. Associations would ordinarily collect dues from their members; however, it has been found that operators in the space administered by the actors described above typically have to pay all levies even where they are not necessarily members of the associations. Another research by an Africa-focused geographical research firm – SBM Intelligence, surveyed the informal sector in some states across Nigeria, including the FCT, Anambra, Bauchi, Cross River, Delta, Oyo, Rivers, and Lagos. The report shows that the informal sectors largely pay taxes but to non-state actors. Players in the sector including commercial drivers, artisans, and traders pay taxes almost daily to carry out their day-to-day activities.

If the Government could find ways to formalize the activities in the informal sector, described above, and the taxes collected therefrom are accounted for, this may significantly enhance the tax to GDP ratio.

The Scope of Unaccounted Taxes

Unaccounted taxes refer to taxes from economic activities which are not remitted or under reported. For the purpose of this write-up, I have extended 'unaccounted taxes' to include levies [other than taxes administered by the bodies statutorily empowered to do so] paid on economic activities. In Nigeria, unaccounted taxes arise from various sources such as:

Informal Sector: A significant portion of Nigeria's economy operates in the informal sector, where businesses and individuals often evade taxes by not registering their activities or underreporting their earnings. Therefore, the taxes from their activities are not reported or under-reported, thereby depriving the Government of vital revenue.

Activities of certain Government Agencies and other unauthorized agents: certain government agents have been found to levy taxes on citizens and businesses. For instance, certain individuals parading as agents of local government in some states will typically levy shop owners for undertaking their economic activities. Based on research, there is hardly evidence that such levies make it to the coffers of the relevant tier of Government. Further, there are certain unauthorized agents that typically assess businesses and individuals to one form of levy or the other. These levies are not accounted for at any level of Government. For example, commercial bus drivers are typically levied by agents that are not authorized by Government (popularly known as 'agbero') in Lagos. As far as the drivers are concerned, this is a form of tax they pay for their economic activities. Unfortunately, these taxes are not remitted to any known tier of Government. Assuming this current practice of 'agberos' which by the way, is prevalent in many other states in Nigeria, could be formalized in a structured manner, and levies collected are accounted for and duly remitted, Government revenue would be enhanced.

Transfer Pricing: Some multinational corporations operating in Nigeria misprice their related party transactions with a view to shifting profits to low-tax jurisdictions. This essentially reduces the tax obligations of such corporations in Nigeria.

Tax Holidays and Incentives: The government's use of tax holidays and incentives to attract foreign investments can sometimes lead to tax avoidance, as companies exploit these benefits to reduce their tax burdens. The Presidential Committee on Fiscal Policy and Tax Reforms Chair recently stated that Nigeria has lost over N6trillion in tax waivers and incentives. It is not clear how the Chair has arrived at this number. However, it has been established that some companies abuse some of the incentive schemes.

Consequences of Unaccounted Taxes

The consequences of unaccounted taxes in Nigeria are far-reaching and detrimental to the country's socio-economic development:

Revenue Shortfalls: Unaccounted taxes result in a significant loss of government revenue, which could have been used to finance critical infrastructure projects, healthcare, education, and poverty alleviation programs. This would also have an impact on the living standards of the citizens.

Widening Income Inequality: When taxes are not collected equitably, the burden falls disproportionately on those who cannot evade taxes, thereby exacerbating income inequality.

Impediment to Economic Growth: Unaccounted taxes reduce the funds available for public investments and hinder economic growth and job creation.

Solutions to Address Unaccounted Taxes

Addressing the issue of unaccounted taxes in Nigeria requires a multi-faceted approach:

Strengthen Tax Administration: Invest in tax administration agencies to improve their capacity to identify and combat tax evasion. Implement modern tax collection and audit techniques, such as data analytics and risk-based auditing.

Tax Education: Increase tax education and awareness campaigns to inform citizens and businesses about their tax obligations, the benefits of taxation, and the consequences of tax evasion.

Review Tax Policies: Continuously review and reform tax policies to close loopholes and reduce the opportunities for tax evasion. Consider revising tax holidays and incentives to ensure they are not exploited.

Anti-Corruption Measures: Implement anti-corruption measures within tax administration agencies to curb corrupt practices that facilitate tax evasion. Considerations should also be given to formalizing the systems of unauthorized agents collecting levies and taxes. This way, the levies paid by the informal sectors are accounted for as part of Government revenue.

International Cooperation: Collaborate with other countries to combat tax evasion by multinational corporations through information sharing and coordinated efforts to close tax loopholes.

Conclusion

Unaccounted taxes in Nigeria represent a significant challenge to the country's economic growth and development. Addressing this issue requires a concerted effort from the government, tax authorities, businesses, and citizens. By improving tax administration, enhancing tax education, and implementing anti-corruption measures, Nigeria can begin to curb unaccounted taxes and unlock the revenue needed to build a more prosperous and equitable future for its people.

Footnotes

1. Lagos Agberos collect more cash than IGR of 35 states - Businessday NG

2. Year 2021 LASG IPSAS FINANCIAL STATEMENT

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.

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