From VAIDS to Finance Act: Nigeria in search of revenue options
The chain reactions that followed Federal Government’s tax amnesty program was about to die down, when the authorities stirred up the horrnet’s nest with an increase in Value Added Tax (VAT) rate. It is a component of the expanded Finance Law. Saturday February1, 2020 was the kick-off date for implementation of the VAT increase. CHIMA NWOKOJI, in this report examines Nigeria’s pursuit of increased revenue through taxation, highlighting untapped opportunities in the tax space.
Just a few days after President Muhammadu Buhari signed the Tax and Fiscal Act, the Accountant-General of the Federation, Alhaji Ahmed Idris announced that the Federal Government has begun implementation of some aspects of the Act with the imposition of 7.5 per cent Value Added Tax on government transactions. This was far ahead of the February1, 2020 effective date later announced by the minister of finance Zainab Ahmed.
This goes to confirm the determination of the government to raise revenue through tax. The Buhari-led administration in 2017 sought to include more Nigerians in the tax net with the launch of Voluntary Assets and Income Declaration Scheme (VAIDS).
The Scheme supported a broader tax net and generated N30.0 billion in receipts despite a target of N305.0 billion. Accordingly, the dwindling federal government’s revenue to Gross Domestic Product (GDP) only improved to 3.1 per cent in 2018 from a low of 2.3 per cent in 2017.
It is therefore hoped that the implementation of VAT at 7.5 and other far-reaching changes in Nigeria’s tax laws as contained in the Act would achieve a better result than VAIDs.
The new Finance Act
In response to calls for a total reform of the tax laws, the Nigeria Tax and Fiscal Act was presented in October 2019 to the Legislature by President Muhammadu Buhari along with the 2020 Budget. On January 13, 2020, through his Twitter handle the president announced the signing of the bill into law.
It had five strategic objectives including: promoting fiscal equity by mitigating instances of regressive taxation, reforming domestic tax laws to align with global best practices, introducing tax incentives for investment in infrastructure, supporting ongoing ease of doing business reforms and raising revenues for government, including proposal to increase the Value Added Tax from five per cent to 7.5 per cent.
Incidentally, increase in VAT emerged as the loudest, silencing about 80 other amended provisions touching various sectors of the Nigerian economy. It cuts across the companies income tax, petroleum profits tax, personal income tax, value-added tax, customs and excise duties, capital gains tax and stamp duties.
There are interesting provisions, which are further highlighted in this report. For example the new tax law provides that businesses must register for VAT filing from the commencement of business, thereby cancelling the extant six months grace period. It defines commencement of business as “the date the first transaction is carried out or first advertises products for sale or first day it delivers or receives a consignment of goods.”
VAT-exempt items have been expanded to include honey, bread, cereals, cooking oils, culinary herbs, fish, flour, starch, fruits, meat, poultry, milk, nuts, roots, salt, vegetables, water, sanitary pads, tampons, tertiary, secondary, primary and nursery tuitions. This according to experts may translate to a slight decrease in the prices of these items as VAT is added to the price of items after production.
A Tax Leader/Head of Tax and Corporate Advisory Services at PriceWaterhouseCoopers (PwC), Mr Taiwo Oyedele explains: “the most talked about VAT increase from five per cent to 7.5 per cent has an expansion of items exempted from VAT to include what the poorest and most vulnerable people would consume in terms of food items, education, healthcare etc.”
According to a Luxembourg-based statistic information service Eurostat, People living in Nigeria spend more money on food than any other country in the world. Food takes up an astonishing 58.9 per cent of Nigerians’ incomes (Kenya is 52.2 per cent, Cameroon 45.5 per cent).
Although, Eurostat put the average at close to 60 per cent, as a consumer nation where population is constantly outgrowing food supply, the poorest people (vulnerable) spend almost 80 to 120 per cent of their earnings in consumption.
The Food and Agricultural Organisation (FAO) of the United Nations even cleared every doubt around this when on Tuesday November 5, 2019, it said that 4.02 million Nigerians would be in the food crisis phase or worse off between October and December. It also stated that 5.94 million people in the country would experience food crisis between June and August 2020 if nothing was done. It is now left to the tax man to go and explain VAT to the hungry man.
This perhaps reinforces the need for not only exemption of the basic food items from the VAT increments as contained in the finance Act, but also, its enforcement.
On the other hand, any VAT increment that aligns with Adam Smith’s Four Main Canons of Taxation; Equity, Canon of Certainty, Canon of Convenience or Ease and Canon of Economy, must exclude the poorest of the poor because they are already vulnerable.
Majority of them, who cannot feed with what they earn according to Taiwo Oyedele, have to borrow or buy food on credit so that they can eat and live till tomorrow.
Therefore, as some analysts have said, tax authorities should ensure that the enforcement of this tax law is a priority to avoid a return to square one.
The Finance Act “is a good development because in 20 years, it is the first time since 1999 we are having something of this scale and size, which is focused on how to fund the budget and issues around tax and reforms and its effect on MSMEs,” Taiwo stated.
Other highlights of the Act are that: contributions to Pension and Retirement Funds, Societies and Schemes are now unconditionally tax-deductible; there is no more tax on compensations for job losses to an individual except it exceeds N10 million.
Also, contrary to the widespread belief, there is no requirement for tax identification number (TIN) to operate personal account, but refers to corporate.
The finance bill states that “Every person engaged in banking shall require that a person intending to open a bank account for the purposes of its business operations must provide a tax identification number as a precondition for opening such bank account or continued operation of a bank account.”
Nigerian companies will pay withholding tax for engaging foreign consultants with significant local economic presence.
It further provided that there is no more 15 per cent tax credit for companies that replaces obsolete machinery; dividends, rental income received by real-estate investment companies now exempt from company income tax provided 75 per cent of such income is redistributed within 12 months; all non-resident companies earning income from advertising, marketing, social media platforms etc would be subject to tax on profits realised in Nigeria; VAT will now be paid on services provided by non-resident companies.
The bill states that consumers of such services must self-remit, if VAT is not included in the invoice;
It went further to include that: minimum tax provisions has been amended to 0.5 per cent of turnover and exemption only applies to small companies (less than 25 million turnover), meaning that non-resident companies will now pay minimum tax; companies with less than N25 million annual revenue to be exempted from VAT and company income tax.
Other salient points are that; company income tax rate will be lowered from 30 per cent to 20 per cent for medium-sized companies, with revenues from 25 million to 100 million; a bonus of two per cent (medium-sized company) and 1per cent (large-sized company) will apply for early payment of company income tax; the N50 stamp duty on all inflows into accounts to apply to amounts from N10,000 and above and dividends from oil companies to be taxed .
The finance act did not close its eye to the insurance sector. Insurance companies can now carry forward tax losses indefinitely, deduct reserve for unexpired risks on time apportionment bases while special minimum tax for insurance has been abolished. Any expense incurred to earn exempt income now specifically disallowed as a deduction against other taxable income; Dividend distributed from petroleum profits now to suffer 10 per cent withholding tax.
It is therefore hoped that when the successes of VAIDS are complemented by the revenue from other tax sources especially VAT increase, Nigeria’s revenue to GDP ratio would have improved tremendously.
But there are questions: what kind and level of improvement will that amount to? Are more Nigerians encouraged and willing to pay taxes? Are the tax collectors and the payers not the same people that have under-remitted and underpaid taxes in the past?
Tax payers and collectors
No one enjoys paying tax. Yet nothing is certain but death and taxes. Tax itself is an amount of money that citizens have to pay to the government so that it can pay for public services. But there is a snag. It looks like a vicious circle of trust deficit. When the people eventually pay that little they can, government says it is too small. Perhaps, for being too small, ‘the government does not prudently apply the little taxes to paying “for public services, leaving the population resentful at all times.
Nigerians have suffered so much from decayed or no infrastructure. There are inefficient mass transit systems, lack of public housing schemes, little or no subsidised education and healthcare delivery. There is lack of power to catalyse small businesses and people do not have clean water among others.
It then looks as if government is all about bloated recurrent expenditure, embezzlement of public funds and misapplication of tax revenues. Little wonder citizens remained reluctant to pay more taxes. The government in turn continues to complain about fallen revenues and keep searching for new ways to collect even more taxes, because the law says citizens must pay taxes, and the circle of mistrust continues.
Ironically, a new survey by the Nigeria Economic Summit Group (NESG) finds that Nigerian citizens are ready to pay their taxes given proper education and expenditure transparency on the allocation and application of resources by the government. It also revealed that at every level, Nigerians do not trust the government and particularly tax officials.
The West Africa Tax Leader at PWC, Mr Taiwo Oyedele rightly hit the knell on its head when he alluded to the same issue of trust deficit. He said, “Low tax compliance results from tax complexity, crisis of trust in the government and inadequate social contract deliverables; while tax officials were constrained by inconsistent tax policies, limited resources, unrealistic targets, and inability to influence service delivery, among others.”
Citing data from the NESG’s Citizens Perceptions Report, he added that over 70 per cent of Nigerians believe that “it is not wrong to pay taxes”. This sentiment is fuelled by the issues around the social contract between the government and the citizenry. Experts also frown at taxing to embezzle, fund political empires or allow to be frittered away by corruption.
Now that the country seem to have enthroned a new tax law, should it be a case of old wine in new skin or what should the government, represented by its tax agency do? The general view is that governments at both local and federal levels should galvanise tax compliance with new initiatives that will strike the right chord with the citizenry.
In the light of the above, a Public Policy analyst, Kenneth Amaeshi insists there is a need for government-citizen engagement to drive a more sustainable culture of tax compliance in Nigeria. In an article titled ‘Tax Accountability Matters’, he argues that citizens have a very poor perception of tax accountability by the government which translates to low tax morale, even in the face of very stiff penalties for default.
He says “Although the government agencies, especially the Federal Inland Revenues Services (FIRS) have invested a lot in aggressive compliance infrastructure, there have been some minor progress; however, tax revenues are still very much sub-optimal….Tax enforcement infrastructure needs to be complemented by enhanced tax morale. Otherwise pursuing one and not the other comes across as a futile effort at clapping with one hand. Unfortunately, most governments in Africa seem to be in this trap.”
But it is instructive that with, or without the best of tax enforcement, if the generality of Nigerians are confident that their taxes will translate to tangible social amenities, there should be little incentive for tax evasion in the long run.
Leakages / untapped opportunities
More worrisome about Nigeria’s tax regime is the fact that a lot of sources that are supposed to generate much more revenues than VAT are either overlooked or not properly taxed.
For example, last year, the Socio-Economic Rights and Accountability Project (SERAP) released a report indicating that the failure of the Nigerian government to enforce Capital Gains Tax on over $8 billion (N2.8 trillion at N358/$) oil and gas assets sold to Nigerian entities fuels poverty, underdevelopment and inequality in the country. Unsurprisingly, the nation woke up to a Forbes report few weeks later which ranked Nigeria the world’s sixth most miserable country.
Also, it has been argued that when government fulfils its obligation to citizens to the point that trust is restored, there will be less tax evasion. This means that tackling tax evasion is yet another untapped opportunity. During a meeting with tax experts across the globe to chart ways of combating offshore tax evasion, Mr Tunde Fowler said Nigeria loses about $15 billion (N5.4 trillion) to tax evasion annually.
The $15 billion, when converted to naira based on N358/$ interbank market exchange rate, translates to about N5.37 trillion. This amount is already above the sum of N4.012 trillion generated by the FIRS between January and September 2019, out of the target of N8.5 trillion as provided in the Medium Term Expenditure Framework (MTEF) before the National Assembly
On the global level, Nigeria loses N580 billion through unnecessary tax incentives annually, a 2015 report by the United Nations Organisation said.
The 2017 Oxfam Inequality Index showed that the Nigerian tax system is largely regressive, with the burden of taxation falling on poorer companies and individuals.
Meanwhile, big multinationals receive questionable tax waivers and tax holidays, making use of loopholes in the tax laws to shift huge profits generated in the country to low tax jurisdictions, the report noted.
Oxfam’s Country Director, Constant Tchona, in July 2019 called on the National Assembly to enact a law that will punish enablers of tax evasion to face fines of up to 100 per cent of the sum evaded.
Still on low hanging fruits to be harnessed by the government, Mr Oyedele is worried that Nigeria is losing a lot of opportunities in the oil sector. According to him, like the Saudi Arabia’s Aramco, the Nigeria National Petroleum Corporation (NNPC) could generate over $40 billion in royalty, income tax and dividend to the nation, especially if the oil sector is diversified to the point that the country refines crude, produces fertilizers and other petrochemical products.
There are opportunities for even greater tax revenue from the energy sector. A recent report by PWC observed that additional tax revenues of about N798 billion could be realised from Electricity distribution companies.
According to the report titled “Solving the Liquidity crunch in the Nigerian Power Sector,” based on 2018 tax-to-GDP ratio of 6per cent and the estimated increase in GDP of N13.3 trillion, additional tax revenues of about N798 billion could be realised, but Discos are still unable to make profit to pay taxes. The question is when will the electricity distribution companies begin to make profits?
Suggesting that a minimum estimated revenue of N1 trillion is required by Discos to break even, PWC stated, “Discos in Nigeria continue to report losses, hence they pay only an estimated minimum tax based on turnover…instead of the 30 per cent CIT, which is higher…and would have resulted in significant tax revenues for the government.”
Other options/ recommendations
Indeed, countries including Nigeria may not have the capacity to tax every taxable citizen and utilise all available means to generate tax revenues, records show that some countries have scored above 80 per cent in efficient tax administration.
Therefore, Nigeria is expected to continue to improve in its fiscal administration systems. Perhaps the FIRS could increase VAT on luxury items to 15 per cent, and leave the rate at five or 7.5 per cent for the other items.
Wealth tax in the United States of America caused a division between Senator Bernie Sanders, former vice president Joe Biden and Senator Elizabeth Warren during the Democratic presidential primary debate on October 16, 2019. It is high time Nigeria takes this into consideration in view of its adjudged regressive tax systems as observed in the Oxfam Inequality Index.
Amid the rapid growth of inequality, there is need to impose heavy tax on the assets held by the wealthiest Nigerians to create a number of new government programs and close the wide gap between the super-rich and everyone else. This will be a shift away from more traditional tax plans that target new sources of income.
In America, 400 richest citizens said to represent only 0.00025 per cent of the population have their share of the national wealth since the early 1980s. These richest 400 Americans now own as much wealth as the bottom 60 per cent. This kind of inequality is worse in Nigeria, where crony capitalism flourishes.
Nigeria can modify Warren’s plan which calls for levying a two per cent tax on wealth above $50 million (N17.9 trillion at N358 to a dollar interbank market exchange rate) , as well as a three per cent tax on wealth above $1 billion. She has said it would raise about $2.75 trillion (N990 trillion) over 10 years, although some economists give lower estimates. Warren said she would use that money to implement a universal child-care program, tuition-free public colleges and universities, and student debt elimination for most borrowers.
In the same way, Sanders’s plan, which he says would help reduce the billionaire class in America, introduces a new one per cent wealth tax on those with assets over $32 million and then increases that rate in steps until it reaches eight per cent for those with more than $10 billion.
This is good especially in Nigeria. It will free more money for development and force some of these billionaire politicians to look inwards and seek development of the health and educational sectors where a lot of foreign exchange has been sunk, in form of foreign studies and medical tourism.
According to the FIRS, over 6,772 billionaires do not pay tax. This category of individuals have between N1billion and N5 billion in their accounts, but no Tax Identification Number (TIN) with which they can file the statutory percentage of tax returns on their income. So, in February 2019, FIRS gave the defaulting wealthy Nigerian taxpayers a 30 days lien to get their TINs. Same was extended to Nigerians and firms with a turnover of N100 million in their accounts, but not paying taxes.
Another area to look into is the ongoing global efforts to address the challenges of the digital economy in a collaborative manner. Given that the digital economy puzzle for the country is really in online transactions involving foreign companies that are not within Nigeria’s jurisdiction, Nigeria should build capacity around this to harness its full potential.
The future is online so government should encourage players in this space, not scare them away. In fact online is easier to track for tax purposes because it leaves a trail.
Contrary to the opinion held by a majority of Nigerians who have spoken against the tax proposal, experts have said the VAT on the digital economy is not double taxation. A tax expert at KPMG, Peter Nwaobi, explained that the proposed VAT on online purchases is not a double tax and there were no initial charges on purchases.
According to Nwaobi, for every online transaction, there is always a five percent VAT on each item. “Before now, for every time you get online, the merchant already charged five per cent VAT on it, either you see it on slip or not, it is there,” he said.
The tax expert further explained that the existing fee is what the FIRS is running after as majority of the funds have not been captured in the tax net.
“This idea will allow the merchant to remit the five per cent they have charged to the bank (acting (as) an agent in this instance),” he said.
A herd of experts have equally suggested that tax authorities should revisit the lopsidedness of tax collection in Nigeria. The country boasts 57 million economically active citizens, among whom only 15,000 are tax compliant. In the same manner, the former minister of finance, Kemi Adeosun once revealed that Lagos and Abuja account for 55.0 per cent and 20.0 per cent of VAT revenues respectively. This is clearly, more pressure on consumers in both cities.
Also, Cattle are about N200 billion business. Is Nigeria getting taxes from it? Is Nigeria getting appropriate taxes from the borders up north as much as it gets from the South? Is the tax regime not lopsided?
Nigeria should make the VAT refund system work so that businesses in a refund position are paid promptly, just as VAT refund falls within 30 days.
Other options are to: Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure to act as palliatives and catalyst for growth; ensure a level playing field, such that every business above the threshold is compliant, and limit arbitrary waivers to expand the VAT base.