As govt braces up to enforce tax payment compliance

Sanya Adejokun takes a look at the steps being taken by the Federal Government to shore up the nation’s tax to GDP ratio.

Introduction

For 15 months, a high level team worked with the Federal Ministry of Finance, undertaking a major data mining exercise. The project was called project Light House and has been able to search various databases including but not limited to Bank Verification Numbers, Corporate Affairs Commission, Nigerian Financial Intelligence Unit, Land Registry Records, Vehicle Registration Records, Immigration and Travel Records and of course mainly Whistle Blower tips to track financial outflows. The project also engaged, on retainership, one of the world’s leading asset tracing firms. Nigeria has also solicited and obtained input from various nations which have availed her with data under the many conventions and treaties that they’ve signed. The project has been able to create accurate financial profiles of many thousands of Nigerian companies and individuals which show levels of non-compliance.

At the formal launch of Voluntary Assets and Income Declaration Scheme (VAIDS) on June 29, Acting President Yemi Osinbajo said “when people pay taxes, they pay attention to what government is doing. There’s a level of social and political consciousness which people have when they pay taxes. So when people say that this is tax payers’ money that you are spending in that way, it is evident that it’s because this money is coming from their pockets that they are able to question political authority, question people who say they’re representing them and question government programmes as well. According to the Federal Inland Revenue Service, the total number of tax payers in Nigeria is just 14 million. Of this number, 96 per cent have their taxes deducted at source from their salaries under the P.A.Y.E system while just 4 per cent comply under Direct Assessment. So the vast majority of Nigerians do not pay taxes.”

This is despite the fact that an estimated 70 million Nigerians are economically active translating to just 20 percent of people engaged in one form of business or the other are registered and paying taxes.

Near sole dependence on oil revenue

Since the early 1970s, when Arab-Israeli war triggered the first oil boom, Nigeria has relied mainly on oil proceeds and less on taxes to run its own affairs. Now, reeling under the heavy burden of the longest spell of oil burst period in decades and with no prospects that prices would ever rise to their pre-mid 2014 levels again, the current administration has decided to ramp up revenues from taxes. Nigeria’s tax to GDP ratio, at just 6 per cent, is one of the lowest in the world (compared to India’s of 16 per cent, Ghana’s of 15.9 per cent, and South Africa’s of 27 per cent). Most developed nations have tax to GDP ratios of between 32 percent and 35 percent.

Whilst considerable progress has been made with taxing those in formal employment, self-employed persons, professionals and companies are able to evade full tax payment due to the inability of the tax authorities to access and assess their true income.

According to the Federal Inland Revenue Service, the total number of tax payers in Nigeria is just 14 million. Of this number, 96 percent have their taxes deducted at source from their salaries under the P.A.Y.E system while just four percent comply under Direct Assessment. This is despite the fact that an estimated 70 million Nigerians are economically active translating to just 20 percent of people engaged in one form of business or the other are registered and paying taxes.

Osinbajo observed that despite having some of Africa’s wealthiest people whose lifestyles are the subject of global admiration, only 214 Nigerians pay taxes of N20 million or more each year. He explained that a personal tax bill of N20 million implies a personal income of 80 million. He added that the group of 214 excludes many names, noting that there are so many people who can pay well over 20 million.

Another worrying observation, according to the Acting President, is that the 214 are all based in Lagos State. He continued, “There’s another figure that talks about those who pay over N10 million and that comes to 914 or so, but that number, all except two are from Lagos State, the other two are from Ogun State, which by the way is my state. To be honest about this, what we are to believe is that nobody is earning over 80 million in a year or even less than that in other states. Don’t forget that these are people who are directly assessed.”

Why VAIDS

Government decided to offer an amnesty window to allow Nigerians who may have evaded tax ignorantly or deliberately the opportunity to pay the correct taxes thus providing the much needed revenue to provide infrastructure. A number of countries including Indonesia, Italy and Argentina that have seen their tax revenue illegally moved to other nations have undertaken similar schemes to fund their national development. It will reduce the amount that government will have to borrow for essential projects and enable Nigeria to make concerted effort to upgrade essential infrastructure and spur development.

In March, the Federal Executive Council approved in principle, the implementation of a Voluntary Assets and Income Declaration Scheme (VAIDS). Although it was expected to come into effect from May, its guidelines were not concluded and issued until June 29 when with the signing of an Executive Order, Osinbajo inaugurated the nine-month scheme meant to encourage voluntary disclosure of previously undisclosed assets and income for the purpose of payment of all outstanding tax liabilities. The scheme offers a limited waiver for declaration until March, 2018.

The Scheme is expected to help expand Nigeria’s tax base and therefore improve the low tax to Gross Domestic Product [GDP] ratio currently about 6 per cent. It also seeks to curb the use of tax havens for illicit fund flow and tax avoidance. It is estimated that the Scheme would generate approximately USD1billion in tax revenues. Aside addressing tax evasion and illicit financial flows particularly by individuals, the Scheme is said to be in line with global best practices on disclosure of information and declaration of assets. A similar scheme was adopted in India resulted in the addition of over 350,000 individuals to the tax net yielding approximately US$1.2 billion. There will be collaboration with foreign governments where assets and illicit funds are likely to be held by Nigerians.

Objectives

Tax evasion is a crime punishable by imprisonment of up to five years, while the taxpayer will still be required to pay the tax due along with the associated interest and penalties. Typically, a penalty of 10 percent of the tax due is assessed along with related interest charges that accrue at 21 percent per annum commencing from the due date of the related tax charge. In some cases, the penalty is 100 percent of the tax due and further. The Scheme intends to increase Nigeria’s tax to GDP ratio from six percent to 15 percent by 2020 and from 14 million tax payers currently to 17 million.

Highlights of the Scheme

Limited Amnesty: The Scheme would grant some waivers as a reward for voluntary declaration of assets and payment of tax liabilities.

Applicable taxes: The disclosure requirements would be in respect of all taxes payable to all levels of government – federal, state and local government taxes including Companies Income Tax, Personal Income Tax, Petroleum Profits Tax, Capital Gains Tax, Stamp Duties, Tertiary Education Tax and Technology Tax.

Non declaration: Any taxpayer who fails to embrace the voluntary disclosure Scheme will be investigated and if found culpable will be prosecuted in addition to full payment of tax due including penalty and interest.

Government will leverage on various international agreements including the recently ratified Convention on Mutual Administrative Assistance in Tax Matters which has been signed by over 100 countries.

Implementation

VAIDS is an initiative designed to encourage voluntary disclosure of previously undisclosed assets and income for the purpose of payment of all outstanding tax liabilities.

The Scheme would be implemented by the Federal Inland Revenue Service (FIRS) in collaboration with all 36 State Internal Revenue Services and the FCT IRS.

Specifically, to:

• Increase Nigeria’s tax to GDP ratio from the current 6% to between 10% and 15%.
• Broaden the national tax base.
• Curb non-compliance with existing tax laws.
• Discourage illicit financial flows and tax evasion.

Benefits to taxpayers: 

Taxpayers who make full and honest declarations will enjoy waiver of interest and penalty, immunity from prosecution, confidentiality, exemption from tax audits for the periods covered and flexible payment of tax due.

Non declaration: 

Taxpayers who fail to participate in the Scheme will be investigated and if found culpable will be subject to criminal prosecution.

A ‘name and shame” list of tax evaders will be published.

Other matters: 

There will be sensitisation for professionals and taxpayers in general. About 7,500 Community Tax Liaison Officers (CTLO) are being recruited and trained for this purpose.

Effective July 2017, every Thursday will be declared as ‘Tax Thursday’ to focus on tax matters.

As a fall-back option, government would rely on various international conventions and multilateral agreements to obtain information required for prosecution of defaulting taxpayers or those who make false declarations.

An international forensic and asset tracing company has been engaged to support this process.

The Multilateral Instrument 

The MLI was developed as part of Action 15 of the OECD and G20’s Base Erosion and Profit Shifting (BEPS) project aiming to facilitate the swift implementation of the treaty related measures for preventing BEPS. A ratification by the National assembly will be required for the MLI to take effect in Nigeria. The changes to specific double tax treaties can then take effect for treaties where the treaty partner has also ratified the MLI.