Changing the tax system in Nigeria

Babatunde Fowler, Chairman, FIRS

It is common knowledge that our tax system in Nigeria is heavily flawed. There is a plethora of issues surrounding taxation in Nigeria but I will touch on two fundamental ones which I believe are the root causes of  Nigeria’s tax situation.

The two issues I will touch on are:

  1. Data
  2. Lack of transparency and trust

Before delving into the issues mentioned above, I will explain why paying taxes is vitally important for our economy.

Paying taxes is not only a civic duty, but also the rational thing to do if we want to move forward as a nation. From macro and micro economical points of view, paying taxes is vital to sustainable growth. Let us look at an analogy: America produces over 9mbpd of crude oil. On the other hand, Nigeria produces about 1.8mbpd, yet we are called an oil rich country. This is largely ironic because the proceeds from the sales of oil can hardly take care of our infrastructural needs.

The United States runs on tax revenues because that is the sustainable way to run an economy and not commodity sales. The IMF has interesting statistics which show that a country cannot achieve sustainable development with a tax-to-GDP ratio below 15%. Nigeria’s tax-to-GDP ratio is at a mere 6%… how depressing.

In comparison, other frontier and emerging economies in Africa such as Ghana and South Africa (which are at 20.8% and 26.9% respectively) are performing better which goes to show that we have a lot of work to do on the tax system in this country.

The benefits of tax revenue for a nation are enormous. We talk about Nigeria being one of the most difficult places to do business in the world. Well, higher tax revenues can solve that problem. How? Higher tax revenues can bring about better infrastructural development, and lower borrowing costs as we would get better credit ratings thereby making our fundamentals stronger as a nation (i.e. non dependence on oil revenues). These are just a few benefits of getting higher tax revenues in Nigeria.

Now let us analyse the issues I mentioned earlier.

Data

Availability of data is a massive issue in Nigeria. If we take a look at the composition of tax revenues in Nigeria, most of the taxes which are unpaid come from the HNI and the informal sector (i.e. self-employed individuals). We have the new initiative by the federal government called VAIDS (Voluntary Asset and Income Declaration Scheme) which in my humble opinion is noble but fundamentally flawed.

VAIDS is fundamentally flawed largely on the basis of data and technology. It is quite naïve to think that a full blooded Nigerian will just voluntarily decide to pay his backlog of taxes all because you are offering some sort of amnesty. The initiative also explains that sanctions will be taken against defaulters after the scheme is over. This is laughable seeing as there is no way to enforce those sanctions when they do not know who the tax evaders are. Why come up with VAIDS in the first place? Noble as the initiative is, it exposes a lot of structural inefficiencies in our tax system. Our tax-to-GDP ratio will always remain low if we do not increase the tax base and in order to do this, we need accurate data to work with. Who are the tax payers? How do we locate the various tax payers? How much do they actually pay? The ease of paying taxes also comes into play here.

Lack of Transparency and Trust

Lack of trust is an epidemic in my opinion. It is the reason why most people do not pay tax in Nigeria. Take the power sector for instance. The sector needs cost reflective tariffs to stay in business but are Nigerians going to pay more for power? The answer is no, because they do not trust that the discos will deliver constant power. I had a discussion with a close friend who works at one of the “big four” tax consulting firms in the country and he explained that from one client they had a tax filing of over 500million naira on just VAT. Now that is just one company out of many. Question is where does the money go? Your guess is as good as mine.

We need to fix this and the earlier we do, the better. Nigeria’s population grows every day and our revenues are not growing with it which is a massive problem.

The Solution

Fortunately, I have some solutions for our tax issues but before going into them, I must admit that they are quite unorthodox and require some high level legislation to carry out.

My main solution is simple: contract collection and disbursement of tax to a multinational company.

Contracting the collection of tax to a multinational company with a reputable brand can go a long way in helping increase our tax revenues. This way, Nigerians know that they are paying it to a pseudo government subsidiary and not the government. This multinational would be tasked with the responsibility of collecting tax in the most efficient way possible. This would have to be in a digital format. The multinational will also have the task of coming up with a data base for tax payers using bank verification numbers and other innovative means.

The practicality around this solution lies around the rent seeking behaviour of our government. Their access to the funds collected need to be limited. The multinational remits some percentage of the total tax collected to the government and then uses the bulk of the rest to build infrastructure that will bring jobs and in return, more taxes.

I also believe that institutionalizing anti-corruption practices can also go a long way in curbing pilferage in our tax system and even Nigeria as a whole. I believe a property verification number will go a long way in helping this cause.

A property verification number will work like the BVN but on properties. This way, tax evasion will be almost impossible because taxes will be paid on assets declared through this scheme.

Studies have shown that tax revenues play important roles in the economic growth of developed countries. If these solutions are implemented, Nigeria’s tax-to-GDP ratio would improve and the country would be able to achieve sustainable development.

Somto Jideonwo is writing from Lagos