Nigeria Tax System: Challenges and Opportunities - A compendium of OAU Tax Club Tax180 Presentations 08.12.2018.pdf
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About This Presentation
This document examines the challenges and opportunities within Nigeria’s tax system, focusing on revenue generation, tax base expansion, and compliance. It discusses the impact of technology on tax administration, highlighting areas such as e-filing, e-assessment, and data analytics. The document ...
Slide Content
Tax180OAUTax
Club
Presentationby
Dr.JoshBamfo
Club
Presentationby
Dr.JoshBamfo
AssessingthePotentialImpact
oftheRevisedTPRegulations
onTaxCompliance&the
Economy
oftheRevisedTPRegulations
onTaxCompliance&the
Economy
Background
Entity A
Country A
Entity B
Country B
Tangibles
Intangibles
Services
Loans
Optimize effective tax rate
Maximize tax payments in their jurisdictions
Appropriate Allocation of
Deductions and Income
INTERCOMPANY TRANSACTIONS
REGULATIONS
OBJECTIVE OF TAX AUTHORITES
OBJECTIVE OF THE TAXPAYER
TransferPricingandtheArm’sLength
Principle
Country A
Entity B
Country B
Tangibles
Intangibles
Services
Loans
Optimize effective tax rate
Maximize tax payments in their jurisdictions
Appropriate Allocation of
Deductions and Income
INTERCOMPANY TRANSACTIONS
REGULATIONS
OBJECTIVE OF TAX AUTHORITES
OBJECTIVE OF THE TAXPAYER
TransferPricingandtheArm’sLength
Principle
Transfer pricing planning opportunity
Parent
(Country A)
Sub
(Country B)Consolidated
Total profit reported on tax return 700 300 1,000
Tax rate 40% 10%
Tax liability before change to transfer price280 30 310
Global effective tax rate (ETR) 31%
Effect of transfer pricing change on ETR
Total profit after using transfer pricing to shift
400 of income
300 700 1,000
Tax rate 40% 10%
Tax liability after change to transfer price120 70 190
Global ETR 19%
EffectsofTransferPricing
Parent
(Country A)
Sub
(Country B)Consolidated
Total profit reported on tax return 700 300 1,000
Tax rate 40% 10%
Tax liability before change to transfer price280 30 310
Global effective tax rate (ETR) 31%
Effect of transfer pricing change on ETR
Total profit after using transfer pricing to shift
400 of income
300 700 1,000
Tax rate 40% 10%
Tax liability after change to transfer price120 70 190
Global ETR 19%
EffectsofTransferPricing
Exposure to double taxation
Parent
(Country A)
Sub
(Country B) Consolidated
Total profit reported on tax return 300 700 1,000
Tax rate 40% 10%
Tax liability before Country B transfer pricing
adjustment
120 70 190
Global ETR 19%
Double taxation effect on ETR
Total profit after adjustment (increase in profits)
by Country A of 400 (assumes no correlative
relief in B) 700 700 1,400
Tax rate 40% 10%
Tax liability after Country A transfer pricing
adjustment (penalties and interest not included)
280 70 350
Global ETR 35%
EffectsofTransferPricing
Parent
(Country A)
Sub
(Country B) Consolidated
Total profit reported on tax return 300 700 1,000
Tax rate 40% 10%
Tax liability before Country B transfer pricing
adjustment
120 70 190
Global ETR 19%
Double taxation effect on ETR
Total profit after adjustment (increase in profits)
by Country A of 400 (assumes no correlative
relief in B) 700 700 1,400
Tax rate 40% 10%
Tax liability after Country A transfer pricing
adjustment (penalties and interest not included)
280 70 350
Global ETR 35%
EffectsofTransferPricing
RecentDevelopments
2018Country-by-Country
ReportingRegulations
(CbCRRegulations)
2018NigeriaTP
Regulations
1
2
2018Country-by-Country
ReportingRegulations
(CbCRRegulations)
2018NigeriaTP
Regulations
1
2
RevisedTPRegulations
RevisedTPRegulations–Objectives
Protect tax base by taxing on a basis commensurate with
economic activities
Give the FIRS the tools to fight tax evasion via
TP mispricing
Reduce incidence of double
taxation
Provide level playing field for MNEs and
Domestic entities
Provide taxpayers with certainty in the treatment
of TP treatment
Protect tax base by taxing on a basis commensurate with
economic activities
Give the FIRS the tools to fight tax evasion via
TP mispricing
Reduce incidence of double
taxation
Provide level playing field for MNEs and
Domestic entities
Provide taxpayers with certainty in the treatment
of TP treatment
RevisedTPRegulations–“theGood”
Changes
.Threshold for
Maintaining
Contemporaneous
TP Documentation
Intra-group
Services
Transactions
Advance
Pricing Agreements
•No documentation requirement if value of
controlled transaction is less than₦300 million
•90 days to provide the FIRS with the
documentation if requested
•osSbaPibleG 3,bBrn,3 %e3S Ga33 G,b1lb%asn,8
benefit( non-duplicative & non-shareholder
test in addition to the appropriateness of
allocation key
•More detailed guidance on APA
•Further guidance to be provided before
commencement
Changes
.Threshold for
Maintaining
Contemporaneous
TP Documentation
Intra-group
Services
Transactions
Advance
Pricing Agreements
•No documentation requirement if value of
controlled transaction is less than₦300 million
•90 days to provide the FIRS with the
documentation if requested
•osSbaPibleG 3,bBrn,3 %e3S Ga33 G,b1lb%asn,8
benefit( non-duplicative & non-shareholder
test in addition to the appropriateness of
allocation key
•More detailed guidance on APA
•Further guidance to be provided before
commencement
RevisedTPRegulations–“theBad”Changes
(AdministrativePenalties)
S/N TP Offense Penalty
1
Failure to file TP declaration within the
specified period
₦10 million in the first instance with and₦10,000 for
every day the failure continues
2
Failure to file updated TP declaration/
notification about changes in directors
₦25,000 for each day in which the failure continues
3
Failure to file TP disclosures within the
specified period
the higher of:₦10 million or 1% percent of the value
of the controlled transaction not disclosed, and
₦10,000 for every day the failure continues
4
Incorrect disclosure of transactions the higher of:₦10 million or 1% percent of the value
of the controlled transaction incorrectly disclosed
5
Failure to file TP documentation upon requestthe higher of:₦10 million or 1% percent of the value
of all controlled transactions and₦10,000 for every
day the failure continues
6
Failure to furnish information or document
within the specified period
1% of the value of each controlled transaction for
which the information or documentation was
required and₦10,000 for every day the failure
continues
(AdministrativePenalties)
S/N TP Offense Penalty
1
Failure to file TP declaration within the
specified period
₦10 million in the first instance with and₦10,000 for
every day the failure continues
2
Failure to file updated TP declaration/
notification about changes in directors
₦25,000 for each day in which the failure continues
3
Failure to file TP disclosures within the
specified period
the higher of:₦10 million or 1% percent of the value
of the controlled transaction not disclosed, and
₦10,000 for every day the failure continues
4
Incorrect disclosure of transactions the higher of:₦10 million or 1% percent of the value
of the controlled transaction incorrectly disclosed
5
Failure to file TP documentation upon requestthe higher of:₦10 million or 1% percent of the value
of all controlled transactions and₦10,000 for every
day the failure continues
6
Failure to furnish information or document
within the specified period
1% of the value of each controlled transaction for
which the information or documentation was
required and₦10,000 for every day the failure
continues
RevisedTPRegulations–“theUgly”Changes
.Limited
Deductions
for Royalty
Payments
• Allowable deductions for royalties paid on intangibles
restricted to 5% of Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA)
Updated Safe
Harbor
Provisions
• Exemptions applicable if controlled transactions are
priced in accordance with guidelines published by the
FIRS
• No clarity on lack of harmonization between prices
approved by other governmental agencies and the
arm’s length principle
Custom
Prices vs
Arm’s Length
Principle
• The FIRS not obliged to accept related party import
prices reported for customs duty
.Limited
Deductions
for Royalty
Payments
• Allowable deductions for royalties paid on intangibles
restricted to 5% of Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA)
Updated Safe
Harbor
Provisions
• Exemptions applicable if controlled transactions are
priced in accordance with guidelines published by the
FIRS
• No clarity on lack of harmonization between prices
approved by other governmental agencies and the
arm’s length principle
Custom
Prices vs
Arm’s Length
Principle
• The FIRS not obliged to accept related party import
prices reported for customs duty
PotentialImpactofRevisedTP
RegulationsontheEconomy
RegulationsontheEconomy
PositiveImpact
HelpprotectNigeria’stax
base
Helpgenerateadditionaltax
revenue
HelpCreatejobopportunitiesin
thetaxspace
HelpprotectNigeria’stax
base
Helpgenerateadditionaltax
revenue
HelpCreatejobopportunitiesin
thetaxspace
NegativeImpact
Increasedoubletaxationrisk
FIRScoulddeterFDIsif
perceivedtobetooaggressive
AmbiguitiesintheRegulations
canleadtomoredisputes
Increasedoubletaxationrisk
FIRScoulddeterFDIsif
perceivedtobetooaggressive
AmbiguitiesintheRegulations
canleadtomoredisputes
ConcludingRemarks
Conclusion
RevisedTPRegulationswillhelpprotectthe
country’staxbase
TPisahighlycontentiousareaoftaxation
It’sgoingtocreatemorecareeropportunities
RevisedTPRegulationswillhelpprotectthe
country’staxbase
TPisahighlycontentiousareaoftaxation
It’sgoingtocreatemorecareeropportunities
8 December 2018
A Presentation by Akinwale Alao,
Senior Manager, KPMG in Nigeria
at The Tax Club, OAU, Ife
A Presentation by Akinwale Alao,
Senior Manager, KPMG in Nigeria
at The Tax Club, OAU, Ife
2
STRENGTH | INDEPENDENCE | STABILITY
Content
10
14
03
Key action steps: Government’s
responsibility
Nigeria’s tax revenue and tax
technology scorecard
Case studies: South Africa and
Brazil
STRENGTH | INDEPENDENCE | STABILITY
Content
10
14
03
Key action steps: Government’s
responsibility
Nigeria’s tax revenue and tax
technology scorecard
Case studies: South Africa and
Brazil
3
STRENGTH | INDEPENDENCE | STABILITY
Nigeria's tax
revenue and
tax technology
scorecard
STRENGTH | INDEPENDENCE | STABILITY
Nigeria's tax
revenue and
tax technology
scorecard
STRENGTH | INDEPENDENCE | STABILITY
4
Overview of tax revenue generation in Nigeria
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
2013 2014 2015 2016 2017
Revenue (Billon Naira)
Year
TAX REVENUE COLLECTED BY THE FIRS*
Budgeted Actual The 2018 budget of N 9.12 trillion
is to be funded by FG revenue of
N7.17 trillion and other sources
(largely debt).
Projected revenue comprises oil revenue (41.7%), non-oil revenue
(17.6%), tax amnesty (1.2%) and others.
Total revenue collected so far in 2018 is about 24% below budget. (CBN Q3 2018 Economic Report).
FIRS’ total tax revenue target for
2018 is about N 5 trillion.
*FIRS -Federal Inland Revenue Service
4
Overview of tax revenue generation in Nigeria
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
2013 2014 2015 2016 2017
Revenue (Billon Naira)
Year
TAX REVENUE COLLECTED BY THE FIRS*
Budgeted Actual The 2018 budget of N 9.12 trillion
is to be funded by FG revenue of
N7.17 trillion and other sources
(largely debt).
Projected revenue comprises oil revenue (41.7%), non-oil revenue
(17.6%), tax amnesty (1.2%) and others.
Total revenue collected so far in 2018 is about 24% below budget. (CBN Q3 2018 Economic Report).
FIRS’ total tax revenue target for
2018 is about N 5 trillion.
*FIRS -Federal Inland Revenue Service
5
STRENGTH | INDEPENDENCE | STABILITY
Need for increased tax revenue in Nigeria
Reduced
(and
reducing) oil
revenues
Debt
servicing
burden
Huge
infrastructure
gap and
increasing
wage bill
Recurring
budget
deficits
0.00
50.00
100.00
150.00
200.00
250.00
300.00
20132014201520162017Revenue (Billon Naira)
Year
LIRS –REVENUE STATISTICS
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
20132014201520162017
Revenue (Billon Naira)
Year
FIRS –REVENUE STATISTICS
It is critical that the FIRS and other tax
authorities meet/surpass their revenue
collection target!
STRENGTH | INDEPENDENCE | STABILITY
Need for increased tax revenue in Nigeria
Reduced
(and
reducing) oil
revenues
Debt
servicing
burden
Huge
infrastructure
gap and
increasing
wage bill
Recurring
budget
deficits
0.00
50.00
100.00
150.00
200.00
250.00
300.00
20132014201520162017Revenue (Billon Naira)
Year
LIRS –REVENUE STATISTICS
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
20132014201520162017
Revenue (Billon Naira)
Year
FIRS –REVENUE STATISTICS
It is critical that the FIRS and other tax
authorities meet/surpass their revenue
collection target!
STRENGTH | INDEPENDENCE | STABILITY
6
Technology in tax administration
Registration
and Filing
Assessment Audit
Documentation and Data Management
Data Mining and Analytics
Education
Electronic tax
registration and
submission of tax
returns
Electronic system of
documentation for
easy archiving and
retrieval of taxpayers’
information
Technologies that
analyze relationships,
patterns, behaviours
etc. as a tool to
proactively identify
tax defaulters, block
tax leakages, etc.
Online assessment
and transmission of
taxpayers’ liabilities
Enlightenment
programmes on
electronic platforms,
online library for tax
literature and
materials etc.
An end- to-end
electronic audit process
6
Technology in tax administration
Registration
and Filing
Assessment Audit
Documentation and Data Management
Data Mining and Analytics
Education
Electronic tax
registration and
submission of tax
returns
Electronic system of
documentation for
easy archiving and
retrieval of taxpayers’
information
Technologies that
analyze relationships,
patterns, behaviours
etc. as a tool to
proactively identify
tax defaulters, block
tax leakages, etc.
Online assessment
and transmission of
taxpayers’ liabilities
Enlightenment
programmes on
electronic platforms,
online library for tax
literature and
materials etc.
An end- to-end
electronic audit process
STRENGTH | INDEPENDENCE | STABILITY
Nigeria’s Scorecard
Parameter Ranking/Rate PercentageRemarks
World Bank's Ease of Doing Business
2018 Index
146 out of 190 countries 23% Very Poor
Paying Taxes 2018 Index 171 out of 190 countries 10% Very Poor
Tax Collected by FIRS as a Percentage of
GDP in2017
6% (thelowest among sub- Saharan African
countries)
Very Poor
2017 Tax CollectionCost to Revenue Ratio2.49% Good
Parameter FIRS RIRS LIRS OGIRS Others
e-Registrationand filing 35% 35% 35% 25% 10%?
e-Documentation& data management 30% 20% 25% 20% 10%?
e-Education 35% 25% 30% 25% 5%?
Data mining & analytics 30% 10% 20% 10% 5%?
e-Assessment 0% 0% 0% 0% 0%?
e-Audit 5% 5% 5% 5% 5%?
7
Nigeria’s Scorecard
Parameter Ranking/Rate PercentageRemarks
World Bank's Ease of Doing Business
2018 Index
146 out of 190 countries 23% Very Poor
Paying Taxes 2018 Index 171 out of 190 countries 10% Very Poor
Tax Collected by FIRS as a Percentage of
GDP in2017
6% (thelowest among sub- Saharan African
countries)
Very Poor
2017 Tax CollectionCost to Revenue Ratio2.49% Good
Parameter FIRS RIRS LIRS OGIRS Others
e-Registrationand filing 35% 35% 35% 25% 10%?
e-Documentation& data management 30% 20% 25% 20% 10%?
e-Education 35% 25% 30% 25% 5%?
Data mining & analytics 30% 10% 20% 10% 5%?
e-Assessment 0% 0% 0% 0% 0%?
e-Audit 5% 5% 5% 5% 5%?
7
8STRENGTH | INDEPENDENCE | STABILITY
Gaps and remedies
RemediesGaps
Limited internet access
Limited IT knowledge and poor awareness of
tax authorities’ IT intiativesamong citizens
Power outages and system failures
Poor work ethic and/or non- IT savviness of
some tax officials
Inadequate IT infrastructure
Obsolete tax legislation
Increased internet penetration
Enlightenmentprogrammes for taxpayers
Drive investment in electricity. Explore
alternative power sources in the short term
Continuouseffective training, motivation and
evaluation
Comprehensivetaxreforms
Procurement/deployment of robust IT
infrastructure
Gaps and remedies
RemediesGaps
Limited internet access
Limited IT knowledge and poor awareness of
tax authorities’ IT intiativesamong citizens
Power outages and system failures
Poor work ethic and/or non- IT savviness of
some tax officials
Inadequate IT infrastructure
Obsolete tax legislation
Increased internet penetration
Enlightenmentprogrammes for taxpayers
Drive investment in electricity. Explore
alternative power sources in the short term
Continuouseffective training, motivation and
evaluation
Comprehensivetaxreforms
Procurement/deployment of robust IT
infrastructure
STRENGTH | INDEPENDENCE | STABILITY
Benefits of technology in tax administration
Increased
tax base
Increased
voluntary
compliance
level of
taxpayers
Efficient tax
administration
Reduced
bureaucracy
and
corruption
Increased
tax revenue
Increased
global
competitive-
ness
9
Benefits of technology in tax administration
Increased
tax base
Increased
voluntary
compliance
level of
taxpayers
Efficient tax
administration
Reduced
bureaucracy
and
corruption
Increased
tax revenue
Increased
global
competitive-
ness
9
10
STRENGTH | INDEPENDENCE | STABILITY
Case
studies:
South Africa
and Brazil
STRENGTH | INDEPENDENCE | STABILITY
Case
studies:
South Africa
and Brazil
11
STRENGTH | INDEPENDENCE | STABILITY
Tax Technology – the South African story
Results
oIncreased level of tax compliance
oIncreased administrative
effectiveness (<1% cost to
revenue ratio)
oHighly efficient tax
administration (returns and
refunds are processed and paid
within a few days)
oAverage year-on-year increase in
tax revenue of about 8%
oSustained relatively high tax-to-
GDP ratio (28.6% -2016)
http://www.oecd.org/tax/tax- policy/global-revenue- statistics-database.htm
Commenced modernization in 2007
Advanced phase: Implementation of risk-based assessment systems, etc.
Current status: Continued drive for effectiveness, almost 100% electronic returns processing, and data analytics capacity building
Early phase: Focus on improving income tax assessment process
11
STRENGTH | INDEPENDENCE | STABILITY
Tax Technology – the South African story
Results
oIncreased level of tax compliance
oIncreased administrative
effectiveness (<1% cost to
revenue ratio)
oHighly efficient tax
administration (returns and
refunds are processed and paid
within a few days)
oAverage year-on-year increase in
tax revenue of about 8%
oSustained relatively high tax-to-
GDP ratio (28.6% -2016)
http://www.oecd.org/tax/tax- policy/global-revenue- statistics-database.htm
Commenced modernization in 2007
Advanced phase: Implementation of risk-based assessment systems, etc.
Current status: Continued drive for effectiveness, almost 100% electronic returns processing, and data analytics capacity building
Early phase: Focus on improving income tax assessment process
11
12
STRENGTH | INDEPENDENCE | STABILITY
Technology-driven reforms Results
oThe Public Digital Bookkeeping System
(SPED) was implemented in 2008.
oAmongst other reforms, SPED led to the
electronic filing of information with the tax
authorities.
oIntroduction of e-invoicing system where
taxpayers issue invoices to all their
customers electronically.
oAs a result, the tax authority has access to
all transactions between taxpayers.
oData analytics training for tax auditors.
oHigher revenue due to over 100%
increase in tax assessments
oIncrease in average tax assessment
amount
oFewer tax auditors are effectively
auditing more taxpayers
oIncreased audit efficiency
oCorruption level during audit has
declined significantly
oSustained high tax-to-GDP ratio of
about 32.2% (2016)
Tax technology – Brazil’s path to progress
STRENGTH | INDEPENDENCE | STABILITY
Technology-driven reforms Results
oThe Public Digital Bookkeeping System
(SPED) was implemented in 2008.
oAmongst other reforms, SPED led to the
electronic filing of information with the tax
authorities.
oIntroduction of e-invoicing system where
taxpayers issue invoices to all their
customers electronically.
oAs a result, the tax authority has access to
all transactions between taxpayers.
oData analytics training for tax auditors.
oHigher revenue due to over 100%
increase in tax assessments
oIncrease in average tax assessment
amount
oFewer tax auditors are effectively
auditing more taxpayers
oIncreased audit efficiency
oCorruption level during audit has
declined significantly
oSustained high tax-to-GDP ratio of
about 32.2% (2016)
Tax technology – Brazil’s path to progress
13
STRENGTH | INDEPENDENCE | STABILITY
Key action
steps:
Government’s
responsibility
STRENGTH | INDEPENDENCE | STABILITY
Key action
steps:
Government’s
responsibility
STRENGTH | INDEPENDENCE | STABILITY
14STRENGTH | INDEPENDENCE | STABILITY
Key action steps for government/tax authorities
01
Drive investment in electricity (especially
renewable energy) and p rocure/deploy
robust IT infrastructure
Employ IT experts and train revenue officials
Use tax revenue judiciously
Carry out comprehensive tax reforms and
introduce privacy laws
Integrate databases of government MDAs, leverage
information domiciled with financial institutions, etc.
and use data mining and analytics tools effectively
02
03
04
05
14STRENGTH | INDEPENDENCE | STABILITY
Key action steps for government/tax authorities
01
Drive investment in electricity (especially
renewable energy) and p rocure/deploy
robust IT infrastructure
Employ IT experts and train revenue officials
Use tax revenue judiciously
Carry out comprehensive tax reforms and
introduce privacy laws
Integrate databases of government MDAs, leverage
information domiciled with financial institutions, etc.
and use data mining and analytics tools effectively
02
03
04
05
STRENGTH | INDEPENDENCE | STABILITY
15STRENGTH | INDEPENDENCE | STABILITY
Questions & Comments
15STRENGTH | INDEPENDENCE | STABILITY
Questions & Comments
STRENGTH | INDEPENDENCE | STABILITY
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
© 2018 KPMG Advisory Services, a partnership registered in Nigeria and member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printedin
Nigeria.
Akinwale Alao
Senior Manager,
Tax, Regulatory & People Services
KPMG in Nigeria
Tel: +234- 1-280-5318 / +234- 808-718-3030
Email: [email protected]
Twitter: @King_Wales
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
© 2018 KPMG Advisory Services, a partnership registered in Nigeria and member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printedin
Nigeria.
Akinwale Alao
Senior Manager,
Tax, Regulatory & People Services
KPMG in Nigeria
Tel: +234- 1-280-5318 / +234- 808-718-3030
Email: [email protected]
Twitter: @King_Wales
2
+
NIGERIA’STAX
REVENUE:
U C H E C H U K W U O N Y E G I D E
2
+
NIGERIA’S TAX REVENUE:
EXPANDINGTHE
NIGERIANTAXPAYERS’
BASE
+
NIGERIA’STAX
REVENUE:
U C H E C H U K W U O N Y E G I D E
2
+
NIGERIA’S TAX REVENUE:
EXPANDINGTHE
NIGERIANTAXPAYERS’
BASE
PRESENTATION
OUTLINE
INTRODUCTION
1
TAXPAYER
BASE GROWTH
CHART
2
CHALLENGES
ENCOUNTERED 5
EFFORTS MADE
4
3
EFFECT ON
REVENUE
OUR
RECOMMENDATIONS
6
OUTLINE
INTRODUCTION
1
TAXPAYER
BASE GROWTH
CHART
2
CHALLENGES
ENCOUNTERED 5
EFFORTS MADE
4
3
EFFECT ON
REVENUE
OUR
RECOMMENDATIONS
6
INTRODUCTION
Taxes are a critical source of revenue generation for any country.
Nigeria’s tax revenue generation within the 20
th
century focused on
few visible or self-compliant companies.
Expansion of the taxpayer’s base is key to achieving the ever
increasing tax revenue budget of Nigeria.
FIRS recently announced that the taxpayer base in Nigeria is set to
hit 33 million (19 million as at May 2018), a commendable ~74%
increase.
The tax-to-GDP ratio has remained static around 6% despite the
reported tax revenue increase by the FIRS.
Nigeria's GDP stood at₦16.58 trillion in Q3 2018, while the total tax
revenue was₦1.3 trillion in the same quarter.
Taxes are a critical source of revenue generation for any country.
Nigeria’s tax revenue generation within the 20
th
century focused on
few visible or self-compliant companies.
Expansion of the taxpayer’s base is key to achieving the ever
increasing tax revenue budget of Nigeria.
FIRS recently announced that the taxpayer base in Nigeria is set to
hit 33 million (19 million as at May 2018), a commendable ~74%
increase.
The tax-to-GDP ratio has remained static around 6% despite the
reported tax revenue increase by the FIRS.
Nigeria's GDP stood at₦16.58 trillion in Q3 2018, while the total tax
revenue was₦1.3 trillion in the same quarter.
TAXPAYERS’BASE
TREND
Data Source: NBS
Years
2015 2016 2017 May-18 *Nov- Dec 2018
Population in millions
0
5
10
15
20
25
30
35
40
TREND
Data Source: NBS
Years
2015 2016 2017 May-18 *Nov- Dec 2018
Population in millions
0
5
10
15
20
25
30
35
40
EFFECTON
REVENUE
YEARS
2015 2016 2017
AMOUNT IN TRILLION
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
REVENUE
YEARS
2015 2016 2017
AMOUNT IN TRILLION
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
CRITICAL
CONCERNS
❑TaxEvasion
❑UndergroundEconomy
❑Corruption
❑AmbiguousTaxLaws
❑DataAvailability
❑RegulatoryChallenges
❑StructuralChallenges
❑PoorTaxAdministration
❑KnowledgeGap
CONCERNS
❑TaxEvasion
❑UndergroundEconomy
❑Corruption
❑AmbiguousTaxLaws
❑DataAvailability
❑RegulatoryChallenges
❑StructuralChallenges
❑PoorTaxAdministration
❑KnowledgeGap
EXISTING
INITIATIVES
❑FIRS’ Integrated Tax Administration System
(ITAS).
❑Government Integrated Financial Management
Information System (GIFMIS)
❑Unique Tax Identification Numbers
❑Consolidation of the JTB database with the
Nigeria Interbank Settlement System (NIBSS)
❑Voluntary Assets Income Declaration Scheme
❑Voluntary Offshore Assets Regularization Scheme
(VOARS)
❑Integrated Stamp Duties Services (ISDS) portal
❑Inter-agency Collaboration (FRSC, CAC) etc
INITIATIVES
❑FIRS’ Integrated Tax Administration System
(ITAS).
❑Government Integrated Financial Management
Information System (GIFMIS)
❑Unique Tax Identification Numbers
❑Consolidation of the JTB database with the
Nigeria Interbank Settlement System (NIBSS)
❑Voluntary Assets Income Declaration Scheme
❑Voluntary Offshore Assets Regularization Scheme
(VOARS)
❑Integrated Stamp Duties Services (ISDS) portal
❑Inter-agency Collaboration (FRSC, CAC) etc
SUGGESTIONS/
RECOMMENDATIONS
❑SensitizetheUnorganisedInformalSector.
❑Fullyintegratethedatabaseofall
responsibleagencies.
❑Maketaxregistration,declarationandfiling
aseasyasABC.
❑Continuouslytraintaxofficials.
❑Bridgetheknowledgegap.
❑Matchtaxcollectionwithinfrastructural
development.
❑IntegratedReporting
❑Act as a partner with taxpayers and not just
taxcollectors
RECOMMENDATIONS
❑SensitizetheUnorganisedInformalSector.
❑Fullyintegratethedatabaseofall
responsibleagencies.
❑Maketaxregistration,declarationandfiling
aseasyasABC.
❑Continuouslytraintaxofficials.
❑Bridgetheknowledgegap.
❑Matchtaxcollectionwithinfrastructural
development.
❑IntegratedReporting
❑Act as a partner with taxpayers and not just
taxcollectors
THANK
YOU!
YOU!
TRANSACTION
TAX
TAX
2
TABLEOFCONTENTS
WhatisTransactiontax?
Thegoals
Problems
Solution
Application
1
2
3
4
5
TABLEOFCONTENTS
WhatisTransactiontax?
Thegoals
Problems
Solution
Application
1
2
3
4
5
3
WHATISTRANSACTIONTAX?
Transaction tax
These are taxes imposed by government on
financial transactions.
Examples
•Sales Tax
•Withholding Tax
•Value Added Tax
WHATISTRANSACTIONTAX?
Transaction tax
These are taxes imposed by government on
financial transactions.
Examples
•Sales Tax
•Withholding Tax
•Value Added Tax
4
THEGOAL
1
2
Expanding Tax Base
Reducing Cost of
doing Business.
3
Efficiently Utilizing
the Revenue
Generated to extend
social benefits.
THEGOAL
1
2
Expanding Tax Base
Reducing Cost of
doing Business.
3
Efficiently Utilizing
the Revenue
Generated to extend
social benefits.
5
RECENTSTATISTICS
03
02
01
In 2017, VAT contributed about 24% of
the total tax revenue for the year. The
value being about 4 trillion Naira.
There are only 2.5 million companies
registered to pay tax out of the 30 million
on the Corporate Affairs Commission List.
2.5, 8%
30, 92%
CorporateTaxCompliance
Index
FIRS registeredCAC registered
The Manufacturing sector generated
the highest amount of VAT revenue at
119billion while the mining sector
contributed the least at 168 million
Naira
Total Ist
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
0
200
400
600
800
1000
1200
Valu AddedTax
Valu AddedTax
RECENTSTATISTICS
03
02
01
In 2017, VAT contributed about 24% of
the total tax revenue for the year. The
value being about 4 trillion Naira.
There are only 2.5 million companies
registered to pay tax out of the 30 million
on the Corporate Affairs Commission List.
2.5, 8%
30, 92%
CorporateTaxCompliance
Index
FIRS registeredCAC registered
The Manufacturing sector generated
the highest amount of VAT revenue at
119billion while the mining sector
contributed the least at 168 million
Naira
Total Ist
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
0
200
400
600
800
1000
1200
Valu AddedTax
Valu AddedTax
6
PROBLEMS
•Administrative inefficiency
•Poor Penalties
•Low tax morale/compliance
•Restriction on use of I.T
•Poor Awareness
200220042006200820102012201320162018
0
1
2
3
4
5
6
7
Nigeria’s Tax-to-GDP ratio 6%
Tax-to-GDP ratio
Ghana – 18%
Egypt – 18%
Morocco – 22%
S/Africa – 27%
PROBLEMS
•Administrative inefficiency
•Poor Penalties
•Low tax morale/compliance
•Restriction on use of I.T
•Poor Awareness
200220042006200820102012201320162018
0
1
2
3
4
5
6
7
Nigeria’s Tax-to-GDP ratio 6%
Tax-to-GDP ratio
Ghana – 18%
Egypt – 18%
Morocco – 22%
S/Africa – 27%
7
P.E.T
Changes in Government policy
direction
Strategic and Market focused
enlightenment
Increase administrative efficiency
and widen the tax net
0
1
2
3
4
5
POLICY
ENLIGHTENMENT
TECHNOLOGY
P.E.T
Changes in Government policy
direction
Strategic and Market focused
enlightenment
Increase administrative efficiency
and widen the tax net
0
1
2
3
4
5
POLICY
ENLIGHTENMENT
TECHNOLOGY
8
POLICY
•Nigeria has a very low VAT rate this
should be increased.
•Flexible and Higher VAT for
luxuries
INCREASE & FLEXIBILITY
•Partnership between the CAC and
the FIRS
•This will increase the tax database
and allow for ease of
administration
COLLABORATION
•An inclusion of the concept of
reverse charge in our VAT Act.
•Allow real-time processing of tax
liability. By plugging into company’s
systems to track their transactions
AMENDMENT OF LAWS
VAT AMNESTY
I
R
V
C
•VAT amnesty SME’s for the first 5 years
of operation
•Relieves the cost of doing business
and in the long run increases the tax
base
POLICY
•Nigeria has a very low VAT rate this
should be increased.
•Flexible and Higher VAT for
luxuries
INCREASE & FLEXIBILITY
•Partnership between the CAC and
the FIRS
•This will increase the tax database
and allow for ease of
administration
COLLABORATION
•An inclusion of the concept of
reverse charge in our VAT Act.
•Allow real-time processing of tax
liability. By plugging into company’s
systems to track their transactions
AMENDMENT OF LAWS
VAT AMNESTY
I
R
V
C
•VAT amnesty SME’s for the first 5 years
of operation
•Relieves the cost of doing business
and in the long run increases the tax
base
9
ENLIGHTENMENT
5.
Increased tax
base and revenue
TAX PAYERS
REGISTERED
COMPANIES
C.A.C
PARTNERSHIP
F.I.R.S
UNREGISTERED
COMPANIES
ENLIGHTENMENT
5.
Increased tax
base and revenue
TAX PAYERS
REGISTERED
COMPANIES
C.A.C
PARTNERSHIP
F.I.R.S
UNREGISTERED
COMPANIES
10
TECHNOLOGY
FIRS
e-Registration
(TIN)
e-Stamp
Duties
e-Filing
e-TCC
e-Receipt
e-Tax Payment
Help Desk
•
INFORMATION SHARING
FIRSTHEPACESETTERS
E-VAT CREDIT NOTES
DATABASE SECURITY
PROPER MAILING SYSTEM
TECHNOLOGY
FIRS
e-Registration
(TIN)
e-Stamp
Duties
e-Filing
e-TCC
e-Receipt
e-Tax Payment
Help Desk
•
INFORMATION SHARING
FIRSTHEPACESETTERS
E-VAT CREDIT NOTES
DATABASE SECURITY
PROPER MAILING SYSTEM
11
APPLICATION
1.
Targets the
Right Market 3.
Policy Reforms
5.
Use of
Technology
2.
Increases
Engagement
4.
Ease of
doing
Business
6.
Turn of
events in 5
years
APPLICATION
1.
Targets the
Right Market 3.
Policy Reforms
5.
Use of
Technology
2.
Increases
Engagement
4.
Ease of
doing
Business
6.
Turn of
events in 5
years
12
THANKYOU
THANKYOU
THANKYOU
THANKYOU
1
The
FutureGold
Olamide Obajimi
The
FutureGold
Olamide Obajimi
2
Outline
The Past The Present The Future
Outline
The Past The Present The Future
3
Nigeria is the seventh largest country in the
world and the most populous in Africa.
Unemployment rate at 18.8% (Q$ 2016),
compared to global average of 10%
The literacy level is estimated to be 59.6%
(male - 69.2% and female – 49.7%)
Tax to GDP Ratio at 6%
GPD
Nigeria discovered oil in 1956. Nigeria currently
ranks 1st in Africa and 6th globally in the export
of crude oil
The oil industry currently contributes about
70% to government revenue and 90% to foreign
exchange needs
The US, fracking technologies have enhanced
the ability to produce oil out of shale deposits –
shale oil. Oil prices are therefore expected to
fall in the long term
Nigeria will have to look for more sustainable
sources of revenue
The future of electric cars and renewable
energy will reduced the need for oil in the
global market
Nigeria
Reliance on Oil
Nigeria is the seventh largest country in the
world and the most populous in Africa.
Unemployment rate at 18.8% (Q$ 2016),
compared to global average of 10%
The literacy level is estimated to be 59.6%
(male - 69.2% and female – 49.7%)
Tax to GDP Ratio at 6%
GPD
Nigeria discovered oil in 1956. Nigeria currently
ranks 1st in Africa and 6th globally in the export
of crude oil
The oil industry currently contributes about
70% to government revenue and 90% to foreign
exchange needs
The US, fracking technologies have enhanced
the ability to produce oil out of shale deposits –
shale oil. Oil prices are therefore expected to
fall in the long term
Nigeria will have to look for more sustainable
sources of revenue
The future of electric cars and renewable
energy will reduced the need for oil in the
global market
Nigeria
Reliance on Oil
4
36
Let’s take a look at some
Tax Stats of Nigeria
TaxPaymentandComplianceinNigeria
States
plus FCT
36
Tiers of
Government
Federal
State
Local
180
Million Total Population
80.7
Million Total Workforce
13.4
Million Tax Payers
17%
Only214
- Number of Active
Taxpayers with over
N20M Tax Orders
Lessthan20%VAT Compliance Rate
6%-Lowest Tax Revenue to GDP Ratio in the African Region (2016)
36
Let’s take a look at some
Tax Stats of Nigeria
TaxPaymentandComplianceinNigeria
States
plus FCT
36
Tiers of
Government
Federal
State
Local
180
Million Total Population
80.7
Million Total Workforce
13.4
Million Tax Payers
17%
Only214
- Number of Active
Taxpayers with over
N20M Tax Orders
Lessthan20%VAT Compliance Rate
6%-Lowest Tax Revenue to GDP Ratio in the African Region (2016)
5
TaxPaymentandCompliance
How does Nigeria compare with other Countries?
TaxPaymentandCompliance
How does Nigeria compare with other Countries?
6
TaxPaymentandCompliance
Nigeria’s Revenue from
Tax seems to be declining
TaxPaymentandCompliance
Nigeria’s Revenue from
Tax seems to be declining
7
TaxPaymentandCompliance
Countries with most natural
resources Tax to GDP ratio %
Countries with least natural
resources Tax to GDP ratio %
Countires with best
infrastructure Tax to GDP ratio %
China 20.1 Vatican City N/A Hongkong 13
Saudi Arabia 5.3 Costarica 21 Singapore 14.2
Canada 31.7 Switzerland 27.8 Netherland 39.8
India 16.8 Belgium 47.9 UAE 1.4
Russia 19.5 Taiwan N/A Japan 35.9
Brazil 34.4 Japan 35.9 Switzerland 27.8
USA 26 Hongkong 13 Germany 44.5
Venezuela 25 Jaymayen N/A France 47.9
DR Congo 5.9 Singapore 14.2 UK 34.4
Australia 27.8 Gilbraltar N/A Spain 37.3
TaxPaymentandCompliance
Countries with most natural
resources Tax to GDP ratio %
Countries with least natural
resources Tax to GDP ratio %
Countires with best
infrastructure Tax to GDP ratio %
China 20.1 Vatican City N/A Hongkong 13
Saudi Arabia 5.3 Costarica 21 Singapore 14.2
Canada 31.7 Switzerland 27.8 Netherland 39.8
India 16.8 Belgium 47.9 UAE 1.4
Russia 19.5 Taiwan N/A Japan 35.9
Brazil 34.4 Japan 35.9 Switzerland 27.8
USA 26 Hongkong 13 Germany 44.5
Venezuela 25 Jaymayen N/A France 47.9
DR Congo 5.9 Singapore 14.2 UK 34.4
Australia 27.8 Gilbraltar N/A Spain 37.3
8
OurFuture
Business friendly policies
Review of tax laws and
tax incentives
Professionalism in tax administration
Corruption free government
OurFuture
Business friendly policies
Review of tax laws and
tax incentives
Professionalism in tax administration
Corruption free government
9
OurFuture
Need for Improvement
High Unemployment
Import-dependent Economy
Poor Infrastructure
Unreliable power supply
Low Access to Quality
Healthcare
High violent Crime Rate
Corruption
High Inflation Rate
The Past
Dividends of Taxation for Nigeria
Income redistribution - re-channeling of
resource to areas of need
Fund accumulation for infrastructure
development
Effective for administering subsidies
Effective for changing consumption
patterns
The Future
OurFuture
Need for Improvement
High Unemployment
Import-dependent Economy
Poor Infrastructure
Unreliable power supply
Low Access to Quality
Healthcare
High violent Crime Rate
Corruption
High Inflation Rate
The Past
Dividends of Taxation for Nigeria
Income redistribution - re-channeling of
resource to areas of need
Fund accumulation for infrastructure
development
Effective for administering subsidies
Effective for changing consumption
patterns
The Future
10
PERSONAL TAX,
REVENUE
GENERATION AND
ECONOMIC
GROWTH IN OSUN
STATE
REVENUE
GENERATION AND
ECONOMIC
GROWTH IN OSUN
STATE
CONTENT
▪INTRODUTION
▪OSUN STATE IN PERSPECTIVE
▪COMPARATIVE ADVANTAGE
▪TAP; THE ACTION PLAN
▪ALTERNATIVE SOURCE
▪THE REVAMPED OSUN
2
▪INTRODUTION
▪OSUN STATE IN PERSPECTIVE
▪COMPARATIVE ADVANTAGE
▪TAP; THE ACTION PLAN
▪ALTERNATIVE SOURCE
▪THE REVAMPED OSUN
2
INTRODUCTION
What is PIT?
-PIT is an acronym for
Personal Income tax
-It is tax levied on income of
individuals as prescribed
under the Personal Income
Tax Act
-These include salary, wage,
fee, allowance, emoluments,
compensations and other
gains and profits
3
What is PIT?
-PIT is an acronym for
Personal Income tax
-It is tax levied on income of
individuals as prescribed
under the Personal Income
Tax Act
-These include salary, wage,
fee, allowance, emoluments,
compensations and other
gains and profits
3
Personal Income Tax Act ;
▪identifies taxable persons,
▪established assessable income,
▪proceeds to tax such income,
▪establishes the residence of the tax payer and
▪the source of origin of his or her income
4
▪identifies taxable persons,
▪established assessable income,
▪proceeds to tax such income,
▪establishes the residence of the tax payer and
▪the source of origin of his or her income
4
▪Pay As You Earn (PAYE)
▪Self Assessment
5
TYPES OF PERSONAL INCOME TAX
▪Self Assessment
5
TYPES OF PERSONAL INCOME TAX
-HEAVY DEBT BURDEN
According to the NBS December2017 report,
Osun state has a total domestic debt of
147,069,973,626.49Naira and an external debt of
$93,347,432.73
OSUN STATE IN PERSPECTIVE
6
According to the NBS December2017 report,
Osun state has a total domestic debt of
147,069,973,626.49Naira and an external debt of
$93,347,432.73
OSUN STATE IN PERSPECTIVE
6
-LOW INTERNALLY GENERATED REVENUE
(IGR)
In 2017, Osun state generated 13 billion naira
and according to the former governor of Osun
state, The state needs to generate 10 billion naira
a month to sufficiently sustain itself.
OSUN STATE IN PERSPECTIVE
7
(IGR)
In 2017, Osun state generated 13 billion naira
and according to the former governor of Osun
state, The state needs to generate 10 billion naira
a month to sufficiently sustain itself.
OSUN STATE IN PERSPECTIVE
7
-TAX APATHY
OIRS closed down OAU on May 2 over alleged
1,800,000,000 naira tax debt to
the state government.
The daily post reported that OAU allegedly
removed the seals of OIRS placed at the entrance
of the institution and other parts of the University
OSUN STATE IN PERSPECTIVE
8
OIRS closed down OAU on May 2 over alleged
1,800,000,000 naira tax debt to
the state government.
The daily post reported that OAU allegedly
removed the seals of OIRS placed at the entrance
of the institution and other parts of the University
OSUN STATE IN PERSPECTIVE
8
“
Taxation is
the price we
pay for
civilization.
Oliver Wendell Holmes
9
Taxation is
the price we
pay for
civilization.
Oliver Wendell Holmes
9
COMPARATIVE ADVANTAGE
▪Agriculture especially cultivation
and marketing of cash crops like
cocoa.
▪Tourism
10
▪Agriculture especially cultivation
and marketing of cash crops like
cocoa.
▪Tourism
10
About 60 Million active cocoa trees in 2016
11
11
State of Osun is known for it’s numerous festivals
and tourist attractions
12
and tourist attractions
12
The Action Plan (TAP)
❑The tax objectives;
-Revenue generation
-facilitating economic growth
-Bridge the gap between the rich and the
poor
13
❑The tax objectives;
-Revenue generation
-facilitating economic growth
-Bridge the gap between the rich and the
poor
13
SHORT TERM PLAN
➢Tax education and sensitization (one year)
➢Digitization of tax collection process to facilitate
tax convenience (USSD, Internet payment) in
three months (3 months)
➢Carrot and stick approach (Motivation
mechanism)
14
➢Tax education and sensitization (one year)
➢Digitization of tax collection process to facilitate
tax convenience (USSD, Internet payment) in
three months (3 months)
➢Carrot and stick approach (Motivation
mechanism)
14
LONG TERM PLAN
▪Essentially grow Small and Medium
Enterprises (SMEs).
▪How?
-FiveyeartaxbreakforSMEs
-Reviewingthecapitalrequirementsforthe
pioneerstatus
-ComparativeadvantageofCocoa
15
▪Essentially grow Small and Medium
Enterprises (SMEs).
▪How?
-FiveyeartaxbreakforSMEs
-Reviewingthecapitalrequirementsforthe
pioneerstatus
-ComparativeadvantageofCocoa
15
TOURISM (alternative source)
-Ooni’spalace
-Oluminrinwater falls
-Erin Ijeshawater falls
-Oranmiyan’sstaff
-Freedom park
-Osun river
16
-Osun -Osogbofestival
-Olojofestival, Ile-ife
-Egungunfestival
-Iwudefestival, Ijesha
-Obokunfestival
FESTIVALS TOURIST SITES
-Ooni’spalace
-Oluminrinwater falls
-Erin Ijeshawater falls
-Oranmiyan’sstaff
-Freedom park
-Osun river
16
-Osun -Osogbofestival
-Olojofestival, Ile-ife
-Egungunfestival
-Iwudefestival, Ijesha
-Obokunfestival
FESTIVALS TOURIST SITES
TOURISM contd.
17
Thesefestivalsandtouristssiteshaveattractedmillions
ofpeopleovertheyears.Forexample,between2013
and2015,atotalnumberof78,000touristsboth
indigenesandforeignersalikecametothegroove.
In2018,theOsunOsogbofestivalattracted121,000
tourists.
Thisareaisripefortaxationasanalternativesourceof
revenuegeneration.
FESTIVALS
17
Thesefestivalsandtouristssiteshaveattractedmillions
ofpeopleovertheyears.Forexample,between2013
and2015,atotalnumberof78,000touristsboth
indigenesandforeignersalikecametothegroove.
In2018,theOsunOsogbofestivalattracted121,000
tourists.
Thisareaisripefortaxationasanalternativesourceof
revenuegeneration.
FESTIVALS
THE REVAMPED OSUN IN 2030
-Osunstatestandstobenefitimmenselyfromthe
sustainabilityagricultureofferscomparedtoother
sourcesofincome.Indigeneempowermenttranslates
toincreasedrevenuegeneration.
-By2030,Nigeriacangenerateawhooping
$3,000,000,000perannumfromcocoasalesinthe
internationalmarket
-Increasednumberofbuoyantbusinessesgrownoutof
SMEsthusaddingtotherevenuebaseofthestate
18
-Osunstatestandstobenefitimmenselyfromthe
sustainabilityagricultureofferscomparedtoother
sourcesofincome.Indigeneempowermenttranslates
toincreasedrevenuegeneration.
-By2030,Nigeriacangenerateawhooping
$3,000,000,000perannumfromcocoasalesinthe
internationalmarket
-Increasednumberofbuoyantbusinessesgrownoutof
SMEsthusaddingtotherevenuebaseofthestate
18
THANKS!
19
19
The better the question. The better the answer.
The better the world works.
.
ANOVERVIEWOF
NIGERIA’SPOSITIONIN
REAPINGREVENUEFROM
INTERNATIONALTAX
The better the world works.
.
ANOVERVIEWOF
NIGERIA’SPOSITIONIN
REAPINGREVENUEFROM
INTERNATIONALTAX
Internationaltax:
Thisisthe
determinationof
taxbyalocaltax
authorityona
non-resident
entityderiving
incomeinthat
jurisdiction
Foreign
entity
operating
inanother
country
tax
payment
to
local tax
authorities
Thisisthe
determinationof
taxbyalocaltax
authorityona
non-resident
entityderiving
incomeinthat
jurisdiction
Foreign
entity
operating
inanother
country
tax
payment
to
local tax
authorities
Presentation title
Arewereally
payingtaxes?
Arewereally
payingtaxes?
Page 4
TaxgrowthinNigeriaandselectedcountries
Source: World Bank Data
NIGERIA INDONESIA THAILAND SOUTH ARFICA
TAX TO GDP
0
5
10
15
20
25
30
2005200620072008200920102011201220132016
NIGERIA
0
1
2
3
4
5
6
7
TAX GROWTH - NIGERIA
200820092010201120122013
2016
TaxgrowthinNigeriaandselectedcountries
Source: World Bank Data
NIGERIA INDONESIA THAILAND SOUTH ARFICA
TAX TO GDP
0
5
10
15
20
25
30
2005200620072008200920102011201220132016
NIGERIA
0
1
2
3
4
5
6
7
TAX GROWTH - NIGERIA
200820092010201120122013
2016
Page 5
WHATTRIGGEREDTHE
INCREASEINTAX
WHATTRIGGEREDTHE
INCREASEINTAX
Page 6
COMPANYINCOMETAX(CIT)
PREVIOUS LEGISLATIONS
►Assessment based on deemed
profit
►Introduction of the “Arms
Length” principle
►Treaties signed with other
countries to aid tax reduction,
most notably The Double
Taxation Treaty (DTT).
CURRENT LEGISLATIONS
►Infusing the OECD’s Base
Erosion and Profit Shifting
(BEPS) into Nigerian
legislation
►A shift in the Assessment of
foreign entities from “deemed
profit” to “actual profit”
►Setup of a dedicated
International Tax Department
by the FIRS tailored to suit the
peculiarity of International Tax
►Introduction of for meticulous
TP Audits and stricter TP filing
and documentation regulations
COMPANYINCOMETAX(CIT)
PREVIOUS LEGISLATIONS
►Assessment based on deemed
profit
►Introduction of the “Arms
Length” principle
►Treaties signed with other
countries to aid tax reduction,
most notably The Double
Taxation Treaty (DTT).
CURRENT LEGISLATIONS
►Infusing the OECD’s Base
Erosion and Profit Shifting
(BEPS) into Nigerian
legislation
►A shift in the Assessment of
foreign entities from “deemed
profit” to “actual profit”
►Setup of a dedicated
International Tax Department
by the FIRS tailored to suit the
peculiarity of International Tax
►Introduction of for meticulous
TP Audits and stricter TP filing
and documentation regulations
Page 7
Transferpricing–whatarethebenefits?
►TheregulationprovidedNigeriawiththetoolstofightTaxevasionandBase
erosion
►ItensuredthattheFIRSisabletotaxonanappropriatetaxablebasis.
►Morerevenueforthegovernmentaccruedthroughtaxationbasedonactual
transactions
►Governmentcan‘snoop-out’fictitioustransactions(sometransactionsare
‘falsetransactions’anddesignedforthesolepurposeofprofitshiftingandtax
evasion)
Transferpricing–whatarethebenefits?
►TheregulationprovidedNigeriawiththetoolstofightTaxevasionandBase
erosion
►ItensuredthattheFIRSisabletotaxonanappropriatetaxablebasis.
►Morerevenueforthegovernmentaccruedthroughtaxationbasedonactual
transactions
►Governmentcan‘snoop-out’fictitioustransactions(sometransactionsare
‘falsetransactions’anddesignedforthesolepurposeofprofitshiftingandtax
evasion)
Page 8
CURRENT LEGISLATION
►Recent Court cases on
the application of VAT on
invoices from non-resident
entity
PREVIOUS LEGISLATIONS
►Amendment of the VAT act to:
•Address prevailing tax loopholes
•Include more stringent penalties
►Redefinition of Import/Export to determine
taxability of such goods and services
VALUEADDEDTAX(VAT)
CURRENT LEGISLATION
►Recent Court cases on
the application of VAT on
invoices from non-resident
entity
PREVIOUS LEGISLATIONS
►Amendment of the VAT act to:
•Address prevailing tax loopholes
•Include more stringent penalties
►Redefinition of Import/Export to determine
taxability of such goods and services
VALUEADDEDTAX(VAT)
Page 9
CURRENT LEGISLATION
►Executive Order (EO 008) for the
Voluntary Offshore Assets Regularization
Scheme (VOARS) signed to ensure that
eligible persons who hold assets and
income offshore are taxed accordinglyPREVIOUS LEGISLATION
►Resident Tax based on worldwide
income i.e. taxation of income of residents
irrespective of where it was earned.
PERSONALINCOMETAX(PIT)
CURRENT LEGISLATION
►Executive Order (EO 008) for the
Voluntary Offshore Assets Regularization
Scheme (VOARS) signed to ensure that
eligible persons who hold assets and
income offshore are taxed accordinglyPREVIOUS LEGISLATION
►Resident Tax based on worldwide
income i.e. taxation of income of residents
irrespective of where it was earned.
PERSONALINCOMETAX(PIT)
Page 10
Result
Result
Page 11
NIGERIA
INDONESIA
THAILAND
SOUTH AFRICA
-40 -20 0 20 40 60 80 100
Percentage Growth in tax revenue from
2013 - 2016
Growth %
►76%
Nigeria has increased its
Tax:GDP ratio by 76%
Fiscal year (NGN’b)
2011
1,543.18
2012
1,792.31
2013
1,493.92
2014
2,260.61
2015
3,741.76
2016
3,307.49
2017
4,027.92
Result
NIGERIA
INDONESIA
THAILAND
SOUTH AFRICA
-40 -20 0 20 40 60 80 100
Percentage Growth in tax revenue from
2013 - 2016
Growth %
►76%
Nigeria has increased its
Tax:GDP ratio by 76%
Fiscal year (NGN’b)
2011
1,543.18
2012
1,792.31
2013
1,493.92
2014
2,260.61
2015
3,741.76
2016
3,307.49
2017
4,027.92
Result
Page 12
Canwego
higher?
Share
your
thoughts !
Canwego
higher?
Share
your
thoughts !
Page 13
InternationalTax:
AToolforEconomic
Integrationand
BalancedProsperity.
ApresentationbytheInternationalTax
Faculty
AToolforEconomic
Integrationand
BalancedProsperity.
ApresentationbytheInternationalTax
Faculty
TableofContent
ImportanceofInternationalTax1
StateofInternationalTaxinNigeria
(PoliciesandProcedures)2
ProblemsArising3
Recommendations5
ImportanceofInternationalTax1
StateofInternationalTaxinNigeria
(PoliciesandProcedures)2
ProblemsArising3
Recommendations5
❑International Tax is a crucial area of
revenue in several countries.
❑Swaziland made 60.9% of its tax revenue
in 2012 from international taxes. Lesotho
made 47.42% in 2013 and The Bahamas,
42.67% in 2015.
ImportanceofInternationalTax
revenue in several countries.
❑Swaziland made 60.9% of its tax revenue
in 2012 from international taxes. Lesotho
made 47.42% in 2013 and The Bahamas,
42.67% in 2015.
ImportanceofInternationalTax
❑Relevant legislations for foreign investment in Nigeria include:
Investment and Securities Act
National Office of Technology Acquisition and Promotion act.
Nigerian Investment Promotion Commission Act.
❑Foreign Direct Investment in Nigeria is poor; Recording $981.7 million dollars in FDI inflows.
South Africa records $150 billion; Egypt records $7.4 billion; Ghana records $3 billion.
❑Nigeria is also doing poorly in international taxation. Tax to GDP ratio is 6%, with less that 1%
from International Taxation.
StateofInternationalTaxinNigeria
Investment and Securities Act
National Office of Technology Acquisition and Promotion act.
Nigerian Investment Promotion Commission Act.
❑Foreign Direct Investment in Nigeria is poor; Recording $981.7 million dollars in FDI inflows.
South Africa records $150 billion; Egypt records $7.4 billion; Ghana records $3 billion.
❑Nigeria is also doing poorly in international taxation. Tax to GDP ratio is 6%, with less that 1%
from International Taxation.
StateofInternationalTaxinNigeria
Double Taxation
Transfer Pricing
Non-Resident
Companies
Digital Companies
Inadequate Regulations
ProblemsArising
Transfer Pricing
Non-Resident
Companies
Digital Companies
Inadequate Regulations
ProblemsArising
❑Nigeria has only 13 ratified DT treaties
and 9 unratified, compared to 92 in
Canada,80inIndiaand40Cyprus.
❑The process of ratifying these treaties
takestoolong(TheDTwithCanadawas
signed in 1992 but only entered into
forcein2002).
❑The US is a major trade partner with
Nigeria but we don't have a DTT with
them
DoubleTaxation
and 9 unratified, compared to 92 in
Canada,80inIndiaand40Cyprus.
❑The process of ratifying these treaties
takestoolong(TheDTwithCanadawas
signed in 1992 but only entered into
forcein2002).
❑The US is a major trade partner with
Nigeria but we don't have a DTT with
them
DoubleTaxation
❑Nigeria has over 90 million internet users; According to NBS, the
value of electronic transactions in Nigeria is 65.3 trillion naira.
❑In 2017, Paypal ranked Nigeria as the third highest mobile shopper
worldwide, with 55% of overseas online purchases come from Nigeria.
❑According to Ovum, between 2012 – 2018, OTT service providers
including Facebook would have gained 109 trillion from Nigeria
untaxed.
❑The major problem with the taxation of digital multinationals is the
vague definition and requirement of a “Fixed Base”.
❑Section 13(2) of the Nigerian Companies Income Tax Act provides
that a company can only be taxed if its profits are attributable to the
fixed base. This is very inadequate, with digital companies in
perspective
TaxationofDigitalEconomy
value of electronic transactions in Nigeria is 65.3 trillion naira.
❑In 2017, Paypal ranked Nigeria as the third highest mobile shopper
worldwide, with 55% of overseas online purchases come from Nigeria.
❑According to Ovum, between 2012 – 2018, OTT service providers
including Facebook would have gained 109 trillion from Nigeria
untaxed.
❑The major problem with the taxation of digital multinationals is the
vague definition and requirement of a “Fixed Base”.
❑Section 13(2) of the Nigerian Companies Income Tax Act provides
that a company can only be taxed if its profits are attributable to the
fixed base. This is very inadequate, with digital companies in
perspective
TaxationofDigitalEconomy
❑Transfer Pricing is the leading edge of what is wrong with international tax.
❑According to Global Financial Integrity, IFFs from Africa between 1970 and
2018 is approximately $854 billion to $1.8 trillion.
❑According to the Guardian, as of February 2018, Africa lost $80 billion to
aggressive tax avoidance schemes like Transfer Pricing.
❑Nigeria has lost 37.6B Naira on unauthorized payments to alone MTN
between 2010 and 2013.
❑Efforts have been made to address his issue; e.g. Enactment of the TP
Regulations of 2012 (Revised 2018). There are still issues however.
❑TP Regulations apply only to associated enterprises under Section 92 of
the Regulation.
❑The Arm’s Length principle is also limited as it is focused on “Market price”.
Who determines market price?
TransferPricing
❑According to Global Financial Integrity, IFFs from Africa between 1970 and
2018 is approximately $854 billion to $1.8 trillion.
❑According to the Guardian, as of February 2018, Africa lost $80 billion to
aggressive tax avoidance schemes like Transfer Pricing.
❑Nigeria has lost 37.6B Naira on unauthorized payments to alone MTN
between 2010 and 2013.
❑Efforts have been made to address his issue; e.g. Enactment of the TP
Regulations of 2012 (Revised 2018). There are still issues however.
❑TP Regulations apply only to associated enterprises under Section 92 of
the Regulation.
❑The Arm’s Length principle is also limited as it is focused on “Market price”.
Who determines market price?
TransferPricing
UnfavorableRegulationsforInvestors
❑Procedures for foreign investment are quite cumbersome, time draining and unnecessary.
S. 195(1)(b) of the ISA requires approval and authorization from relevant foreign jurisdiction.
S. 20 (2) of the NIPC imposes cumbersome requirement which much be met in 14 days
❑Lack of a unified set of regulations. Relevant procedures are scattered across too many
regulations.
❑Procedures for foreign investment are quite cumbersome, time draining and unnecessary.
S. 195(1)(b) of the ISA requires approval and authorization from relevant foreign jurisdiction.
S. 20 (2) of the NIPC imposes cumbersome requirement which much be met in 14 days
❑Lack of a unified set of regulations. Relevant procedures are scattered across too many
regulations.
NonResidentCompanies
❑Taxation, until recently used to be on deemed basis
This was problematic because deemed basis is never accurate and causes problems on both
sides
❑Later changed to actual basis but Nigeria still makes less than it should.
❑The fixed base requirement is still a hindrance here since it's not all NRCs that have a fixed
base
❑Taxation, until recently used to be on deemed basis
This was problematic because deemed basis is never accurate and causes problems on both
sides
❑Later changed to actual basis but Nigeria still makes less than it should.
❑The fixed base requirement is still a hindrance here since it's not all NRCs that have a fixed
base
Recommendations
Recommendations–TaxingtheDigitalEconomy
❑Redefinition of the “Fixed Base” concept in our law. Section 13(2) of the CITA
shouldbeamendedtoprovidethatfixedbasefordigitalcompanieswillbetheir
subscriberoruserbase,insteadofaphysicallocation.
❑VAT should also be imposed on digital services, collected and remitted by third
party intermediaries like payment platforms (Interswitch, Paga, Banks).
Colombia imposes 19% VAT on digital services collected by banks at the time
ofprocessingthetransaction.
❑Redefinition of the “Fixed Base” concept in our law. Section 13(2) of the CITA
shouldbeamendedtoprovidethatfixedbasefordigitalcompanieswillbetheir
subscriberoruserbase,insteadofaphysicallocation.
❑VAT should also be imposed on digital services, collected and remitted by third
party intermediaries like payment platforms (Interswitch, Paga, Banks).
Colombia imposes 19% VAT on digital services collected by banks at the time
ofprocessingthetransaction.
Recommendations–DoubleTaxation
❑Closer working relationship between executive and legislature for law and policy
making.
❑ThereistheneedforNigeriatoconsiderconsummatingDTTswithfamiliartrading
countriesliketheUS,Indiaetc.
❑These treaties should not only be increased in volume, but the substance of the
treatiesshouldbeassessedsoitisfavourabletoNigeria
❑Closer working relationship between executive and legislature for law and policy
making.
❑ThereistheneedforNigeriatoconsiderconsummatingDTTswithfamiliartrading
countriesliketheUS,Indiaetc.
❑These treaties should not only be increased in volume, but the substance of the
treatiesshouldbeassessedsoitisfavourabletoNigeria
Recommendations–TransferPricing
❑TPRegulationsshouldbeextendedoutsideMNCs.
❑The “Market price” of the Arm’s Length Principle should be
revised.
❑TPRegulationsshouldbeextendedoutsideMNCs.
❑The “Market price” of the Arm’s Length Principle should be
revised.
Recommendations–FavorableRegulationsforInvestors
❑ProceduresforforeigninvestmentinNigeriashouldbemadeclearer.Thiscan
be done through short guides that affords a comprehensive compilation of
rulesandprocedures.
❑Immigration hardships should also be alienated. For instance, special
categoriesofvisascanbecreatedforaliensforthepurposeofdoingbusiness
inNigeria,justlikeitisdoneintheUS.
❑ProceduresforforeigninvestmentinNigeriashouldbemadeclearer.Thiscan
be done through short guides that affords a comprehensive compilation of
rulesandprocedures.
❑Immigration hardships should also be alienated. For instance, special
categoriesofvisascanbecreatedforaliensforthepurposeofdoingbusiness
inNigeria,justlikeitisdoneintheUS.
Recommendations–AttractingmoreForeign
Investment
❑Incentivesshouldbeofferedtoforeigninvestorsasthis
❑Relaxedrestrictionsonforeigninvestments.
❑Identifyingkeyindustriesorpriorityindustriesforforeigninvestment.
❑Reduced tax for a period of time or tax exemptions for a period of time. Bonds
signedtoensurebusinessesdon'tleaveaftertheholidayperiod.
❑Investment allowances which allow a deduction from the income taxable based
on some percentage of new investment and tends to lower the price of acquiring
newcapital.
❑Throughaccelerateddepreciationandenhanceddeductionallowance
Investment
❑Incentivesshouldbeofferedtoforeigninvestorsasthis
❑Relaxedrestrictionsonforeigninvestments.
❑Identifyingkeyindustriesorpriorityindustriesforforeigninvestment.
❑Reduced tax for a period of time or tax exemptions for a period of time. Bonds
signedtoensurebusinessesdon'tleaveaftertheholidayperiod.
❑Investment allowances which allow a deduction from the income taxable based
on some percentage of new investment and tends to lower the price of acquiring
newcapital.
❑Throughaccelerateddepreciationandenhanceddeductionallowance
THANKYOU!
Page 1 of 10
Re-positioning Nigeria's tax incentive framework to accommodate a
balanced tax system
By Oluseye Arowolo
1
1. Introduction
The National Tax Policy (NTP) identifies the lack of a robust framework for taxing
the informal sector as one of the major challenges facing Nigeria’s tax system. It
also acknowledges the use of fiscal incentives in stimulating desired performance
in relevant economic sectors.
It is not unusual to broadly classify the economy into formal and informal sectors.
The informal sector is generally accepted to comprise the economic activities or
interactions of individuals, enterprises or other unincorporated entities or
organisations whilst the formal sector represents the economic interactions of
organised individual or corporate entities.
2
Given that Nigeria’s informal sector has been estimated to account for about 65%
of the country’s Gross Domestic Product, it would be important for this sector
informal sector to contribute its fair share in taxes to government’s total revenue
earnings. One major diagnostic conclusion of the NTP is that “compliance has
been a great problem in the Nigerian tax system as a result of the large scale
informal sector”. It stressed that “the administrative burden of applying of tax
laws may be cumbersome for some of these entities and therefore efforts should
be made to deal effectively and efficiently with them. This involves strategies to
increase both compliance and revenue whilst keeping the cost of administration
low as possible”.
In my paper titled, “Nigeria’s Tax Incentive Framework: What are the big
questions for business & policy?” published by Tax Notes International in
their Volume 74 of May 2014, I submitted that, “Nigeria is an economy in need
of huge capital injection by way of foreign direct investment from foreigners or
Nigerians in diaspora into critical sectors or industries. It is an economy in need
of serious infrastructural investment howsoever can be achieved”.
I also contended in that paper that, “one of the considerations that an investor
evaluates is the tax and regulatory framework surrounding the target business,
industry and/or sector in the potential host country. An aspect of this inquiry is
the level of tax incentives/reliefs available or possible within that framework. The
Federal Government of Nigeria, whenever it seeks to improve the scale of
development, exploitation or productivity of a particular sector or industry, has
often shown a predisposition to throw some package of tax incentives to such
sectors in the belief that such should be adequate to attract the requisite
investors and/or investment. However, a relevant question would be whether a
plethora of tax incentives/reliefs necessarily make such industry or sector or the
Nigerian economy at large, competitive.”
This morning, you gentlemen and ladies of OAU Tax Club, have requested me to
revisit the utility or shall I say the value of an incentive framework in creating or
fostering a balanced tax system.
1
Being a paper presented on 8 December 2018 by Oluseye Arowolo, Partner, Tax & Regulatory Services,
Deloitte & Touche at Tax 180 seminar organised by the Tax Club of Obafemi Awolowo University, Nigeria
2
Deloitte InsideTax Article,” Harnessing the bottom billions in the informal sector – Are tax authorities willing
to engage?”
Re-positioning Nigeria's tax incentive framework to accommodate a
balanced tax system
By Oluseye Arowolo
1
1. Introduction
The National Tax Policy (NTP) identifies the lack of a robust framework for taxing
the informal sector as one of the major challenges facing Nigeria’s tax system. It
also acknowledges the use of fiscal incentives in stimulating desired performance
in relevant economic sectors.
It is not unusual to broadly classify the economy into formal and informal sectors.
The informal sector is generally accepted to comprise the economic activities or
interactions of individuals, enterprises or other unincorporated entities or
organisations whilst the formal sector represents the economic interactions of
organised individual or corporate entities.
2
Given that Nigeria’s informal sector has been estimated to account for about 65%
of the country’s Gross Domestic Product, it would be important for this sector
informal sector to contribute its fair share in taxes to government’s total revenue
earnings. One major diagnostic conclusion of the NTP is that “compliance has
been a great problem in the Nigerian tax system as a result of the large scale
informal sector”. It stressed that “the administrative burden of applying of tax
laws may be cumbersome for some of these entities and therefore efforts should
be made to deal effectively and efficiently with them. This involves strategies to
increase both compliance and revenue whilst keeping the cost of administration
low as possible”.
In my paper titled, “Nigeria’s Tax Incentive Framework: What are the big
questions for business & policy?” published by Tax Notes International in
their Volume 74 of May 2014, I submitted that, “Nigeria is an economy in need
of huge capital injection by way of foreign direct investment from foreigners or
Nigerians in diaspora into critical sectors or industries. It is an economy in need
of serious infrastructural investment howsoever can be achieved”.
I also contended in that paper that, “one of the considerations that an investor
evaluates is the tax and regulatory framework surrounding the target business,
industry and/or sector in the potential host country. An aspect of this inquiry is
the level of tax incentives/reliefs available or possible within that framework. The
Federal Government of Nigeria, whenever it seeks to improve the scale of
development, exploitation or productivity of a particular sector or industry, has
often shown a predisposition to throw some package of tax incentives to such
sectors in the belief that such should be adequate to attract the requisite
investors and/or investment. However, a relevant question would be whether a
plethora of tax incentives/reliefs necessarily make such industry or sector or the
Nigerian economy at large, competitive.”
This morning, you gentlemen and ladies of OAU Tax Club, have requested me to
revisit the utility or shall I say the value of an incentive framework in creating or
fostering a balanced tax system.
1
Being a paper presented on 8 December 2018 by Oluseye Arowolo, Partner, Tax & Regulatory Services,
Deloitte & Touche at Tax 180 seminar organised by the Tax Club of Obafemi Awolowo University, Nigeria
2
Deloitte InsideTax Article,” Harnessing the bottom billions in the informal sector – Are tax authorities willing
to engage?”
Page 2 of 10
In my view, an evaluation of this challenge will require an incursion into some
form of conceptual analysis. Accordingly, I have taken the liberty to interrogate
such words as “balanced tax system”, “the tax incentive framework”, the use of
“repositioning” or “accommodate” being mindful of your overriding aspiration to
realise a tax system or environment in Nigeria where both the formal and
informal sectors are voluntarily tax compliant.
2. Defining a balanced tax system
There are different senses in which the term “balanced tax system” has occurred.
In the first sense, a “balanced” tax system is a system that ensures no group of
the economy enjoys more tax benefits or suffers more tax burdens than others.
In the second sense, a balanced tax system is a system, which creates an
equivalent or fair impact on businesses and individuals whilst considering the
taxpayers’ ability to pay. A possible third sense is that a balanced tax system is
one that is established on the principles of equality, certainty, convenience and
economy.
In all the senses above, a natural conflict can be discerned between the concept
of “balanced tax system” and the creation/existence and administration of
incentives or fiscal reliefs. The following questions help to put this conflict in
sharp focus:
If by nature incentives are selective, then how can a group which enjoys such
relief not have more benefit than those who are not eligible or how can those
who are not eligible not suffer greater burdens than those who are, within the
same economy?
How can the impact be fair on all classes of economic actors within the same
economy?
How do you seek to evaluate and justify compliance with the principle of
equality for instance for different economic actors within the same economy?
In order to avoid this conflict or be under pressure to offer some thoughts on how
to resolve this conflict within the context of this paper or programme given
consideration of time and space constraints, I have considered the term
“balanced tax system” to mean a system where both the formal and the informal
sector voluntarily pay their fair share of taxes to the Government.
3. Elements of a balanced tax system
High understanding of tax obligations across all levels
In a balanced tax system, taxpayers and tax authorities are fully aware of
their tax obligations. There is certainty as regards the amount of tax to
pay, how to pay, when to pay and when to file tax returns. This helps
eliminate any ambiguity or complexity as regards payment of taxes.
Convenience of payment, collection and filing
When payment of taxes and filing of tax returns become convenient and less
stressful, taxpayers are encouraged to comply voluntarily with their tax
obligations. While operators in the formal sector are typically more
compliant with their tax obligations when compared to the informal sector, a
In my view, an evaluation of this challenge will require an incursion into some
form of conceptual analysis. Accordingly, I have taken the liberty to interrogate
such words as “balanced tax system”, “the tax incentive framework”, the use of
“repositioning” or “accommodate” being mindful of your overriding aspiration to
realise a tax system or environment in Nigeria where both the formal and
informal sectors are voluntarily tax compliant.
2. Defining a balanced tax system
There are different senses in which the term “balanced tax system” has occurred.
In the first sense, a “balanced” tax system is a system that ensures no group of
the economy enjoys more tax benefits or suffers more tax burdens than others.
In the second sense, a balanced tax system is a system, which creates an
equivalent or fair impact on businesses and individuals whilst considering the
taxpayers’ ability to pay. A possible third sense is that a balanced tax system is
one that is established on the principles of equality, certainty, convenience and
economy.
In all the senses above, a natural conflict can be discerned between the concept
of “balanced tax system” and the creation/existence and administration of
incentives or fiscal reliefs. The following questions help to put this conflict in
sharp focus:
If by nature incentives are selective, then how can a group which enjoys such
relief not have more benefit than those who are not eligible or how can those
who are not eligible not suffer greater burdens than those who are, within the
same economy?
How can the impact be fair on all classes of economic actors within the same
economy?
How do you seek to evaluate and justify compliance with the principle of
equality for instance for different economic actors within the same economy?
In order to avoid this conflict or be under pressure to offer some thoughts on how
to resolve this conflict within the context of this paper or programme given
consideration of time and space constraints, I have considered the term
“balanced tax system” to mean a system where both the formal and the informal
sector voluntarily pay their fair share of taxes to the Government.
3. Elements of a balanced tax system
High understanding of tax obligations across all levels
In a balanced tax system, taxpayers and tax authorities are fully aware of
their tax obligations. There is certainty as regards the amount of tax to
pay, how to pay, when to pay and when to file tax returns. This helps
eliminate any ambiguity or complexity as regards payment of taxes.
Convenience of payment, collection and filing
When payment of taxes and filing of tax returns become convenient and less
stressful, taxpayers are encouraged to comply voluntarily with their tax
obligations. While operators in the formal sector are typically more
compliant with their tax obligations when compared to the informal sector, a
Page 3 of 10
balanced tax system, which incorporates both the formal and informal
sector, is characterized by ease of tax compliance.
Voluntary compliance
Voluntary compliance is one of the key attributes of a balanced tax system.
In such a tax system, relevant tax authorities do not need to aggressively
chase after taxpayers or adopt strict enforcement measures to ensure tax
compliance and recoupment of taxes due. Taxpayers discharge their tax
obligations as and when due.
Transparency and accountability
Transparency and accountability on the part of Government is achievable
with proper taxpayers’ trust and confidence. The trust and confidence
engenders voluntary compliance, which in turn makes a more cost -effective
system. However, this is dependent on stakeholders’ accountability on
revenue generated. Taxpayers’ trust and confidence in the government is
often eroded by the perception that the government has not been fully
accountable for tax revenue and that tax revenue has not been put to
judicious use.
Low compliance burden/cost
The higher the cost of compliance, the less likely it is that taxpayers will
voluntarily comply with their tax obligations. In this regard, a balanced tax
system is characterized by low compliance costs/burdens.
Effective dispute resolution mechanism
Understandably, human existence and business are dynamic and laws may
not be as fast. Thus, tax systems may not be dispute-free. In this regard, a
fast dispute resolution mechanism assists in achieving a balanced tax
system.
4. Current structure of Nigeria’s tax incentive framework?
The structure of the tax incentive framework in Nigeria can be evaluated under
general or specific incentives
3
. Those incentives that focus on particular sectors
can be examined under the specific category.
As should be expected, the specific incentives are more than the general
incentives. Only illustrative examples of the incentives have been highlighted in
each category
4
.
General incentives
These are the incentives as stipulated under the Companies Income Tax
Act
5
.
3
My differentiation of the incentives into general and specific is not cast in concrete. Another author may
choose to present this information differently. What is of importance is that these are available within the tax
framework as at the date of this article
4
A more detailed list of the available incentives in the Nigerian economy is provided on
http://www.nipc.gov.ng/investment-incentives. The Nigerian Investment Promotion Commission is an agency
of the Nigerian government set up to promote, co-ordinate and monitor all investments in Nigeria.
5
Cap C21 Laws of the Federation of Nigeria, 2007 (as amended) (CITA).
balanced tax system, which incorporates both the formal and informal
sector, is characterized by ease of tax compliance.
Voluntary compliance
Voluntary compliance is one of the key attributes of a balanced tax system.
In such a tax system, relevant tax authorities do not need to aggressively
chase after taxpayers or adopt strict enforcement measures to ensure tax
compliance and recoupment of taxes due. Taxpayers discharge their tax
obligations as and when due.
Transparency and accountability
Transparency and accountability on the part of Government is achievable
with proper taxpayers’ trust and confidence. The trust and confidence
engenders voluntary compliance, which in turn makes a more cost -effective
system. However, this is dependent on stakeholders’ accountability on
revenue generated. Taxpayers’ trust and confidence in the government is
often eroded by the perception that the government has not been fully
accountable for tax revenue and that tax revenue has not been put to
judicious use.
Low compliance burden/cost
The higher the cost of compliance, the less likely it is that taxpayers will
voluntarily comply with their tax obligations. In this regard, a balanced tax
system is characterized by low compliance costs/burdens.
Effective dispute resolution mechanism
Understandably, human existence and business are dynamic and laws may
not be as fast. Thus, tax systems may not be dispute-free. In this regard, a
fast dispute resolution mechanism assists in achieving a balanced tax
system.
4. Current structure of Nigeria’s tax incentive framework?
The structure of the tax incentive framework in Nigeria can be evaluated under
general or specific incentives
3
. Those incentives that focus on particular sectors
can be examined under the specific category.
As should be expected, the specific incentives are more than the general
incentives. Only illustrative examples of the incentives have been highlighted in
each category
4
.
General incentives
These are the incentives as stipulated under the Companies Income Tax
Act
5
.
3
My differentiation of the incentives into general and specific is not cast in concrete. Another author may
choose to present this information differently. What is of importance is that these are available within the tax
framework as at the date of this article
4
A more detailed list of the available incentives in the Nigerian economy is provided on
http://www.nipc.gov.ng/investment-incentives. The Nigerian Investment Promotion Commission is an agency
of the Nigerian government set up to promote, co-ordinate and monitor all investments in Nigeria.
5
Cap C21 Laws of the Federation of Nigeria, 2007 (as amended) (CITA).
Page 4 of 10
4.1 10% Investment Allowance for capital expenditure incurred on
plant and machinery
4.2 Replacement of industrial plant and machinery attracts capital
allowance of 95% in the first year with 5% retention in the
company’s books as tax written down value until disposal. An
Investment Allowance of 15% is also granted on such
replacements.
4.3 Tax exemption on capital gains from sale of shares and stocks
4.4 Withholding tax (WHT) on interest income and dividends are
franked investment income (not subject to further tax in the hands
of the beneficiary). Please note however, that where the beneficiary
is from a country with which Nigeria has a Double Taxation Treaty
(DTT), the applicable withholding tax is 7.5%
4.5 Profits earned on exports or in the production of goods used as
inputs in manufacturing export products are tax exempt (may be
applicable in respect of ‘exported’ electrical capacity)
4.6 Purchasers of local plant and machinery are entitled to 15%
Investment Tax Credit (ITC)
4.7 Possibility of partial or total exemption from WHT on interest on
loan obtained from foreign affiliates/lenders depending on the tenor
of the facility
Specific Incentives
These are incentives targeted at particular industries or sectors
(agriculture, mining, gas utilisation, export processing, double tax treaty,
pioneer relief, Exemption from VAT on export of goods and services,
Exemption from Income Tax on bonds and government short term
securities, Exemption from customs duties of certain machinery and
equipment e.g. power plant, modular refinery, aviation, cement, modular
refinery etc.; Rural Investment Allowance), which I have detailed below:
4.1 Agriculture:
a) Companies in the agro-allied business do not have their
capital allowance restricted. It is granted in full i.e. 100%.
b) The payments of minimum tax by companies that make small
or no profits at all do not apply to agro-allied business.
c) Agro-allied plant and equipment enjoy enhanced capital
allowances of up to 50%.
d) Processing of agricultural produce is a pioneer industry;
consequently, there is 100% tax-free period for 3 – 5 years or
projects into processing of agricultural produce.
e) Agricultural and Agro allied Machinery: All agricultural and
agro-industrial machines and equipment to enjoy 0% import
duty.
4.1 10% Investment Allowance for capital expenditure incurred on
plant and machinery
4.2 Replacement of industrial plant and machinery attracts capital
allowance of 95% in the first year with 5% retention in the
company’s books as tax written down value until disposal. An
Investment Allowance of 15% is also granted on such
replacements.
4.3 Tax exemption on capital gains from sale of shares and stocks
4.4 Withholding tax (WHT) on interest income and dividends are
franked investment income (not subject to further tax in the hands
of the beneficiary). Please note however, that where the beneficiary
is from a country with which Nigeria has a Double Taxation Treaty
(DTT), the applicable withholding tax is 7.5%
4.5 Profits earned on exports or in the production of goods used as
inputs in manufacturing export products are tax exempt (may be
applicable in respect of ‘exported’ electrical capacity)
4.6 Purchasers of local plant and machinery are entitled to 15%
Investment Tax Credit (ITC)
4.7 Possibility of partial or total exemption from WHT on interest on
loan obtained from foreign affiliates/lenders depending on the tenor
of the facility
Specific Incentives
These are incentives targeted at particular industries or sectors
(agriculture, mining, gas utilisation, export processing, double tax treaty,
pioneer relief, Exemption from VAT on export of goods and services,
Exemption from Income Tax on bonds and government short term
securities, Exemption from customs duties of certain machinery and
equipment e.g. power plant, modular refinery, aviation, cement, modular
refinery etc.; Rural Investment Allowance), which I have detailed below:
4.1 Agriculture:
a) Companies in the agro-allied business do not have their
capital allowance restricted. It is granted in full i.e. 100%.
b) The payments of minimum tax by companies that make small
or no profits at all do not apply to agro-allied business.
c) Agro-allied plant and equipment enjoy enhanced capital
allowances of up to 50%.
d) Processing of agricultural produce is a pioneer industry;
consequently, there is 100% tax-free period for 3 – 5 years or
projects into processing of agricultural produce.
e) Agricultural and Agro allied Machinery: All agricultural and
agro-industrial machines and equipment to enjoy 0% import
duty.
Page 5 of 10
4.2 Mining:
a) 3 to 5 years tax holiday.
b) Low income tax of between 20% and 30%.
c) Deferred royalty payments depending on the magnitude of
the investment and the strategic nature of the project.
d) Possible capitalization of expenditure on exploration and
surveys.
e) Extension of infrastructure such as roads and electricity to
mining sites.
f) The holder of a mining lease shall, where qualified, be entitled
to:
i) Depreciation or capital allowance of 75% of the certified
true capital expenditure incurred in the year of investment
and 50% in subsequent years.
ii) Investment allowance of 5%.
iii) Exemption from payment of customs & import duties.
g) In addition to roll-over relief under the capital gains tax
(CGT), companies replacing their plants and machinery are to
enjoy a once-and-for-all 95% capital allowance in the first
year with 5% retention value until the assets is disposed,
15% will be granted for replacement of an asset.
4.3 Gas utilisation:
In line with the Federal Government’s objective of encouraging gas
utilisation by industries and to achieve its objective of eliminating
gas flaring, the following fiscal incentives are available to
companies that utilise gas for power generation:
a) An initial tax free period of three years, subject to renewal for
an additional two years
b) Accelerated capital allowances after the tax free period
namely:
o an annual allowance of 90% with 10% retention, for
investment in plant and machinery; and
o an additional investment allowance of 35% which shall not
reduce the value of the asset
c) Tax free dividends during the tax free period where the
investment was in foreign currency or the introduction of
imported plant and machinery was not less than 30% of the
company’s equity share capital
d) Exemption from imposition of VAT on plant, machinery and
equipment
4.2 Mining:
a) 3 to 5 years tax holiday.
b) Low income tax of between 20% and 30%.
c) Deferred royalty payments depending on the magnitude of
the investment and the strategic nature of the project.
d) Possible capitalization of expenditure on exploration and
surveys.
e) Extension of infrastructure such as roads and electricity to
mining sites.
f) The holder of a mining lease shall, where qualified, be entitled
to:
i) Depreciation or capital allowance of 75% of the certified
true capital expenditure incurred in the year of investment
and 50% in subsequent years.
ii) Investment allowance of 5%.
iii) Exemption from payment of customs & import duties.
g) In addition to roll-over relief under the capital gains tax
(CGT), companies replacing their plants and machinery are to
enjoy a once-and-for-all 95% capital allowance in the first
year with 5% retention value until the assets is disposed,
15% will be granted for replacement of an asset.
4.3 Gas utilisation:
In line with the Federal Government’s objective of encouraging gas
utilisation by industries and to achieve its objective of eliminating
gas flaring, the following fiscal incentives are available to
companies that utilise gas for power generation:
a) An initial tax free period of three years, subject to renewal for
an additional two years
b) Accelerated capital allowances after the tax free period
namely:
o an annual allowance of 90% with 10% retention, for
investment in plant and machinery; and
o an additional investment allowance of 35% which shall not
reduce the value of the asset
c) Tax free dividends during the tax free period where the
investment was in foreign currency or the introduction of
imported plant and machinery was not less than 30% of the
company’s equity share capital
d) Exemption from imposition of VAT on plant, machinery and
equipment
Page 6 of 10
4.4 Double Tax Treaty/Agreements (DTT/DTA)
Nigeria has ratified its double taxation treaties with The U.K., The
Netherlands, France, Pakistan, Belgium, Romania, Canada, South
Africa, Philippines, China, Spain, South Korea and Italy
6
. Nigeria’s
double taxation treaties with Singapore, Mauritius, South Korea,
United Arab Emirates have been concluded are yet to be ratified
These agreements offer some tax advantages to companies
resident in treaty countries. The tax advantages in some cases
include:
a) Where a company from a DTT State executes a turnkey
project, only the income attributable to the portion of contract
performed in Nigeria is liable to tax in Nigeria. For companies
from non-treaty states, the entire profit from a turnkey
project is liable to tax in Nigeria
b) A company from a non-treaty state that derives income from
Nigeria as provided by Section 11(2) of CITA is liable to tax in
Nigeria, irrespective of the period of the activity carried out in
Nigeria. In the DTT with the Netherlands for instance, an
installation activity incidental to the sale of machinery or
equipment, which is necessary to complete the sale and does
not exceed six (6) months, will not constitute a permanent
establishment. This implies that the income from such activity
performed by accompany resident in Netherlands will not be
subject to income tax in Nigeria and vice-versa
c) Withholding tax rate for dividend, interest and royalty is 10%.
For companies from treaty States, however, a reduced rate of
7.5% is applicable. Note that in Nigeria, the withholding tax
on dividend, interest and rent is the final tax on those
incomes
4.5 Export Processing:
Sections 8 of the Nigeria Export Processing Zone Act (NEPZA),
which is the omnibus legislation for the operation of free zones in
Nigeria, stipulates:
“8. Approved enterprises operating within the Export Free Zone
shall be exempt from all Federal, State and local government
taxes, levies and rates”
7
Consequently, a Free Zone Enterprise is entitled to:
a) Complete tax holiday for all Federal, State and Local
Government taxes, rates, custom duties and levies.
b) One-stop approval for all permits, operating licences and
incorporation papers.
6
The treaty with Italy covers Air and Shipping agreements only
7 Other incentives available and applicable to the FZE include: legislative provisions pertaining to taxes, levies,
duties and foreign exchange regulations are not applicable within the Zone; unrestricted repatriation of foreign
capital investment/appreciation; remittance of profits and dividends earned by foreign investors in the Zone
can be made at any time; etc. Please refer to S. 18 Oil and Gas Free Zone Act (OGEFZA).
4.4 Double Tax Treaty/Agreements (DTT/DTA)
Nigeria has ratified its double taxation treaties with The U.K., The
Netherlands, France, Pakistan, Belgium, Romania, Canada, South
Africa, Philippines, China, Spain, South Korea and Italy
6
. Nigeria’s
double taxation treaties with Singapore, Mauritius, South Korea,
United Arab Emirates have been concluded are yet to be ratified
These agreements offer some tax advantages to companies
resident in treaty countries. The tax advantages in some cases
include:
a) Where a company from a DTT State executes a turnkey
project, only the income attributable to the portion of contract
performed in Nigeria is liable to tax in Nigeria. For companies
from non-treaty states, the entire profit from a turnkey
project is liable to tax in Nigeria
b) A company from a non-treaty state that derives income from
Nigeria as provided by Section 11(2) of CITA is liable to tax in
Nigeria, irrespective of the period of the activity carried out in
Nigeria. In the DTT with the Netherlands for instance, an
installation activity incidental to the sale of machinery or
equipment, which is necessary to complete the sale and does
not exceed six (6) months, will not constitute a permanent
establishment. This implies that the income from such activity
performed by accompany resident in Netherlands will not be
subject to income tax in Nigeria and vice-versa
c) Withholding tax rate for dividend, interest and royalty is 10%.
For companies from treaty States, however, a reduced rate of
7.5% is applicable. Note that in Nigeria, the withholding tax
on dividend, interest and rent is the final tax on those
incomes
4.5 Export Processing:
Sections 8 of the Nigeria Export Processing Zone Act (NEPZA),
which is the omnibus legislation for the operation of free zones in
Nigeria, stipulates:
“8. Approved enterprises operating within the Export Free Zone
shall be exempt from all Federal, State and local government
taxes, levies and rates”
7
Consequently, a Free Zone Enterprise is entitled to:
a) Complete tax holiday for all Federal, State and Local
Government taxes, rates, custom duties and levies.
b) One-stop approval for all permits, operating licences and
incorporation papers.
6
The treaty with Italy covers Air and Shipping agreements only
7 Other incentives available and applicable to the FZE include: legislative provisions pertaining to taxes, levies,
duties and foreign exchange regulations are not applicable within the Zone; unrestricted repatriation of foreign
capital investment/appreciation; remittance of profits and dividends earned by foreign investors in the Zone
can be made at any time; etc. Please refer to S. 18 Oil and Gas Free Zone Act (OGEFZA).
Page 7 of 10
c) Duty-free, tax-free import of raw materials for goods destined
for re-export.
d) Duty-free introduction of capital goods, consumer goods,
components, machinery, equipment and furniture.
e) Permission to sell 100% of manufactured, assembled or
imported goods into the domestic Nigerian Market.
f) When selling into the domestic market, the amount of import
of import duty on goods manufactured in the free zones is
calculated on the basis of the value of the raw materials or
components used in assembly not the finished product.
g) 100% foreign ownership of investments.
h) 100% repatriation of capital, profits and dividends.
i) Waiver of all import and export licenses.
j) Waiver on all expatriate quotas for companies operating in the
zones.
k) Prohibition of strikes and lockouts.
l) Rent-free land during the first 6 months of construction
4.6 Pioneer relief:
This is more or less the omnibus incentive regime available within
the customs territory in Nigeria. The Industrial Development
(Income Tax Relief) Act (IDITRA) provides the legal basis for the
grant of pioneer incentives to eligible companies, industries and
products. The Act empowers the President of the Federal Republic
of Nigeria to direct the publication in a gazette a list of pioneer
industries and products.
A pioneer status certificate offers the incentive of a tax holiday to
its holder. The tax holiday is typically for a term of three (3) years
in the first instance and extension for two (2) additional years.
Under the pioneer relief:
a) dividend paid out of pioneer profits are tax free
b) capital expenditure on qualifying assets incurred during the
tax relief period is treated as having been incurred on the first
day following the tax relief period. This entitles the pioneer
company to apply for and obtain a certificate of acceptance on
the fixed assets and deduct such expense from its assessable
profits in the year(s) after the tax relief period
c) losses incurred during the pioneer period are deemed to be
incurred on the first day following the tax relief period and is
available for carrying forward, subject to the 4-year limitation
period
4.7 Other specific incentives include:
a) Exemption from VAT on export of goods and services
b) Exemption from Income Tax on bonds and government short
term securities
c) Exemption from customs duties of certain machinery and
equipment e.g. power plant, modular refinery, aviation,
cement, modular refinery etc.
d) Rural Investment Allowance
c) Duty-free, tax-free import of raw materials for goods destined
for re-export.
d) Duty-free introduction of capital goods, consumer goods,
components, machinery, equipment and furniture.
e) Permission to sell 100% of manufactured, assembled or
imported goods into the domestic Nigerian Market.
f) When selling into the domestic market, the amount of import
of import duty on goods manufactured in the free zones is
calculated on the basis of the value of the raw materials or
components used in assembly not the finished product.
g) 100% foreign ownership of investments.
h) 100% repatriation of capital, profits and dividends.
i) Waiver of all import and export licenses.
j) Waiver on all expatriate quotas for companies operating in the
zones.
k) Prohibition of strikes and lockouts.
l) Rent-free land during the first 6 months of construction
4.6 Pioneer relief:
This is more or less the omnibus incentive regime available within
the customs territory in Nigeria. The Industrial Development
(Income Tax Relief) Act (IDITRA) provides the legal basis for the
grant of pioneer incentives to eligible companies, industries and
products. The Act empowers the President of the Federal Republic
of Nigeria to direct the publication in a gazette a list of pioneer
industries and products.
A pioneer status certificate offers the incentive of a tax holiday to
its holder. The tax holiday is typically for a term of three (3) years
in the first instance and extension for two (2) additional years.
Under the pioneer relief:
a) dividend paid out of pioneer profits are tax free
b) capital expenditure on qualifying assets incurred during the
tax relief period is treated as having been incurred on the first
day following the tax relief period. This entitles the pioneer
company to apply for and obtain a certificate of acceptance on
the fixed assets and deduct such expense from its assessable
profits in the year(s) after the tax relief period
c) losses incurred during the pioneer period are deemed to be
incurred on the first day following the tax relief period and is
available for carrying forward, subject to the 4-year limitation
period
4.7 Other specific incentives include:
a) Exemption from VAT on export of goods and services
b) Exemption from Income Tax on bonds and government short
term securities
c) Exemption from customs duties of certain machinery and
equipment e.g. power plant, modular refinery, aviation,
cement, modular refinery etc.
d) Rural Investment Allowance
Page 8 of 10
5. Drivers of Nigeria’s current tax incentive framework?
The following are the typical rationale for the current tax incentive framework:
Stimulate growth in specific industries
Attract foreign direct investment
Retain and increase investment in a particular sector
Expand domestic production
Encourage exports of non-oil products & services
Shield existing investment from unfair competition
6. How effective is Nigeria’s current incentive framework?
Often times, the impact of the tax incentive regimes in Nigeria may have been
assumed. For instance, Professor Dotun Philips observed, “Clearly, there are
serious doubts regarding the relevance and efficacy of tax incentives in Nigeria. It
is virtually impossible to empirically isolate their impact…often the relevant policy
statements and laws regarding these tax incentives are not clear or
unambiguous…there is little evidence of their critical significance in the
investment and production decisions of corporate bodies in Nigeria.”
8
Eddy Omolehinwa was more direct and scathing when he stated, “ Have the
incentives granted the Nigerian companies really promoted economic growth? My
answer is “No”
9
In J. A. Arogundade’s view, “ a review of the tax incentive policy in Nigeria will be
necessary…many of them have decorated the statute books for so long without
anybody undertaking a survey to determine their effectiveness or continued
relevance.”
10
7. How can we then re-position the incentive framework to achieve a
balanced tax system?
Before the re-positioning of the current incentive system is considered, there is a
need to carry out a quantitative cost-benefit analysis to determine what
exactly is the benefit from the tax incentives already granted compared to the
attrition in revenue that would have been due to Government had the incentives
not been granted. This assessment would enable an informed decision on
whether or not a re-positioning of the current incentive framework is required.
Where it is determined that the incentives granted have been beneficial to the
Country, the following are suggestions on how Nigeria’s tax incentive framework
can be recalibrated to achieve a balanced tax system:
Streamlining tax compliance burdens for Micro, Small and Medium
Enterprises (MSMEs) in Nigeria
The informal sector is largely made up of Micro, Small and Medium
Enterprises. Some of these businesses view monthly tax obligations as a
deterrent to their financial stability (i.e. in terms of time and money). In
order to encourage these class of MSMEs to register for tax and be
compliant, it is suggested that the monthly tax compliance obligations be
8
Professor Dotun Philips: Corporate Tax Incentive & Economic Growth in Nigeria, being a paper presented at
the seminar organised by Chartered Institute of Taxation of Nigeria (CITN) 1995 cited by E.N. Osemene op cit
9
Eddy Omolehinwa: Tax Incentive – A critique, being a paper presented at a seminar organised by Federal
Inland Revenue Service for Senior Staff in 1997 cited by E.N. Osemene op cit p. 5.
10
Joseph Ajibola Arogundade: Nigerian Income Tax & Its International Dimension, 2005 p. 111
5. Drivers of Nigeria’s current tax incentive framework?
The following are the typical rationale for the current tax incentive framework:
Stimulate growth in specific industries
Attract foreign direct investment
Retain and increase investment in a particular sector
Expand domestic production
Encourage exports of non-oil products & services
Shield existing investment from unfair competition
6. How effective is Nigeria’s current incentive framework?
Often times, the impact of the tax incentive regimes in Nigeria may have been
assumed. For instance, Professor Dotun Philips observed, “Clearly, there are
serious doubts regarding the relevance and efficacy of tax incentives in Nigeria. It
is virtually impossible to empirically isolate their impact…often the relevant policy
statements and laws regarding these tax incentives are not clear or
unambiguous…there is little evidence of their critical significance in the
investment and production decisions of corporate bodies in Nigeria.”
8
Eddy Omolehinwa was more direct and scathing when he stated, “ Have the
incentives granted the Nigerian companies really promoted economic growth? My
answer is “No”
9
In J. A. Arogundade’s view, “ a review of the tax incentive policy in Nigeria will be
necessary…many of them have decorated the statute books for so long without
anybody undertaking a survey to determine their effectiveness or continued
relevance.”
10
7. How can we then re-position the incentive framework to achieve a
balanced tax system?
Before the re-positioning of the current incentive system is considered, there is a
need to carry out a quantitative cost-benefit analysis to determine what
exactly is the benefit from the tax incentives already granted compared to the
attrition in revenue that would have been due to Government had the incentives
not been granted. This assessment would enable an informed decision on
whether or not a re-positioning of the current incentive framework is required.
Where it is determined that the incentives granted have been beneficial to the
Country, the following are suggestions on how Nigeria’s tax incentive framework
can be recalibrated to achieve a balanced tax system:
Streamlining tax compliance burdens for Micro, Small and Medium
Enterprises (MSMEs) in Nigeria
The informal sector is largely made up of Micro, Small and Medium
Enterprises. Some of these businesses view monthly tax obligations as a
deterrent to their financial stability (i.e. in terms of time and money). In
order to encourage these class of MSMEs to register for tax and be
compliant, it is suggested that the monthly tax compliance obligations be
8
Professor Dotun Philips: Corporate Tax Incentive & Economic Growth in Nigeria, being a paper presented at
the seminar organised by Chartered Institute of Taxation of Nigeria (CITN) 1995 cited by E.N. Osemene op cit
9
Eddy Omolehinwa: Tax Incentive – A critique, being a paper presented at a seminar organised by Federal
Inland Revenue Service for Senior Staff in 1997 cited by E.N. Osemene op cit p. 5.
10
Joseph Ajibola Arogundade: Nigerian Income Tax & Its International Dimension, 2005 p. 111
Page 9 of 10
streamlined to a quarterly, bi-annual or annual basis. This may encourage
some of them to register for tax and fulfill their tax obligations.
Re-evaluate criteria for granting tax incentives or waivers
There may also be a need to re-evaluate the criteria for granting tax
incentives or waivers. For instance, Nigeria’s prevailing Companies Income
Tax Act (CITA) provides that businesses with an annual revenue of less
than ₦1 million should pay corporate taxes at a rate of 20% of its taxable
profit (i.e. instead of the standard 30%). CITA is an Act enacted decades
ago.
In line with current realities, the ₦1 million threshold may have to be
upwardly reviewed to accommodate current players in the informal sector.
In the same vein, the ₦100 million asset base requirement before a
corporate tax exemption (pioneer status) can be granted to a business may
be too high for players in the informal sector. This threshold may also be
critically reviewed or evaluated to accommodate the informal sector.
Provide incentives for informal sector to fulfil their collection agent
obligations
Some taxes mandate businesses to act as collection agents for the
Government, e.g. Withholding Tax and Value Added Tax.
“While taxpayers have unequivocal civic responsibility to ensure that taxes
due to government are collected and remitted, Relevant Tax Authorities
(RTAs) need to appreciate substantial resources and administrative time
that are devoted to ensuring compliance and reflect this in their
consideration whenever they decide to reject or refuse the taxpayers
application for a waiver of penalty and/or interest.
The National Tax Policy is clear on the role of tax authorities. RTAs should
create a conducive tax environment, which can engender taxpayer
confidence at all levels of tax administration. Given that most of the tax
audit/investigation exercises that trigger additional tax liabilities are usually
not carried out as and when due by RTAs, RTAs deny the taxpa yers of the
opportunity to organise their tax affairs to align with their position on
certain items and thus avoid additional tax liabilities.
The additional costs to businesses arising from additional tax liabilities
(principal plus penalty and interest in most cases) for PAYE, WHT and VAT
is frustrating especially when no benefit accrues to nor are any incentive
granted to companies who render these collection services (at their own
expense) to government”
11
If this concern applies to the formal sector, then it does not require any
serious exercise of imagination to appreciate what this would mean for the
informal sector. Economic actors in the informal sector may need to be
“incentivized” to deliver on their tax collection agent obligations. Afterall,
from a Government perspective, it is better to have “1” than to have “0”.
11
Deloitte InsideTax Article,”Tax Collection Agency – Is it time to compensate?”
streamlined to a quarterly, bi-annual or annual basis. This may encourage
some of them to register for tax and fulfill their tax obligations.
Re-evaluate criteria for granting tax incentives or waivers
There may also be a need to re-evaluate the criteria for granting tax
incentives or waivers. For instance, Nigeria’s prevailing Companies Income
Tax Act (CITA) provides that businesses with an annual revenue of less
than ₦1 million should pay corporate taxes at a rate of 20% of its taxable
profit (i.e. instead of the standard 30%). CITA is an Act enacted decades
ago.
In line with current realities, the ₦1 million threshold may have to be
upwardly reviewed to accommodate current players in the informal sector.
In the same vein, the ₦100 million asset base requirement before a
corporate tax exemption (pioneer status) can be granted to a business may
be too high for players in the informal sector. This threshold may also be
critically reviewed or evaluated to accommodate the informal sector.
Provide incentives for informal sector to fulfil their collection agent
obligations
Some taxes mandate businesses to act as collection agents for the
Government, e.g. Withholding Tax and Value Added Tax.
“While taxpayers have unequivocal civic responsibility to ensure that taxes
due to government are collected and remitted, Relevant Tax Authorities
(RTAs) need to appreciate substantial resources and administrative time
that are devoted to ensuring compliance and reflect this in their
consideration whenever they decide to reject or refuse the taxpayers
application for a waiver of penalty and/or interest.
The National Tax Policy is clear on the role of tax authorities. RTAs should
create a conducive tax environment, which can engender taxpayer
confidence at all levels of tax administration. Given that most of the tax
audit/investigation exercises that trigger additional tax liabilities are usually
not carried out as and when due by RTAs, RTAs deny the taxpa yers of the
opportunity to organise their tax affairs to align with their position on
certain items and thus avoid additional tax liabilities.
The additional costs to businesses arising from additional tax liabilities
(principal plus penalty and interest in most cases) for PAYE, WHT and VAT
is frustrating especially when no benefit accrues to nor are any incentive
granted to companies who render these collection services (at their own
expense) to government”
11
If this concern applies to the formal sector, then it does not require any
serious exercise of imagination to appreciate what this would mean for the
informal sector. Economic actors in the informal sector may need to be
“incentivized” to deliver on their tax collection agent obligations. Afterall,
from a Government perspective, it is better to have “1” than to have “0”.
11
Deloitte InsideTax Article,”Tax Collection Agency – Is it time to compensate?”
Page 10 of 10
Provide subsidized record -keeping tools to informal sector
Tax compliance is heavily reliant on documentation of transactions. In this
regard, there are some players in the informal sector who wish to be tax
complaint but are hindered by their inability to appropriately document
transactions. On this basis, the Government could provide subsidized
record keeping tools to the informal sectors. This would enable them easily
track their transactions and may encourage them to be tax compliant.
8. Conclusion
There is no gainsaying that Nigeria needs all hands to be on deck on the issue of
revenue generation. On this basis, any ideas, proposals or suggestions that may
assist to expand the tax net and also increase revenue generation must be
critically evaluated, considered and implemented on its merit.
Thank you and God bless
Provide subsidized record -keeping tools to informal sector
Tax compliance is heavily reliant on documentation of transactions. In this
regard, there are some players in the informal sector who wish to be tax
complaint but are hindered by their inability to appropriately document
transactions. On this basis, the Government could provide subsidized
record keeping tools to the informal sectors. This would enable them easily
track their transactions and may encourage them to be tax compliant.
8. Conclusion
There is no gainsaying that Nigeria needs all hands to be on deck on the issue of
revenue generation. On this basis, any ideas, proposals or suggestions that may
assist to expand the tax net and also increase revenue generation must be
critically evaluated, considered and implemented on its merit.
Thank you and God bless
Let’s Connect:
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MERISLABSMERISLABSMERISLABS
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Youtube
merislabs.com
TOMIDE ADEOYETOMIDE ADEOYETOMIDE ADEOYE
M: +234 818 192 7251
E: [email protected]
LinkedIn | GitHub | Website
Medium | Twitter
MERISLABSMERISLABSMERISLABS
M: +234 705 591 4441
E: [email protected]
LinkedIn | GitHub | Website
Youtube
merislabs.com
TOMIDE ADEOYETOMIDE ADEOYETOMIDE ADEOYE
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