Why Nigerian Taxpayers Suffer Low Tax Morale

Victor Athe, Partner, Tax Services, Stransact Chartered Accountants discusses in an interview with The Vanguard newspaper why Nigerians are feeling overburdened by existing taxes and VAT, the 2023 finance Act, public debt to GDP ratio, and how the Federal government can harmonise tax collection among other issues.

What is the philosophy of Stransact Chartered Accountants and Audit in offering support to businesses?

Stransact offers a broad spectrum of professional services covering tax compliance/advisory services, all aspects of transfer pricing (TP) and its related services, transactions advisory, deals advisory, accounting, audit, and all other attest-type services. Our strategy for our target market is to provide these professional services to our clients with the same or a superior level of quality compared to what is offered by the big brands in the market. This way, we constantly help our clients derive strategic value in all their transactions, that are significantly in excess of the costs to them.

Last year, Nigeria enacted the Finance Act 2023 (FA 2023). What is your structural assessment of this Act?

The Nigerian Companies Income Tax Act (CITA) provides specific rules for the taxation of foreign entities engaged in international shipping and airline transportation in Nigeria. The profits which these foreign entities specifically derive in Nigeria are typically subjected to tax using a deemed income approach (where income tax rate is applied on a fair and reasonable percentage of their gross revenues). The FA 2023 now requires that the gross revenue statements submitted by these foreign entities when filing their annual income tax returns would now have to be certified by an external auditor. The agencies that maintain regulatory oversight over shipping and air transport companies have also been mandated to ensure that these foreign companies present evidence of adequate tax compliance in Nigeria before all relevant regulatory permits and approvals are approved for them. In my view, the additional requirements introduced by the FA 2023 would actually help ensure that the tax bases relating to the economic activities carried on by the foreign entities in Nigeria are not eroded. This way, the country can reap its fair share of taxes from the enormous economic activities of these foreign businesses.

What are the key challenges and opportunities for businesses in relation to taxation in the current economic and regulatory landscape?

There are undoubtedly a plethora of challenges in Nigeria’s current economic and regulatory landscape as it relates to taxation, including multiplicity of taxes, poor tax administration, non-availability of database, tax touting, ambiguity of Nigerian tax laws, non-payment of tax refunds, issues around utilisation of withholding tax credit notes, wrong interpretation of tax laws during tax dispute resolutions, etc. Most of these issues generally result in a low tax morale in taxpayers (both businesses and individuals). Recent studies have shown that a key determinant of tax morale is the perceived quality of the tax administration. Increase in tax morale has also been linked to satisfaction with public services, supporting the existence of the fiscal contract between taxpayers and the state-a willingness to pay tax in return for effective public services. Notwithstanding the existing challenges, there are lots of tax incentives that have been structured to encourage increased investments in the Nigerian economy. Some of the existing incentives include tax holidays, tax exemption schemes, repatriation of foreign capital/profits at official exchange rates, export incentives, Export Expansion Grant (EEG) Scheme, gas utilisation incentives, tourism incentives, reduced tax rates on interest income among others.

How can tax contribute to the growth of the country’s GDP?

There is evidence to support the fact that countries with high tax-to-gross domestic product (GDP) ratios have higher tax morale. Improving tax morale holds the potential to increase government revenue from taxation with relatively little enforcement efforts. States are battling with taxes too.

What do you think is holding back some states in addressing the issue of multiple taxation?

The Nigerian Constitution on which all other laws run, contains the exclusive, concurrent, and residual legislative lists. Each specifies the type of taxes that the various tiers of governments in Nigeria should have legislative powers over. The debacle on whether the federal government or state governments should collect Value Added Tax, VAT, is yet to be conclusively resolved due to the peculiar complications and complexities around the issue. The practice of coming up with different names for the same tax type by federal, state and local government agencies and ministries is tantamount to tax duplication.

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Duplication or multiplicity of taxes is driven primarily by the need for states to generate more revenue. Despite the increase in statutory federal allocations to the states by about 69 per cent in 2024 compared to the previous year, most states are still not able to independently fund the deficit of their respective budget expenditures. The ultimate outcome of tax duplication is that taxpayers would have to bear a burden of taxes that is astronomically higher than what they had anticipated or planned. This huge disincentive for businesses in Nigeria contributes significantly to the poor ranking of Nigeria on the world ease of doing business index and weighs in negatively on the investment climate in Nigeria. This also encourages tax touting - creation of illegal taxes that are enforced and collected through illegal, aggressive and unorthodox means, which are mostly extortionate.

What kind of policy should be in place for there to be harmonisation of taxation?

Our National Tax Policy (NTP) document was first created sometime in 2012, and then revised in 2017, to provide policy direction for tax matters generally. This also serves as a procedural guideline for achieving effective harmonisation between the respective tax authorities of the different tiers of government. The NTP was designed to be an instrument for creating awareness on the importance of taxation as a stable flow of revenue for the Nigerian government in the face of dwindling oil revenue. The NTP sought to address fundamental issues relating to multiple taxation, lack of accountability for tax revenue and lack of clarity on the taxation powers of each level of government. However, considering the fact the NTP is only a document that is not a legal instrument, the intended benefits are yet to be realised, due primarily to lack of effectiveness in its implementation, perhaps due to the lack of legal backing.

Between the federal government and state governments, who has the right to collect taxes?

One of the challenges Nigeria is currently facing is that the indices that drive the allocation of revenue accruing to government centrally does not effectively consider and reward contributions to the economy from arms of government that demonstrate effective utilisation of resources, promotion of investments, infrastructural development, and others. The working poor — and, increasingly, the squeezed middle — are contributing a higher proportion.

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How do you think things would develop in Nigeria if the federal government started taxing big money and redistributing wealth democratically? Would we see instant changes?

One of the major challenges bedeviling our revenue system is that a lot of high networth individuals (HNIs) are either outrightly evading payment of taxes of some or all sources of their income, or do not pay the appropriate level of taxes commensurate to their income in line with the provisions of our income tax laws. For instance, the Personal Income Tax (PIT) Act which governs the taxation of individuals in Nigeria stipulates that every individual that is Nigerian resident should be assessed to PIT on their global income (income earned from both within and outside Nigeria). The proper enforcement of this provision alone can change Nigeria’s revenue fortunes very significantly. One of the cardinal features of a proper/effective tax system is the redistribution of wealth. This is why the PIT rates in Nigeria are graduated such that the highest income earners are taxed at the highest rate. However, where there is paucity of data on the actual income earned by high net-worth persons, who may have exploited a large part of our collective economic resources in generating such income, then the Nigerian economy will constantly be short-changed where an effective system is not put in place to hold these HNIs accountable to remit their fair share of taxes.

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After a decade of heavy borrowing to fund infrastructure expansion, the ratio of public debt to GDP in Nigeria increased…

Under IMF’s Debt Sustainability Framework (DSF), a country’s debt-carrying or debt-accumulation capacity would typically be determined by the strength of its macro-economic performance and policies. Studies have shown that accumulation of debts above recommended threshold levels, could be inimical to economic growth, especially when the debt increase is not aligned with the country’s growth needs. A high public debt-to-GDP ratio can also further exacerbate the already deteriorating exchange rate in various ways, including putting pressure on foreign exchange reserves, investor confidence, inflationary pressures, and the need for more foreign currency to service debt obligations. This underscores the importance of sustainable fiscal management and prudent borrowing practices to maintain exchange rate stability and overall economic health. One important thing I believe the FG should do is to ramp-up our tax revenue in our current context by widening the tax base. There are several steps that can be taken to achieve this, including the increased formalisation of the current vast informal sector in Nigeria. On assumption of office, the current Acting Federal Inland Revenue Service (FIRS) Chairman also immediately expressed commitment to significantly improving the nation’s tax-to-GDP ratio from the then 10 per cent to as much as 18 per cent. There is clearly an inverse relationship between the public debt-to-GDP ratio and the tax-to-GDP ratio. This means as the latter increases, the former is likely to reduce since it would directly mean that government would have a larger pool of resources available to finance its expenditure priorities, and would not need to borrow or cut down on its expenditure to maintain fiscal stability. Another measure that can be taken is the stringent implementation of some of the recent amendments to our tax laws, such as the Significant Economic Presence (SEP) rules. There are currently cases of Multinational Enterprises (MNEs) deriving income from sales through digital/electronic channels to Nigerians (mostly B2B transactions), and are caught under our SEP rules, but do not remit the appropriate share of income taxes to the Nigerian Government. Considering the significant earnings these MNEs derive in Nigeria, it may be an effective strategy to channel focus to collecting the appropriate level of taxes (income tax and VAT) from these multinational businesses that are deriving enormous value from Nigeria.

With many Nigerians already feeling overburdened by existing taxes and VAT, the Federal Government is aiming to increase the ratio of tax revenue to GDP…

It is certainly important for the Federal Government to work at expanding the tax base to capture a sizable portion of the country’s vast informal sector, which mostly comprises unregistered small-scale businesses. This sector plays a crucial role in the nation’s economy, as it accounts for a significant portion of employment and national GDP - more than 50 per cent. Tax collection from the informal sector has remained a complex issue since the majority of the businesses therein, largely operate without proper regulatory oversight. However, recent efforts by the Government, which include the introduction of Micro, Small, and Medium-sized Enterprises (MSME) Development Fund, ease of doing business reforms and tax reforms, introduced by the amendments to our tax legislations (e.g. the exemption of small businesses from VAT and Income Tax obligations); are all laudable steps aimed at encouraging the increased formalisation of informal sector.

Why Nigerian Taxpayers Suffer Low Tax Morale — Victor Athe