Treasury single account and taxation (part 2)

What are the potential benefits and challenges?

With the adoption of TSA, government will borrow less and therefore the debt servicing cost should reduce drastically to probably less than half of the current level. It is also likely that a lot of funds previously unaccounted for will be uncovered. Kaduna state for instance discovered as much as N24 billion recently through adoption of TSA.

Government may perhaps pay less in banking fees. For instance the fees payable to banks for revenue collection services could be based on a unit price per transaction instead of being linked to the turnover value of transactions. A bank does not necessarily expend more resources to collect say a N10 billion single payment than it does to process a N10 million single transaction. It is therefore not necessary to pay a commission or percentage of revenue collected.

One major issue in the past was that many banks delayed the remittance of revenue collected on behalf of government in order to temporarily trade with the money at the expense of government. Some MDAs also trade with government funds often for personal gains to the detriment of budget execution and timely payment to beneficiaries such as pensioners. It is therefore expected that these sharp practices will stop and there should be prompt release of funds for projects. If contractors are paid on time then the need for them to borrow at high interest rates will be reduced and hence result in overall lower cost of public projects, better budget performance and prompt project completion.

One of the objectives of TSA should be to eliminate or shorten any delay in payments. Good international practice has been to automate the payment processes, and adopt an electronic payment system, with direct payments to the bank accounts of contractors or beneficiaries. But for this to work MDAs must take cash flow planning and revenue/cost projections more seriously to ensure effective cash management.

TSA should also provide some transparency around unspent budgetary allocation which can be carried forward to another year. I have always wondered why we have low budget executions (sometime 60% or less) and yet we begin every budget year on the basis of zero revenue.

It is not all rosy though. There may be some legal barriers to full implementation of TSA. While S162 of the Constitution regarding maintenance of Federation Account provides a broad legal framework it does not address the operational details. Some MDAs have financial autonomy granted to them by legislation including powers to maintain a fund from which to pay expenses and even to invest surplus funds and maintain a reserve.

Some MDAs generate revenue in various foreign currencies and TSA should also cater for them especially dealing with exchange difference accounting in their respective annual reports given that the means of establishing exchange differences at the end of the period by translating closing foreign currency balances may no longer be applicable.

States and local governments should also be encouraged to adopt TSA so that monthly federation account allocations can be paid directly into their TSAs held at the CBN thereby making it easier for the government to manage liquidity in the system.

Are there potential tax implications?

If tax collection fees are negotiated based on transactions rather than value of revenue collected, then cost of tax collection will go down for the tax authorities from over 5% currently in some cases to a ratio closer to the 1% international benchmark. It will also ensure that gross revenue collection and commissions are separately accounted for rather than the net revenue approach which does not promote transparency.

Given that interest on government bonds and treasury bills are tax free, tax revenue should increase to the extent that banks will be compelled to lend to the private sector which is mostly taxable. Unfortunately banks’ reported profits may go down especially in the short term while their taxes will increase. The impact will be partially offset by the excess dividend tax which banks currently pay whenever they distribute their exempt profits as dividends to shareholders.   

Also, TSA should facilitate transparent reporting of tax revenue and pave the way for tax offsetting and faster payment of refunds. It should be possible for taxpayers to use excess payments or refunds in one tax area (say withholding tax or VAT) to pay other taxes such as corporate income tax, CGT and so on as this is merely an accounting issue which can be dealt with within TSA configuration.

There should be enhanced fiscal federalism as TSA transit accounts may be necessary for tax revenues that are centrally collected but are to be shared by the different levels of government such as VAT. It should in fact be possible to automatically allocate monies to states and local governments on a real time basis rather than on a monthly basis.

TSA should lead to better fiscal and monetary policy coordination as better transparency is achieved through reconciliation of fiscal and banking data, which in turn improves the quality of fiscal information.

It may be necessary to introduce codes within TSA to provide required geographical and organisational information for taxes where derivation is one of the factors for revenue sharing.

TSA should prevent delays in reconciling taxpayers’ accounts which historically has been the case where taxes paid by companies are not remitted promptly to tax authorities or the authorities do not have visibility on collections to update taxpayers’ records. This leads to delays in obtaining tax credits or even tax clearance certificates. Each day, all banks involved in revenue collection should remit taxes collected to the tax authorities’ accounts linked to TSA and provide information to the tax authorities to update taxpayers’ records. Hopefully once the ongoing implementation of electronic tax filing system is fully implemented, this process should happen automatically with little or no human intervention.

What is the way forward?

Overall the adoption of TSA should be positive for the economy in general and also the tax system in particular. The appropriate authorities will have to now embrace transparency and accountability more than ever before.

To cushion the liquidity impact on the financial system, an orderly migration of cash balances from the commercial bank accounts to the TSA should be considered, and complemented with monetary policy measures. Also the legal framework should be reviewed and amended where necessary while training should be provided to relevant staff of CBN and MDAs to ensure efficient implementation.

Tax authorities should use the opportunity to start presenting robust tax revenue reporting to include tax collection by tax types, industry sectors, states, number of taxpayers, demography, tax credits, unpaid refunds, value of tax incentives granted, and so on. The FIRS and Joint Tax Board should fast-track the implementation of their e-filing projects which should help ultimately in ensuring that instant credits are granted to taxpayers for remittances to TSA via commercial banks.

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Taiwo Oyedele

Taiwo Oyedele is the Head of Tax and Regulatory Services at PwC Nigeria, and Tax Leader, West Africa Market. He is an author and public speaker on business, accounting and tax matters.

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