In 2019, the United Nations Economic Commission for Africa’s (UNECA) Economic Report on Africa, estimated Nigeria’s Value Added Tax (VAT) gap in the 2018 fiscal year to be about 71.2 per cent. The VAT gap is calculated as the difference between the potential and actual VAT collections, caused by policy and compliance shortcomings. To put this in perspective, the Nigerian Bureau of Statistics noted the total VAT collected by the Government in 2019 as N1.2 trillion (i.e., about $3.3billion). Hence, the estimated VAT gap in 2019 might have been N2.9 trillion (that is about $8.2billion).
Although UNECA acknowledged in its report that the VAT gap may be lower than the projected value due to the underlying assumptions in its calculations, the result indicates that there is scope to increase the nation’s total revenue from VAT and other consumption-related taxes. Trends in global tax administration show a positive correlation between tax collection and the level of technology adoption. Therefore, any initiative that would significantly improve Nigeria’s tax collection must be technology driven.
With the continuous evolution of transaction and payment systems, tax authorities are constantly revising tax collection strategies leveraging on technology, including the adoption of real-time reporting and assessment of tax. Real-time tax reporting and assessment enable tax authorities to authentically verify commercial transactions as they occur, resulting in improved taxpayers’ compliance and early collection of taxes by the Government.
In Nigeria, the extensive implementation of the cashless payment policy by the Central Bank of Nigeria provides a compelling reason for the implementation of a real-time tax reporting and assessment system which would enhance government’s revenue from VAT and other consumption-related taxes, especially from the micro, small and medium scale enterprises that account for more than eighty per cent (80percent) of businesses in Nigeria.
Real-time tax collection in Nigeria
The concept of real-time tax reporting and assessment is not futuristic for Nigeria’s tax administrators. In 2016, the Federal Inland Revenue Service (FIRS) launched the automated collection of VAT and withholding tax (WHT) for companies in specific sectors, including the financial services and upstream oil and gas industry, using various third-party propriety software.
This initiative was roundly challenged by the targeted companies citing cybersecurity, systems compatibility and data privacy concerns. Again, in 2020, the FIRS announced plans to implement an automated VAT Platform (Vatrac) for branded shops, superstores, general supermarkets, standard restaurants, and eateries with more than N25 million turnover per annum. Vatrac is a software designed to manage the entire lifecycle of VAT collection and remittance, and the onboarding process would involve registration, training, installation and activation of the software. Essentially, Vatrac would be embedded in the Taxpayer’s billing/invoicing system and transmit information to the FIRS’ system real-time, but some of the targeted Taxpayers have again raised concerns around cybersecurity, systems compatibility and data privacy.
In 2017, the Lagos State Government issued the Hotel Occupancy and Restaurant Consumption (Fiscalisation) Regulations under the 2015 Hotel Occupancy and Restaurant Consumption Law. Based on the Regulations, hotels and restaurants operating in Lagos State were appointed as agents for collection of the consumption tax and are required to attach a designated Electronic Fiscal Device (EFD) to their billing systems. The EFD is designed to interact with the Lagos State Internal Revenue Service’s (LIRS) central system to record and transmit the consumption tax billed and collected by each agent. The legality of the consumption tax is still a subject of litigation in Nigeria.
Without a doubt, companies spend significant resources to safeguard their internal processes and enterprise resource planning (ERP) systems. Therefore, it is reasonable that the triad of cybersecurity, systems compatibility and data privacy would be a priority for businesses when considering this issue. Consequently, it is pertinent to explore how the Nigerian Tax Authorities may address these challenges in a bid to successfully implement the real-time tax reporting agenda.
Read also: Understanding the tax legislations in Nigeria’s finance bill 2020
Examples from other tax jurisdictions
In Brazil, the real-time tax reporting and assessment model are based on electronic monitoring and mandatory validation of transactions conducted by businesses. This initiative is part of the Public System of Digital Bookkeeping programme of the Receital Federal do Brasil (i.e. Federal Revenue of Brazil) and according to the International Monetary Fund report in 2019, the Public System of Digital Bookkeeping is credited to have increased Brazil’s tax revenue by 80 per cent (80percent). Every business entity is required to issue electronic invoices for supply of goods and services (that is, Nota Fiscal Eletrônica and Nota Fiscal de Serviços Eletrônica) in a specified format with required details.
This electronic invoice must be submitted to the relevant tax authority for authorisation before being issued to customers, along with the authorisation code. This process is largely automated and conducted through an Application Programming Interface (API) provided by the State Treasury Office. The API can integrate with a company’s ERP systems, e-commerce solutions or third-party integrator systems. Prior to issuing the authorisation code, the Tax Authority reviews the tax calculation on the invoice and captures the transaction information. To assure the Taxpayers of the privacy and security of the data collected, the government introduced a tax-related privacy clause in its National Tax Code (Art 198) which specifies the responsibilities of the Tax Authority to maintain the privacy of tax-related information obtained from this process.
In the United Kingdom (UK), Her Majesty’s Revenue and Customs (HMRC) introduced the Making Tax Digital (MTD) initiative which includes a VAT compliance component. Essentially, Vat-registered businesses with a taxable turnover above the VAT threshold (£85,000) are required to keep digital records and submit the required information quarterly to the HMRC via any MTD compatible software. While taxpayers are free to choose their preferred software for this purpose, it must be capable of maintaining the records in a digital format and transmitting them to the HMRC via the designated API without manual intervention.
The software must be digitally linked to other relevant software within the business to create an unbroken digital journey which can be audited by the HMRC. To ensure the privacy of the taxpayers’ information, the HMRC has a designated Privacy Notice published on its website to sensitise the public on the confidentiality of information obtained. The Notice describes how the information will be collected, utilised, stored and secured following the European General Data Protection Regulation (GDPR) and the local Data Protection Act (DPA).
In Hungary, the National Tax and Customs Administration (NTCA) permits the taxpayers to adopt either a manual or electronic invoicing model. For the electronic invoicing model, taxpayers are required to inform the NTCA about the invoicing software being used. The software must be capable of extracting, transmitting and storing certain invoice data in a pre-determined format (XML format) for the Tax Authority’s use. Like in the UK, the NTCA protects Taxpayer’s information following the European General Data Protection Regulation (GDPR) on collation, storage and security of personal data.
Conclusion
The jurisdictional references cited above are representative of the initiatives adopted by many countries with well-developed tax systems. The following points can be gleaned from the examples:
1. The role of the tax authority is limited to recommending the digital compliance process required of taxpayers. The taxpayers are expected to comply with the digital compliance requirement using their preferred tools, process and software.
2. The interaction with the tax authorities’ digital platform is typically through an API provided by the tax authorities. Therefore, there is no need to physically install or attach a software or devise to the taxpayers’ systems. In some instances, the tax authorities may recommend software that can be considered by taxpayers.
3. The charter or declaration of the tax authorities regarding data privacy responsibilities is documented and accessible to all the taxpayers. The information required, the purpose of the collection and the structures around data security/access are all documented in this charter or declaration.
4. The collection of transaction information (i.e., sales and purchases) for tax purposes is usually a component of larger digital initiative requiring taxpayers to maintain and transmit their accounting information in digital format on a real-time basis. This enables tax authorities to have a complete and real-time view of transactions conducted by taxpayers beyond the statutory tax returns.
In Nigeria, the Federal Inland Revenue Service (Establishment) Act (FIRSEA) empowers the FIRS to obtain information from the taxpayers in physical or electronic format. However, the FIRSEA does not prescribe specific measures to ensure system compatibility with the taxpayers’ ERP. We would like to note that the freedom of taxpayers to choose or adopt suitable software for compliance with the tax authorities’ digital requirement would significantly address the concerns around cybersecurity and systems compatibility. Therefore, companies can evaluate and select the most suitable compliance option based on individual circumstances.
On data privacy, tax and data protection laws in Nigeria emphasise the confidentiality of information obtained by the tax authorities in the discharge of their duties. However, the thrust of the confidentiality rule extends beyond unjustified disclosure of the taxpayers’ information to persons within or outside the tax authority. It covers the right of the taxpayers to be aware of what data is being collected and stored, and how it would be used by the tax authority. This should not be taken for granted! The policy and procedures of the tax authorities around these issues should be documented and publicized, in line with the best practices cited above.
There is no doubt that the digital compliance requirements of the tax authorities would require taxpayers to reconfigure their accounting systems or acquire bespoke tax engines/ tools which would increase the cost of compliance in the short-term. However, this additional cost may be insignificant compared to the direct and indirect cost of a cybersecurity or data privacy breach. Hence, the tax authorities would need to collaborate with taxpayers to strengthen their level of confidence on the real-time tax reporting initiatives and achieve the desired result.
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