Tax lessons Nigeria can learn from Estonia

Taxes are one of the financial obligations of citizens and businesses to the government and serve as a major source of revenue.

Experts say tax-friendly economies record higher investment inflow than countries with difficult tax regimes.

Nigeria has 39.6 million micro, small and medium enterprises as well as large corporations, all of which are expected to pay different taxes to the federal, state, and local governments.

However, concerns have been raised about the country’s tax system, which sees businesses paying over 50 different taxes and levies officially and more than 200 taxes unofficially, according to Taiwo Oyedele, Africa tax leader at PwC.

The Manufacturers’ CEOs Confidence Index (MCCI) report for the second quarter of 2021 shows that the second major problem of manufacturers was taxation by government agencies, as 380 chief executives of manufacturing firms (95 percent of respondents) stated that multiple taxes and levies charged by government agencies had a depressing effect on manufacturing production.

“Apart from the approved list of taxes and levies to be charged to companies as compiled by the Joint Tax Board, there is a large number of outside taxes, levies, and fees that are charged to manufacturers by the revenue-generating agencies of the government,” the report said.

BusinessDay’s findings reveal that the Republic of Estonia, a country in Northern Europe, has for the last eight years been ranked by the Tax Foundation, a non-profit research think-tank focused on federal, state, and local taxes, as the country with the best tax system with a score of 100.

According to the 2021 International Tax Competitiveness Index, which measures the extent to which a country’s tax system adheres to competitiveness and neutrality, Estonia has the most competitive tax system among 38 members of the Organization for Economic Cooperation and Development (OECD).

Similarly, the 2020 World Bank ease of doing business index ranked Nigeria 159th on tax payment with a score of 53.7, while Estonia ranked 12th with a score of 89.9 points.

The Tax Foundation revealed that while Estonia has a 20 percent corporate tax rate, which is only applied to distributed profits, while Nigeria has a corporate tax rate of 30 percent. The government of Estonia does not charge corporate income tax on retained and reinvested profits.

Estonia has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

In Nigeria, resident companies are liable to corporate income tax (CIT) on their worldwide income while non-residents are subject to CIT on their Nigeria-source income.

Andres Sutt, minister of entrepreneurship and information technology in Estonia, said via a blog post on the Republic of Estonia website that a strong and competitive tax system helps Estonia maintain a favourable business environment and attract foreign entrepreneurs around the world.

“Estonia’s tax system constitutes a strong competitive advantage because it supports free entrepreneurship and minimal bureaucracy, allowing businesses to focus on the development of their products and services,” he said.

Estonia practices a simple and uniform taxation regime at a competitive rate, which is noticed worldwide especially among entrepreneurs; consequently, companies spend less time and are keen on tax compliance.

Marcello Estevão, global director, Macroeconomics, Trade & Investment Global Practice at World Bank, said complex tax systems foster a culture of evasion and can create opportunities for corruption.

“A 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent, it also creates a more predictable environment for international investors, attracting investment and tax revenues in the process,” he said.

According to the Estonia government website, in 2021, the Estonian Investment Agency facilitated €194 million worth of foreign direct investment (FDI), which contributed to the creation of over 1,600 high-added value jobs across the country; this was an improvement from the €160 million of foreign investment to Estonia in 2020, which helped create over 800 high-paid jobs.

Read also: Why tax compliance low in Nigeria- Revenue – CITN

During this same period, FDI inflow into Nigeria dropped to $698.8 million from $1.02 billion, according to the National Bureau of Statistics (NBS). Economic experts attribute this decline to various factors including the country’s unfriendly tax system.

Many entrepreneurs in Nigeria have over the years complained about the numerous taxes paid by their businesses even as they struggle to operate amid other challenges.

The Nigerian government has continued to impose different types of taxes on businesses such as the sugar tax, which is an excise duty of N10 per litre imposed on all non-alcoholic and sweetened beverages, the NYSC tax, among others.

An article on the impact of multiple taxation on businesses in Nigeria by Olaniwun Ajayi Law Practice reveals that issues around multiple taxes create a hostile business environment for many businesses and reduce the country’s global competitiveness.

“In addition to the plethora of taxes and levies in Nigeria, it is more worrisome where different taxes or levies on the same income or profits base is imposed by federal, state and local government tax authorities, these have significant cost implications for businesses, creates uncertainty for businesses and intending investors,” it said.

According to the Tax Foundation, businesses can choose to invest in any number of countries throughout the world to find the highest rate of return, which means that businesses will look for countries with lower tax rates on investment to maximise their after-tax rate of return.

“If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance,” it said.

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