Nigeria’s Federal Government may be realising a little too late that its earlier target of achieving higher non-oil revenues through taxes is a herculean task which is only possible if it creates an enabling environment where businesses thrive and pay more taxes.
President Muhammadu Buhari, through Abba Kyari, his chief of staff, in an August 8, 2019 letter queried Babatunde Fowler, the executive chairman of Federal Inland Revenue Service (FIRS), over what he described as the revenue agency’s inability to meet set target revenue from 2015 to 2018.
Fowler responded to the query yesterday (Monday, August 19), linking the variance in the budgeted and actual revenue collection performance of the Service for the period 2016 to 2018 to the low inflow of oil revenues for the period, especially Petroleum Profit Tax (PPT). He said it was due to fall in price of crude oil and reduction of crude oil production; and the Nigerian economy which went into recession in the second quarter of 2016, slowing down general economic activities.
There are three main sources of tax revenue for the Federal Government. First is Petroleum Profit Tax and Royalties, while Company Income Tax (CIT), and Value Added Tax (VAT) make up the second and third.
The PPT and Royalties are derived from oil and form the major chunk of taxes. Over the past 10 years, this source has accounted for at least half of total tax collections by FIRS.
Interestingly, the FIRS chairman noted that higher tax revenue collection such as CIT and VAT are a function of economic activities.
BusinessDay checks show that there is a cumulative N3.9 trillion of unmet tax revenue target for the said four-year period (2015 to 2018). When the current FIRS administration came on board in August 2015, the targets for the two major non-oil taxes were increased by 52 percent for VAT and 45 percent for CIT.
Taxes collected by the government are: CIT, Withholding Tax (WHT), VAT, PPT), Personal Income Tax (PIT), Stamp Duties, National Information Technology Development Levy (NITDL), Tertiary Education Tax (ET), and Capital Gains Tax (CGT).
In the quest to boost non-oil revenue, reduce budget deficit and end the country’s rising debt profile, Nigerian government increased the revenue target from tax remittance by 56.02 percent from N5.32 trillion in 2018 to N8.3 trillion in 2019, the all-time highest the country will be remitting from tax in the review period.
Businesses wobble
Latest report by the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency (SMEDAN) puts the number of small and medium businesses that shut down between 2013 and 2017 at 2,877. Many Nigerian firms have struggled between 2015 and 2018, making it hard for them to pay taxes.
“Nigerian economy was mostly down and in recession. The small and medium enterprises suffered from shocks in the economy, forcing many to close shop,” Friday Opara, director, strategic partnership, Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), who contributed to the survey, told BusinessDay on the phone.
Findings show that most of the firms closed down between 2015 and 2017 owing to foreign exchange crisis.
Ayodele Oni, energy lawyer and partner at Bloomfield law firm, said taxes cannot rise in an economy that is not growing.
“Oil prices have been dropping and we are not attracting new investments, so naturally earnings will fall and so would taxes,” Oni said.
The Organised Private Sector (OPS) said the query issued to FIRS chairman lacks empirical basis within the context of the Nigerian economy.
According to the business community, only a government with unrealistic expectations would expect higher tax revenues from an economy still on its knees.
Timothy Olawale, director-general of Nigeria Employers’ Consultative Association (NECA), a member of the OPS, said companies’ profits over the last four years have been on a downward trend and “this should be expected to reflect on taxes paid to the government’s coffers”.
He explained that over time, the employers of labour in Nigeria have lamented the challenges bedevilling businesses without anyone paying attention.
“We had also cited dwindled taxation revenue as natural outcome of the problem. The consequences are beginning to manifest. Considering the forgoing, there is really no basis for vilifying the FIRS chairman except he is expected to operate outside the provision of the tax laws,” he added.
The DG of NECA noted that government will do well by improving the enabling environment for businesses to thrive so they can continue to contribute their quota to national development, which includes higher tax revenue to government’s coffers and improved employment generation.
“The querying of the FIRS chairman seems controversial considering the factors for which he was queried as well as the timing of such query. He is in line for a second term and this could be a possible move to discredit him, thus preventing him from returning to office,” said Ayorinde Akinloye, a Lagos-based research analyst.
Wole Obayomi, partner and head of tax at KPMG, said tax collection is a function of economic activity and profit which companies make.
“I do not think it is a fair comment to compare the dollar yield of the tax collections because we are talking about two different exchange rate regimes,” Obayomi said.
“During one period you had a naira/dollar exchange rate of N152 and at the other, which is since the last three or four years, you have had an exchange rate of over N305. So they are probably comparing apples with oranges. Even if you had the same naira amount, the dollar yield will be different for the reason given earlier. In fact, given the performance of the current leadership of FIRS, you can say they have tried in this regard,” he added.
He further explained that the government may have accused Fowler of not being frugal.
Periods of slow economic activity tend to reflect in lower taxes. The South African Revenue Service (SARS), for instance, has experienced two successive years of tax shortfalls: R30-billion in 2016/17 and R49-billion in 2017/2018.
The South African government admitted that the tax shortfalls were due to a struggling economy.
In 2018, the oil sector contributed N2.467 trillion to the share of taxes collected by the FIRS which represents 46.38 percent of the taxes collected in the period.
Though Nigeria’s oil sector accounts for less than 10 percent of the GDP, it contributes 90 percent of Nigeria’s export income and 70 percent of government revenue.
However, the sector is troubled by militancy which leads to the destruction of oil and gas assets and discourages investments. The Nigerian National Petroleum Corporation said it spent over N125bn in one year as repair cost.
According to the NNPC, product theft and vandalism have continued to destroy value and puts the corporation at a disadvantaged competitive position. In the last one year, a total of 2,278 vandalised points have been recorded across various pipelines running through Nigeria. Oil companies are fleeing onshore areas to deep offshore abandoning fields that would have been producing and earning huge revenues the government can tax.
The Federal Government has been unable to provide enabling environment due to its inability to pass the Petroleum Industry Bill which the Nigerian Extractive Industries Transparency Initiative (NEITI) estimates constrains over $15 billion in new investments.
Hence oil companies are recording poorer earnings which limit how much contribution they make. For example, the Nigerian Liquefied Natural Gas (NLNG) paid $2.1 billion as income tax in 2015 but this fell to $323,273,784.39 in 2016 after the economy slipped into a recession. It recovered slightly to $606,668,750 in 2017.
Oil major Shell also saw a dip in its payments to the Nigeria government from $1.18bn in 2016; tax payments fell to $765.526m in 2017 and recovered in 2018 to $1.2 billion.
In August 2016, the Manufacturers Association of Nigeria (MAN) and the NOI Polls reported that 222 small-scale businesses closed shops, leading to 180,000 job losses.
The pharmaceutical industry is replete with firms that are merely struggling to stay afloat. Evans Medical and Swiss Pharma Pharma went under in 2017 due to financial crisis. These firms could not compete despite obtaining the World Health Organisation (WHO)’s prequalification needed for international competition. In 2014, companies like Emzor, GSK, and a number of others earned $7.708 million from export of medicines to the African market, according to the International Trade Centre (ITC). Four years later, however, the companies made only $708,000.
Neimeth International Pharmaceuticals plc made a loss of N139.2 million for the fourth quarter of 2018. It later posted only N5.45 million profit after tax in the second quarter of 2019. The Agbara, Ogun State-based Pharma Deko suffered 36 percent drop in revenue in 2018, from N1.593 billion in December 2017 to N1.023 billion in 2018. It suffered loss after tax of N265.26 million.
Grif, Federated Steel, and Universal Steel have also exited the Nigerian market in the last three years because they could not import annealed cold-rolled steel (their inputs) due to FX restriction on the product.
Okomu recorded losses in the first half of 2019 as its turnover declined by 34 percent from N12.9 billion in 2018 to 8.5 billion in 2019. This is a reflection of the state of the industry. PZ Cussons is also struggling.
Members of MAN said they could not sell products worth N375.42 billion in 2018 and N321.12 billion in 2017.
“High inventory of unsold finished manufactured goods in the period was ascribed low consumption, smuggling, and counterfeiting of Nigerian manufactured products,” MAN said in its Economic Review in the second half of 2018.
Nigeria fully embraced a system of automatic exchange of data where financial data of citizens are easily accessible and made tax evaders have nowhere to hide. The tax amnesty – Voluntary Asset and Income Declaration Scheme (VAIDS) – which took off on July 1, 2017 enabled taxable Nigerians to declare their assets and incomes and get certain waivers, including penalties and interest payments. The scheme had covered the whole gamut of taxes, and given Nigerians the opportunity to regularise their tax affairs.
The FIRS, which moved towards digitalisation of tax operations and increasing the agency’s human capital, had set a wishful target of increasing Nigeria’s tax-to-GPD ratio to 16 percent.
In 2018, the Federal Inland Revenue Services (FIRS) in line with improving the ease of doing business in Nigeria upgraded its online platform to perform a wider range of services to taxpayers. Some of the e-Services accessible online include taxpayer registration, payment of taxes, application for tax clearance, filing of taxes, etc.
The FIRS revenue collection statistics show that in 2015 it failed to meet set target of N4.7 trillion by N800 million as only N3.7 trillion was the actual collection.
In 2016, the target collection was N4.2 trillion but actual was N3.3 trillion, representing a shortfall of N900 million. In 2017, FIRS targeted N4.8 trillion but the actual collection was N4 trillion, which represented an unmet target of N800 million. Also, in 2018, despite a target of N6.7 trillion set, only N5.3 trillion was actual collection representing a shortfall of N1.4 trillion.
In 2018, PPT and Royalties amounted to N2.8 trillion, 53 percent of the N5.3 trillion collected for the year, according to data compiled from the FIRS.
PPT and Royalties have largely mirrored oil prices over time, with the trend being that collections tend to be higher when oil prices are high and vice-versa.
Being the dominant contributor to total tax revenue, strong PPT collections often fed into total tax take.
When BusinessDay calculated the tax receipts in dollar terms using the prevailing exchange rate at the time, it revealed the relationship between oil prices and taxes.
In 2012, when oil prices were over $100 per barrel, total tax take came to $32.2 billion. Oil prices have endured a volatile ride since then and have been consistently lower than the 2012 price, helping to explain why taxes have been lower since then.
In 2013, total tax collected was $31 billion, while in 2014 and 2015, it was $18.3 billion and $19.4 billion.
In 2016, when oil prices tanked to a decade-low, tax revenue came to $13.01 billion, the lowest between the 2012 and 2018 period under review.
When oil prices recovered in 2017, so did tax collection which increased to $13.2 billion. In 2018, total tax revenue was $17.4 billion, also in line with higher oil prices in that period.
Taiwo Oyedele, a partner and head of tax at PWC, confirmed the relationship between oil and taxes.
“That is why the highest revenue in dollar terms was in 2012 when the price of crude oil was around $100 per barrel. Meanwhile, CIT and VAT have been negatively impacted by weak economic activity which has translated to lower company profits and weak household consumption,” Oyedele added.
CIT & VAT collections in 2018 amounted to N2.3 trillion, 43 percent of the total tax receipts. Before 2015, FIRS had not only met its yearly target revenue, but was also able to surpass. Further check shows that in 2007, it targeted N1.75 trillion but actual revenue was N1.84 trillion. In 2008, it targeted N2.27 trillion while N2.972 trillion was actually collected.
In 2009, the FIRS set target revenue of N1.90 trillion while the actual collection was N2.19 trillion. Also, in 2010, despite setting a target of N2.55 trillion, the FIRS recorded actual collection of N2.83 trillion.
In 2011, the FIRS set target of N3.63 trillion but the actual collection reached N4.628 trillion. Likewise, in 2012, despite N3.63 trillion target, the revenue agency collected N5.007 trillion; in 2013, it set N4.468 trillion target but collected N4.805 trillion; while in 2014, it surpassed the N4.086 trillion set target with a record actual collection of N4.714 trillion.
The Federal Ministry of Finance initiated the VAIDS, which led to a record high of N5.32 trillion remitted from tax as revenues in 2018. Despite missing its target of N6.7 trillion, the revenue generated is so far the highest in the country’s history.
The FIRS revenue target of N8 trillion may push the tax authority to devise various means possible in its tax generation drive.
This can be confirmed by the regulator’s recent action as it commenced sending out letters to banks appointing them as tax collection agents for taxes considered payable by their named customers.
In order to achieve this, the FIRS directed the relevant banks to place lien on accounts of businesses, corporate organisations and partnerships with an annual banking turnover in excess of N1 billion, but without tax identification, to prevent them from drawing funds from the accounts until the taxes have been fully settled.
Prior to 2018, the highest revenue figure ever attained by FIRS was N5.07 trillion, in 2012, when oil price hovered around $100-$120 per barrel, but now remarkable, given that it was achieved at a period when oil prices averaged $70 per barrel.
Meanwhile, Nigeria emerged from its first recession in 25 years, largely caused by low oil prices and militant attacks on energy facilities, in the second quarter of 2017. The nation’s GDP grew by 1.93 percent for the full year 2018, compared to its 0.82 percent in rate in 2017, data by the National Bureau of Statistics (NBS) show.
In the last two years, Nigeria’s tax environment has witnessed significant change and the sluggish rate at which the economy is growing, at 2.01 percent in the first quarter of 2019, has increased the pressures on companies who are now looking for ways to reduce cost. The regulator, on the other hand, is now forced to aggressively enhance revenue.
Thus, taxation, more than ever before, has now become an issue to companies, heads of tax and financial heads as they are left with the burden to make critical changes that will strengthen profitability and risk management.
Nigeria recorded an increase in its 2018 tax activities both from the side of the regulators and corporates. The events were driven largely by the country’s quest to generate revenue to meet its budget deficit.
The drive for a high tax revenue in the review year led to the extension date of the Voluntary Assets and Income Declaration Scheme (VAIDS) from the initial stated March 31 deadline to June 30, 2018.
Other key tax and revenue highlights were the introduction of the Voluntary Offshore Assets Regularisation Scheme (VOARS), the release of the revised Income Tax (Transfer Pricing) Regulations 2018 (the Regulations), amongst other major activities in the year.
The efforts by the government to drive revenue through tax resulted to the all-time high tax revenue collection of N5.32 trillion in 2018, out of which Value Added Tax (VAT) stood at N1.11 trillion for the first time.
Nigeria’s tax-to-GDP ratio is relatively lower when compared to other developing economies like Ghana with 17.6 percent ratio and Kenya’s 18.5 percent and is also lower than the average for the 21 African countries in Revenue Statistics which is 18.2 percent, as compiled from the Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organisation with 36 member countries.
Last year, President Buhari signed an Executive Order (EO 008) on VOARS mandating Nigerian taxpayers who hold offshore assets and incomes to voluntarily declare those assets and incomes within a period of 12 months, and pay income tax on them. The Executive Order became effective from Monday October 8, 2018.
Based on the Order, affected taxpayers who truthfully and voluntarily complied with the conditions of the Scheme were expected to be granted immunity from prosecution after paying either a one-time levy of 35 percent on their total offshore assets, or the outstanding taxes, penalties and interest determined based on a forensic audit of such assets and income.
Defaulting Nigerian taxpayers who failed to take advantage of the Scheme were to undergo investigation and enforcement procedures concerning offshore assets held by them upon the expiration of the Scheme. This was to be based on information obtained by the government through automatic exchange of information between Nigeria and foreign countries where the assets are located.
IHEANYI NWACHUKWU, JOSHUA BASSEY, ODINAKA ANUDU, LOLADE AKINMURELE, ISAAC ANYAOGU & ENDURANCE OKAFOR
