Nigeria’s 2016 tax receipts threatened as company profits sink

Nigeria’s projected 2016 oil and non-oil revenues of N2.27 trillion may be under significant threat as businesses in Africa’s largest economy gasp for breath amid sinking profits and rising costs of production.

Zenith Bank, UBA and Guaranty Trust Bank have reported lower pre-tax profits and tax payments in the first quarter of 2016, compared to the same period in 2015.

Analysts expect that other firms may follow the same trajectory due to the slowdown in Nigeria’s  economic growth.

“Low oil prices will continue to prove a challenge for the Nigerian economy,” Razia Khan, chief economist for Africa at Standard Chartered Bank, said in response to questions.

“It is clear that better compliance will play some role in helping to improve the amount of non-oil revenue that is collected. All the same, a second consecutive year of weak economic growth may pose some risk to the non-oil revenue assumption.”

The Federal Government has projected oil and non-oil revenues of  N2.27 trillion for 2016 which is to come mainly from company income tax, value added tax (VAT), and customs and excise duties.

The Finance Ministry plans to achieve this by closing leakages in Customs and Federal Inland Revenue Services (FIRS), while widening the tax net and ensuring better compliance.

The tax projections may be overly optimistic however, in an economy growing way below potential, with most companies reporting lower year on year profits and trade volumes plunging on a biting dollar shortage.

“Export firms are unable to make profit because although the prevailing market exchange rate of N320 to the dollar reflects in their cost of operations, the proceeds from their exports are converted at the official rate of N197-199,” said Sheriff  Balogun, president of  the Nigeria-America Chamber of Commerce, in an interview with BusinessDay.

“In a bid to downplay the loss, they keep their profit outside Nigeria, while others have resorted to covert exportation, leaving government with a distorted record of exports and a constrained tax inflow.”

Experts say the import duty and VAT is based on the N197-199 official rate, and this short-changes the government, causing it to lose a significant chunk of tax revenue.

“The oil and gas sector earnings are in dollars. However, because they have naira denominated expenses, companies convert their earnings to naira at the prevailing market rate but remit taxes according to the official rate,”  said Taiwo Ayodele, a partner and head of tax and regulatory services, PWC, in a telephone interview with BusinessDay.

Nigeria’s tax-to-GDP, one of the lowest globally, was 1.6 percent in 2012 compared with 14.9 percent in nearby Ghana, 25 percent in South Africa, 25.5 percent in the U.K. and 26.8 percent in Norway, according to World Bank data.

Growth in the $502 billion economy which is Africa’s largest, dropped to 2.8 percent last year, the slowest since 1999 and will decelerate further to 2.3 percent in 2016, the International Monetary Fund (IMF) said on March 31.

Most large and small Nigerian companies have reported lower full year earnings for 2015 compared to the previous period and analysts expect the trend to continue this year.

The country’s hard currency peg at N199/$ which has worsened as foreign-exchange shortage crimped growth and discouraged dollar inflows, has been widely criticised by investors and businesses.

“The foreign exchange shortage has impacted our supply lines. We are spending much more time in order to secure the foreign exchange for certain raw materials and for some equipment we need for our plants,” Yaw Nsarkoh, Unilever Nigeria’s managing director said.

Government’s plan to widen the tax base may not necessarily solve the problem of falling tax receipts, experts say.

“An increase in tax payers doesn’t necessarily equate to increase in tax revenue, especially when traditional payers now pay less with fewer profits,” said Yomi Olugbenro, partner, tax and regulatory services at Deloitte.

“To achieve the tax revenue target, government has to think through the FX policy, because if you put policies that discourage exports, diversification will not work and alternative sources of revenue will close up,” Balogun, president of the  Nigeria-America Chamber of Commerce, says.

In an earlier report, BusinessDay noted that businesses and manufacturers may get some relief  as the CBN was poised to reform and restore liquidity and two-way quotes to the autonomous fx markets which have been gummed up for more than a year now.

However, not much has changed just yet, as the apex regulator continues to stall on the much needed reform which is seen crimping profits of businesses.

Sources tell BusinessDay that efforts to draw the attention of the government to the challenges facing businesses due to its fixing exchange rates seem to be falling on deaf ears.

“We wrote a letter to the deposit money banks and stakeholders, while we copied the CBN. In the letter, we questioned the CBN’s decision to peg naira at N197-199 per dollar when the foreign exchange act (FEA) of 2004, stipulates that the purchaser and the seller determine the rates of transactions,” Kyari Bukar, chairman of Nigeria Economic Summit Group (NESG), said to BusinessDay.

LOLADE AKINMURELE