How new tax reform bills will drive equity, investments

The Presidential Fiscal Policy and Tax Reforms Committee has recently developed Nigeria Tax Bill, Nigeria Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill which are currently before the National Assembly.

According to Taiwo Oyedele, chairman of the committee, these bills aim to address the Nigerian tax system’s difficulties such as multiplicity of taxes, fragmentation of revenue administration, and issues with the excessive tax burden on most vulnerable citizens, including small businesses and low-income earners.

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The bills also seek to create a friendly and competitive business environment in Nigeria by addressing incessant taxes that stifle business growth.

Major deliverables of the bills include:

Equity

There have been controversies about the tax bills since they were announced and transmitted to the National Assembly for consideration in September.

The major part of the bill that is being contended is that which aims to retool the current distribution model of Value Added Tax (VAT) to the derivation-based model. Northern leaders who are leading in the agitation argue that companies remit VAT using the locations of their headquarters and tax office and not where the services and goods are consumed.

They further argue that the proposal would negatively impact the North and called on lawmakers from the region to oppose the bill in its current form, demanding that national policies should promote equitable distribution to avoid regional marginalisation.

However, Oyedele, speaking during an interview with BusinessDay, explained that the bills seek to correct the anomaly in the current tax system which gives credit for the VAT generated to the place where it is remitted.

“On the VAT revenue sharing, we believe it’s just the misunderstanding of our proposal.

Businesses file their VAT returns and make payments where they have their accounts departments. Usually, the accounting department of the company will be at the head office, so most of those big companies have their head offices in Lagos. Some of them, particularly the oil companies, have their head offices in Rivers State. And some companies have their head offices in the FCT, especially the government-owned enterprises. Some of them are headquartered here in the FCT. Those three alone account for more than 70 percent of how we collect VAT and where we collect it from. But it does not mean that that’s where the activities that give us the VAT were all consummated.

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“So, when MTN is paying and remitting its VAT in Lagos, it is remitting the VAT for the calls made across Nigeria. Dangote and BUA will sell cement all over Nigeria but remit the VAT in Lagos.

“Why should Lagos take the credit for the calls made in Kano? Why should Lagos take the credit for the cement used in Edo? Why should Lagos take the credit for the Coca-Cola used for ‘Owambe’ party somewhere in Ekiti? So we are saying, ‘let’s do the right thing. VAT is a consumption tax.’ When MTN is paying its VAT in Lagos, we would ask MTN to give us a schedule, which is VAT for this month. This will show how many calls that came from Kogi, Zamfara, Borno, Anambra, Abia. So they can tell where the calls are coming from. If you are Dangote, you don’t send one or two bags to retailers. You have distributors and the distributors have addresses. Dangote can tell you, we have sold 2 million bags of cement, and we sent 200,000 to Kogi.

“So if those companies now give us their VATs and the breakdown of where those things were generated, then every state gets recognised and rewarded for the activities that took place within their states, and on that basis, they get a share of the VAT revenue.”

The new bills, he said, will correct how the derivation is calculated to allow states to keep the lion’s share of what they have created.

“So we said, 60 percent of what is created should be kept by states and for the remaining 40 percent, we now share it 20 percent equally and 20 percent by population. We honestly were thinking in my committee that we would be commended.”

Investment

Oyedele noted that Nigeria is currently among the top countries with the highest corporate tax globally, which, for him, is a disincentive to investors.

He explained that in the bill contains a provision to cut down the corporate tax payable by companies, which currently reaches up to 40 percent with the addition of education tax, information tax, engineering and science tax, police tax, among others.

With the bill, Oyedele said that the company income tax rate will be cut from 30 percent to 25 percent over the next two years, while consolidating all other taxes into a single tax and reducing them to 4 percent development tax.

He said, ‘”Overall, if you set up a company and you make profits and pay all the taxes, the amount left would show that you would have paid more than 40 percent in corporate taxes. Nigeria is one of the top 10 highest corporate tax regimes in the world today.

‘’You cannot grow an economy like that. What the Organisation for Economic Co-operation and Development (OECD), for example, do is to have low corporate income tax rates so they can attract investments. And then when people come with their investments, they will hire others. Those people will pay personal income tax, and those who go and buy things will pay VAT. The attraction is to make corporate tax attractive so that investments can come, and then it can generate other taxes.

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‘’We were doing the opposite, which is what we want to fix.”

Protection for poor/vulnerable Nigerians

Another argument against the tax reforms has been that it could stifle economic growth and deepen poverty.

However, one of the provisions of the tax bills is the outright removal of taxes on food, education, healthcare, housing, and transportation, which account for over 80 percent of monthly spending made by the average Nigerian household.

Oyedele noted that a lot of Nigerians, especially the poor and vulnerable, labour daily just for food – they tend to spend 100 percent of their earnings on food.

He said, ‘’If you go down the ladder of society, they tend to spend close to 100 percent on food. If you go up, they spend less on food. Then you have things like accommodation, transportation, electricity, health, education. These five categories account for 82 percent of where our people spend their money.

‘’The lower you go on the ladder of society, the bigger the amount you spend on these essentials. What we have done in our proposals is to remove VAT from these items for the ordinary person, the masses, which for us is about 180, 190 million of our people. So they pay zero VAT on food, education, and health care. Then they are exempted from paying VAT on transportation, accommodation or rent. By doing that, what we have done is save more in the hands of the ordinary person.’’