BusinessDay

#NES28’ critical tax reforms for shared prosperity’ (1)

Ahead #NES28, experts seek new approach to tax collection policies and mechanisms to bring about improved tax culture and boost revenue inflow badly needed in Nigeria for its capital and recurrent expenditures. Below are excerpts from the experts’ opinion during a pre-summit webinar, as transcribed by Gbemi Faminu.

Frank Aigbogun, board member, NESG: Opening remark

Nigeria’s expenditure has been on the rise, so too has been poverty. On the other hand, tax revenues are currently inadequate and far from their potential, limiting the government’s ability to address critical challenges facing the people. Tax revenue is critical for the government to finance its activities and meet development objectives for shared prosperity.

As you know when revenue is optimised and the tax system is correctly designed, the government has the ability to raise the required revenue to meet its objectives and promote the efficiency of government and of course, the economy.

Nigeria has made significant strides in improving its tax system, the introduction of a yearly Finance Act and appropriation bill has supported the responsiveness of tax legislation to government objectives, and promoted policy implementation.

The tax framework and policy implementation can be strengthened further in three prominent areas, including addressing issues related to tax compliance, tax impediments to economic growth, addressing issues related to tax, addressing issues about taxation and support to households and enterprises.

All around the world, parliaments almost on a daily basis, deal with legislation that directly affect tax, or regarding other legislations, there are always tax questions attached to them.

However, Nigeria suffers from low tax compliance, contributing to depressed revenue mobilisation. At 6 percent, Nigeria’s tax-to-GDP ratio is lower than the average for African countries, which currently stands at about 18 percent. Low tax compliance and poorly designed tax concessions can trigger unfavourable economic conditions as recently observed in Sri Lanka.

With the persistence of low tax compliance in Nigeria, there is a need for a paradigm shift in tax paying culture. Leading by example, we can play a significant role in driving up tax compliance in Nigeria consistent with the recommendations of the National Tax Policy, political leaders can support this cultural change through tax compliance by themselves.

The structure of taxes should also promote economic growth and a business friendly environment, especially for Small and Medium sized Enterprises (SMEs) who contribute approximately 50 percent of GDP and 84 percent of job creation.

Tax policy reform is vital because taxes finance public education, healthcare and infrastructure financing. These public services equip poor people with better schemes and prospects in the job market and offer better chances to improve their economic status, this cannot be more important than the time we are in Nigeria.

Taxes are also the financial backbone of social security networks and basic welfare, providing essential support to the poor against unexpected risks and preventing them from falling back into poverty during difficult times.

However, policy weaknesses, lack of appropriate tax reforms and public understanding are the main obstacles preventing these taxes from playing a more significant role in Nigeria’s economic development.

It is important for Nigeria to develop the right policy environment, including tax reforms, to remove the various impediments and reverse the worrying trend, and to do so urgently. To be effective, these interventions need to consider local economic, social, and cultural contexts as well as enhance capacity for policymakers and tax administrators, leveraging technology to ensure everyone benefits from the gains of development.

The potential of tax reforms to alleviate poverty, reduce inequality, accelerate growth of SMEs, rejig the forex regime and drive tax harmonisation and compliance through political leadership remains untapped to a great extent in our dear country, Nigeria.

This pre-summit event will engage relevant stakeholders to discuss how to address tax impediments to economic growth in Nigeria, deliberate on advocacy strategies to drive tax reforms through political leadership and examine the possibilities of fiscal policy measures to ensure social development of our country.

Taiwo Oyedele, Africa tax leader, PwC – context setting

The context therefore is first and foremost for us to look at the economy because tax itself operates within the context of the economy. So, the macroeconomic indices are not what we would like them to be, from inflation to high unemployment rate, which we expect that it would have increased from the 33.3 percent last reported over a year ago.

Combination of the two translates to a high misery index, extreme poverty is increasing, public debt is rising but Nigeria remains the largest economy in Africa. This means, even though we are not fully optimising our potential we are still the largest and we can only imagine what is possible if we get things right. I think the most important thing to do is policy reforms, even if it has to do with insecurity, it goes beyond spending more money and requires policy coordination, capacity and collaboration, which also applies to fiscal and monetary policies.

For monetary policies, we have seen challenges around naira devaluation against other foreign currencies, particularly the US dollar. The other dimension to this conversation is the fact that because all major currencies are depreciating against the dollar because of policy rate normalisation, so US raises interest rates on Treasury Bonds, and then dollar flows in that direction away from the rest of the world. That in itself means that the other currencies will depreciate.

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Euro was at par at some point, so this is adding to the problem we already have in Nigeria. At some point, black market rate was over N700, it has however dropped to N600, thereabouts.

Foreign remittances (FDI, FPI) are not coming as we expect them to. We have seen the CBN trying to introduce various interventions – from diaspora remittances, naira-for-dollar scheme to RT200. But then again, the point is, if you have to do a lot of special interventions that is an indication that things are not working well because we need to make the country work for everyone to reduce patronage and unhealthy competition in the market.

External reserves and balance of payment challenges are there. We have multiple exchange rate windows; the low interest rate regime is also another problem that is putting people more into poverty. This is because the real returns gotten were below inflation rates, which means they are getting poorer every day.

We also know that inflation by itself is naturally regressive, which means poor people suffer more than the rich because they usually don’t have investment in assets that can protect them from inflation.

On fiscal policies, we deal with the persistent low tax to GDP ratio, high debt servicing costs to revenue ratio. In the first four months of the year, the Federal Government spent 118 to 119 percent of revenue just to service debt. In other words, we indeed borrowed all the money we spent for everything else from salaries to other overheads to capital expenditure.

The National Assembly, for some reason, seems to have been very busy introducing new taxes in the past few months and couple of years. On corporates, for example, we have seen policy levies on their profits, we’ve seen the one on engineering and science, we’ve seen the one on NYSC, which they say needs to be funded, and then the private sector needs to contribute.

Even more recently, there’s another one that was introduced for social security investment programme to be funded by the private sector as a percentage of profit. But you can’t keep doing that in an environment where businesses themselves are struggling. So, there’s so much more that they can only take. Where the rest of the world are reducing corporate income tax rates to attract more investment we seem to be doing the opposite. We also have multiple agencies trying to collect revenue, leading to inefficiencies, and tax morale is low.

Sometimes, the tone from the top does not help, like the presidential pardon to politicians who have been convicted of stealing taxpayers’ money. This sends wrong signals both to the administrators, law enforcements and more importantly to the taxpayers who will be questioning the need for them to continue to pay taxes if people that are not tax compliant take the money and get away with it.

We also have issues with the Tax Clearance Certificate (TCC). For people who wanted to contest different positions, many of them have never paid income taxes before because they had no record to show for it and the tax authorities said it was okay for them to pay a nominal amount and be given TCC so they can contest. We have seen reports by the auditor-general showing that many MDAs are not tax compliant, even when they deduct taxes from their contractors and even their employees in form of PAYE, sometimes they do not remit.

We have other issues such as heightened insecurity, industrial actions like the ASUU strike. We also struggle with policy coordination even within the Federal Government, Legislature, Executive, and also sub-national sometimes. What is coordination like with the state and local government?

Petrol subsidy is getting out of hand, if it’s not already out of hand. The latest report by the World Bank shows that Nigeria has now moved up in the IDA list, which means we have borrowed more than before, and that is not a ranking where you want to be number one, I think we are now number four.

We have other developments around the African Continental Free Trade Area (AfCFTA) and the unified payment system within Africa, which is a positive development. But we also have to bear in mind we have a global geo-political tension that is creating ripples around the world, which are affecting all of us.

First is Russia and Ukraine war, and now many of us are praying very hard that the escalation in Taiwan will be put under control because we just can’t afford anything happening again.

If anything happens between China and Taiwan and the US gets involved, it will be too much for the world to handle while we are just recovering from COVID-19.

The economy, from my perspective, is shaped generally by five big factors; there is debt and taxes, there is politics and policies, there is geopolitical crisis, there is insecurity, and then subsidies.

Now, if you think about subsidy, I think the true cost of subsidy, even the financial cost is underreported because the NNPC is treating PMS subsidy as a way of recovery. In other words, they sell crude and take our dollar to buy refined products. So, they are taking our dollars at the official rate of N415/N420 and that in itself is an FX subsidy because even manufacturers cannot get dollar for N420 to buy raw materials and inputs, which is not captured.

Secondly, worldwide data show that when you buy PMS in most countries around the world, between 20 to 80 percent of the pump price paid is actually taxes. In Nigeria, there are no taxes on fuel product, and that is subsidy and we are not quantifying. If you put all of these together while considering that the government is borrowing significantly, it means that by paying the subsidy, you reduce the amount of revenue that goes to FAAC for governments to share, and therefore government has to borrow.

If you add the borrowing costs, which is double digits, from government to the subsidy cost, we then have the subsidy as currently being reported plus the FX subsidy on it plus tax subsidy, plus the cost of borrowing. It will be almost twice as large, and it is just not affordable for this country and it is something that we have to deal with urgently.

The fiscal landscape gives an opportunity to change the unimpressive narrative and highlight things that are working. In the economic context, we have a mix of different things like deficits, trade issues, forex, inflation, unemployment and security. But we have made some progress in key areas around the tax system, like the voluntary assets and income declaration scheme that was introduced around 2016/2017, which helped increase the tax awareness and brought in a good number of people into the tax net that were not previously within the tax net.

The national tax policy was introduced and approved in 2017, pretty much setting the tone for the Nigerian tax system and some progress are being made in implementing those provisions as contained in the national tax policy. This has led to the changes that we see through the Finance Acts, and some of those have helped to deal with critical issues like the exemption of people who earn 30,000 or less from personal income tax as well as exemption of small businesses from VAT, and if your turnover was less than N25 million, you didn’t need to register.

We have seen improved coordination at the sub-national level by the Joint Tax Board (JTB), bringing the tax authorities together to speak with one voice. Some of their recent intervention was how do you get politicians to pay the right amount of taxes.

We have seen improved capacity for revenue mobilisation by FIRS and the state internal revenue service. We have seen FIRS collect at least in nominal terms, the highest amounts of revenue in their history. And for many months, we have seen the Federal Allocation Committee being funded almost exclusively from tax revenue, which is progress, but we also do admit there is still a lot more that we need to do.

In taxing the digital economy, progress has been recorded as Nigeria did not sign the inclusive framework for very good reasons. Sometimes you do not need to agree with the government’s decision, you just need to understand when you see that the basis for the decisions that have been made are compelling with the assurance that things are not done haphazardly.

We have also seen the significant economic presence order introduced in Nigeria for taxing the digital economy, and we see the government continually working on reforms to improve that and the FIRS is also trying to use intelligence to curb tax evasion.

It is important to note that Nigeria’s tax base remains small and faces structural problems, and that is why we have little fiscal space to do more. For example, we see countries where the government is introducing interventions to help with the cost of living crisis because if that is not addressed, it becomes a social crisis and it can bring down the government.

The intervention we have at the Federal Government level for the poor is extremely limited. Many of us believe that giving money to poor people will not solve their problems because they need something more fundamental than that.

So, we have many changes in the tax system. Some of them have to do with policy and administration; legislation and regulation; case laws and other developments.

There are critical fiscal issues we need to think about – such as tax harmonisation and how to ensure that the number of taxes are limited to very few board based, properly defined taxes. There is no point having over 60 taxes across all levels of government when 99 percent of revenue comes from less than 10 taxes, which makes individuals and businesses pay more while the government collects less. The remaining disappears into inefficiency, diverted and stolen funds in the middle chain, which needs to be addressed urgently by reducing the number of taxes and revenue agencies.

We can have only one revenue agency at the Federal Government level collecting all taxes, levies and charges like it is done in other countries.

For example, the Rwanda revenue authorities recently directed that even when you want to pay to get your international passport, payment should be made to the revenue agency.

So, every time a new law is enacted, it says private sector should pay additional tax from their profits and then it says that 1 percent is taken from the federal allocation (0.2%), you cannot keep taking money from the Federal Allocation to address different interventions.

Then structural challenges include regressive taxes. Few days ago, the governors issued an advisory to the Federal Governments where they recommended a Federal Income Tax of 3 percent on anyone who earns more than N30,000. You cannot introduce a flat 3 percent on anyone who earns more than N30,000 as that is regressive because it means you are making the poor people pay 3 percent the same way with rich people, which is not done anywhere.

They also recommended that the Personal Income Tax at the state level be repealed while a Sales Tax of 10 percent introduced, adding that VAT be increased to 10 percent with a plan to take it to 15 and 20 percent.

It is good for the governors to share their thoughts, but everything has to be put into the context of what we want as a country and as citizens, and what is in our interest, which is to protect the vulnerable, make everyone tax compliant and make taxes progressive rather than regressive.

We see a widening tax gap and rising cost of collection by administrators and rising cost of compliance by taxpayers, both of which do not work in the interest of the country. So, there is need to improve vertical-horizontal coordination.

Regarding constitutional amendment, lawmakers are still trying to amend the Constitution and put VAT on the Exclusive legislative list while they try to establish revenue courts for federal and states and the role of RMFAC within the revenue space.

At the sub-national level, there is increasing focus on fiscal federalism, and in Nigeria that is only interpreted only in one direction, which is more power to the state. But fiscal federalism is actually about which government is most appropriate to handle any particular public service or activity, and once those activities are assigned, commensurate revenue is given for the support of those activities.

PMS subsidy is getting out of hand, interestingly, amid the NNPC and the new NNPC Limited. I recently made a comparison between NNPC and Saudi Aramco, where the latter in 2021 made net income and paid taxes almost close to $200 billion and their revenue was $400 billion.

Saudi Aramco does about 9.2 million barrels of crude oil daily. If the equivalent is calculated in Nigeria, you find that the Nigerian government owns about 60 percent of the oil blocs and that gives close to 1 million barrels per day that belongs to the Federal Government of Nigeria.

The market cap of Saudi Aramco is now about $2.5 trillion, so proportionately NNPC should be at least $250 billion generating revenue of no less than $40 billion and paying taxes and dividend to the government close to $18 billion.

What that means is if we have that level of efficiency and you sell 20 percent of NNPC to the public, you raise enough money to pay off Nigeria’s debt if you want to pay off.

Another good thing is that in creating that process, the efficiency you get will create employment, do local refining, diversify the activities of NNPC and the possibilities are almost endless. Even with the whole conversation around green energy there are a lot of significant roles for us to play as a country.

Using tax intelligence for tax expansion, there are issues around tax compliance and tax evasion because we are not using intelligence enough to connect the dots about what people are doing.

Tone from the top needs to get better, like the presidential pardon and politicians not paying the right amount of taxes. It is not just about the money they will pay but the fact that when you don’t have people with the right tax culture in leadership, they cannot solve most of our problems because they don’t understand what it means to pay taxes, let alone presiding efficiently over taxpayers money. That then affect the tax culture and the low tax morale, and we end up taxing poverty.

No country can become rich by taxing poverty, so when policies are introduced without thinking about the impact on the vulnerable, you expose the country to bigger problems. Looking at the threshold of extreme poverty, which is now about $2.15 per person and the fact that the average household in Nigeria is about five people, and based on unemployment and underemployment rates, about two people will be employed if you’re lucky. If calculated in naira anybody who earns N70,000 or below, if they are being taxed, you are taxing extreme poverty and they are not being protected. If people can’t feed, they cannot be rational, when people are not rational, you cannot have security and progress.

The other one is the recent introduction of excise on telecommunication. If you have to do this, why don’t you start with post-paid services, so you protect people who are trying to buy data just to earn a living. Or you could establish a threshold that says you only pay these excise on telecommunication once you exceed a certain threshold per month, to protect the poor and the vulnerable.

Going forward, what are the critical tax reforms we need to implement for us to have inclusive growth and shared prosperity in the short, medium and long term?

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