Competing for global wallets: Tax growth and capital formation

Financial capital is the lifeblood of economic development. For Nigeria to compete globally and grow its economy, it needs substantial capital for infrastructure, skills, and international recognition. Without enough capital, real progress is difficult because good soup, na money kill am.

Why capital formation matters

Capital formation is about gathering the resources needed for economic growth. Investing in assets like buildings, machinery, and new ideas can boost production capacity. There is a strong link between having enough capital and being able to grow the economy.

For perspective, Nigeria’s total budget of $34 billion equates to approximately $151.9 per person. This figure illustrates the limited resources available on a per capita basis, underscoring the need for more effective capital formation strategies.

Nigeria must move beyond hand-to-mouth existence and accumulate capital to fuel economic activities. This capital can be formed through borrowing, saving resources, and tax collection. However, borrowing capacity depends on our ability to repay. Our ability to repay comes from the revenue we generate, which, in turn, depends on the economic depth and revenue collection know-how.

Taxation and capital formation

Taxation is a fundamental capital source for any nation. A country’s ability to generate tax revenue depends on the wealth of its human capital, the productivity of its businesses, and the availability of natural resources. Countries that operate at the high end of the value chain can generate substantial tax revenues. For instance, states hosting the headquarters of major companies and key professionals tend to have higher tax income.

There is a close relationship between the size of the economy and tax generation. A large economy can generate more taxes, and substantial tax revenues can, in turn, stimulate further economic growth. The critical issue lies in identifying taxable economic assets and organising effective tax collection processes.

Challenges in tax collection

A major challenge in tax collection is data and identity management. While the formal sector is relatively well-regulated, the informal sector presents significant difficulties. Proper identity management and comprehensive database management for businesses and other taxable assets are essential for improving tax collection. Without knowing who or where the taxpayers are, it becomes nearly impossible to collect taxes effectively.

“Our ability to repay comes from the revenue we generate, which, in turn, depends on the economic depth and revenue collection know-how.”

In addressing these challenges, Nigeria can look to examples from other rapidly growing economies that have implemented robust tax policies and have seen their tax-to-GDP ratios improve significantly.

Learning from Others: Tax Policies That Work

Ireland attracts multinational corporations with a 12.5 percent corporate tax rate and Research and Development (R&D) tax credits, while also supporting startups with grants.
Switzerland offers tax rates from 12 percent to 21 percent, a stable environment, and strong R&D investment.
Singapore, with a 17 percent corporate tax rate, is a business hub due to its SME incentives, infrastructure, and free trade agreements.
The UAE, historically low-tax, now has a 9 percent rate for high-profit businesses and offers free zones with 100 percent foreign ownership.
China has a 25 percent tax rate but provides preferential rates in special economic zones, supported by significant infrastructure and technology investments.
South Africa, with a 28 percent tax rate, offers incentives like investment allowance and benefits in Special Economic Zones.
Rwanda, with a 30 percent tax rate, attracts investors with tax incentives, import duty exemptions, and heavy infrastructure investments, including tech hubs and airport improvements.

Operational tips for tax growth

Here, we present a framework to guide the effectiveness of tax collection that we could look into. Nextzon calls it the LEADCEM framework. Below is a brief definition of what it means:

Law: Clear tax laws and regulations.

Enumeration: presence of a reliable and robust database of taxable entities. Knowing exactly who and what needs to be taxed.
Assessment: presence of tools and know-hows for computing tax amounts per taxable entity.
Demand Notice Management: Having a reliable and efficient tool and process for generating and distributing demand notices and tracking payments against the same.
Collection: presence of strategy, tools, and manpower unique to each tax head and taxable entity, whether online or through other means.
Enforcement: What gets measured and rewarded gets done. The system must be able to identify those who have not paid and find ways to force them to pay. Again, the enforcement mechanism will vary by tax head and taxable entity.
Media: Using media to raise awareness and ensure compliance.

Every element of the LEADCEM framework must be tailored to the revenue health of the environment and sector, i.e., the formal and informal sectors.

Conclusion

For Nigeria to truly compete on the world stage and grow its economy, it must generate capital through various means, including tax collection. The efficiency and effectiveness in tax collection will help attract loans, make savings possible, and help ultimate capital formation to fund growth of infrastructure and the economy at large.

Sir Mac Atasie is a seasoned strategy consultant and innovation architect who has been a key part of shaping Nigeria’s corporate and technological ecosystem. As CEO of Nextzon and former Head of Strategy at Accenture, he has led many transformative initiatives. He also served as the CEO of HEIRS Alliance, forerunner to HEIRS Holdings, a conglomerate with investments in Transcorp and other notable corporations. With a deep imprint in Nigeria’s financial sector, Mac has designed strategies for leading banks, insurance companies, and regulatory bodies including the CBN, SEC, and BOI.