• Friday, March 29, 2024
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Government accountability and its impact on voluntary tax compliance (2)

How not to tax a desperate country

In recent times, there has been an increased demand for transparency and accountability from government at all levels by Nigerians. More citizens are becoming aware of the extravagant activities of government officials thanks to the instant access to information via social media.

Thus, Nigerians can easily compare the remuneration of their public officials to that of their contemporaries in other similar developing nations. There have also been instances of trending videos of alleged lavish lifestyles of public office holders and their family members, which seem to validate the perception of the citizenry that its public officials may be wasteful.

Although the sources of the bulk of the information (in the form of pictures and videos) remain largely unverified, the consensus is that public funds are being siphoned for personal gains. As a result, there has been increased agitation for government officials to deliver on electoral promises and for the overall development of the nation’s infrastructure from the revenue generated from all sources, especially taxes.

A review of the Constitution of the Federal Republic of Nigeria (FRN) (1999 as amended) reveals that the Constitution does not specifically mandate the three tiers of government to be accountable to the citizenry. However, section 14 of the Constitution pronounces that the FRN shall be a State based on the principles of democracy and social justice. The State is, therefore, responsible for security and welfare of the people. In addition, the State is to control the national economy in such a manner as to secure the maximum welfare, freedom and happiness of every citizen based on social justice and equality of status and opportunity.

Citizens, on the other hand, are expected to declare their income honestly and pay their taxes promptly. The above notwithstanding, section 22 of Chapter II of the Constitution provides that “the press, radio, television and other agencies of the mass media shall at all times be free to uphold the fundamental objectives contained in this Chapter and uphold the responsibility and accountability of the government to the people”.

In addition to the above, Nigeria voluntarily signed up to the global Extractive Industries Transparency Initiative (EITI) in 2003. The implementation of the EITI led to the introduction of the Nigeria Extractive Industries Transparency Initiative (NEITI). The NEITI Act was enacted in 2007, with the aim of institutionalising accountability mechanisms and processes, aimed at instilling a culture of transparency in Nigeria’s extractive sector for the benefit of all Nigerians.

NEITI achieves its objective through annual audits, identification of areas requiring remediation and adopting an engagement-oriented approach, towards achieving meaningful impacts in the lives of the citizens. While the aim of setting up the NEITI is commendable, its limitations are far-reaching. Its mandate is restricted to the extractive industry, thus, it is unable to drive accountability in other sectors. Furthermore, beyond determining the accuracy of payments to the federal government, it is unable to monitor the utilization of the funds, a crux of accountability.

Tax compliance in Nigeria

One of the factors that have contributed to the country’s low tax-to-GDP ratio, especially when compared to similar emerging economies, is the low level of voluntary compliance. Despite the various enlightenment schemes on the importance of tax compliance, an average Nigerian does not see the need to pay taxes when he or she is still responsible for providing basic amenities, such as portable water, power, security and even good roads!

Take the case of Mr Sadiq, who lives in the suburbs of Lagos. He has had to employ the services of a security guard to protect his family and himself at his home. He is also responsible for generating his own electricity using two generator sets to meet his family’s daily needs. Mr Sadiq has also contributed, on several occasions, to fix the road leading to his estate. He patronises a nearby merchant to supply portable water to his home. Mr Sadiq’s children attend a private school and the fees leave a hole in his pocket every term.

Nonetheless, Mr Sadiq’s employer deducts the applicable personal income tax from his salary every month and remits it to the State Internal Revenue Service. Mr Sadiq is currently dissatisfied with the amount he pays as taxes monthly and has dialogued with his employer on numerous instances on the best way to reduce his tax burden, because the government has failed in its responsibilities of providing social amenities for his family and himself.

Mr Olajide, a friend to Mr Sadiq, is a businessman who resigned from his paid employment to pursue his entrepreneurial dreams. Just like Mr Sadiq, he provides his family with basic amenities of life ranging from electricity supply to portable water. However, Mr Olajide is one of the many Nigerians who do not voluntarily pay taxes because of the expectation of a ‘quid pro quo’ relationship with the government.

According to the International Monetary Fund (IMF), only 10 million persons out Nigeria’s labour force of 77 million are registered for tax purposes. This constitutes about 12.9 percent of the country’s labour force. The government and tax authorities (both federal and states) are aware of the low voluntary compliance level especially in the country’s informal sector and have made some efforts to address the issue.

One key intervention programme is the tax amnesty scheme rolled out between 2016 and 2017. The most recent is the Voluntary Asset and Income Declaration Scheme (VAIDS), which was introduced in July 2017 via Executive Order 004 of 2017. The VAIDS initially offered a nine-month window (i.e. July 2017 to March 2018) for taxpayers to regularise their tax status relating to previous tax periods by paying all outstanding tax liabilities without fear of criminal prosecution for tax offences.

The window was, however, extended by an additional three months, ending in June 2018. The VAIDS also provided the additional benefit of interest and penalties waiver due on the outstanding taxes. The main objective of this exercise was to bring more individuals/businesses into the tax net with the aim of improving compliance, going forward. However, the jury is out on whether the scheme achieved this objective.

In Nigeria, there has been a historic mismatch in the revenue collected from taxes, the welfare of the citizenry and the general state of infrastructure in the country. Hence, taxpayers have often justified their non-compliance by arguing that public revenue arising from taxes has either been wasted or looted for personal gains. Thus, tax avoidance or outright evasion is being practiced by the citizens. Regardless of the legality or morality of the citizen’s assertion, one can grasp the economic logic of it i.e. if the government has been unfaithful in little, why trust it with more tax revenue? Therefore, the authors are of the view that it is becoming crucial for the government to be accountable for the revenue generated especially through taxes in order to strengthen taxpayer’s confidence in the system.

Other jurisdictions – what happens?

Nigeria can learn from other jurisdictions in motivating voluntary tax compliance of its citizenry.

For example, Sweden has been dubbed one of the strongest, most stable and high-compliance tax states in the world. According to the OECD Revenue Statistics for 2018, the Swedish tax-to-GDP ratio was 44.0 percent in 2018, exceeding the OECD average of 34.2 percent by nearly 10 percentage points. Although there are three other countries (France, Denmark and Belgium) with higher tax-GDP ratio than Sweden, the country has been lauded for its high tax compliance rates, despite having the highest personal income tax rate in the world (current high band of 61.85 percent). Like Nigeria, Sweden also operates a PAYE system, whereby income tax on salaries is deducted by the employer and paid directly to the tax authority/agency.

It has been reported that Swedes take taxation very seriously because of the transparency in the tax system. This transparency maintains a sense of equality and keeps citizens accountable such that tax evasion is virtually non-existent. In Sweden, it is common knowledge that taxation finances things like education, healthcare and other social benefits. For instance, 27 percent of tax revenue in Sweden is used to fund education and healthcare, 5 percent for the police and military while 42 percent is for social security. Thus, the general attitude in Sweden is that paying taxes is a good thing, especially as everyone benefits from it. Skatt, the Swedish word for tax, also means “treasure”, and Swedes certainly value what they get for their money. Specifically, anybody under the age of 21 receives free medical, dental, and optical services. Furthermore, if a Swedish worker puts in at least 20 hours per week for twelve months, then loses his/her job, such worker will receive A-kassa, 80 percent of the former salary for up to 200 days, and then 70 percent of it for the next 100 days. Such person must be actively seeking work to get these benefits.

In 2017, The Economist magazine reported that Swedes were deliberately overpaying their taxes (by approximately $4 billion in 2016). Initially, it was deemed as a further indication of the ultra-collectivist, yet liberal nature of Sweden. However, a closer investigation uncovered the truth; a combination of negative interest rates on bank deposits and positive interest rates (0.56 percent) on tax refunds made it more profitable to overpay taxes and hope to get a refund (Sweden has now scrapped the interest rate). Essentially, it made more sense to over pay tax than to keep money in the bank.

In China, although, not exactly similar to that of Sweden, the country has incentives to encourage voluntary tax payments. Taxpayers with serious diseases will have their amount of out-of-pocket medical costs deducted from their taxable income each year. For children’s education, an amount of 1,000 yuan (about 145 U.S. dollars) will be deducted every month from the parents’ taxable income for each child’s education from pre-school all the way to doctoral education, including technical education.

The above and many other incentives, including government transparency and accountability for tax revenue, have contributed to increasing the voluntarily compliance rates in these two countries.

The way forward

Clearly, stimulating the tax to GDP ratio and improving tax compliance go beyond the numerous initiatives and schemes that have been introduced by the FGN. Rather, there should be a concerted effort on the part of the government to win back the trust of taxpayers by displaying judicious use of tax revenue and instituting adequate checks against misappropriation of tax revenue.

Voluntary tax compliance can easily help to achieve the government’s expectation and reduce the amount expended on revenue collection by the tax authorities. Voluntary compliance, however, is a function of the taxpayers’ assessment of the government’s transparency and accountability. It is, therefore, important for the government to ensure that there is a continuous and comprehensive communication on the utilization of tax revenues generated periodically. This will help build trust of taxpayers in the tax system rather than continue to debate on why we should pay tax (or why we shouldn’t) and never get to the business of paying it.

 Dayo Adeniji & Aminat Jegede

Adeniji and Jegede are, respectively, Senior Manager and Manager at KPMG Nigeria