The Federal Government of Nigeria has in recent times relied heavily on crude oil sales for generating the country’s revenue. However, in the current economic climate and with the price per barrel falling to $42, it is important for there to be renewed thinking on the significance of tax as a source of government revenue.
Tax is a principal mechanism by which the state pays for the services and facilities that it provides for its citizens. The success of a tax system relies on all taxpayers paying their fair contribution.
Relevant statistics
Tax as a percentage of GDP can be used as a yardstick to measure how effective a tax system is. That of Nigeria (6 percent) is much lower than our neighbours (e.g., Ghana 20 percent, Cameroon 18 percent), the BRICS countries (e.g., Brazil 34.4 percent, Russia 29.5 percent, South Africa 26.9 percent) and other MINT countries (e.g., Turkey 32.5 percent, Indonesia 12 percent).
According to figures released by the Federal Inland Revenue Service (“FIRS”), tax revenues for Q1 2015 dropped by 25 percent quarter on quarter, with a tax gap in the region of N290bn (for the period January 2015-July 2015). There was also a 7 percent drop in non-oil taxes for the same period in 2014.
The spectrum of tax avoidance/evasion
One of the main reasons for the tax gap and low ratio in Nigeria is the prevalence of tax avoidance and evasion at varying levels.
Tax evasion is a criminal act which involves businesses or individuals avoiding the payment of their true tax liability.
Tax avoidance (i.e., the exploitation of weaknesses in a tax system to minimise the amount of tax due) is seen by some as contrary to the intentions of tax legislation and therefore unacceptable.
There is no justification for businesses that make vast profits in a country while avoiding paying their fair share of tax in that country. Others, mainly big businesses, take the view that tax avoidance is legitimate, justifiable and acceptable.
In between tax avoidance and tax evasion is a category known as “tax avoision”, which involves the non-payment of tax by means which cannot be clearly marked as legal tax planning or illegal tax evasion.
In recent times tax authorities in a number of countries have adopted a more aggressive approach to combating tax avoidance and evasion in order to improve their tax revenues.
Improving Nigeria’s tax revenues
In order to halt the decline in tax revenues, it is paramount that alongside the war against corruption the government instigates a similar war against tax avoidance and evasion.
Below are some ideas of how the government could seek to tackle tax avoidance and evasions which would result in improvement in the government’s tax revenues.
Risk-based audits
The FIRS should strive to make the most efficient use of its available resources by adopting an intelligence based and risk-led approach to auditing tax declarations. This approach should be based on a number of factors including: (a) Size and complexity of the business; (b) Past compliance history; (c) Behaviours; (d) Tax throughput; (e) Inconsistencies and fluctuations; (f) Business sector; (g) Recent changes; and (g) Approach to tax planning.
The process of risk-based reviews can be automated to save time and create a bank of benchmarked information.
Large business focus
The largest tax avoiders are usually multinational corporations (“MNCs”) that constantly shift their profits to low tax havens thereby depressing their tax burden in the country in which the profit is generated. These MNCs should be policed exclusively by specialist large business units.
The unit should consist of tax specialists of the highest calibre, sector specialists that understand the sector as well as those that work in-house, accountants and auditors conversant with the complexities and intricacies of big business.
Enforcement and debt management
A tax system devoid of an aggressive enforcement programme will not serve as a deterrent to tax avoiders/evaders. Any successful tax system is built on an effective and efficient enforcement and debt collection process.
It is of the utmost importance that businesses that pay their fair share of tax must have confidence in the tax system, bringing avoiders/evaders to book and enforcing payments of tax debts goes a long way in providing such reassurance to law abiding taxpayers.
So, the government must go on the offensive in enforcing tax debts by any means necessary including the use of specialist debt collectors, seizure of assets, closing down of businesses and the additional financial penalties.
Disclosure of use of tax avoidance schemes
Businesses should be required to disclose their use of tax planning schemes to FIRS. This will allow the tax authority to obtain early information about tax arrangements and how they work; and information about who has used them. Whilst the disclosure in itself may have no impact it may be rendered ineffective if deemed to be abusive and if not, the loopholes exploited may be blocked.
Businesses using schemes may also be required to pay the tax savings derived from the use of a scheme while FIRS decides on the legality of the scheme disclosed.
General anti-abuse rule (“GAAR”)
Tax planning which has the sole or main purpose of reducing the tax burden is abusive and legislation in the form of an all-encompassing GAAR is required to deter businesses from entering into such abusive arrangements.
A GAAR will counteract the abusive tax advantage which businesses seek to obtain by entering into such tax planning. The GAAR will allow FIRS to adopt a look through approach and assess for the tax which would be due but for the tax planning.
Liaison with other government departments
Government departments such as Customs and Excise have a wealth of information about businesses and their trading activities in Nigeria. This information could be used to identify tax evaders/avoiders.
Tax amnesty
The government should consider offering a general amnesty as part of a media campaign and in a bid to quickly boost the tax revenues. A properly structured tax amnesty could prove to be a winner for the government, economically and politically.
The amnesty will give businesses the opportunity to disclose undeclared earnings and unpaid taxes without the potential sanctions which normally accompany tax evasion.
It will also be an opportunity to encourage as many businesses as possible to come into the tax system and regularise their affairs.
Ola Adigun
