As Nigeria looks to broaden and stabilise its source of revenues, the government is taking steps to streamline a complex, multi-layered system of taxation that has historically resulted in wide-spread evasion.
According to the Ministry of Finance, more than 75% of smaller enterprises fail to pay taxes, while revenues collected amount to 7% of GDP, a figure the government has said it wants to see increased to 22% within two years.
Need for reform
However, Nigeria may find it difficult to achieve this target unless it can refine its tax-paying process, according to a new report by consultancy PricewaterhouseCoopers (PwC). In the report, prepared by PwC for the World Bank and published in late November, Nigeria was rated 170th out of 189 countries for ease of paying tax, down from 155th last year.
Taxation in most West African countries is a challenging policy issue, given the large size of the region’s informal sector. Accord to PwC, Nigeria has some relative strengths, including its “total tax rate”, defined as the sum of various taxes (such as corporate, labour, property and turnover taxes) expressed as a percent of profit for a hypothetical medium-sized business. By this measurement, Nigeria’s 33.8% was below both the global average of 43.1% and that of Africa, at almost 53%.
However, it fared poorly in other categories. One such example was the number of tax payments that the hypothetical company had to make, which stood at 47, well above international standards. But it was the time a business had to spend to meet its tax obligations – 956 hours annually as against the African average of 230 hours or the global average of 268 hours – that dragged Nigeria’s rating down.
According to Taiwo Oyedele, PwC Nigeria’s head of tax and corporate advisory services, some of the problems that have been highlighted are a result of multiple layers of taxation. Presently, entities are required to pay taxes at the local, state and federal levels, all trying to raise revenue without due consideration to the impact on the tax payer.
“Overall, the ranking of Nigeria is 170 out of 189 countries worldwide,” Oyedele told the local press. “So Nigeria is not doing well. That is clearly not where we should be, especially as we aim to be one of the top 20 countries in the world by year 2020.”
Calls to boost tax base, encourage investment
According to Mark Abuh, a tax expert with the World Bank-funded business development initiative Growth and Employment in States, it is important to streamline existing processes as a measure to encourage investment. A multi-tiered tax system reduces enterprise output, operating surplus, investment, non-oil export and GDP while promoting inflation, he told local media on December 2.
“It is a key disincentive to both local and foreign investments; it leads to high cost of business and could eventually lead to divestment of major stakes off an economy,” Abuh said.
Moving to close loopholes, raise compliance
While introducing new taxes could be one option to boost revenues, the PwC-World Bank report has instead recommended improving compliance with existing laws as the best way to increase tax earnings.
Leadership seems to be moving in this direction already, with Finance Minister Ngozi Okonjo-Iweala announcing on November 27 the government had commissioned consultancy McKinsey & Company to work with the Federal Inland Revenue Service (FIRS) to boost revenues. The move is part of a programme to increase tax intake by almost $500m in 2014. Among the measures that will be implemented are improved audit of returns, filing enforcement, reviews of tax holidays and exemptions, increased registration of companies and improved external communication.
A similar move in nearby Ghana to consolidate and streamline that country’s taxation agencies and regulations a few years ago resulted in an immediate improvement of more than three percentage points year-on-year for its rate of tax revenue as a percentage of GDP, from 12.7% in 2010 to 15.9% 2011.
“One of the areas of weakness has always been in our tax policy,” minister Okonjo-Iweala said. “The new move will see the non-oil sector contribute more to the economy through payment of appropriate taxes by relevant organisations. The FIRS has a target of $14.1bn under the 2014 budget and Nigeria can increase this by another $481m. We hope that in the medium term we can improve further.”
Overcoming the weaknesses referred to by the finance minister may well improve tax revenue, but prolonged negotiations between representatives of the three tiers of government will likely be needed to streamline tax procedures and reduce the burden on business.