In Nigeria’s current push to diversify from oil revenues, tax analysts have identified comprehensive tax reform as a potential goldmine. There is a vast untapped sector of individuals and businesses operating in the informal economy. Since employees and often employers are not registered with any government agency, it becomes nearly impossible for the Federal Inland Revenue Service (FIRS) to levy and enforce tax payments towards this sector. If the Nigerian government and the FIRS can implement massive structural reforms to its tax policies, taxation has the potential to become a viable option to replace dependence on at least a portion of oil revenue. Overall, tax reform would be a low-cost and sustainable way for Nigeria to raise consistent revenues on a yearly basis. There are also challenges that must first be overcome in order to make tax reform a long-term solution.
Nigeria’s Historical Tax System
The modern establishment of taxation policies in Nigeria dates back to start of British colonial rule after the fall of the Sokoto Caliphate. By 1914, taxes were levied throughout the entirety of what is considered modern day Nigeria. The number of people per household, amount of land owned, and other agricultural factors were the key determinants of taxation assessments. The oldest of these taxes levied on citizens is the personal income tax, which has seen a variety of amendments and improvements throughout the decades.
Similarly, to twenty-first century governments, the British colonial elite attempted to justify these taxes by promising infrastructure and general economic improvements. The British were simply the body creating the legislation, whereas the local Nigerian leaders were the ones tasked with actually collecting and enforcing these regulations. The backlash and general sense of discontent was placed on local leaders. This sparked the beginning of longstanding distrust between the tax enforcers and the taxed, much of which still continues today.
Current Taxation Statistics
Due to the historically high degree of resistance to direct taxation, a majority of taxes imposed upon Nigerian individuals are indirect, in the form of Value Added Taxes (VAT) and other import taxes on goods and services seen in the figure below. Currently, only 16.7% of Nigerian individuals pay income taxes, mostly due to the fact that they are employed by businesses registered with government taxation authorities. Thus, with over 80% of Nigerian workers not paying any personal income taxes, there is an opportunity for the FIRS to implement policies that could significantly tighten the large gap that currently exists.
Current Challenges to Tax Reform
Tax reform in Nigeria is certain to be a long-term project, with many challenges that the FIRS will need to address. As previously mentioned, there is an overwhelming lack of information on the side of the FIRS and other government agencies regarding the businesses operating within Nigeria. According to a study done in 2012 by the Nigerian National Bureau of Statistics, 99.87% of small and medium enterprises in Nigeria are not registered with the Corporate Affairs Commission. This essentially means that corporate taxes accounting for 50% of the country’s total tax revenue come only from large enterprises. These startling statistics highlight the extensive problem regarding lack of information in the form of documentation and registration. Furthermore, a majority of these businesses operate solely through cash transactions, making it nearly impossible for the FIRS to uncover transaction history or value the assets of the business to impose taxes or conduct audits.
Throughout Nigeria, there is a general distrust and dislike of the taxation system due to corruption and lack of communication between levels of the government. Generally, when citizens are paying taxes to their government, they establish a relationship in which the government is expected to act responsibly with their funds. However, with the staggering level of corruption in the Nigerian government, Nigerians have not seen transparent nor meaningful results. In a 2016 survey conducted by PriceWaterhouse Cooper (PwC), 70% of respondents say they are tax averse because they do not see their tax money being put to good use. Additionally, there is a lack of communication between levels of government, leading to double taxation and/or no taxation for many businesses and individuals, leaving a bad taste on the side of the taxpayer.
Lastly, the lack of integrated technology makes imposing taxes difficult on the part of the government, and paying taxes difficult for individuals and entities. There are a variety of government agencies imposing taxes, each with their own record keeping and database. This further perpetuates the problems of double taxation or non-taxation. On the side of the taxpayer, the tax paying process is extremely complex, as there are multiple different payments to be made to multiple different collection agencies within their municipality, state, or country.
Reform in the Making
In recent years, Nigeria has begun a serious overhaul of its taxation system, laying the groundwork for reform in 2017 under the “National Tax Policy”. The National Tax Policy lays out the objectives of tax reform, guiding principles of the tax system, goals of the reformed tax system, each major stakeholder’s role in the system, and how these policies will be administered. The policy addresses the tax to GDP issue, along with the challenges to collecting information, strengthening cooperation between government agencies, technological advances, and simplifying the tax paying process. It is notable that the National Tax Policy accurately evaluates the present challenges to taxation, the future goals for tax policy, and ways in which these goals can be achieved.
In addition to the creation of the National Tax Policy, the ERGP was also established in 2017. Within the growth plan, the Ministry of Budget and National Planning details tax policy objectives, most notably increasing the tax to GDP ratio from 6% to 15%, the target ratio of developing countries. In addition, the plan lists potential strategies to achieving the target tax to GDP ratio and general financial stability, with the most prominent being acceleration of non-oil revenue generation. Within this strategy, key activities include raising the VAT tax on luxury goods and increasing indirect taxation overall as a way to capture a greater share of tax revenue from informal economy participants. Additionally, the plan aims to deploy technology to widen the net of taxable individuals and entities, generate larger tax compliance, and increase revenue collection. The government also recognizes accountability and transparency as being key factors to improve tax participation and aims to increase audits and encourage whistle-blowing. Finally, the government details plans to encourage the building of infrastructure by offering tax incentives, thus attempting to show its citizens how taxation can benefit the country as a whole.
How Nigeria can Achieve its Tax Reform Goals
Nigeria is on the path to a major tax overhaul as the FIRS recognizes the need to focus on technology, cooperation, and simplicity to make its tax policies successful during implementation. These elements are all overlapping and should be tackled in tandem.
The FIRS believes that leveraging existing technologies will allow for the collection of data on employees and employers to be significantly simplified. The creation of a singular database of taxpayers, both individual and corporate, will allow for cooperation between government agencies and different levels of government. This will then result in easier assessment of taxes due and will prevent double-taxation or non-taxation. Additionally, the creation of a payment portal by the FIRS will simplify how taxpayers pay and allow for more transparency, as taxpayers can see exactly what taxes are due. To further simplify the payment process, the government is seeking to consolidate local, state, and federal taxes into one bill.
The government recognizes that it must also work to foster cooperation between itself and its citizens. Increased accountability and transparency are essential to incentivize citizens to pay their taxes. The administration aims to show its citizens that their taxpayer money is being put to good use, benefitting the development of Nigerian society. Overall, the Nigerian government is working to implement the recommendations mentioned above through yearly finance reform bills, amendments to various tax regulations, and the development of technology and ease of payment.
The Years Ahead & Future Potential
Currently, most of the policies discussed by the FIRS have not been widely implemented throughout the country, and tax compliance continues to be a major problem. According to the FIRS, total tax revenue generated in 2019 from businesses was $5.26 trillion naira, equivalent to $13.5 billion USD. Per the Corporate Affairs Commission of Nigeria, there are 3.1 million registered businesses in the country, therefore this would mean that the average tax payment made by a business was just $5 USD. This figure clearly shows that Nigeria’s tax policies and enforcement mechanisms have a long way to go in order to make tax revenue a sustainable and reliable way of generating non-oil revenue. However, if the government can continue to develop mechanisms of capturing taxpayer data, the tax base will continue to grow. In addition, the government aims to continue to develop its level of accountability and trust with taxpayers to make them less tax adverse. The Nigerian tax system has a long way to go in the realm of implementation and enforcement, however the government has an accurate vision of goals to pursue and ways to reach them through the National Tax Policy and the ERGP. Tax reform and increased participation is a long-term commitment that will generate effective and sustainable revenues year over year, allowing Nigeria to reduce its dependency on oil revenues.
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