Growing the Share of Revenue Government Collects As Taxes, By Uddin Ifeanyi
At 35 per cent, our company income tax rate is one of the highest in the world. But a slew of exemptions, waivers, and holidays meant that last year, the effective income tax paid by companies operating in the country was, according to the International Monetary Fund (IMF), just 6 per cent!
The total amount of money that the Nigerian government collects in taxes (also known as the “tax take”) is small — both in respect to the economy’s size, and, in comparison with similar economies. Two years ago, for example, our tax take was 5.3 per cent of domestic output. A cohort of frontier and emerging economies, including Algeria, Angola, Brazil, Ghana, and South Africa, averaged 22 per cent in the same year.
In a sense, this is the clearest indication of how difficult efforts by successive governments have been to pivot the economy away from its dependence on oil export earnings. Put another way, we have struggled to broaden and/or deepen the economy’s productive base over the years. This, also, largely explains why rising unemployment will remain a huge burden over the medium term. And why social tension might worsen. With oil prices considerably much higher today than was envisaged by most analysts at the beginning of the year — and likely to remain that way for much of this year — it will be even more difficult to keep policy makers focussed on this pain point.
Yet, the fact of oil futures being quoted at prices considerably lower than today’s (spot) prices should have managers of the economy very worried. Arguably, the temporary supply shocks to the market, especially the ratcheting up of American sanctions on Iran, should see new supply come in to drive spot market prices down. The current backwardation in global markets for crude oil is, nonetheless, a minor irritation. Far bigger, in terms of the long-term outlook of the Nigerian economy is the need to address the problem of low non-oil revenue as part of the process of fixing this economy. This is not so much because the current government needs money to finance its ambitious infrastructure development plans. Though, the large debt obligations arising from our current spending pattern is an important consideration in the revenue conversations. For, depending on whose figures you use, we are currently spending anything between 66 kobo and 77 kobo on every naira we earn as revenue servicing our debts. A significant improvement in our tax take should render this process less onerous.
Much of last year, the gripe amongst most of the small- and medium-sized business proprietors that I spoke to was about how the tax authorities were making their lives hellish. The taxes due from these businesses were based on assessments of the turnover on their bank accounts, rather than profits from their businesses.
Investment in improving health and education outcomes across the country require money. As does the provision of infrastructure without which the economy and its citizens will enter a second-class category in an increasingly interconnected world. Even the process of de-risking the economy (for improved private sector play) that some experts argue is a better alternative to government bingeing on debt in order to provide infrastructure would be helped by deeper government coffers.
Seated across from a senior staff of one of the south-western state’s internal revenue service last week, it was, thus, “natural” to raise these concerns — and more. Much of last year, the gripe amongst most of the small- and medium-sized business proprietors that I spoke to was about how the tax authorities were making their lives hellish. The taxes due from these businesses were based on assessments of the turnover on their bank accounts, rather than profits from their businesses. And once assessed, the tax authorities compelled banks to place liens on the respective accounts until the business owners “settled”. Given the ease with which the tax authorities could compel banks to place liens on the latter’s customers’ accounts, most small- and medium-sized businesses (despite this government’s publicly-avowed commitment to make the conditions for doing business in the country better) went through private Hell last year.
In a particularly egregious example that was related to me, a fast-moving consumer goods (FMCG) business noticed that the names on its income tax assessment were for staff of a much bigger outfit in its industry. It promptly moved to correct this. The tax authority apologised for this error. And returned an assessment exactly equal, in naira terms, to the disputed one. The new iteration, however, compensated for the smaller size of the assessed company by including combinations of the names of very senior staff more than twice! Plainly, the imperative of meeting the revenue targets against which staff of the internal revenue service would be appraised consistently trumped common sense.
…we would go further in the design of revenue generating programmes across the different levels of government if we but paid attention to how the incentives that drive these are structured and how economic entities qualified to pay taxes respond to these.
“Yes”, I was told” by the internal revenue service’s big cheese, “these snafus happen”. “But by far the bigger threat to government’s tax collection effort are the shenanigans resorted to by these companies!” I didn’t know, for instance, that the tax authorities have been trying to assess and collect taxes from the distribution chain of the FMCGs — to little effect. Nor that the huge punting/betting industry in some states barely pay taxes. Apparently, too, some sole proprietors would rather book substantial profit as emoluments in order to pay the much smaller personal income tax instead of the company income tax.
Did my interlocutor not see that beyond the law and order implications of all these, there are design flaws that incentivise the penchant to game the system? Not really. At 35 per cent, our company income tax rate is one of the highest in the world. But a slew of exemptions, waivers, and holidays meant that last year, the effective income tax paid by companies operating in the country was, according to the International Monetary Fund (IMF), just 6 per cent! Did it not make much sense, then, to pare the company income tax rate to circa 20 per cent, and remove the loopholes that make the current rate as effective as a fairly-used sponge?
Obviously, we would go further in the design of revenue generating programmes across the different levels of government if we but paid attention to how the incentives that drive these are structured and how economic entities qualified to pay taxes respond to these. Unfortunately, the takeaway from that conversation is that the internal revenue service would prefer to ratchet up the use of bank liens on assessed accounts in its tax raising drive this year — especially now that the elections are over.