President Muhammadu Buhari appointed tax czar Babatunde Fowler with a mandate to explore avenues of boosting non-oil revenue. Assistant Editor Nduka Chiejina examines the challenges before the Federal Inland Revenue Service (FIRS) acting Executive Chairman and the precedent set by his predecessors.
With the tumbling prices of oil at the international market and the over exposure of the economy to the unpredictable volatilities of commodity markets, the option left to the Federal Government is to aggressively shop for alternative revenue sources. And faced with this reality, President Muhammadu Buhari is looking beyond oil.
One of the ambitious plans the government has come up with is the use of taxation to boost revenue and diversify the economy. No doubt, the Federal Inland Revenue Service (FIRS), the agency saddled with tax monitoring and collection, has a great role to play.
The FIRS has been mandated to raise its revenue projection with a directive that a major component of the strategy to diversify the economy is to renew the focus on increasing tax revenues to mitigate the impact of dwindling oil revenues.
President Buhari approved the appointment of Mr. Babatunde Fowler, a former chairman of the Lagos Internal Revenue Service (LIRS), as the Executive Chairman of the FIRS in an acting capacity. Fowler has a mandate to lead the team of tax administrators to actualise government’s target.
The rebasing has shown that the country has a much more diversified economy than envisaged. The fact that Nigeria’s econohas an oil-dependent is incontrovertible as it derives more 75 per cent of its earnings from that sector. But, the underlying strength of the economy is not so much in oil as it is in other areas.
The country should however go beyond the Gross Domestic Product (GDP) of the structure of the economy for tax purposes. The current structure shows that it has potentials to attain a diversified base and to increase non-oil taxes as a percentage of the GDP.
Besides, the country has to diversify its sources of revenue from oil as the rebased GDP has shown that its tax and revenue to the GDP ratio has fallen from 20 per cent to 12 per cent, out of which the non-oil tax accounts for only four per cent. The figure is considered very low, compared to where the country should be.
A run through the indices of other countries shows that South Africa’s tax to GDP ratio is 27 per cent, Kenya (20 per cent) and Ghana (15 per cent), which is the benchmark. So, at 12 per cent, Nigeria needs to double up efforts.
Before the rebasing of the economy, the Federal Government had compared notes with other countries that have better tax administrations. It approached South Africa and Angola. South Africa has successfully increased its tax revenue by $3 billion with the help from domestic and international tax experts. Angola got about half a billion dollars.
During the administration of President Goidluck Jonathan, the government invited McKinsey and Compa to diagnose the nation’s tax system. One of McKinsey’s findings was that 65 per cent of registered tax payers did not file their returns for two years, 75 per cent of registered small and medium scale businesses were not captured in the tax net, and 30 per cent of the companies operating under the pioneer status incentive, abused their tax exempt status.
“They find ways and means of continuing that tax exemption by doing all sorts of things including moving from one company to another within the system, evading tax payment for a long time,” McKinsey wrote in its report.
Since the Nigerian Liquefied Natural Gas (NLNG) Limited exited from its tax holiday, they made a huge remittance of about N200 billion which the government factored into the revenue stream the following month.
As Fowler settles down to business, he will have to talk to, negotiate with, and try to find a payment regime supportive of businesses and individual tax payers. But, he has an institutional backing that “if at the end, businesses and individuals still refuse to pay and support this economy, then we will have to look at other ways of dealing with the situation. We can’t have a situation where only the poor pay tax and the big people refuse to pay.”
The challenge of trust
Some people deliberate refuse to pay taxes because others are not paying. To this end, the government believes it has to be more transparent and efficient in the application of the tax payers’ money. Such monies, it said, must be applied “to provide roads, airports, power and all the services that make the citizens feel they can survive in their country.” The Buhari administration has insisted that it has to change the way of doing things and that it can no longer be business as usual.
The FIRS executive chairman has been tasked to address the issue of corruption and transparency in the use of tax resources “because as long as citizens feel that their money is being spirited away, they are not going to pay. So, the government should be more accountable in the way the money is being used.”
It is a two-way thing, as participants at the Capacity Enhancement Programme (CEP) organised by the FIRS demanded of government that “citizens want to see what is being done with their resources and the government also wants to ensure that citizens pay their taxes.”
The former acting chairman of the FIRS, Ahaji Kabir Mashi, hinted of specific initiatives put in place under the CEP. Some of the interventions he said, were technical – some to improve audit processes; speed up audit and collect tax arrears and debt enforcement.
The consensus is that Nigeria can control its own destiny better by relying on internal resources. After strengthening the tax administration and improving tax collection, all the country needs to do is to look at its tax policies in the areas of existing charges, levies and taxes that are making compliance difficult for businesses and individuals. These challenges, replicated at the local, state and federal levels, make life difficult. The Joint Tax Board (JTB) is already making efforts to harmonise all taxes.
Online tax payment begins
The FIRS chief inherited an online payment system. Tax payers can log on to the internet banking platform of any commercial bank, choosing the FIRS link, and following the prompting, perform their statutory obligations.
This online payment was one of the products introduced by the Mashi administration. The electronic electronic tax payment was initiated by FIRS in collaboration with the Nigeria Inter-Bank Settlement System (NIBSS) and Systemspecs Limited to simplify tax payment.
At the launch and public sensitisation of the new product in Lagos, the former FIRS chief described the e-Tax Pay Solution as a self-service channel available on all commercial banks’ internet banking platforms. He said once a tax payer logs on to any designated bank’s internet platform, a tax payer can click the FIRS link to either pay, or submit necessary documents, the same way other bills are paid online.
“It is that simple. It is that convenient. It is that accessible and it is very secure. Tax payers do not have to go to any tax office before taxes are paid. Tax payment is just a click away”, Mashi said.
The introduction of the e-Tax Pay Solution was in response to a directive by the Federal Government that tax payment should be made easy and stress-free to attract more tax payers into the tax net.
“It is this quest for simplification of tax payment process and ease of access to tax services that led FIRS to recently roll out the electronic filing service under the Integrated Tax Administration System (ITAS). It serves as a means of reducing time and cost of compliance for the tax payers and reducing interface between the tax payers and tax authorities. It provides added convenience for tax payers, who will now sit at the comfort of their homes and offices and upload their tax returns on the e-Tax Pay Solution platform”, Mashi explained.
He urged Nigerians to cultivate the use of the e-Tax Pay Solution or e-filing platforms as these were created for their convenience and ultimately engender a transparent and efficient tax system that optimises tax revenue collection and voluntary compliance.
Mashi, the immediate FIRS Executive Chairman, took over from the erstwhile Executive Chairman, Mrs. Ifueko Omoigui-Okauru in April 2012. Under him, the FIRS collected N14.529 trillion for the federation.
The Service recorded N5.07 trillion as its annual collection in 2012, N4.805 trillion in 2013 and N4.714 trillion in 2014. The same year, the Service launched the e-filing programme under ITAS as well as other automation projects: e-tax pay and VAT auto collect. The FIRS was also certified by the International Organisation for Standardisation, amongst others.
The FIRS said it has taken initiative to grow the non-oil tax component with the take-off of CEP, which is aimed at delivering an additional $500 million non-oil taxes in the 2014 fiscal year. The new proactive approach to grow non-oil tax which Fowler may have to build upon include: the take-off of the CEP which targets delivering of additional non-oil revenue of about $500 million over a period of three years.
The Federal Government is targeting a revenue accruals of N1.789 trillion from Petroleum Profit Tax (PPT), N1.030 trillion from Companies Income Tax (CIT), N96 billion from CIT on gas, N861 billion from VAT and N10.21 billion from Capital Gain Tax while N8.46 billion is expected from stamp duties, and Education tax, personal income tax, technology levy are expected to contribute N156 billion, N59 billion, N10.6 billion respectively to make up total government target of N4.21 trillion. These figures may change as the need arises and as the Buhari administration considers necessary.
The N4.21 trillion revenue target underscores a huge task that needs to be done by FIRS. “From all intents and purposes, there is work to be done. And we have commenced the year (2015) with a lot of positives, we have ongoing nationwide VAT and Withholding tax verification exercise and depending on the gains, we may extend this later in the year”, said Mashi.
Fowler has big shoes to fill as his immediate past predecessor Mr. Sunday Ogungbesan pioneered the administration of Large Taxpayers Unit in Lagos. He paddled the administration of Tax Policy Department of the Service for many years and was pioneer Director, Planning Reporting and Statistics Department.
Fowler’s first move
At his first public engagement, Fowler announced that consultants would be barred from assessing and collecting tax revenue on behalf of the Federal Government. Mr. Babatunde Fowler dropped the hint in Abuja at a parley with members of the JTB. According to him, consultants would henceforth be engaged for data collection only.
He told the JTB that the FIRS has “under 1,000 staff in audit function so you can imagine 1,000 staff trying to review or audit the books of 450,000 companies, it just won’t work. To improve the levels of transparency and accountability these consultants will only gather data, the law does not allow them to do assessment or collect revenue on behalf of government they’re just to assist our staff to collect data.”
The FIRS, he said, “will do the assessment with the States Board of Internal Revenue and issue the demand notices for the tax due.”
Some members of the JTB from the states had complained that “many consultants come to make huge claims so that they can get huge commissions, but they don’t have the capacity to actually collect the huge revenue they claim to have collected in some states.”
On the calls for an upward review of VAT, Fowler noted that “it is the responsibility of the Federal Government and the federal ministry of finance to decide whether VAT will change or not.”
Fowler agreed that five per cent VAT charge was low “when you consider other countries who charge VAT both in West Africa and in Europe but those other countries have reached what I will call the maximum level when it comes to paying taxes or public tax. Those countries have 99 per cent tax compliance. So, I think we should first of all get there before we consider increasing VAT, when everyone is paying their taxes then we can look elsewhere.”
In order to build on the achievements of his predecessors, Fowler said he would reach out to States’ Board of Internal Revenue for collaboration stressing that “there are many stones left unturned as far as our current tax administration processes are concerned. For example it is common knowledge that administration of VAT is greatly hindered by many factors, ranging from inadequate coverage of vatable persons to non-remittances of VAT deductions, tax revenue loss in this aspect can only be imagined”.
On how the Service will operate under his watch, Fowler told reporters that his “strategy is going to change a bit, our objective is to have 99.9 percent level of compliance meaning that everyone and corporate entities that are taxable are captured in the tax net and pay the appropriate tax.”
“The FIRS will exchange information with states boards of internal revenue so that we have all the information on their own data base. We’ve given them ours already, meaning that if there is any company that they don’t have in their data base, they can capture such company so immediately we will have a growth in the number of tax payers at both the federal and state levels within one week.”
The FIRS chair said the revenue boards have “to identify and locate tax payers through sharing and exchange of information as much as possible; conduct joint audit exercises by FIRS and SBIRs; carry out joint tax enlightenment and enforcement exercises; sharing and exchange of information concerning unremitted taxes identified by either side; embark on joint training programmers and workshop and strengthen collaboration on areas of review and amendments of tax laws and legislations from time to time.”
He, however, applied cautious in stating a revenue target by the FIRS when he said that “in terms of percentages and the information given by FIRS, they did say that they have 450,000 corporate organisations out of which one-third were paying. We intend to make sure that 99.9 per cent pay taxes due, in terms of what figure that will be I don’t know but if we are to assume that they are medium to small scale companies maybe we can begin to say 50 per cent growth within the next 12 months.”
Fowler also disclosed that the collation and analysis of Internally Generated Revenue (IGR) of states from 2010 to 2014 is being carried out. The importance of this, he said, cannot be over emphasized “as it would enable us compute non-oil revenue ratio/GDP. As at Thursday, September 10, 2015, we have received IGR figures up to December, 2014 from all the states.”
Fowler also revealed that efforts by the JTB secretariat in monitoring Pay As You Earn (PAYE) at the Nigeria Electricity Liability Management Commission (NELMC) was beginning to yield results “as more states are being listed for payment as soon as funds are released for the purpose.”
The commission he said is also considering piecemeal payments to the states on the outstanding list. “Enugu state just benefited from this arrangement by receiving half payment of its total entitlements from NELMCO sometimes we give taxpayers that opportunity to make piecemeal payments especially when it is a government agency because a government agency is run through budget and of course, you have to have cash to back up those payments”, he said.
To avoid multiple tax payment, Fowler urged Nigerians, who are not sure of what taxes to pay, to stop at any state board of internal revenue office or any FIRS office for clarification. It is time for companies to start paying correct taxes. The differences in figures between states and FIRS will soon be done away with.”
Crack down on tax evaders
Nigerian companies have been urged to adopt automated business solutions. They have been called upon to ensure that they have robust, automated payroll systems and processes in place to easily comply with the demands of an impending tough tax regime.
Magnus Nmonwu, Regional Director for Sage West Africa, stated that “a hard-line attitude to non-compliance from the Nigerian federal and state tax authorities means that companies must get all their processes and paper work in order to avoid tax troubles in the months to come.”
The FIRS has spoken of plans to crack down on tax evaders by conducting audits of companies to ensure compliant with the various regulations. In one of such raids on erring companies in Lagos, the LIRS enforcement units temporarily sealed the premises of 10 firms for failing to remit N45.52 million Personal Income Tax (PIT) of staff to the state government.
Nmonwu noted: “tthese actions show that Nigeria’s tax authorities are taking a zero-tolerance approach to non-payment of tax or incorrect remittances of taxes to the government, whether the reason is a deliberate evasion or an accidental oversight. With companies in Nigeria coming under more scrutiny for their tax affairs, it is essential to put in place systems and processes that help you to easily comply with tax regulations.”
The Personal Income Tax Act (PITA) states that employers are required to file annual returns of all remunerations paid to their employees and taxes deducted and remitted to the tax authorities on or before 31 January every year. Failure to do so carries a maximum penalty of N500, 000 for the employer and N50, 000 for individuals.
Besides, employers must remit PAYE tax each month for each employee to the relevant state internal revenue services, on or before the 10th day in following the month.
Employers and employees are required to contribute 10 per cent and eight per cent respectively of their employee’s monthly remuneration to the contributory Pension Scheme.
There are also other statutory payments, such as the Employee Compensation Scheme (formerly known as the Workmen Compensation Act), Development Levy, National Housing Fund, Industrial Training Fund, just to name a few.
According to Nmonwu, one reason some companies struggle to meet these tax obligations and deadlines “is that they don’t have formal business systems in place to enable accurate record-keeping, precise calculations and deductions and automated preparation and submissions of these statutory returns to the relevant tax authorities or government agencies when due.”
He added: “Against the backdrop of growing regulatory complexity, organisations need to realise that spreadsheets and other manual methods are no longer sufficient to meet their needs.”
To comply, companies must streamline capturing of transactions, automate payroll calculations and bring visibility of the business. Such solutions also make it simpler to keep track of annual changes to tax regulations that impact on payroll tax calculations and various changes in legislation, Nmonwu said.
He said: “The discipline a good payroll solution offers to the business also comes with other benefits. Payroll fraud is a major risk, especially for smaller businesses, and incorrect payments can cost dearly. Payroll software delivers better visibility into transactions, provides an audit trail, reconciles input and output and offers a set of controls, checks and balances that help to prevent errors and fraud. The ability to generate tax certificates, reports and electronic payslips with the click of a button is a major timesaver.”
He said the federal and state governments have been eager to expand their tax bases and are investing heavily in modernising and streamlining tax administration. Given that they desperately need tax funds for social spending and infrastructure investment, they are closing in on companies that don’t comply.
