The Federal Government has been implementing diverse policies designed to raise revenue. The government’s plan to raise Value Added Tax (VAT) from five per cent to 7.5 per cent, imposition of tax on technology firms and banking software manufacturers and the new policy mandating banks to collect five per cent stamp duty on every Point of Sale (PoS) transaction are some of the moves to raise cash to fund N8.9 trillion 2019 budget and other infrastructure projects. COLLINS NWEZE examines the new policy and its implications for businesses and the economy
The Federal Government and its agencies have not hidden their thirst for more revenue. From new campaigns to deepen tax and revenue nets to regulations in banking sector to get customers pay more for banking services, there is a new drive to mobilise funds to provide the requisite infrastructure that will catalyse the economy.
The proposal by the Federal Executive Council (FEC) to raise Value Added Tax (VAT) from five per cent to 7.5 per cent has continued to generate varied reactions from stakeholders in the economy.
While the Manufacturers Association of Nigeria (MAN) believes the raise will spike inflation and affect people’s purchasing power, the Chartered Institute of Taxation of Nigeria (CITN) says the increase was long overdue and should be commended because it will help government realise its developmental objectives.
Before the policy, government also took major steps to tax technological firms. Government is targeting the Nigerian digital economy which is worth $88 billion with capacity to create three million jobs by 2021 but it is largely untaxed. It is looking at getting more taxes from multinational companies such as Google, Apple, Twitter, Amazon, Facebook, Uber, eBay and banking software manufacturers by developing framework that will get them pay taxes locally. Achieving that will however require new tax laws that capture their mode of operations.
These firms deploy the Base Erosion and Profit Shifting (BEPS) rule to shift profits from the spots where economic activity and value creation occur into low or no-tax locations. The practice and absence of suitable tax laws have constrained the Nigerian tax authorities from taxing the digital economy. The Federal Inland Revenue Service (FIRS) is engaging the National Assembly to amend the tax laws to align with changing technology advancement and halt tax revenue leakages from the digital space.
It is beleived that a large part of government revenue will come from this segment of the economy. Millions of Nigerians that make purchases for goods and services online from entities that have no physical presence in the country deny government the much-needed tax revenue. Google, Apple, Amazon, Facebook, Twitter, Uber, eBay, anti-virus firms and banking software providers among others, fall within the digital economy space. They employ thousands of workers to check every loophole that will enable them evade taxes. They also retain the services of the big accounting and global law firms with the sole aim of driving down the rate of tax they pay wherever they operate or their goods are sold.
Tax-motivated profit shifting of this kind has risen up the multilateral agenda since the 2007-2008 global financial crisis, with organisations such as the International Monetary Fund (IMF) pointing to ample evidence that it is taking place. Estimates of the global scale of annual public revenues lost to profit shifting vary. One recent estimate put global losses from corporate tax avoidance at about $500 billion yearly, with developing countries, including Nigeria hardest hit.
Traditionally, discussions about who pays tax and where have been based on two models: residence taxation and source taxation. The former holds that people and companies should contribute to the public services provided for them by the country where they reside and that this tax applies to all their income, no matter where it comes from. The latter holds that the country providing the opportunity to generate income or profits should have the right to levy tax.
CBN wades in
The Central Bank of Nigeria (CBN) came out with a new policy mandating banks to take N50 stamp duty fee on every Point of Sale (PoS) transaction.
The directive on the Unbundling of Merchant Settlement Amounts was contained in the CBN circular to all banks, processors and switches titled: Review of Process for Merchants Collections on Electronic Transactions.
The new policy requires that instead of Stamp Duties Payment on aggregate transaction, the charges will now be taken on individual transaction that occur on PoS.
The circular signed by CBN Director, Payments System Management Department, Sam Okojere, authorised banks to unbundle merchant settlement amounts and charge applicable taxes and duties on individual transactions as stipulated by the regulators.
Merchant Service Charge was also reviewed downward from 0.75 per cent capped at N1,200 to 0.50 per cent capped at N1,000.
The CBN and Nigeria Interbank Settlement System (NIBSS) are working closely, including setting remittance processes that ensure that the stamp duty charge for PoS is collected.
In an NIBSS report titled: Returns on Stamp Duty Collection for Merchant Transactions, the payment agency said the new stamp duty payment plan is in line with the provision of the Stamp Duties Act and Federal Government Financial Regulation 2009.
The policy, it added, was aimed at ensuring strict adherence to the CBN guideline on the subject, collection and Remittance of Statutory Charges on receipts to Nigeria Postal Service under the Stamp Duties Act dated January 15, 2016.
The procedural processing guide for stamp dutycharges for PoS, web merchant and all deposit money banks (DMBs) should download daily PoS/Web settlement report from their respective processors settlement file transfer portal.
N8.9tr budget funding
The N8.9 trillion 2019 budget needs adequate funding for it to achieve the desired results.
Report from Afrinvest West Africa, showed that the oil price assumption was kept at $60/barrel, which it believes is conservative, as Brent crude oil price has recently increased due to moderating oil supply due to Iran sanctions and Organisation of Petroleum Exporting Countries (OPEC) output cuts which have brought the average daily oil price to $63.5/b as at May this year.
“The oil production assumption of 2.3mb/d is ambitious as we expect 2.1mb/d in 2019 and the official exchange rate of N305/$ was kept, consistent with the CBN’s stance. These assumptions translate to a projected oil revenue of N3.7 trillion as against (N3 trillion in 2018), which we believe is unrealisable due to the repayment of cash call arrears, petrol subsidies and the prospect of lower than expected oil production. The projected non-oil revenue was unchanged at N1.4 trillion in 2019, reflecting a more measured expectation,” the report said.
The report explained that the largest share of non-oil revenue at 57.7 per cent is expected to be generated from Companies Income Tax (CIT) while 21.8 per cent and 16.6 per cent are to be collected through Customs and Excise Duties and VAT respectively. Meanwhile, independent revenue is projected lower at N624.6 billion lower than last year’s figure of N848 billion.
“While this shows that the Federal Government is finally being realistic, we expect this to be below projections. Overall, considering that the Federal Government collected an estimated N3.7 trillion in 2018, we expect sustained underperformance in revenue by as much as 41.2 per cent in 2019,” analysts at Afrinvest said.
This year, total recurrent expenditure is projected at N6.9 trillion, crowding out capital spending which is 30 per cent of total spending.
“While the Federal Government’s projects fiscal deficit stands at N1.9 trillion or 1.4 per cent of Gross Domestic Product (GDP), our estimates of N4.8 trillion and 3.4 per cent respectively shows that this is likely to be worse than expected. The implication of a much wider fiscal deficit would be both higher than expected borrowing and partial implementation of the already poor capital spending,” the report added.
Stakeholders react
President, Chartered Institute of Taxation of Nigeria (CITN) Dame Olajumoke Simplice said despite the planned VAT raise, Nigeria’s VAT is still one of the lowest in the world, adding that she expected the new rate to be pegged at 7.5 per cent or 10 per cent.
According to her, the last VAT review was 25 years ago. She said the country also has the lowest VAT rate in Economic Community of West African States (ECOWAS) sub-region.
According to the CITN chief, VAT review should take place every five years.
“VAT is a tax on consumption and is only paid when you consume goods or pay for services. Nigeria’s decision to raise VAT is good for its trade relations with other countries. Besides, VAT is very easy to collect and should be utilised for the development of the economy,” she said.
Simplice said government should also be held accountable on what the funds from VAT are spent, adding that the funds should be judiciously used for developmental projects.
According to her, the new VAT rate will increase prices of goods, but is unlikely to affect manufacturers because they will pass the increased prices of goods to consumers.
Simplice advised tax payers to form pressure groups to monitor tax revenue spending and ensure accountability on the part of government.
The International Monetary Fund (IMF) has consistently advised Nigeria to raise its VAT and channel the funds to developmental projects and budget funding.
At the conclusion of the Funds 2018 Article IV Consultation with Nigeria, its Executive Board emphasised the need for a growth-friendly fiscal adjustment, which front-loads non-oil revenue mobilisation and rationalises current expenditure to reduce the ratio of interest payments to revenue to a more sustainable level and create space for priority social and infrastructure spending.
The board said: “In addition to ongoing efforts to improve tax administration, directors underlined the need for more ambitious tax policy measures, including through reforming VAT, increasing excises, and rationalising tax incentives.”
Speaking on tax reforms at the Fiscal Monitor Session of the event, IMF Assistant Director, Fiscal Affairs Department, Cathy Pattillo, said tax reform in the country is very important issue.
She said IMF’s main recommendation for Nigeria is the need for a comprehensive tax reform that would sustainably increase non-oil revenue.
“And the reason why that is needed is that Nigeria has one of the lowest ratios of non-oil revenue to Gross Domestic Product (GDP) at around 3.4 per cent in the world. And the total tax revenue to GDP at six per cent is also very low compared to peers,” she said.
According to her, the interest to tax ratio is low, adding that the funds realised should be spent on important developmental projects such as infrastructure and human capital. She also advised the Federal Government to increase excise taxes, and begin aggressive streamlining of tax incentives and exemptions.
Speaking on the new VAT raise rate proposal, which is expected to take effect after the relevant law has been passed, the Manufacturers Association of Nigeria (MAN) described the timing of the increase as inappropriate.
The group said the step will also spur spontaneous increase in inflation rate occasioned by increase in prices of goods and services.
MAN said although, it appreciates the need for the government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil, increasing the VAT at this time was inappropriate, especially at a time when the minimum wage of N30, 000 was just agreed upon.
A statement by MAN Director-General Segun Ajayi-Kadir said the increase could send a wrong signal that the government is not sensitive to the plight of the low- and middle-income earners who are clearly in the majority.
Also speaking on taxation and need to diversify the country’s revenue base, Executive Chairman, Foundation for Economic Research and Training, Prof Akpan Ekpo, said Federal Government’s revenue is dependent on oil.
He said: “I call the oil revenue exogenous revenue because you have no control over the price and you are not even in control of the output. You cannot use that to finance long-term development. You should see it as a windfall and use it as such, as they did in Norway. We have not done that over the years. So we must diversify the economy into other areas so that we can earn foreign exchange from other sources outside the oil sector.
“Another way of making money is to look at the tax structure. I am not saying we should increase tax rate, but we need to bring more people into the tax net. A lot of Nigerians who are wealthy or rich do not pay tax, you have to bring them into the tax net. Then you have to tax luxury goods heavily. For example, if you go to Abuja and Lagos airports, the number of private jets that you see, they should pay tax. People will not like to hear this, our VAT rate is the lowest in the world. If you tinker with VAT to even 6.5 per cent, that will generate a lot of revenue. So, those are the areas, because right now the government needs liquidity to do a lot of things,” he said.
According to Ekpo, who was immediate past Director-General, West African Institute for Financial and Economic Management (WAIFEM), it is good to tax people.
Understanding digital economy
Digital services often result in consumers in one country receiving a product or service without the supplier of that product or service being physically present in the country.
Already, the question of how the increasingly digital economy will be taxed is under discussion by revenue authorities, multinational entities and advisory bodies alike around the world.
The debate is even getting louder in Nigeria, where the FIRS is working with the National Assembly to amend the tax laws to ensure that revenue from technology companies are captured.
The FIRS Executive Chairman, Babatunde Fowler, said the agency will soon begin VAT collection on online transactions.
Speaking during a FIRS stakeholders retreat in Lagos, with the theme: Parliamentary Support for Effective Taxation of the Digital Economy, he said the digitilisation of the economy is considered to be a major stimulant to growth, development and innovation.
He said online and cross-border transactions requiring little or no physical presence have transformed world trade. The digitalisation of the economy has also created a big challenge for taxation as most local laws are not robust enough to address the complexities created by the new digital economy.
Fowler said there are plans for banks to act as collecting agents for VAT on online transactions for purchase of goods and services done by multinational tech giants without physical presence in the country. The agency is also working with the National Assembly to get the tax laws amended to that effect.
The FIRS chief said a number of countries have made new regulations, adding that the bill on the amendment of of the tax laws will be brought the Senate to enable the country move fast in tapping tax revenue opportunities in the digital economy.
He said the country needed to start from the basics, adding that banks should help the government is harnessing tax revenue from the digital economy. “I support the idea of using the banks to extract tax revenue from the digital economy. Let’s review the activities of banks as it relates to the digital economy and check areas that require legislation. The banks need to be engaged to help government collect the taxes from the digital economy,” the FIRS chief said.
He said FIRS generated N5.3 trillion last year, which is N1.4 trillion deficit against the N6.7 trillion it targeted for the year.
But in spite of the shortfall, the 2018 figure showed an increase of N1.3 trillion or 32 per cent over the N4.03 trillion generated in 2017. Data presented by the agency on the occasion showed that it generated revenue comprises of N2.5 trillion from oil tax revenue and N2.8 trillion from non-oil tax revenue.
He said: “In the 2019 budget, the target for FIRS is within the region of N8 trillion and with other arms of government support, we believe we can achieve it.”
Associate Director, Andersen Tax, Ogochukwu Isiadinso, explained that since non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to income tax in Nigeria is usually controversial.
Section 13 of Companies Income Tax Act (CITA) implies that a non-resident company must have physically performed activities in Nigeria, directly or indirectly, before such a company can be liable to income tax in Nigeria. For instance, where a software company provides online data to users in Nigeria without being physically present in Nigeria in any form, it may be difficult to conclude that such a company is liable to CIT in Nigeria, although the company could have derived income from the country.
“A major challenge is therefore determining at what point such non-resident would be deemed to have carried on business in Nigeria and therefore liable to income tax in Nigeria. Also, customers that complete transactions on online platforms may not be aware of the exact location of the digital goods and services they are consuming. In some instances, the jurisdiction may be in dispute as the location of the seller can be different from the location of the goods being sold.
“To ensure digital companies do not escape tax in Nigeria, the FIRS has often required Nigerian companies to withhold tax on all payments made to non-resident persons regardless of the non-establishment of the tax presence specified under Section 13 of CITA. This requirement has encountered resistance from taxpayers given that such non-resident persons may not be liable to tax under Nigerian laws,” she said.
Partner & Head Consumer and Industrial Markets KPMG Nigeria, Tayo Ogungbenro, said digital economy is the combination of several general purpose technologies and the range of economic and social activities carried out by people over the internet and related technologies.
“The digital economy encompasses physical infrastructure like broadband lines, routers, computers, smartphones, – the applications they power (Google, Salesforce), the functionality they provide ( data analytics, cloud computing) among others. It is expected generate up to $88 billion and three million jobs by 2021.