VAIDS and the need for ef­fec­tive tax ad­min­is­tra­tion in Nige­ria

For there to be in­sti­tu­tion­al­iza­tion of vol­un­tary dis­clo­sure in Nige­ria's tax ad­min­is­tra­tion, there needs to be an en­act­ment of a per­ma­nent VDP law by the Na­tional As­sem­bly.

Financial Nigeria Magazine - - Contents - Ola­jide Olu­tuyi, a Fi­nan­cial Nige­ria Guest Writer, is a grad­u­ate in Man­age­ment from the Univer­sity of Leth­bridge, Canada. He is Found­ing Part­ner, Green­touch Con­sult­ing Inc. Canada, Co­Founder/CEO Top-Olax En­ergy Ltd. He is on the Board of Cal­gary Quest Sch

As part of ef­forts to im­prove non-oil rev­enue amid a global out­look of low oil prices, Nige­ria's Act­ing Pres­i­dent, Yemi Os­in­bajo, re­cently signed an Ex­ec­u­tive Or­der (EO) on the Vol­un­tary As­set and In­come Dec­la­ra­tion Scheme (VAIDS). The main ob­jec­tive of the scheme – which com­menced on July 1, 2017 and will last for a pe­riod of nine months – is to help ex­pand the coun­try's tax base.

Other ob­jec­tives of the scheme, as an­nounced by the Min­is­ter of Fi­nance, Kemi Adeo­sun, in­clude in­creas­ing tax-toGDP ra­tio from 6% to 18% by 2020, and im­prov­ing com­pli­ance with ex­ist­ing tax laws. VAIDS is also ex­pected to curb the use of tax havens, dis­cour­age tax eva­sion, and tackle il­licit fi­nan­cial flows. With the in­tro­duc­tion of VAIDS, the govern­ment hopes to en­cour­age vol­un­tary dis­clo­sure of pre­vi­ously undis­closed as­sets and in­come and the pay­ment of out­stand­ing tax li­a­bil­i­ties.

In one of its re­ports on Vol­un­tary Dis­clo­sure Pro­grammes, the Or­ga­ni­za­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) de­scribes VDPs as “op­por­tu­ni­ties of­fered by tax ad­min­is­tra­tions to al­low pre­vi­ously non­com­pli­ant tax­pay­ers to cor­rect their tax af­fairs un­der spec­i­fied terms. When drafted care­fully, vol­un­tary dis­clo­sure pro­grammes ben­e­fit ev­ery­one in­volved – tax­pay­ers mak­ing the dis­clo­sure, com­pli­ant tax­pay­ers, and gov­ern­ments.” The Nige­rian VAIDS is be­ing im­ple­mented by the Fed­eral In­land Rev­enue Ser­vice (FIRS) in col­lab­o­ra­tion with all 36 State In­ter­nal Rev­enue Ser­vices (IRS) and the FCT IRS.

While sign­ing the EO on the scheme, Os­in­bajo said it had be­come im­per­a­tive for the govern­ment to do some­thing about the low level of tax com­pli­ance, adding that, “When peo­ple pay taxes, they pay more at­ten­tion to what govern­ment is do­ing. There's a greater level of po­lit­i­cal and so­cial con­scious­ness. Taxes are not only about boost­ing govern­ment rev­enues. When peo­ple pay taxes, they hold the govern­ment to ac­count more.” He is right. In de­vel­oped coun­tries, cit­i­zens pay their fair share of taxes and they have a say in the way their rep­re­sen­ta­tives in govern­ment man­age govern­ment funds.

Con­sid­er­ing Nige­ria's low tax-to-GDP ra­tio, and the fact that out of a tax­able class of about 69 mil­lion peo­ple, only 14 mil­lion are cur­rently in the tax net, the im­ple­men­ta­tion of VAIDS could go a long way in in­creas­ing non-oil rev­enue. De­spite hav­ing a non-oil sec­tor that ac­counts for up to 93% of Nige­ria's GDP, govern­ment's nonoil rev­enue in 2016 was N2.99 tril­lion (or 2.9% of GDP). Suf­fice to say, though, that there was a de­cline in non-oil col­lec­tion from the N3.08 tril­lion recorded in 2015. Nev­er­the­less, this does not al­ter the main gist, which is the dis­mal per­for­mance of the non-oil sec­tor in terms of gen­er­at­ing rev­enue for the govern­ment.

Per­ma­nent and tem­po­rary dis­clo­sure schemes

Vol­un­tary dis­clo­sures re­gard­ing tax mat­ters are not new in tax ad­min­is­tra­tion. In­deed, VDPs are widely used in de­vel­oped coun­tries, help­ing to en­hance the ef­fec­tive­ness of their tax ad­min­is­tra­tion. Vol­un­tary dis­clo­sure pro­grammes can gen­er­ally be grouped into two cat­e­gories, namely per­ma­nent or tem­po­rary pro­grammes. The Nige­rian VAIDS is con­sid­ered a tem­po­rary pro­gramme.

The Cana­dian Vol­un­tary Dis­clo­sures Pro­gram is a per­ma­nent pro­gramme. It gives in­di­vid­u­als and com­pa­nies a se­cond chance to change a tax re­turn that was pre­vi­ously filed or to file a re­turn that should have been filed. To be el­i­gi­ble, it must be vol­un­tary. Should an in­di­vid­ual or com­pany be con­tacted by the Canada Rev­enue Agency be­fore mak­ing the dis­clo­sure, it won't be con­sid­ered vol­un­tary.

South Africa also op­er­ates a per­ma­nent VDP as part of its tax ad­min­is­tra­tion. How­ever, a tem­po­rary VDP was in­tro­duced last year. Called the Spe­cial Vol­un­tary Dis­clo­sure Pro­gramme (SVDP), it is sim­i­lar to Nige­ria's VAIDS. The SVDP win­dow pe­riod is be­tween Oc­to­ber 1, 2016 and Au­gust 31, 2017. It is meant for in­di­vid­u­als and com­pa­nies who have not, in the past, dis­closed tax and ex­change con­trol de­faults in re­la­tion to off­shore as­sets.

In de­vel­oped coun­tries, there are ben­e­fits as­so­ci­ated with vol­un­tary dis­clo­sure, in­clud­ing re­duced penal­ties and an al­lowance to ne­go­ti­ate for pro­tec­tion against crim­i­nal pros­e­cu­tion – in se­ri­ous cases of de­fault.

In the case of VAIDS, some ben­e­fits to in­di­vid­u­als and com­pa­nies were also listed dur­ing the roll­out, such as: im­mu­nity from

pros­e­cu­tion for tax of­fences; im­mu­nity from tax au­dit; waiver of in­ter­est; and waiver of penal­ties. How­ever, for there to be in­sti­tu­tion­al­iza­tion of vol­un­tary dis­clo­sure in Nige­ria's tax ad­min­is­tra­tion, there needs to be an en­act­ment of a per­ma­nent VDP law by the Na­tional As­sem­bly. The South African Rev­enue Ser­vice Vol­un­tary Dis­clo­sure Pro­gramme (VDP), which came into ef­fect on Oc­to­ber 1, 2012, is ad­min­is­tered un­der the Tax Ad­min­is­tra­tion Act, 2011.

VDPs have been found to rake in sig­nif­i­cant funds for gov­ern­ments. Canada's VDP raked in $1.3 bil­lion in the 2014-2015 fis­cal year, out of which about $780 mil­lion came from off­shore dis­clo­sures. Sim­i­larly, the United States Off­shore Vol­un­tary Dis­clo­sure Pro­gram (OVDP) has raked in about $10 bil­lion in taxes, in­ter­est and penal­ties since 2009. In Nige­ria's case, the VAIDS has a tax rev­enue tar­get of $1 bil­lion.

Re­vamp­ing tax ad­min­is­tra­tion

For VAIDS or a fu­ture VDP law to be very suc­cess­ful, an ef­fi­cient and ef­fec­tive tax ad­min­is­tra­tion has to be in place. The coun­try's cur­rent tax ad­min­is­tra­tion is bogged down with sev­eral is­sues, rang­ing from lack of ac­cu­rate data, du­plic­ity of taxes and crude col­lec­tion sys­tems. These is­sues will need to be dealt with.

In his book, The Wealth of Na­tions, pub­lished in 1776, Scot­tish econ­o­mist, Adam Smith, out­lined the four prin­ci­ples or canons of a tax sys­tem: 1) “The sub­jects of ev­ery state ought to con­trib­ute to­wards the sup­port of the govern­ment, as nearly as pos­si­ble, in pro­por­tion to their re­spec­tive abil­i­ties; that is, in pro­por­tion to the rev­enue which they re­spec­tively en­joy un­der the pro­tec­tion of the state.” 2) “The tax which each in­di­vid­ual is bound to pay ought to be cer­tain, and not ar­bi­trary. The time of pay­ment, the man­ner of pay­ment, the quan­tity to be paid, ought all to be clear and plain to the con­trib­u­tor, and to ev­ery other per­son.” 3) “Ev­ery tax ought to be levied at the time, or in the man­ner, in which it is most likely to be con­ve­nient for the con­trib­u­tor to pay it.” 4) “Ev­ery tax ought to be so con­trived as both to take out and to keep out of the pock­ets of the peo­ple as lit­tle as pos­si­ble over and above what it brings into the pub­lic trea­sury of the state.”

Mod­ern-day economists have re-stated the above four canons as: equal­ity (ev­ery­body ought to pay the same rate or per­cent­age of his in­come as tax); cer­tainty (there should be no am­bi­gu­ity about the time, man­ner and quan­tity of pay­ment); con­ve­nience (the sum, time and man­ner of pay­ment of taxes should not be bur­den­some to the tax­payer); and ef­fi­ciency (taxes should be as sim­ple as pos­si­ble and col­lec­tion costs min­imised). Much of these prin­ci­ples are lack­ing in Nige­ria's tax ad­min­is­tra­tion.

The FIRS and the Min­istry of Fi­nance would need to work hard to re­vamp the coun­try's tax ad­min­is­tra­tion. Al­though Ex­ec­u­tive Chair­man of the FIRS, Ba­batunde Fowler, has ex­pressed op­ti­mism that the agency and the govern­ment will meet their rev­enue tar­get for VAIDS, the tax agency will need to do more than a tem­po­rary dis­clo­sure pro­gramme to boost tax rev­enue in the coun­try. It should also look at how a per­ma­nent VDP can be embed­ded in the tax ad­min­is­tra­tion.

But the much big­ger task is putting in place poli­cies to en­gen­der sus­tain­able in­clu­sive eco­nomic growth, in­crease ac­cess to fund­ing for small busi­nesses and re­vi­tal­ize the pri­vate sec­tor. Tax rev­enue plays a key role in build­ing the econ­omy. How­ever, the econ­omy has to be sup­ported to grow and di­ver­sify. And the eco­nomic di­ver­si­fi­ca­tion agenda of the govern­ment is hinged on boost­ing non-oil rev­enue, of which tax rev­enue is a huge part of.

While VAIDS re­mains a tem­po­rary pro­gramme, the tax agency must also en­sure puni­tive measures for tax de­fault­ers are clearly stated. Oth­er­wise, VAIDS will soon join the pool of sev­eral govern­ment pro­grammes that were rolled out with pomp and pageantry but never achieved their ob­jec­tives.

In de­sign­ing an ef­fec­tive tax sys­tem, the FIRS and the Fi­nance Min­istry must bear in mind the power of tax­a­tion, as James Madi­son, Amer­ica's fourth Pres­i­dent opined: “The power of tax­ing peo­ple and their prop­erty is es­sen­tial to the very ex­is­tence of govern­ment.”

Ex­ec­u­tive Chair­man, Fed­eral In­land Rev­enue Ser­vice, Ba­batunde Fowler

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