Need for business-friendly tax review
VERWHELMED by sharply declining revenue instigated by poor economic choices and the coronavirus pandemic, Nigeria is planning to review its tax regime to capture the global information and communication technology firms doing business in the country. In a candid admission of government finances, Vice-president Yemi Osinbajo recently disclosed that Twitter, Facebook, Google, Instagram, and the other global Ict/social media corporations with their business presence in Nigeria would be subjected to tax. Tax payment is normal, but the proposed ICT tax coincides with the brazen politics of the Major General Muhammadu Buhari (retd.) regime to curtail the operations of Twitter in Nigeria after an indefinite suspension order.
With a projected budget deficit of N5.6 trillion in the 2021 budget, huge borrowings, a huge import bill, fast depleting foreign reserves and a weak currency, Nigeria requires more income to tame economic ruin. Fortunately, taxation provides that. Unfortunately, Nigeria lacks efficient tax administration. The fresh drive to tax the global tech firms seems to be another of those loosely defined policies. Consequently, the benefit to the economy might just be momentary. Some fear that wrongly handled, it could even prove counterproductive.
In truth, Nigeria has a habit of weak collection despite a plethora of tax laws. At N8.8 trillion or 6.1 per cent taxto-gdp, Nigeria shared the lowest tax collection rate in Africa with Equatorial Guinea in 2019, according to the Organisation for Economic Co-operation and Development. This is abysmally low to grow an economy.
It translates to one of the lowest tax-to-gdp globally. The OECD puts the tax-to-gdp average of the countries under its umbrella at 33.8 per cent in 2018. For the Latin America and Caribbean countries, it was 23.1 per cent. In Africa, Seychelles leads the pack with 32.4 per cent; the rate exceeds 25 per cent in Morocco, South Africa, and Tunisia.
In concrete terms, the Federal Inland Revenue Service said Nigeria lost a huge $178 billion to corporate tax evasion in the 10 years to 2020. The wealthy are evading tax, according to Osinbajo. In 2017, he stated that only 914 people paid taxes of N10 million to N20 million annually in Nigeria despite the opulent lifestyle of many people in the country. By contrast, South Africa had 900,000 people paying the equivalent of N20 million annually by 2017. Instead of devising effective strategies to collect its money, the Federal Government is borrowing recklessly. That huge loss tallies with the figure of between $14 billion and $15 billion per annum in tax losses also given by the FIRS in October 2019. But Valueadded Tax collection jumped from 69.8 per cent in 2019; the government achieved 75.4 per cent in 2020, although the rate was hiked to 7.5 per cent from 5.0 per cent.
The major headache is that the present tax system is grossly inefficient. Tax evasion is high, perhaps because oil income has dominated the economic space for too long. Instead of levying new taxes, the focus should be on reducing taxes in a time of stagflation. This has the incentive to attract foreign direct investment, growing the economy and creating jobs. UNCTAD says that Nigeria grossed $2.6 billion in foreign direct investment in 2020, down from the $3.3 billion in 2019. With oil revenue unpredictable, Nigeria’s economic fortune needs an infusion of FDI. The catch is that the strident plan to tax the global tech firms can boomerang.
At 30 per cent of profit, Nigeria’s company income tax is relatively high. To become the top investment destination in Asia, Singapore capped the corporate tax rate at 17 per cent; personal income tax starts from zero per cent and is capped at 22 per cent, making the country competitive. Singapore’s capital gains tax is zero per cent. In Nigeria, the CGT is 10 per cent. In February 2008, Singapore abolished the estate duty tax; it runs a free port with relatively free excise and import duties. At 7.0 per cent, its VAT is lower than Nigeria’s. The lesson is that in 2020, the FDI to Singapore was $58 billion.
Thus, Nigeria should not be fixated on high taxes, as taxes are high already, a disincentive to investors. Recently, Twitter bypassed Nigeria when it settled for Ghana as the headquarters of its African operations. It cited a debilitating environment and poor democratic habits for neglecting Nigeria. Back in 2015, Facebook, a social media giant that attained the $1 trillion value in June, chose South Africa as its African headquarters.
Although VAT is high continent-wide, most European countries deliberately keep many tax headings low to attract investment and boost their economies. At 18.6 per cent, Norway has a high corporate tax rate, but Germany’s 3.5 per cent rate makes it a haven for the industry in the European Union.
Therefore, Nigeria should strike a delicate balance between increasing taxes and using taxes to attract FDI. It should even be more concerned about implementing an effective tax collection system. At best, the tech giants just move their corporate offices out to tax havens, which are abundant around the world.
Collaborating with the banks, the Asset Management Corporation of Nigeria and the FIRS should deploy technology to their advantage in debt and tax collection. Constantly naming and shaming tax evaders and debtors can force some obligors to pay up. As an extreme measure, the National Assembly can make a law to bar tax defaulters from running for political offices or from being nominated for political appointments.
The Voluntary Assets and Income Declaration Scheme, which offered amnesty for tax owed, generated N33 billion in the first six months of existence by March 2018. Having identified about 130,000 high net-worth individuals and corporate bodies evading tax, it still fell short of its goal of generating $1 billion due to a mix of politics and sentiments. It should be revived, pursuing defaulters vigorously until they pay up or are given the maximum sentence.
Corporate tax dodging by the MNCS, especially oil firms and digital companies, should be tackled, too. The regime should continually balance the desire to offer a competitive tax environment for FDI with the need to ensure that an appropriate share of domestic tax is collected from multinationals. What is, therefore, needed is a tax system that will promote economic competitiveness. Business competitiveness is based on low tax rates, generous incentive programme, a reliable legal system, a skilled workforce, strong infrastructure, high living standards, trust, reliability, and integrity.