TAX MANAGEMENT
AND
COMPLIANCE IN NIGERIA
EDITED BY
Muhammad Akaro Mainoma
Godwin Emmanuel Oyedokun
Kabiru Isa Dandago
Muhamad Taofeeq Abdulrazaq
Ishola Rufus Akintoye
Famous Izedonmi Prince
Rafiu Oyesola Salawu
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
EDITORS
Professor Muhammad Akaro Mainoma
Nasarawa State University, Keffi,
Nigeria
Professor Godwin Emmanuel Oyedokun Lead City University, Ibadan, Nigeria
Professor Kabiru Isa Dandago
Bayero University, Kano, Nigeria
Professor Muhamad Taofeeq Abdulrazaq Lagos State University, Ojo Lagos,
Nigeria
Professor Ishola Rufus Akintoye
Babcock University, Ilishan-Remo,
Nigeria
Professor Famous Izedonmi Prince
University of Benin, Benin City,
Nigeria
Professor Rafiu Oyesola Salawu
Obafemi Awolowo University, Ile-Ife,
Nigeria
Quality Reviewers
Professor Taiwo Olufemi Asaolu
Obafemi Awolowo University, Ile-Ife,
Nigeria
Nasarawa State University, Keffi,
Nigeria
Professor S.A.A. Aruwa
ii
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ISBN: 978-978-978-734-0
Copyright © 2020 – OGE Business School
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise without
the prior joint permission of the Author.
Published in Nigeria by:
OGE Business School
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Off Hakeem Balogun Street, Alausa
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iii
DEDICATION
For more information about the book, and order, please contact:
OGE Business School
10, AbiodunSobanjo Street, Off BayoAjayi Street,
Off Hakeem Balogun Street, Alausa
Aigdingbi, Ikeja, Lagos. Nigeria
godwinoye@yahoo.com; info@ogecops.com
www.ogecops.com
+2348033737184,
+2348055863944
+2348095419026
iv
This edited book is dedicated to all Tutors, Teachers, Lecturers,
Researchers, Professors and all lovers of education
v
ABOUT THE BOOK
PREFACE
This edited book titled Tax Management and Compliance in Nigeria is
the current write-up of about twenty-four erudite scholars with verse
knowledge of Taxation, Accounting, Law, Finance, and Business
among others. The twenty-nine chapter therein critically evaluates Tax
management, Tax compliance, Tax reforms, the Nigeria tax system,
Taxation legal and regulatory framework, Alternative tax policy, Tax
incentives, Transfer pricing, Tax planning, Tax assessment, Tax risk,
and Reviewed cases in taxation and not without taking readers through
their various effects of the economy of the Nigerian state in the past,
present with some pictures and suggestions for the future.
Tax Management and Compliance in Nigeria is a compendium of
interesting discourse with an emphasis on various parts of tax
management and tax compliance in Nigeria which has been an issue in this
era of the dwindling economy.
Professor Muhammad Akaro Mainoma, Professor Godwin Emmanuel
Oyedokun, Professor Kabiru Isa Dandago, Professor Muhamad
Taofeeq Abdulrazaq, Professor Ishola Rufus Akintoye, Professor
Famous Izedonmi Prince, and ProfessorRafiuOyesolaSalawu were the
seasoned academics of repute that painstakingly took time to edit this
book and made it suitable for tutors, teachers, lecturers, researchers,
Professors and all lovers of education. The quality review was done by
the duo of Professor Taiwo Olufemi Asaolu and Professor S.A.A.
Aruwato meet a desirable standard.
This book will immensely benefit all lovers of education, taxpayers,
administrators, business owners, professionals, policymakers,
lecturers and students of higher learning (Universities, Polytechnics,
Monotechnics, and Colleges of Education) across the country as well
as those writing various related professional examinations in taxation
and accounting.
Over time, practitioners, administrators, academic, professionals in the
field of tax have been involved in rigorous searching of international
journals, convention, international regulation, departmental instructions,
and guidelines to determine how best to tackle management and
compliance issue of tax, hence the diverse but collaborative contributions
from erudite scholars and practitioners in taxation to address issues
through writing of this book.
Tax Management and Compliance in Nigeria as an edited book has
twenty-six article chapters with topics ranging from tax compliance,
management and challenges in Nigeria, relevance of culture in tax
compliance, multiplicity of tax, tax risk management, bridging tax gaps in
Nigeria through tax planning and systemic approach to sustaining Nigeria
tax system amongst others which are compiled and written and edited by
over forty professionals and academicians with the aim of enlightening
and educating practitioners, researchers, academicians and students of
various higher institutions both in Nigeria and abroad on the issues of tax
management and tax compliance.
The book is written in plain language and devoid of professional jargons
and it is a product of careful studies, researches, and practices over time
from well-meaning academic professionals in taxation. It is, therefore, a
must-read for all professionals, tax administrators and students of various
levels in Nigeria and abroad. However further criticism is welcome for
inclusion in the revised edition.
Prof. Muhammad A. Mainoma
Prof. Godwin E. Oyedokun
Lead Editors
vi
vii
ACKNOWLEDGMENTS
To God be the glory.
We appreciate the time and contributions among other resources of
Professor Kabiru Isa Dandago, Professor of Accounting and Finance at
Bayero University, Kano, Professor Muhamad Taofeeq Abdulrazaq,
Professor of Law and Taxation at the Lagos State University, Ojo,
Professor Ishola Rufus Akintoye, Professor of Accounting and Finance
at Babcock University, Ilishan-Remo, Professor S.A.A. Aruwa,
Professor of Accounting and Finance at Nasarawa State University,
Keffi, Professor Famous Izedonmi Prince, Professor of Accounting at
University of Benin, Benin City and Professor Rafiu Oyesola Salawu
and Professor Taiwo Olufemi Asaolu, Professors of Accounting and
Finance at Obafemi Awolowo University, Ile-Ife, Nigeria for their roles
in editing and writing forward for this book.
We noted the contribution of and the sleepless nights of Mr. Omoyibo
Peter and his staff of Diamond Prints and Design in ensuring this book
is a success.
FOREWORD
Tax management and compliance involve the implementation of
management decisions based on principles, procedures, and actions to
ensure the effectiveness of remittance by taxpayers. The study of tax
management and compliance, therefore, emphasizes the thorough
evaluation of the strength and weaknesses and ways of increasing the
compliance level in Nigeria.
This edited book contains various topics related to tax management and
tax compliance in Nigeria and as it is no news that the country is
currently facing various issues in terms of the compliance level of
taxpayers and also ensures adequate management to address main
economic issues facing the country.
This book has various contributions from academicians and
practitioners who are deeply rooted in tax practices as edited by
Professor Muhammad Akaro Mainoma and Professor Godwin
Emmanuel Oyedokun as the lead editors among others has sufficiently
covered key areas of tax management, tax planning and tax compliance
in the country with a detailed exposure relevant to readers at levels of
both academics and professionalism.
We also acknowledged the efforts of all technical staff at OGE Business
School who all worked day and night in supporting the production of
this book such as; Joseph Oluwakayode Oyedokun, Taiwo Oyetope
Olakunle, Victor Oluwatobi Okunola, Khairat Oluwatoyin Ibrahim,
Nasirat Oluwabukunmi Olaleken, SheuIsah, Amoo Tomiwa Samson,
Olanrewaju Sulaimon Ganiyu, Adegoke Akinwunmi Opeyemi,
Oyedokun Dolapo Micheal and Alimi Zainab Olayinka.
Having fully involved in the overall quality review and editing of this
compendium of writings, I, therefore, recommend this book on tax
compliance and management to students, researchers, and
practitioners of taxation who wish to widen their research knowledge/
scope on tax management and compliance level in Nigeria.
Prof. Muhammad A. Mainoma
Prof. Godwin E. Oyedokun
Lead Editors
Professor Taiwo OlufemiAsaolu, FCA
Professor of Accounting and Finance
Obafemi Awolowo University, Ile-Ife, Nigeria
viii
ix
TABLE OF CONTENTS
COPYRIGHT....................................................................
iii - iv
DEDICATION...................................................................
v
ABOUT THE BOOK ........................................................
vi
PREFACE .........................................................................
vii
ACKNOWLEDGMENTS.................................................
viii
FOREWORD ....................................................................
ix
TABLE OF CONTENTS ...................................................
x - xiii
NOTES ON CONTRIBUTORS ........................................
xiv - xvii
OVERVIEW TAXATION AND NIGERIAN
TAX SYSTEM
Oyedokun, Godwin Emmanuel .........................................
NEXUS BETWEEN TAXATION AND
SUSTAINABLE BUSINESS DEVELOPMENT
Mainoma, M. Akaro ..........................................................
1 - 53
54 - 62
TAX MANAGEMENT AND COMPLIANCE
Adegbenro, Saheed Aderemi ............................................... 63 - 76
TAX COMPLIANCE AND ITS CHALLENGES IN
NIGERIA: THE PRACTICAL PERSPECTIVE
Ogbonna, Udochukwu ......................................................
RELEVANCE OF CULTURE IN ENSURING
SUSTAINABLE TAX COMPLIANCE AMONG
NIGERIANS
Agbetunde, LateefAyodele................................................
x
77 - 83
84 - 118
ENHANCING TAXATION AS ALTERNATIVE
TO OIL
Somorin, Abiola Olateju....................................................
119 - 143
MULTIPLICITY OF TAXES IN NIGERIA
Dada, Samuel Olajide ........................................................
144 - 184
IMPACT OF VALUE ADDED TAX ON
ECONOMIC GROWTH IN NIGERIA
Muhibudeen, Latifat and Abdulkadir, Abba Hafiz..............
185 - 208
TAX REFORMS AND SUSTAINABILITY OF
SMALL AND MEDIUM SCALE ENTERPRISES
IN NIGERIA
Hassan, T. A. and Adegboyega Adebayo ............................
209 - 221
ALTERNATIVE TAX POLICY CHOICES FOR
BUSINESS SUSTAINABILITY: LESSONS AND
PRESCRIPTIONS
Dike, Mark Anthony C.......................................................
222 - 231
TAX INCENTIVES AND FINANCIAL
PERFORMANCE OFMULTINATIONAL FIRMS
IN NIGERIA
Lawal, Babatunde Akeem, and Ajayi-Owoeye,
Ayooluwa Olotu.................................................................
232 - 256
TRANSFER PRICING TECHNIQUES AND TAXES
OF ASSOCIATED COMPANIES IN NIGERIA
Dada, Samuel Olajide; Abiodun, Nurudeen O.;
Benjamin, Rebecca D.; and Adekunle, Isoken J..................
257 - 279
TAX RISK MANAGEMENT
Ademola, Olanrewaju ........................................................ 280 - 306
xi
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
Oyedokun, Godwin Emmanuel, Babalola Wasiu,
and Awosika Mayowa ........................................................
TAX ASSESSMENT AND THE STATUTE OF
LIMITATION: AN APPRAISAL
Joseph, Eimunjeze; Jawando, Mojisola and
Okolie, Chisom .................................................................
TAXATION PLANNING AND COMPLIANCE:
A NORMATIVE APPROACH
EDUCATION FOR NATIONAL DEVELOPMENT
Ikotun, SabicIdowu; Shonubi, Akeem Olalekan,
and Ajala, Olufunmilayo Adekemi.....................................
SYNOPSIS OF COMPANIES INCOME TAX ACT
(CITA) CAP C 21 LAWS OF FEDERATION
OF NIGERIA (LFN), 2004 (AS AMENDED)
Somorin, Abiola Olateju.....................................................
307 - 342
343 - 374
375 - 385
386 - 429
LIVING TRUST AS AN INSTRUMENT OF
WEALTH PLANNING
Uwanna, Ikechukwu .........................................................
484 - 490
TAXATION CASE REVIEW
Abdulrazaq, M. Taofeeq ....................................................
491 - 501
BRIDGING TAX GAPS IN NIGERIA THROUGH
PLANNING
Akintoye Ishola Rufus........................................................ 502 - 523
ADOPTION OF POPULATION CENSUS AND
STRUCTURE: A FRAMEWORK OF TAX
PLANNING AND COMPLIANCE IN NIGERIA
Ikotun, Sabic Idowu; Kayode George and Ajayi,
Olorunshola .......................................................................
524 - 537
ETHICAL ISSUES IN TAX PLANNING:
SETTING UP OF A SUCCESSFUL TAX PRACTICE
Omonayajo Benjamin A.....................................................
538 - 565
ETHICAL ISSUES IN TAX PLANNING
Ademola, Olanrewaju .......................................................
430 - 448
VOLUNTARY ASSET AND INCOME
DECLARATION SCHEME (VAIDS): AN
APPRAISAL OF THE INTENT AND OBJECTIVE
Fowokan, TitilayoEni-Itan ................................................
TAXATION IN A DIGITALIZED ECONOMY:
HOW PREPARED IS NIGERIA?
Oyetunji, Oluwayomi Taiwo and Lawal,
Busayo Olawumi................................................................ 566 - 587
449 - 461
SYSTEMIC APPROACH TO SUSTAINING THE
NIGERIAN TAX SYSTEM
Akintoye Ishola Rufus .......................................................
UTILIZING APPROVED TAXES AND LEVIES
COLLECTION ACT 2004 FOR EFFECTIVE
REVENUE GENERATION AT STATES LEVEL:
THE ROLES OF CHARTERED ACCOUNTANTS
Dandago, Kabiru Isa .........................................................
xii
462 - 484
xiii
588 - 608
NOTES OF CONTRIBUTORS
Abdulkadir Abba Hafiz is of the Department of Accounting, Yusuf
Maitama Sule University Kano, Nigeria.
Abdulrazaq, M. Taofeeq is a Professor of Taxation, Faculty of Law,
Lagos State University and former Registrar/Chief Executive of
Chartered Institute of Taxation of Nigeria.
Abiodun Nurudeen O. is of the department of Accounting, School of
Management Sciences Babcock University Ilishan-Remo Ogun State,
Nigeria
Adegbenro, Saheed Aderemi is a lecturer at Lead City University,
Ibadan.
Adegboyega Adebayo is of the Department of Business Education, Tai
Solarin University of Education Ijagun Ogun State.
Adekunle, Isoken J. is of the department of Accounting. College of
Arts, Social and Management Sciences, Crescent University,
Abeokuta.
Ajayi-Owoeye, Ayooluwa Olotu is of the Department of Accounting,
Babcock University Ilishan Ogun State, Nigeria.
Awosika Babalola Wasiu is a Postgraduate Lecturer at Lead City
University, Ibadan.
Benjamin, Rebecca D. is of the department of Accounting, School of
Management Sciences Babcock University Ilishan-Remo Ogun State,
Nigeria
Dada Samuel Olajide is of the Babcock University Ilishan Remo
Ogun State, Nigeria.
Dandago Kabiru Isa is a Professor of Accounting at the Department
of Accounting, Bayero University, Kano and a Professor of Taxation at
Kaduna State University.
Dike Mark Anthony C. is a Managing Partner of Patmos
Professionals and Past President of Chartered Institute of Taxation of
Nigeria
Eimunjeze, Joseph is a Partner in the Firm's Tax, Banking and Finance
and Corporate Advisory Teams UdoUdoma and Belo Osagie, Lagos
Ademola Olanrewaju is a Partner at Ascension Consulting Services.
Agbetunde Lateef Ayodele is a Researcher/Chief Lecturer and former
Head of the Department of Accountancy, Yaba College of Technology
Yaba Lagos, Nigeria
Ajala Olufunmilayo Adekemi is of the Department of Banking and
Finance, the Polytechnic of Ibadan, Oyo State, Nigeria.
Ajayi Olorunshola is a lecturer with Caleb Business School, Caleb
University, Magodo, Lagos.
xiv
Fowokan Eni-Itan Titilayo is the Group Head Tax, Dangote
Industries Ltd and a Council Member of the Chartered Institute of
Taxation of Nigeria (CITN)
Hassan, T. A. is of the Department of Business Education, Tai Solarin
University of Education IjagunOgun State.
Ikotun, Sabic Idowu is a Senior Research Fellow of Centre for
Environment and Management, Lagos and Adjunct Lecturer in the
Department of Business Administration, McPherson University, Seriki
xv
Sotayo, Ogun State, and Caleb Business School, Caleb University,
Imota, Lagos.
Okolie Chisom is an Associate in the Firm's Tax, Banking and Finance
and Capital Market, Udo Udoma and Belo Osagie, Law Firm, Lagos
Ikotun, Sabic Idowu is of the Department of Business Administration,
McPherson University Seriki-Sotayo Abeokuta Ogun State, Nigeria
Onyekwelu, UcheLucy-Anne is a Senior Lecturer in the Department
of Accountancy, Enugu State University of Science and Technology,
Enugu
Ishola Rufus Akintoye is a Professor of Accounting and Finance at
Babcock University, Ogun State and he is also a Professorial Chair of
Chartered Institute of Taxation of Nigeria at the same University.
Jawando Mojisola is a Senior Associate in the Firm's Tax, Power and
Corporate Advisory Teams, UdoUdoma and Belo Osagie, Law Firm,
Lagos
Kayode George is a lecturer in the Department of Criminology,
Security, Peace and Conflict Studies, Caleb University, Imota, Lagos
State, and Deputy Dean, Caleb Business School, Caleb University,
Imota, Lagos.
Oyedokun Godwin Emmanuel is a Lecturer in the Faculty of
Administration, Department of Accounting, Nasarawa State
University, Keffi and a Council Member of the Chartered Institute of
Taxation of Nigeria (CITN)
Oyetunji Oluwayomi Taiwo, is a Lecturer at McPherson University,
Seriki – Sotayo, Ogun State
Uwanna, Ikechukwu is of Tsedaqah Attorneys, Lekki, Lagos, Nigeria
Lawal Babatunde Akeem is a Senior Lecturer and Head of the
Department of Accounting and Finance, McPherson University,
Seriki-SotayoOgun State, Nigeria
Lawal Busayo Olawumi is an Accountant at Extension Publications
Limited, Ososami, Ibadan, Oyo State.
Mainoma M. Akaro is a Professor of Accounting & Finance and
Immediate Past ViceChancellor at Nasarawa State University, Keffi,
and the President of Association of National Accountants of Nigeria
Muhibudeen Latifat is of the Department of Accounting, Yusuf
Maitama Sule University Kano, Nigeria.
Ogbonna, Udochukwu Godfrey is a Lecturer at Rhema University,
Aba, Nigeria
xvi
xvii
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
CHAPTER ONE
OVERVIEW OF TAXATION AND
NIGERIAN TAX SYSTEM
OYEDOKUN Godwin Emmanuel
different purposes; some of these are highlighted as follows:
1. Revenue Generation: the primary objective of tax is
generation of revenue to help the government to run the
administration and provide basic facilities for the citizens of
the country that is finance ever-increasing public-sector
expenditure.
INTRODUCTION TO TAX AND TAX ADMINISTRATION
Tax has been defined by many scholars in the past, it is a compulsory
levy imposed by the government on income of individuals and
cooperation to generate revenue for running the activities of the
government.
Taxation is described it as a compulsory contribution by the
government and he concluded that even though taxpayers may receive
nothing identifiable in return for their contribution, they nevertheless
have the benefit of living in a relatively educated, healthy and safe
society. However, the government ought to use this contribution to
provide for a relatively safe and secure environment for the citizens
Nightingale, (1997). In other words, he defined taxation as a levy
imposed by the government on the income profit of the individual,
partnership and corporate organization.
Taxation is defined as an enforceable contribution of money enacted
pursuant to legislative authority. If there is no valid status by which it is
imposed. A CHARGE IS NOT TAX. Taxation is targeted towards
alleviation and social welfare.
Purposes/ Objectives of Taxation
From the definition above, taxes are paid to the government for
1
2. Provision of Merit goods: Merit goods include health and
education. This must not be left entirely private hands though
private participation should be encouraged.
3. Control the level of inflation: this is function is performed in
situation where people are taxed heavily, their disposable
income will be reduced, and they will have less purchasing
power, therefore reducing the level of inflation
4. Redistribution of income: Tax system is a means of ensuring
the redistribution of income and wealth in order to reduce
poverty and promote social welfare. This can be achieved
whereby people earning more will pay higher tax than those
earning less.
5. To solve Balance of payments problems: Where the import is
more than the export, the government can raise taxes to take
care of the deficit that arises as such.
6. To discourage businesses and consumption of “harmful
Goods: Taxes can be used to discourage businesses that are
harmful to the growth of the economy of the country and also
2
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
consumption of harmful goods such as cigarette and alcohol,
by imposing heavy taxes on them.
must not be static but should be subject to change, so as to suit
what obtains at any moment of time.
Principles of Taxation
Adam Smith in 1776 sets out the canon or principle of taxation in his
work “The Wealth of Nations”. These are principles otherwise called
characteristics imperative for every government to put in place to
ensure an efficient, effective, just and equitable tax system. These are:
7. Canon of simplicity: This states that tax should not be too
complex where tax laws are implied ones and subject to
different interpretation. Also its computation must be simple to
understand by the tax payer and others.
Structure/ Classification of Tax System
1. Canon of Equity: this principle sates that those in the same
income bracket should pay the same tax. This can be horizontal
equity or vertical equity. Horizontal equity refers to people in
the same income group to pay the same/ equal amount of tax
while vertical equity refers to people with different income to
pay different tax.
2. Canon of certainty: this principle states that the scope of the
tax must be clear and ascertainable that is actual tax to be paid,
how it was computed, when and where to pay it.
3. Canon of convenience: this states that the timing and modality
of tax payment must be convenient to the taxpayer.
4. Canon of neutrality: it states that the tax system must be
neutral as not to affect work, savings and investments
negatively.
5. Canon of Economy: it states that the administrative costs of
collecting tax should be reasonable enough as to contribute
meaningfully to the revenue pool of the government.
6. Canon of flexibility: this principle states that the tax system
3
CLASSIFICATION OF TAXATION
TAX BASE
TAX SUBJECT
1. Income
2. Consumption
3. Capital
TAX BURDEN
1. Direct Tax
2. Indirect Tax
1. Tax Progression
2. Proportional Tax
3. Regressive Tax System
Taxes can be classified in any of the following:
A. Classification by Method/Tax Burden: This class is
subdivided to three forms of tax. These are:
- Proportion Tax: -it has a fixed rate that is applied to a tax
payer's assessable income to obtain the tax liability. The tax
payable is proportional to the taxpayers' income.
- Progressive Tax: This applies higher tax rates as income
increases. Its sole objective is to redistribute income in the
economy. It is also called “Pay as you earn”.
- Regressive Tax: Formerly used in Britain, the concept is
the higher you earn, the lower the tax you pay.
B. Classification by Incidence/ Tax Subject: this is further
divided into two. These are:
4
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
-
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
Direct Tax: this is assessable directly on the taxpayer who
is required to pay tax on his property, income or profit.
Direct taxes include: Personal income tax, Companies
Income Tax, Capital Gains Tax, Petroleum Profit Tax,
Education Tax.
Indirect tax: indirect taxes are imposed on commodities
before they reach the consumer, and are paid by those upon
whom they ultimately fall. They are paid as part of the
selling price of the commodity. Examples are: Customs and
excise duties, Value Added Tax, Stamp Duties, Import and
Export duties.
government the right to levy taxes on individuals and organizations.
For tax to be effective, it must be backed by the law passed by the
legislator or the parliament (A.G of Ogun State v. Aberuagba, 1985).
Decree No.21 of 1998 Law of the Federation of Nigeria (LFN),
contains the Federal Government approved the list of Taxes and Levies
that could be collected by the three tiers of the Government. The
purpose of which was to avoid duplication of taxes or conflict among
the three tiers of Government (Agbonika, Agbonike, & Mohammed,
2018). The approved list was further harmonized / amended in year
2015 via the schedule to the Taxes and Levies (Approved List for
Collection) (Act amendment) Order, 2015.
C. Classification by Perspective of Tax Base: Taxes can also
be classified according to what is being taxed. In Nigeria,
the following bases are in use:
- Capital base - This include Capital Gains Tax. This is on
the sale of capital goods (non-current asset).
- Income base-This include: Personal Income Tax,
petroleum income tax and Company Income Tax as the
name implies the income of the government is being taxed
upon.
- Consumption base - The examples of the case of
consumption are value added tax, stamp duties and excise
duties.
Tax Laws in Nigeria
There exist various tax laws in Nigeria, these tax laws govern tax
administration in the country. The legislative power for taxes in the
country is vested on the Federal Government but administered by the
three tiers of the government (i.e. Federal, State and Local
Government).
-
Tax Laws
The Nigeria tax system is a tree tier system made up of the Federal,
State and Local Government. Section 4 & 150 item D of part II of the
second schedule of the Nigerian 1999 Constitution, gives the
5
List of Tax Laws in Nigeria
Below is the list of the various tax laws in Nigeria, short notes on the
laws and some of the vital sections and subsections addressed by the
various Acts follows these list:
(i) Company Income Tax Act, Cap. 21 Volume 3, LFN 2004 (as
amended)
(ii) Education Tax Act; CAP. E 4 Volume 17 LFN 2004
(Repalced with Tertiary Education Trust Fund
(Establishment, etc) Act, 2011.
(iii) Petroleum Profit Tax Act; Cap. P13 Volume 13 LFN 2004 (as
amended)
6
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
(iv) Personal Income Tax Act; Cap. P8, Volume 13 LFN 2004 (as
amended)
(v) Value Added Tax Act; Cap. V1 Volume 15 LFN 2004 ( as
amended)
(vi) Stamp Duty Act; CAP. S8 LFN 2004 (as amended)
(vii) Capital Gains Tax Act; Cap C1 Volume 2 LFN 2004 (as
amended)
(viii)National Information Technology Agency Act; CAP N156
LFN 2004 (as amended)
(ix) Custom and Exise Management Act; Cap 45 LFN, 2004 (as
amended)
(x) Casino Taxation Act; CAP. C3 LFN 2004
(xi) Income Tax (Authorised Communications) Act; CAP. 14
LFN 2004
(xii) Industrial Development (Income Tax Relief) Act; (IDA)
CAP. 17 Volume 7 LFN 2004
(xiii)Federal Inland Revenue Service (Establishment Act) CAP.F
36 2007
(xiv)Taxes and Levies (Approved List for Collection) Act; CAP
T2 LFN 2004 (as amended)
(xv) Nigerian Export Processing Zones Authority Act; 1992
Decree No. 63 (contains tax laws applicable to Export
Processing Zone in Nigeria)
(xvi)Finance Act 2019 (Amending 7 Tax Laws)
Company Income Tax Act (CITA)
The Company Income Tax Act; Cap C 21 Volume 3 Law of the
Federation (LFN) 2004 (as amended), provides legal backing to the
imposition of Income tax on companies in Nigeria. Section 9(1) of the
7
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
act provide that Company Income Tax (CIT) is an annual tax, and for
each year of assessment the tax shall be payable at the rate contained
under Section 40 of the Act upon the profits of company accruing in,
derived from, brought into, or received in, Nigeria.
Tax rate
The rate for Companies Income Tax as provided under section 40(1) of
CITA is thirty Kobo for every naira (i.e. 30%) of a company's assessible
profit. Section 29 of the Act provides the basis of computing assessable
profit of a company.
Companies that have been in operation for at least 4 calender years are
subjected to the minimum tax rule, except those specifically exempted
by the law. Section 33(1) of Act provides that the Minimum tax rule
comes into play when: (i) a company has made a tax loss; (ii) total
profits result in no tax payable; or (iii) tax payable is less than the
minimum tax.
In line with Section 33(2) of the Act, minimum tax that shall be
computed/payable as follows:
a) If the turnover of the company is NGN500,000 or below and
the company has been in business for at least 4 calender years
i) 0.5% of gross profit
ii) 05.% of net assets
iii) 0.25% of paid up capital
iv) 0.25% of turnover (not exceeding NGN 500,000)
b) Where the turnover exceeds NGN 500,000 the minimum tax
is the sum of the highest of a above plus 0.125% of turnover
in exess of NGN 500,000
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
Residency
Profits of a Nigerian company as provided under Section 13(1) of the
Act shall be viewed as been made in Nigeria irrespective of where the
profit might have arose and wether such profit have been brought into
or received in Nigeria or not.
Section 13 (2) of the act addresses the issue of residency of a nonNigerian company as regards its exposure to CIT in Nigeria. A nonNigerian company is a company or corporation that is not registered or
incorporated in Nigeria, but which derives income or profits from
Nigeria. It could also be referred to as a foreign company and it means
any company established under any law in force in a territory or
country outside Nigeria (Section 105 CITA 2004).
Assessable profit
Section 24 & 28 of CITA covers expenses and incomes that shall not be
included in the computation of assessable profit for the purpose of tax,
they include: Loss Relief; Capital allowance, Balancing Allowance
and Balancing Charges. Section 24 of CITA allows for expenses which
are “wholly, exclusively, necessarily and reasonably” incurred of
running the company, such expenses are to be deducted or set-off while
computing the assessable profit of companies. Section 25 covers
deductible donations while section 26 covers deduction for research
and development. Section 27 of CITA on the other hand covers those
deduction that are disallowed from profit.
Profits of a non-Nigerian Company as captured under Section
13(2)(a)-(d) of the Act shall be deemed to be derived from Nigeria for
purpose of tax if.
I) The company has a fixed base in Nigeria to the extent that the
profit is attributable to the fixed base.
ii) The company does not have a fixed base in Nigeria but
habitually operate a trade or business through a person or
some other company authorized to act on its behalf.
iii) That trade or business or activities involve a single contract
for surveys, deliveries, installations or construction; or
iv) Where the trade or business or activities is between the
company and another person controlled by it or which has a
controlling interest in it to the extent that artificial or
fictitious.
9
Section 31 of CITA covers the ascertainment/calculation of total profit.
The total profits of any company shall be the amount of its total
assessable profits from all sources for the year together with any
addition made or allowed in accordance with the provision of section
31, 32 and the schedule to CITA.
Tax Returns
Section 55 to 60 of CITA covers the submission of returns to the tax
authority. A newly incorporated companies is to file its CIT within 18
months from date of incorporation or not later than 6 months after end
of its accounting period, whichever is earlier. Existing companies are
required to file their CIT returns within 6 months from the end of their
accounting year.
Education Tax Act (EDTA)
Education Tax Act; CAP. E 4 Volume 17 LFN, 2004 and Education Tax
Fund (Amendment) Act No.17, 2003, is now governed by the Tertiary
Education Trust Fund (TETFUND) (Established, Etc) Act 2011. Funds
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
realised from the Education Tax are applied to the rehabilition,
restoration and consolidation of tertiary education in Nigeria by
TETFUND. The funds are distributed between Universities,
Polytechnics and Colleges of Education in the ratio of 2:1:1
respectively.
(5) years. For those in operation for less than 5 years, their tax rate shall
be 65.75% as contained under Section 21(2) of the Act. Section 22(2)
also puts the tax rate for Companies under production sharing contract
at 50% of their chargeable profit for the contract period. Companies
dealing in downstream petroleum sector are however charged 30% on
their profits. Aside the above taxes, as provided under section 1 of the
Education Tax Act 2004 (as amended), all such companies are as well
to pay 2% EDT on their chargeable profit. The EDT is however a
deductable expense in computing the assessable profits of upstream
petroleum companies.
Tax Returns
Estimated tax returns for each accounting period are to be submitted
not later than two months after the commencement of the accounting
period. Final returns for each accounting period shall be filed within
five months after the expiration of the accounting period.
Tax Rate
The act requires every company incoporated in Nigeria to pay 2% of its
assessible profit as Education Tax (EDT). The law is applicable under
the Company Income Tax Act (CITA) as well as the Petroleum Profit
Tax Act (PITA). EDT is a deductable tax for the purpose of determing
the assessible profits of companies engaged in petroleum operation
(upstream) as provided under Section 1(3) of the Act.
Tax Returns
The due date of filing Education Tax Returns is same as that of CIT and
PPT. As provided by Section 11 of the TETFund (Establishment, ETC)
Act, first offence against the Act is liable upon conviction to a fine of
N1,0000,000 or a term of 6 months improsonment or both. Second and
subsequent offences attract a fine of NGN 2,000,000 or a term of 12
months or both.
Petroleum Profit Tax Act (PPT)
The Petroleum Profit Tax Act; Cap P13 Volume 13 LFN 2004 (as
amended) governs the taxation of companies enguaged in the core
activities of exploration and production of oil and gas under the ground
or sea bed (i.e. upstream operations) in Nigeria.
As provided under section 51 of the Act, penalty for late submission of
a return is N10,000 and further sum of N2,000 for each and every day
the failure continues. Any instalment of tax not paid on the due date
shall attract a penalty of 10% and interest at prevailing minimum
rediscount rate of CBN and if payment is not made within one month,
enforcement shall take place.
Tax Rate
Section 21(1) of the Act imposes 85% tax rate on the chargeable profit
of an upstream company that had been in operation for more than five
Personal Income Tax Act (PITA)
The personal Income Tax Act; Cap P8 Volume 13 LFN 2004 provides
the legal backing for the collection of Personal Income Tax (PIT) in
Nigeria. The act was amended by the Personal Income Tax
(Amendment) Act, 2011. Section 3 of PITA provides that every tax
payer in Nigeria is liable to pay tax on the totality of his income
whether derived from whithin or outside Nigeria. The salaries, wages,
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
fees, allowances, and other gains or benefits, given or granted to an
employee are chargeable to tax. An employer under the Act is expected
to register with the relevant tax authority for the purpose of deducting
income tax from his employees salaries with or without formal
notification or direction by the relevant tax authority (Section 80(6)).
tax exempt deduction for contributions made towards: (a) National
Housing Fund Contribution; (b) National Health Insurance Scheme;
(c) Life Assurance Scheme; (d) National pension Scheme and (e)
Gratuities.
Section 1 and 2 of the Act provides that PIT shall be collected on
income of individuals, a Corporate sole or body of individuals,
Communiteis, Families and Trustees or Executors of any settle men.
PIT is a direct tax payable by the tax payers in the state in which they
reside. Taxes from the following persons are however excluded from
state collectible taxes: (i) employees of the Nigerian forces (Army,
Navy, Air force or Police) except those employed in civilian capacity;
(ii) Officers of the Nigerian foreign service; (iii) Residence of the
Federal Capital Territory, Abuja; and (iv) Persons residing outside
Nigeria but who derives income or profit from Nigeria. Taxes from
these categories of persons are colleted by the Federal Inland Revenue
Service (Section 2(1)(a)(b) PITA).
Tax returns
The due date of filling returns for PIT is 31st March of every year. The
due date of remmittance of PAYE is the 10th day of every succeeding
month. An employer is espected to file the return of emoluments and
tax dedcued from employees in the proceeding year not later than 31st
of January of every year (FIRS, n.d.).
An individual who fails to file a return shall be liable on conviction to a
fine of N5,000 and further sum of N100 for every day during which the
failure continues or imprisonment of 6 months or both. Any employer
who fails to file a return shall be liable on conviction to a penalty of
N500,000 for a corporate body and N50,000 in the case of an individual
employer.
Tax rate
As contained under paragraph 3 of the Sixth schedule of the Personal
Income Tax (Amendment) Act, 2011, the PIT rate graduates from 7% to
24%., with a minimum tax level set at 1% of gross income less than
N300,000 per annum.
Value Added Tax Act
The Value Added Tax Act; Cap. VI Volume 15 LFN 2004 (as amended)
provides the legal backing to the imposition of Value Added Tax (VAT)
in Nigeria. VAT is a consumption Tax paid when goods are purchased,
and services rendered; it is a form of indirect tax borne by the final
consumer as part of price paid for the goods or services.
Paragraph 1 and 2 of the Schedule contains relief allowances and other
deductions allowed to be made from the gross income before arriving at
the taxable income. In line with these paragraphs, the tax payer is
entitled to a consolidated relief allowance of N200,000 or 1% of gross
income, which ever is higher plus 20% of his gross income, as well as
Tax rate
Section 4 of the Act provides the rate of VAT to be 5% on the value of all
goods and services as determined under sections 5 and 6 of the Act,
except those goods or services exempted or classified as zero rate under
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
the First Schedule of the Act. However, with the Finance Act 2020, this
rate is now 7. % from February 1, 2020.
a tax that is levied on documents. Historically, this included the
majority of legal documents such as cheques, receipts, military
commissions, marriage licences and land transactions.
Registration
As provided under Section 8 of the Act, Companies are required to
register with the Federal Inland Revenue Service within six months of
the commencement of business. Failure to register shall attract a
penalty of N10,000 payable for the first month in which the failure
occurs and a further N5,000 for each subsequent month in which the
failure continues.
Tax returns
Section 15 of the Act provides that all taxable persons are required to
file VAT returns every month - not later than 21st day following the
month of transaction. Government Ministries, Departments &
Agencies, Oil and Gas Companies play a dual role as taxpayers and
agents of VAT collection, they are as well required to file their monthly
returns as contained in Section 15 of VATA. By virtue of the VAT
(Amendment) Act, 2007, both Government agencies and Oil and gas
companies are empowered to withhold VAT at source and remit same to
the FIRS accordingly.
Section 25 to 37 of the Act covers the various offences and respective
penalties. Such offences include furnishing of false documents;
Evasion of tax; failure to notify change of address; failure to issue tax
invoice; resisting, etc., an authorized officer; failure to register; failure
to collect tax; failure to remit tax etc.
Stamp Duties Act (SDA)
The Stamp duty Act, CAP S8, LFN 2004 (as amended) provides legal
backing to the imposition of Stamp Duties tax in Nigeria. Stamp duty is
15
The administration of Stamp Duty is jointly carried out by the State and
Federal authorities depending on the nature of the document. Duties on
documents executed between a company and an individual, group or
body of individuals are assessed and collected by the Federal Inland
Revenue Service (FIRS). Duties on documents executed between
persons or individuals are assessed and collected by the States Internal
Revenue Service (IRS).
There are two forms of Stamp Duty: Fixed duties and Ad-Valorem.
Fixed duties charges remain same irrespective of consideration; Duties
payable on Ad-Valorem varies with consideration involved. Amount
of duty payable is determined by the Commissioner of Stamps. The
duties must be paid before execution of document.
Capital Gains Tax Act (CGTA)
Capital Gains Tax Act; Cap. C1 Volume 3 LFN 2004 (as amended)
governs the imposition of Capital Gains Tax (CGT) in Nigeria. CGT is
a tax passed on the gains made on the disposal of an asset being the
difference between the original purchase price of the assets and the
sales price.
Tax rate etc.
Section 2(1) of the Act put the rate of capital gains tax in Nigeria at 10%
on accrued gains on the disposed capital asset. Section 3 provides that
chargeable assets include all forms of property whether situated in
Nigeria or not, including options, debts and incorporeal generally, any
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
currency other than Nigerian currency, any property created by the
person disposing of it, or otherwise coming to be owned without being
acquired.
Liable Companies
The companies liable to this tax as captured under the third schedule of
the Act are: (i) GSM Service Providers and all Telecommunications
companies; (ii) Cyber Companies and Internet Provider; (iii) Pensions
Managers and pension related companies; (iv) Banks and other
Financial Institution; and (v) Insurance Companies. This tax is payable
by these companies in addition to the payment of the regular CIT.
As provided under section 13 of the Act, allowable expenditure for the
computation of CGT includes the incidental costs which are wholly,
exclusively and necessarily incurred for the purposes of the disposal,
such as fees, commission or remuneration paid for the professional
services of any surveyor or valuer, or auctioneer, or accountant, or
agent, or legal adviser and costs of transfer or conveyance. Section 26
to Section 42 of the act covers Organizations, Statutory Bodies etc.
excluded from CGT as well as various exempted gains.
Tax returns: Filing of Returns for CGT is same as in Company Income
Tax
Custom & Excise Taxes Management Act
The Customs and Excise Management Act, Cap 45 LFN, 2004 (as
amended) governs the imposition of Customs and Excise or duties
charged at the Nigeria's ports (of entry or exit). Duties are charged on
both imports and Exports into or out of the country as contained under
Section 37(1) and Section 59(1) respectively, except permitted
otherwise under the customs laws.
National Information Technology Development Agency Act
(NITDA)
National Information Technology Development Levy (NITDL) is
governed by the National Information Technology Development
Agency Act; CAP N156 LFN 2004 (as amended). Section 16 of the Act
assigns the collection of NITDL to the Federal Inland Revenue Service
(FIRS).
Section 45 of the Act covers the valuation of imported goods for the
purpose of ad valorem duties. Subsection (1) provides that where duty
is chargeable on imported goods by reference to their value, their value
shall be taken to be laid down in the First Schedule to the Act and duty
shall be paid on the value. The importer may also be required to provide
necessary information required for the valuation (Section 45(2)).
Tax rate
Section 12(2)(a) of the Act puts the rate at 1% of profit before tax of
companies and enterprises with an annual turnover of N100,000,000.
Section 17(2) of the Act provides that where the levy is not paid within
60 days, a demand-note for the unpaid amount plus 2% of the levy shall
be due.
Witholding Tax (WHT)
WHT does not have a separate act, rather it is captured in the bodies of
variuos tax legislation such as CIT Act, PIT Act and PPT act.
Witholding is an advance tax payment, representing payment on
account of final tax liability of the individual tax payer or company. It
does not represent a separate or final tax and does not exempt the tax
payer from filing of annual returns. The person or organization making
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
the deduction is expected to remit same to the relevant tax authority.
Tax rate
The tax rate as provided under subsection (2) of the Act is 12.5%.
Tax rate
The WHT deduction rate is transaction type dependant ranging from
5% - 10% as shown below:
Transactions
Companies Individual
Dividend, interest & rent
10%
10%
Royalties
10%
5%
Hire of equipment motor vehicles plants and machinery
10%
10%
Commission, consultancy, technical and management fees,
10%
legal fees, audit fees, and other professional fees
5%
Construction
5%
5%
All types of contracts and agency arrangements, other than
5%
sales in the ordinary course of business
5%
Directors' fees
10%
N/A
Tax returns
The due date for filling WHT returns is 21st day of every succeeding
month. Penalty for late filling of retuns is N25,000 for the first month it
occurs and N5,000 for each subsequent month the failure continues.
Income Tax (Authorised Communication) Act
The Income Tax (Autorised Communication) Act is backed by the
Income Tax (Authorised Communication) Act CAP. 14 LFN 2004. The
act makes provision for authorised communication on Tax matters in
Nigeria, for the purpose of any investigation or enquiry authorised in
any manner whatsover by the Federal Government.
Industrial Development (Income Tax Relief) Act (IDA)
Industrial Development (Income Tax Relief) Act (IDA) CAP. 17
Volume 7 LFN 2004 (as amended) is an act to repael and re-enect with
major changes in the Industrial Development (Income Tax Relief) Act
and to make provision for tax releif for certain industries that may be
issued with pioneer certificates by the Minister and other matters
ancillary thereto. The Pioneer Status Incentive was established by the
Industrial Development (Income Tax Relief) Act, No 22 of 1971 and is
a tax holiday which grants qualifying industries and products relief
from payment of corporate income tax for an initial period of three
years, extendable for one or two additional years (nipc, n.d.)
Casino Taxation Act
The taxation of Casinos in Nigeria is governed by the Casino Taxation
Act; CAP. C3 LFN 2004. The act contains 26 Sections and provides in
part that; every licenced Casino is liable to pay a tax (Casino revenue
tax) on the net gaming revenue accruing to it. Licences shall only be
granted to a company having casino operations as its main object and
duly incorporated in Nigeria under the Companies and Allied Matters
Act.
Federal Inland Revenue Service (Establishment Act) 2007
CAP.F 36
The Act provides for the establishment of the Federal Inland Revenue
Service (FIRS). The object of the Federal Inland Revenue Service
(FIRS) as provided under Section 2 of the Act is the control and
administration of different taxes and laws specified in the first schedule
or other laws made or to be made from time to time, by the National
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20
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
Assembly or other regulations there under the Government of the
Federation and to account for all taxes collected.
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
9. National Information Technology Development Levy
Taxes and Levies to be collected by the Federal Government
1. Company Income Tax;
2. Withholding Tax - on Companies, residents of the Federal
Capital Territory, Abuja and non-resident individuals;
3. Petroleum Profits Tax;
4. Value Added Tax;
5. Education tax;
6. Capital gains tax – on residents if the Federal Capital
territory, Abuja, bodies corporate and non-resident
individuals.
7. Stamp Duties on bodies corporate and residents of the
Federal Capital territory, Abuja.
8. Personal Income Tax in respect of (a) members of the armed
forces of the Federation; (b) Members of the Nigeria Police
Force, (c) residence of the Federal Capital Territory, Abuja;
and, (d) staff of the Ministry of Foreign Affairs and nonresident individuals.
Taxes and Levies to be collected by the State Government
1. Personal income tax in respect of – (a) Pay-as-You-Earn
(PAYE); and (b) Direct taxation (Self-assessment)
2. Withholding tax (individuals only)
3. Capital gains tax (individuals only)
4. Stamp duties on instruments executed by individuals
5. Pools betting and lotteries, gaming and casino taxes
6. Road taxes
7. Business premises registration fees in respect of urban and
rural areas which includes registration fees and per annum
renewals as fixed by each state.
8. Development levy (individuals only)
9. Naming of street registration fees in the state Capital
10. Right of occupancy on lands owned by the state Government
in urban area of the State.
11. Market taxes and levies where State finance is involved.
12. Land Use Charge where applicable
13. Hotel, Restaurant or Event Center Consumption Tax, where
applicable
14. Entertainment tax where applicable
15. Environmental fee or levy
16. Mining, Milling and quarrying fee, where applicable
17. Animal Trade Tax, where applicable
18. Produce Sales Tax
19. Slaughter or Abattoir fees, where state finance is involved
20. Infrastructure Maintenance Charge or Levy, where applicable
21. Fire Service Charge
22. Property Tax where applicable
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22
Taxes and Levies (Approved List for Collection) Act; CAP T2 LFN
2004 (as amended)
Decree No.21 of 1998 LFN, contains the Federal Government
approved the list of Taxes and Levies that could be collected by the
three tiers of the Government. The approved list was further
“harmonized” in year 2015 via; The schedule to the Taxes and Levies
(Approved List for Collection) (Act amendment) Order, 2015.
Thus, the government approved list of taxes that could be collected in
Nigeria by the respective three tiers of the government are as follows:
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
23. Economic Development Levy, where applicable
24. Social Service Contribution Levy, where applicable
25. Signages and Mobile Advertisement, jointly collected by
States and local governments.
Taxes and levies to be collected by Local Government
1. Shops and kiosks rates.
2. Tenement rates.
3. On and Off Liquor Licence fees.
4. Slaughter slab fees.
5. Marriage, birth and death registration fees.
6. Naming of street registration fee, excluding any street in the
State Capital.
7. Right of Occupancy fees on lands in rural areas, excluding
those collectables by the Federal and State Governments.
8. Market taxes and levies excluding any market where State
finance is involved. 9Motor park levies.
10. Domestic animal licence fees.
11. Bicycle, truck. Canoe, wheelbarrow and cart fees, other than
a mechanically propelled truck.
12. Cattle tax payable by cattle farmers only.
13. Merriment and road closure levy.
14. Radio and television licence fees (other than radio and
television transmitter).
15. Vehicle radio licence fees (to be imposed by the Local
Government of the State in which the car is registered).
16. Wrong parking charges.
17. Public convenience, sewage and refuse disposal fees.
18. Customary burial ground permit fees.
19. Religious places establishment permit fees.
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OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
20. Signboard and Advertisement permit fees.
21. Wharf Landing Charge, where applicable
Federal Government taxes are administered by the Federal Inland
Revenue Service (FIRS), while those to payable to the State
Government and Local Government are administered by the various
State Boards of Internal Revenue (SBIRS), and the various local
government councils respectively. (Strachan Partners 2018,
“Administration of Taxes in Nigeria”, para 1).
According to Agbonika, Agbonike, & Mohammed (2018), the above
list was to avoid tax replication and disputes among the three tiers of
Government.
Several writers and tax practitioners are of the opinion that the taxes
and levies listed under the Decree are not conclusive of the powers of
inherent in the government to impose taxes. For tax to be effective, it
must be backed by the law passed by the legislator or the parliament
(A.G of Ogun State v. Aberuagba, 1985).
Nigeria Export Processing Zone Authority Act 1992 Decree No. 63
Section 2(1) of the Act establishes the Nigeria Export Zone Authority
(NEPZA). Section 4 defines the functions of the Authority (NEPZA)
which include under Section 4(a) the administration and management
of all Export Processing Zones in the Country. Section 1(2) provides
for the operation and management of an Export Processing Zone by a
public, private or combination of both public and private entity under
the supervision of and the approval of NEPZA.
24
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
The Act provides legal backing to the tax system under the Nigerian
Export processing Zones/ Nigeria Free Trade Zones as follows:
i. In line with Section 11(2) and 12(9) of the Act – purchases
made by an Approved Enterprise from Companies operating
in the Customs Territory shall attract no VAT or WHT.
ii. In line with Section 11(1) & 12(7) of the Act – Sales made by
Approved Enterprises to Companies operating in the Customs
Territory shall attract VAT payable by the purchaser but shall
not attract WHT.
iii. In line with Section 8 and 18(1) of the Act, tax exemption did
not cover Unapproved Enterprises operating within the
Zones, as such – Purchase or sales made from Customs
Territory by Unapproved Enterprises operating within the
Zones shall attract both VAT and WHT as applicable.
iv. In line with the provisions of Section 12(1) and 18 of the Act –
Imported good conveyed through other ports outside the
Zones but consigned to the Zones shall attract No VAT or
WHT provided the goods are escorted from the port of entry to
the free Zone by the Nigeria Customs Service.
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
of the CITA dealing with derivation of Income – VAT and
WHT shall be applicable where Approved Enterprises have
contract of supplies or design with Companies in the Customs
Territory.
List of incentives provided under Section 18(1) of the Act with tax
implications which Approved Enterprises shall be entitled to are as
follows:
a. legislative provisions pertaining to taxes, levies, duties and
foreign exchange regulations shall not apply within the Zones;
b. repatriation of foreign capital investment in the Zones at any time
with capital appreciation of the investment;
c. remittance of profits and dividends earned by foreign investor in
the Zones;
d. no import or export licences shall be required
e. up to 25% of production may be sold into the customs territory
against a valid permit, and on payment of appropriate duties;
Tax Laws outside the NEPZA act which shall be complied to by
Approved Enterprises in a Zone are:
v. submitting of Tax Returns – to be done through the Free Zone
Authority to FIRS.
vi. All relevant Tax Laws are applicable in dealings between an
Approved Enterprise and its Head Office or Branch offices
located in the Customs Territory, except as related to
purchases and sales covered above.
vii. Also, in line with Section 51A of the PPTA, Sections 8 and 63
Sources of Nigeria Tax Laws
The following are the sources of Nigerian tax laws:
a. The various income tax laws. In Nigeria, we have the States and
Federal laws including the Federal Government Acts and the
State Government Laws.
b. Opinion of income tax experts and authors insofar as the courts
take judicial notice of them.
c. Court judgments until overruled
d. Departmental and official circulars
e. Accepted recommendations of commissions of inquiry
f.
Constitution
g. Practices of the Revenue Department
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
Administrations of Taxes in Nigeria
There are bodies designated for the administration of taxes. They
involve practical interpretations and application of the tax laws. The
bodies charged with the administration of tax in Nigeria are the
Federal, the State, and Local Governments. The tax authorities of these
tiers of government derive their formation from the federal laws which
include:
1. Federal Inland Revenue Service Board, Section 1, 2 and 3 of
the Companies Income Tax Act (CITA) Cap C21 LFN 2004. It
handles company income tax, value added tax, Education tax,
capital gain tax (corporate), Petroleum Profit Tax.
The FIRS is the body that has the responsibility of assessing all revenue
accrued to the federal government. Any tax that has to do with the
corporate bodies is collected by FIRS.
2. The State Board of Internal Revenue (SBIRS), Section 85A, B
and C of Personal Income Tax Act as amended. The state
government is in charge of personal income tax of individuals
such as employees, sole traders, and partnership. They also
collect capital gains tax (individuals)
3. The Local Government revenue committee, sections 85D and
E of Personal Income Tax Act as amended. Local
governments collect taxes on market stalls, cattle fees,
naming of streets.
However, some category of people such as personnel of the armed
forces, Navy, Police etc and residents of FCT, Abuja; pay their taxes to
the Federal Inland Revenue Service (FIRS) because they do not have a
principal place of residence. This also applies to the offices of foreign
affairs.
27
The Organs of Tax Administration
A. State Board of Internal Revenue
The Finance (Miscellaneous Taxation Provisions) Amendment Decree
No.3 of 1993 made provision for the establishment of an operational
arm known as the State Internal Revenue Service. It must be noted that
section 87 of PITA establishes the State Board of Internal Revenue.
Composition
The State Board consists of:
(a) The Executive Head of the State Internal Revenue Service as
Chairman. He is often appointed by the Governor;
(b) The Directors and Heads of Departments within the Internal
Revenue Services;
(c) Three other persons nominated by the Commissioner for Finance
in the State on their personal merits;
(d) A Director from the State Ministry of Finance;
(e) A Legal Adviser from the State Ministry of Justice; and
(f) The Secretary of the State Internal Revenue Service, who shall be
an ex-officio member.
Notice that any five members of the State Board, of whom one must be
the chairman or a Director, shall constitute a quorum.
Duties
The duties of the State Board of Internal Revenue include:
(a) Ensuring the effectiveness and optimum collection of all taxes
and penalties due to the Government under the relevant tax laws;
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
(b) Doing all such things as may be deemed necessary and expedient
for the assessment and collection of the tax, accounting for all
amounts so collected in a manner to be prescribed by the
Commissioner;
(c) Issuing instructions or directives on technical aspects of
assessment including interpretation of Income Tax Act to their
various officers;
(d) Advising the government, through the Commissioner for
Finance, on tax matters which include amendments to tax laws;
and
(e) Appointing, promoting, transferring and imposing disciplinary
measures on employees of the State Service.
B.
Technical Committee
Composition
The composition of the Committee consists of the following:
(i) Chairman of the State Board of Internal Revenue as chairman
(ii) The Directors within the State Service.
(iii) The Legal Adviser to the State Service; and
(iv) The Secretary of the State Service.
The functions are as follows:
i.
It has power to deploy additional staff from within the State
service for the purpose of discharging its duties;
ii. It advises the State Board in all its powers and duties;
iii. It considers all matters that require professional and technical
expertise and makes recommendations to the State Board; and
iv. It attends to other matters referred to it by the Board from time to
time.
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i)
ii)
iii)
Local Government Revenue Committee
Composition
The Supervisor for Finance as chairman.
Three Local Government Councilors as members.
Two other persons experienced in revenue matters to be
nominated by the Chairman of the Local Government on their
personal merits.
Functions
I.
It shall be responsible for the assessment and collection of all
taxes, fines and rates under its jurisdiction and account for such in
a manner to be prescribed by the chairman of the Local
Government.
ii. It shall be autonomous of the Local Government Treasury and
shall be responsible for the day to day administration of the
Department, which forms its operational arm.
C. Federal Inland Revenue Service Board
The Board was first established under Section 3 of the repealed Income
Tax Administration Ordinance 1958 and amended by subsequent Acts
and Decrees. The Finance (Miscellaneous taxation provisions)
(Amendment) Decree No.3 of 1993 provided for an operational arm to
be known as the Federal Inland Revenue Service. The administration of
taxation on the profits of incorporated companies is vested in the
Federal Inland Revenue Service (FIRS) whose management board is
known as Federal Inland Revenue Service Board (FIRSB) (Section13). FIRS (Establishment) Act, 2007.
Composition
I.
An Executive Chairman who shall be a person within the service
experienced in taxation to be appointed by the President.
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ii.
iii.
D. Joint Tax Board (JTB)
The Joint Tax Board was established under Section 85(1) of the
Personal Income Tax Decree 1993 as amended
The Directors and Heads of Departments of the service.
The Officer from time to time holding or acting in the post of
Director with responsibility for planning, research and statistics
matters in the Federal Ministry of Finance.
iv. A member of the Board of the National Revenue Mobilization,
Allocation and Fiscal Commission.
v.
A member from the Nigeria National Petroleum Corporation, not
lower in rank than an Executive Director.
vi. A Director from the National Planning Commission.
vii. A Director from the Department of Customs and Excise.
viii. The Registrar-General of the Corporate Affairs Commission
(CAC).
ix. The Legal Adviser who shall be an ex-officio member of the
Board.
Duties
I.
Advising the Federal Government through the Minister of
Finance on tax matters which include any amendment to the
existing law.
ii. Assessment and collection of Companies Income tax.
iii. Issuing instructions on the financial aspects of assessment
including interpretation on income tax Acts.
iv. Reviewing and approving the strategic plans of the service.
v.
Employ and determine the terms and conditions of service
including disciplinary measures of the employees of the service.
vi. Do such other things, which in its opinion are necessary to ensure
the efficient performance of the functions of the service under the
Act.
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Composition
It consists of the following:
I.
Chairman of the Federal Board of Inland Revenue who is also the
chairman;
ii. One member from each state, being a person experienced in
income tax matters nominated by the Commissioner for Finance
of the State;
iii. Secretary who is not a member but only in attendance for purpose
of maintaining records of the Board's proceedings. He is
appointed by the Federal Public Service Commission; and
iv. Legal Officer – who is not a member but attends meetings in
advisory capacity.
Note that at any meeting any seven members shall constitute a quorum.
Duties
I.
To settle disputes between the States as regards tax matters
especially disputes as to residence and remittance.
ii. To promote uniformity both in the application and incidence of
the provisions of tax laws on individuals throughout the country.
iii. To advise the government on request in respect of double taxation
arrangements, rates of capital allowances and other tax matters.
iv. To impose its decisions on matters of procedure and
interpretation of the Act, on any state, for purposes of conforming
with agreed procedure or interpretations.
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E. Joint State Revenue Committee
The Joint State Revenue Committee was established by section 92 of
the Personal Income Tax Act 1993 (as amended) for each State of the
federation.
Tax Assessment and filing of returns
Composition The Committee consists of the following:
i.
Chairman of the State Internal Revenue Service as the Chairman;
ii. The chairman of each of the Local Government Revenue
Committees.
iii. A representative of the Revenue Mobilization Allocation and
Fiscal Commission as an observer;
v.
A representative of the Bureau on Local Government Affairs not
below the rank of a Director;
vi. The State Sector commander of the Federal Road Safety
Commission, as an observer;
vii. The Legal Adviser of the State Internal Revenue Service; and
viii. The Secretary of the Committee who shall be a staff of the State
Internal Revenue Service.
Assessment
The tax authority will assess the tax payer on the amount of tax due
while the tax payer is duty bound to pay the tax liability within the
specific time limit or exercise the right of objection.
Assessment simply means computation or determination. For tax
purposes it means determining the tax liability. It is the duties of the tax
authority to assess the tax payer to tax and it is the duty of the tax payer
to pay the tax liability.
Assessment is the process of determining the tax liability of the tax
payer. There are different forms of assessment in place:
i.
Original assessment
ii. Revised/ Amended assessment
iii. Additional assessment
Types of Assessment
Duties
The duties of the Joint State Revenue Committee consist of the
following:
I.
advise the Joint Tax Board and the State and Local Government
on revenue matters;
ii.
implement the decisions of the Joint Tax Board;
iii. harmonise tax administration in the state;
iv. enlighten members of the public generally on State and Local
Government revenue matters; and
v.
carry out such other functions as may be prescribed from time to
time by the Joint Tax Board.
Original Assessment: This is the first assessment raised by the tax
authority on the tax payer in the particular year of assessment. This is
the initial assessment given in the form of provisional assessment. It
may be amended after the determination of tax payable and this is due
to appeal. Provisional assessment is the amount paid in the immediate
preceding tax year. It is usually payable where the current year
assessment is difficult to ascertain. Provisional Assessment may be
amended after the taxable income of the payer has being determined. It
is usually called interim assessment.
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The original assessment further leads to what is called base of
judgment assessment which is given by the tax authority to the tax
payer when the tax payer refuses to file his returns i.e. declare the
amount of money during the year. Best of assessment (BOJ) is subject
to objection and appeal procedure.
Many of the cases above one thing is certain, the tax payer must pay a
certain amount. The agreed amount in either the revised assessment or
the original assessment. Best of assessment must be paid within two2
months.
If a tax payer disagrees with the assessment given to minimize by the
tax authority he shall within the 30 days from the date of the notice of
assessment put in writing a letter of objection stating precisely the
grounds of objection (reasons of objection). The tax authority in
accepting the notice of objection will consider the grounds of objection
if valid, the tax authority will issue revised assessment (will be
discussed later) if found otherwise that is if the grounds of objection are
se not to be valid, the tax authority will issue a notice of refusal.
An aggrieved tax payer upon receipt of notice of refusal may issue a
notice of appeal to the ax appeal tribunal within 30 days after the
receipt of notice of refusal The notice of appeal must be in writing and
must contain the following:
1. The name and the address of the applicant
2. Precise grounds of appeal
3. Official number and date of the relevant notice of amendments
4. Address for service of any notice or other documents to be given
to the applicant
5. Amount of the assessment, chargeable income and tax charged as
shown by the notice and year assessment
6. The date the application was served notice of refusal
The tax authority may either accept the notice of appeal and issue
revised assessment or reject the appeal and issue notice of refusal.
35
If the tax payer refuses to pay within the two months, a sum of 10% of
the ax shall be added and a demand notice will be served on the tax
payer through a demand notice. If the payment is not made within one
month from the date of the service of the demand notice the tax
authority may proceed to enforce payment
Revised or Amended Assessment: This arises where a tax payer has
objected to an original or additional assessment for which an
amendment has been made to the initial assessment raised. This
assessment is issued by the tax authority when taxpayers' notice of
objection has been certified valid and an amendment has been made to
the initial assessment.
Additional Assessment: Additional assessment arises where a tax audit
has been carried out or where additional information is received by tax
authority which will result in an additional assessment being raised. An
additional assessment may be the subject of a notice of objection.
Generally, an additional assessment will arise after the tax liability of
the respective years has in fact been settled.
Forms of Assessment
Best of Judgment (BOJ) Assessment: - This arises where a tax payer
refuses to file his returns or neglects completely to register with a tax
authority or an inspector of taxes is of the opinion that the records
submitted are not reliable, then the tax authority may use the best if its
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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judgment to determine the tax liability of such a tax payer. BOJ is
subject to the objection and appeal procedure.
2.
Self-Assessment: - This form of assessment allows the tax payer to
voluntarily provide information on his tax position and hence compute
his own tax liability. The typical self-assessment form should be
completed containing all information expected to be found on a normal
notice of assessment. At the end of every tax year a tax payer is obliged
to fill the self-assessment form. This form is a technique where the tax
payer computes the tax payable for the year of assessment and files the
appropriate returns. There are some benefits associated with the use of
self-assessment:
1. The tax payer is allowed to pay the tax payable in six months
installment (the first installment in form of a cheque is submitted
along with the self-assessment form).
2. Where all installments are paid at when de, the tax payer is
allowed a one percentage deduction from his 6th installment.
Advantages of Self-Assessment
1. Taxes payers are granted the opportunity to pay taxes in six equal
installments over six months.
2. Where all installments are paid on due date, 1% bonus is
deductible from the sixth installment.
3. Its reduces cost of collection of taxes
4. It gives the tax payer a sense of belonging as such tax invasion is
reduced
Limitations of self-assessment
1. Due to high level of illiteracy, there may be a reduced level of
compliance by the tax payer
37
3.
Due to a low level of tax morals in Nigeria that is people generally
are not motivated to pay tax. There will be a high level of
understatement of income leading to tax invasion
The cost incurred by the tax authority on tax and it is higher.
Filling of Returns
For each year of assessment, a taxable person shall file a return of
income in the prescribed form and containing the prescribed
information with the tax authority of the State within 90 days from the
commencement of every year of assessment. This is not applicable to
any person whose only source of income is employment in which he
earns ? 30,000 per annum or less from, that source.
A taxpayer is expected to file returns every year stating all sources of
income as well as the computation of taxable income and tax payable.
The documents to be supplied by the tax payer when filling annual
returns include:
i.
Audited financial statement
ii. Schedule of capital allowances computed
iii. The taxable income
iv. The tax payable
Where a taxable person has delivered a return, the relevant tax
authority may either accept the return and make an assessment
accordingly or refuse to accept the return, and to the best of its
judgment, determine the amount of the assessable, total or chargeable
income and make an assessment accordingly. There may be additional
assessment, if the tax authority later discovers that the taxable person
has been assessed at a lower amount, within the year of assessment or
within six years after the expiration thereof. The tax authority should
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send to the taxable person the notice of assessment which should state
the amount of any assessable, total or chargeable income, tax charged,
place at which payment should be made and rights of objection (if any)
of the taxable person. On the determination of an objection or appeal (if
applicable) the tax shall be payable within one (1) month of the date of
service of the notice on the taxable person.
failed to agree with relevant tax authority may appeal against the
assessment on giving notice within thirty (30) days after the date of
service of notice of the refused of the relevant tax authority to amend
the assessment as desired.
In case of companies, every company whose turnover is ? 1 million and
above shall file self-assessment return within six months of its
accounting period. The company is expected to forward with the tax
return, evidence of direct payment of the whole or part of tax due into a
bank designated for the payment of tax. Every company including a
company granted exemption from incorporation shall at least once a
year without notice or demand there from, file a return with the Board
in a prescribed form and containing prescribed information together
with the audited financial statements, capital allowances computation
and a true and correct statement in writing containing the amount of its
profits from each and every source computed, and declaration on the
truth and fairness of computed amounts and signed by a director or
secretary of the company.
Any company which fails to file returns shall be liable to pay as penalty
an amount of N25,000 in the first month in which the failure occurs and
? 5,000 for each subsequent month in which the failure continues.
In Nigeria, if a person disputes an assessment he may apply to the
relevant tax authority by putting up a letter of objection stating
precisely the grounds of objection to the assessment. This letter of
objection shall be made within thirty (30) days from the date of service
of the notice of the assessment. An aggrieved taxable person, having
39
The notice of appeal, which must be in writing, must contain the
following:
a) The name and address of the applicant;
b)
The official number and the date of the relevant notice of
assessment;
c) The amount of the assessment, total or chargeable income and of
the tax charged as shown by that notice and the year of
assessment concerned;
d) The precise grounds of appeal;
e) Address for service of any notice or other document to be given to
the applicant; and
f) The date on which the applicant was served with notice of refusal
by the relevant tax authority to amend the assessment as desired.
When an Assessment is Final and Conclusive
An assessment is conclusive and final where:
i. No valid objection or appeal has been lodged within the statutory
time limit.
ii. No further notice has been given of a further appeal against a
decision of the appeal commissioner or a Judge.
iii. The amount of total income or profit has been determined on
objection or on appeal, the assessment as made, agreed to, revised
or determined on appeal.
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Tax Clearance Certificate
Tax clearance certificate is issued whenever the Board feels that the tax
assessed on profits or income of a taxable person has been fully paid or
that no tax is due on such profits or income. This certificate should be
issued by the Board to the person within two weeks of the demand, if
not; they give reasons for the denial.
OFFENCES AND PENALTIES
If a tax payer contravenes any provisions of Federal Inland Revenue
Service Act 2007,for which no penalty is specifically prescribed, he
shall be liable on conviction to a fine not exceeding N50,000 or
imprisonment for a term not exceeding six months or to both fine and
imprisonment where offence is committed by a corporate organization,
or firm or other association of individuals:
i.
every director, manager, secretary or other similar officer of the
body corporate
ii. every partner or officer of the firm
iii. every person concerned in the management of the affairs of the
association; or
iv. every person who was purposing to act in any capacity, commits
an offence
The tax clearance usually contains the following;
i.
Chargeable income
ii. Tax payable
iii. Tax card
iv. Statement to certify that no tax is due
The uses of tax clearance certificate include:
i.
To acquire a certificate of occupancy.
ii. To acquire a Visa
iii. To obtain license of firearms
iv. When contesting for an election.
v. To acquire a building license/plan
vi. To bid for a contract with the government.
Shall be liable to be proceeded against and punished for the offence in
like manner as if he had himself committed the offence, unless he
proves that the act or omission constituting the offence took place
without his knowledge, consent or connivance.
There are several situations that the tax clearance certificate is required
in Nigeria such situations are:
i.
Application for government loan
ii. Registration for fire arms
iii. Application for plot of land
iv. Application to be elected for public office
v. Application for pool license
Examples of Offences and Penalties under Federal Inland Revenue Act
2007
[1] Failure to complete and deliver to the FIRS any return required or
failure to produce books, documents etc, for examination at the
place and time stated in the notice, or failure to appear personally
before an officer of FIRS for examination or failure to give orally
or in writing further information required.
Penalty: Liable on conviction in respect of each offence to a fine of
100% of the amount of the tax liability.
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[2]
The implementation of tax policy has always been a tricky business.
For example, in pre-revolutionary colonial America, the argument "No
taxation without representation" resulted from the tax policy of the
British Crown, which taxed the settlers but offered no say in their
government. A more recent American example is President George H.
W. Bush's famous tax policy quote, "Read my lips: no new taxes."
Failure of a bank to furnish, upon demand by the FIRS, quarterly
returns on the names and addresses of all customers of the bank
connected with all transactions involving N5million and above
in the case of an individual or N10,000,000 and above in the case
of a body corporate or failure to submit returns on the names and
addresses of new customers of the or any other additional
information about its customers required by the FIRS.
Penalty: Liable on conviction to a fine not exceeding N500, 000 on
corporate customers and not exceeding N50,000 in the case of an
individual customer.
[3] Failure to pay tax within the period prescribed.
Penalty: Penalty of 10% of the amount of tax payable
Other offences and penalties are as stated in Federal Inland Revenue
Act 2007.
TAX POLICY
Tax policy is the choice by a government as to what taxes to levy, in
what amounts, and on whom. It has both microeconomic and
macroeconomic aspects. The macroeconomic aspects concern the
overall quantity of taxes to collect, which can inversely affect the level
of economic activity; this is one component of fiscal policy. The
microeconomic aspects concern issues of fairness (whom to tax) and
allocative efficiency (i.e., which taxes will have how much of a
distorting effect on the amounts of various types of economic activity).
Policymakers debate the nature of the tax structure they plan to
implement (i.e., how progressive or regressive) and how they might
affect individuals and businesses (i.e., tax incidence).
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NATIONAL TAX POLICY (NTP) 2017
According to the National Tax Policy for Nigeria, the Nigerian tax
system is expected to contribute to the well-being of all Nigerians and
the taxes which are collected by government should directly impact on
the lives of the citizens. This can be accomplished through proper and
judicious utilization of the revenues collected by the government.
The Nigerian National Tax policy provided the following guiding
principles of Nigeria tax system
All existing and future taxes are expected to align with the following
fundamental features:
(a)
Equity and fairness: Nigeria tax system should be fair and
equitable devoid of discrimination. Taxpayers should be required
to pay according to their ability.
(b)
Simplicity, certainty and clarity: Tax laws and administrative
processes should be simple, clear and easy to understand.
(c)
Convenience: The time and manner for the fulfillment of tax
obligations shall take into account the convenience of taxpayers
and avoid undue difficulties.
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(d)
Low compliance cost: The financial and economic cost of
compliance to the taxpayer should be kept to the barest minimum.
and international agencies. This will mitigate tax evasion and revenue
losses.
(e)
Low cost of administration: Tax administration in Nigeria
should be efficient and cost-effective in line with international
best practices.
(d) Enforcement of tax laws
Tax authorities shall ensure the enforcement of civil and criminal
sanctions as provided under the various tax laws.
(f)
Flexibility: Taxation should be flexible and dynamic to a manner
that does not retard economic activities.
(g)
Sustainability: The tax system should promote sustainable
revenue, economic growth and development. There should be a
synergy between tax policies and other economic policies of
government.
(e) Funding of tax authorities
Government shall provide adequate funding for tax authorities.
Accordingly, government should ensure that an adequate percentage of
revenue collected should be provided to the authority for its operations.
Efficiency of administration
The following are important in ensuring an efficient tax administration:
(a) Payment processing and collection
Collection system shall leverage on modern technology towards
advancing ease of payment and prevention of revenue losses.
(b) Record keeping
Tax authorities shall partner with the relevant agencies to set up
automated systems and adequately train tax officials in the use and
maintenance of such systems. Electronic systems of record keeping in
line with global best practices should be entrenched to enhance the tax
administration process.
(c) Exchange of information
Tax authorities shall develop an efficient framework for cooperation
and sharing of information with other tax authorities and relevant local
45
(f) Funding for tax refunds
Government shall provide adequate funding to meet refund
obligations. Tax authorities shall ensure timely and efficient payment
of refunds.
(g) Ease of paying taxes
Tax authorities shall ensure that payment procedures and
documentation are convenient and cost effective. Tax authorities shall
work towards ensuring accelerated improvement on the global index of
ease of paying taxes.
(h) Revenue autonomy
Governments shall ensure a reasonable level of financial and
administrative autonomy for their respective tax authorities to facilitate
effective discharge of their duties.
Objective of NTP
There are certain objectives which the tax system is expected to
achieve.
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These objectives include:
To address inequalities in income distribution:
Nigeria's tax system should take cognizance of our peculiar economic
circumstances and seek to narrow the gap between the highest and
lowest income groups. Those with the highest incomes should pay the
highest percentage of tax and tax revenue should be utilized to provide
Nigerians with affordable social amenities, basic infrastructure and
other utilities.
Promoting fiscal responsibility and accountability
One of the primary objectives of the National Tax Policy is to create a
tax system which ensures that the government transparently and
judiciously accounts for the revenue it generates through taxes by
investing in the provision of infrastructures, public goods and services.
Where this is in place, Nigerians would have a tax system that they can
fully relate to and which is a tool for national development.
Facilitating economic growth and development:
The overriding objective of the Nigerian tax system should be to
achieve economic growth and development. As such, the system
should allow for stimulation of the economy and not stifle growth, as it
is only through sustained economic growth that the potential ability to
offer improvements in the well-being of Nigerians will arise. The tax
system should therefore not discourage investment and the propensity
to save. Taxes should not be a burden, but should be applied proactively
with other policy measures to stimulate economic growth and
development.
To provide the government with stable resources for the provision
of public goods and services:
For Nigeria to pursue an active development agenda and carry out the
basic functions of government, its tax system should generate
sufficient resources for government to provide basic public goods and
services (e.g. education, healthcare, infrastructure, security etc.). It is
therefore a primary objective of taxation to provide the government
with resources that it shall invest in judicious expenditure that will
ultimately improve the well-being of all Nigerians.
47
To provide economic stabilization:
Nigeria should use its tax system to minimize the negative impacts of
volatile booms and recessions in the economy and also to help
complement the efforts of monetary policy in order to achieve
economic stability.
To pursue fairness and equity
Nigeria's Tax system must be fair and shall institutionalize horizontal
and vertical equity. Horizontal equity ensures equal treatment of equal
individuals. The Nigerian tax system should therefore seek to avoid
discrimination against economically similar entities. Vertical equity on
the other hand addresses the issue of fairness among different income
categories. In this regard, the Nigerian tax system shall recognize the
ability-to-pay principle, in that individuals should be taxed according
to their ability to bear the tax burden. Individuals and entities that earn
high incomes should pay a corresponding high percentage of tax. The
overall tax system shall therefore be fair, so that similar cases are
treated similarly. In addition, any ambiguity or conflicting provisions
in the law shall be resolved in a manner as to ensure fairness to the
taxpayers and the tax authorities.
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To correct market failures or imperfections:
One of the objectives of the Nigerian tax system is the ability to correct
market failures in cases where it is the most efficient device to employ.
In this regard, taxes may be reviewed upwards or downwards as may be
necessary to achieve government's intentions. Market failures which
the Nigerian tax system may address are those that are as a result of
externalities and those arising from natural monopolies.
2.
The National Tax Policy (NTP) establishes fundamental principles to
guide an orderly development of the Nigeria tax system and reinforces
the need for tax laws and administrative practices to promote economic
development.
The Policy should address key challenges confronting the Nigeria tax
system including:
1. low tax to GDP ratio
2. fragmented database of taxpayers and weak structure for
exchange of information
3. multiplicity of taxes and revenue agencies
4. poor accountability for tax revenue
5. use of aggressive and unorthodox methods for tax collection
6. failure by tax authorities to honour refund obligations to
taxpayers
7. the non-regular review of tax legislation, which has led to
obsolete laws, that do not reflect
8. current economic realities
Some of the key recommendations include to address the challenges
include:
1. ensuring that there is only one revenue agency per level of
government
49
3.
4.
5.
6.
establishment of a tax court as an independent body to adjudicate
in tax matters
lower tax rate and VAT compliance threshold for SMEs
establishment of an Office of Tax Simplification for continuous
improvement to tax legislation and administration and develop
Key Performance Indices for Nigeria to attain a top 50 position on
the global index of ease of paying taxes by 2020 and consistently
improve on the ranking
administrative framework for amnesty and whistle blowing as
part of the strategies for curbing evasion and widening the tax net
INEC to mandate political parties to articulate, prepare, provide
and make public their tax agenda before and during election
campaigns
The approved Policy also contains and appendix of changes required to
existing laws, repeals and new enactments.
Tax Policy and Investment Opportunities
A country's tax regime is a key policy instrument that may negatively or
positively influence investment. Tax Policy relates to the formulation
of a tax strategy which is supportive to investment. It covers the
advantages and disadvantages of alternative tax policy choices in
meeting the twin goals of offering a tax system attractive to investment,
while at the same time raising revenues to support the key pillars of a
business-enabling environment, such as infrastructure.
A poorly designed tax system, where the rules and their application are
non-transparent, overly complex or unpredictable, may discourage
investment adding to project costs and uncertainty. Systems that leave
excessive administrative discretion in the hands of tax officials tend to
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
invite corruption and undermine good governance objectives
fundamental to securing an attractive investment environment. Policy
makers are therefore encouraged to ensure that their tax system
imposes an acceptable tax burden that can be accurately determined,
and which keeps tax compliance and tax administration costs in check.
Below are the identified nine most important questions relevant for
judging the effectiveness of a country's tax policies:
I.
the consistency of a country's tax burden with its broader
development objectives;
ii. an evaluation of the actual tax burden on domestic profits;
iii. a comparison of the actual versus the target tax burden;
iv. understanding the potential tax effects on investment;
v. an evaluation of tax distortions to investment;
vi. the determination of taxable income;
vii. accounting for unintended tax incentive effects;
viii. tax expenditure reporting;
ix. international tax co-operation.
Challenges of Tax Administration and Collection in Nigeria
According to Eze(2012), in discussing an efficient and effective system
of tax administration, there must always be consideration of the
challenges which militate against the creation and maintenance of such
a system. In Nigeria, there are issues which are faced across the three
tiers of government. Accordingly, these issues will be discussed
without references to which tiers are affected or otherwise.
The major challenges faced in tax administration in Nigeria include:
a. Lack of an overall understanding of the role of taxation in
National development.
b. Dependence on oil revenue leading to a neglect of taxation as a
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OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
source of revenue.
Lack of sufficient political support for the tax administration
Level of business activity in the economy.
Large informal sector outside the tax net
Poor attitude to taxation, lack of tax culture low awareness
amongst tax payers.
Low level of voluntary compliance.
Deliberate evasion and non-compliance.
Multiple taxation
Corruption, leakage and diversion of tax revenue by tax officials
before and during collection by government officials after
distribution.
Lack of accountability for tax revenue.
Lack of inter-governmental collaboration, co-operation and coordination between tiers and agencies of government.
Lack of sufficient government impact on citizens.
Issue within the tax administration set up which include capacity
issues, quality and quantity of human resources, technology issues,
manual system of tax operatives, lack of records, law level of tax payer
education and finding challenges
CONCLUSION
A country's tax regime is a key policy instrument that may negatively
or positively influence investment. Tax Policy relates to the
formulation of a tax strategy which is supportive to investment. It
covers the advantages and disadvantages of alternative tax policy
choices in meeting the twin goals of offering a tax system attractive to
investment, while at the same time raising revenues to support the key
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
pillars of a business-enabling environment, such as infrastructure. A
poorly designed tax system, where the rules and their application are
non-transparent, overly complex or unpredictable, may discourage
investment adding to project costs and uncertainty.
CHAPTER TWO
THE NEXUS BETWEEN TAXATION AND SUSTAINABLE
BUSINESS DEVELOPMENT
MAINOMA M.Akaro
Professor of Accounting and Finance
Nasarawa State University, Keffi, Nigeria
Nigeria Tax System is a system that is characterized with tax policies,
tax laws and as well as tax administration. These coupled of policies
and laws are expected to work together in concord with one another in
order to achieve the overall objective for economic growth of the
country. However, with reference to the presidential committee set on
National tax policy in (2008), the overall focus and primary objectives
of Nigeria tax system is to provide and contribute to the social and
economic wellbeing of Nigerian. This is to be done either directly by
improving existing and formulating new tax policies, and
indirectly to appropriately make optimum utilization of tax
generated from revenue for the benefit and development of the
citizen. In order to achieve these objectives through the revenue
generated, therefore, the tax system was expected to minimize the
economy distortion in the country.
The essence of government is to coordinate the affairs of an economy
by providing security, shelter, infrastructure, health, education and
other basic amenities to its citizens. To achieve this and other
developmental initiatives, government definitely requires financial
resources. A fundamental source of these financial resources is a
compulsory levy imposed on income of eligible persons (corporate and
individuals) called tax. It therefore follows that tax is a very important
tool in fostering societal development.
Nigeria has one of the best tax system in world, this is structured in line
with the levelof government with autonomous power for each level of
government. Like any system, Tax system in Nigeria have it fair share
of Nigeria problems as a sub-system in Nigerian System. Efforts had
been made to now focus on taxation as a source of veritable revenue. I
thereby submit that the entire tax system in Nigeria (Tax Law, Tax
Policy and Tax Administration) is still a work in progress. Embracing
tax justice will go a long way to promote good tax culture in Nigeria.
The fact that tax is imposed on income indicates that there is the need
for some sort of economic activities to take place in an economy before
tax is imposed. Economic activities on the other hand are made
possible by having vibrant businesses whose survival is guaranteed by
stable and steady fiscal policies and conducive investment
environment. In recent time, global attention is focused on not just
development but sustainable development. This applies to every
sphere our economic lives.
53
54
INTRODUCTION
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
THE NEXUS BETWEEN TAXATION AND SUSTAINABLE BUSINESS DEVELOPMENT
Fiscal pressure, in the opinion of some economists, may have a
negative impact on the saving and investment process if it is too high,
because income tax will not only affect savings but also investment
income. Where this happens, the businesses are affected and their
development is impaired.
Taxation as a process is effective when an economy has a sound tax
system. In Nigeria, the National Tax Policy identified a number of
objectives for which our tax system is expected to achieve. These
include promoting fiscal responsibility and accountability, facilitating
economic growth and development, provision of stable resources to the
government to provide public goods and services. Other objectives
include income redistribution, economic stabilization as well as
fairness and equity among tax payers.
It is important to note that taxation is of great concern in investors'
decisions and hence in economic growth and employment. Complex
and excessive taxation deters foreign investors, drives out domestic
investors, curbs entrepreneurship, and results in deadweight losses due
to tax compliance and tax avoidance costs. Friendly taxation,
meanwhile, broadens the tax base by attracting foreign investment,
encouraging domestic investment and stimulating entrepreneurship,
thus entailing greater tax compliance.
This paper examines the nexus between taxation and sustainable
business development.
The Concept of Taxation
Taxation is a complete process involving imposition and
administration of tax. Somorin (2015:10) defines taxation as “the
process or machinery by which communities or groups of persons are
made to contribute in some agreed quantum and method for the purpose
of the administration and development of the society”. This clearly
shows that taxation is not necessarily the same as tax; while tax is the
amount, taxation is the machinery set in place to generate that amount
and apply it for the development of the society. Taxation is the principal
means by which governments raise revenue. Without taxation,
governments would be unable to finance their operations or deliver the
many public goods and services that they provide to the community.
55
The Concept of Sustainable Business Development
The concept of business development has not lent itself to simple
definition. A concise definition adopted in this paper is the one by the
Economic Development Services (2003) which defined business
development thus:
a. An activity that increases, or is intended to increase, the profit,
production, or service potential of an enterprise;
b. An investment of capital and time that causes, or is intended to
cause, the growth and expansion of an enterprise
c. A process of moving a business towards the point where it can
provide its services and products to the entire outside group that
wants them.
In this sense, businesses develop about improvement in the profit
production, services and investment of business enterprise with a view
to expanding the wealth and growth of the enterprise. Considering the
roles businesses play in an economy, particularly in terms of
employment generation and stimulation of economic activities,
discussion on sustainability of businesses is crucial and fundamental.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
THE NEXUS BETWEEN TAXATION AND SUSTAINABLE BUSINESS DEVELOPMENT
Taxation and Sustainable Business Development
Optimal tax policies should always take into account the implications
of the degree of taxation on the activity of businesses. A strong private
sector, supported by an optimal economic freedom and a tolerable tax
burden is a real support for survival of businesses and by extension,
economic development. The implications of the degree of taxation on
business activity and financial equilibrium are enormous. It is often
considered that the impact of fiscal policy is implicit on the business
environment, on the capacity to provide the necessary resources for the
activity as well as on the quality of the performance of economic
agents. Against this background, the relaxation or increase of fiscal
pressure influences the behavior of economic agents.
clever accountants an advantage over those who must wade through
the tax code on their own.
In a bid to ensure that taxation guarantees sustainable business
development, the fundamental principles of simplicity,
efficiency/economy, neutrality and equity must be strictly adhered to.
Most importantly, the issues of tax burden and tax incentives need to be
reconsidered.
To ensure that taxation promote sustainable business development, it is
important that our tax system is built on the principle of Simplicity.
Simplicity is often considered as an important principle of taxation. A
simple tax system makes it easier for individuals and businesses to
understand their obligations and entitlements. As a result, businesses
are more likely to make optimal decisions and respond to intended
policy choices. Complexity also favours aggressive tax planning,
which may trigger deadweight losses for the economy. Complexity
also makes it harder for governments to monitor and enforce tax
collections. In most cases these complexities give room for loopholes
in tax laws. A tax system full of loopholes gives those who can afford
57
Another important factor to consider is efficiency. This bothers more
on compliance cost to businesses and administration cost for
government. It is important for the government to reduce tax
compliance cost and if possible tax rate for sustainable business
development. According to Tomlin (2008), economists argue that the
resources smaller companies direct towards tax compliance are
resources that could otherwise be used for reinvestment and facilitating
future growth. Reducing the compliance costs and tax rate increases
the small enterprises profit margin (Ocheni, 2015). Sustainable
business development is guaranteed when there is increase in profit
margin.
An effective sustainable business development can also be achieved
where taxation is neutral and equitable between forms of business
activities. Equity in the tax system is one crucial factor in shifting the
culture from one of evasion to one of compliance. A neutral tax will
contribute to efficiency by ensuring that optimal allocation of the
means of production is achieved. In this sense, neutrality entails that
the tax system raises revenue while minimizing discrimination in
favour of, or against, any particular economic choice. This implies that
the same principles of taxation should apply to all forms of business,
while addressing specific features that may otherwise undermine an
equal and neutral application of those principles.
Tax burden is a crucial item of discussion and consideration under any
tax system. The current tax system seems to impose heavier taxes on
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
THE NEXUS BETWEEN TAXATION AND SUSTAINABLE BUSINESS DEVELOPMENT
income used for saving and investment, and on the formation of human
capital, than on income used for consumption. Ezugwu and Akubo
(2014) observed that the current 30% corporate income tax rate is
higher than the 25.32% average of the Organization of Economic Cooperation and Development (OECD).
In view of this, there is the need to emphasize on shifting the burden
placed on businesses. This can be achieved by emphasizing on
consumption tax than on income tax as well as availing businesses with
more tax incentives. This entails shifting the burden of tax to the final
consumers who are focal beneficiaries of products and services
provided by business entities.
It is important to say that indeed, corporate taxation comprises all taxes
paid by a business. In addition to the corporate income tax paid on
earnings, it also includes employer- borne social security
contributions paid on personnel, real estate taxes and many other minor
taxes. Each one of these taxes may have different treatments,
interpretations, and allowances that add up to greater tax complexity
thus placing heavy tax burden on businesses. With such burdens,
sustainable business development is impaired. It is very important that
the entity is allowed to continue to survive so that more taxes can be
obtained. The source must be sustainable. Where heavy taxes are
imposed on the profits of business entities, the survival of such entities
is threatened thus sustainability of the source of tax would be in
jeopardy.
Economic theory clearly indicates that as the tax incidence on
businesses declines, the number of jobs and business start-ups should
increase (Artiz & Meier, 2012). Intuitively, as businesses face reduced
taxes, all else held constant; they have more income to divert to other
costs of production, such as wages and the allocation of jobs. Increased
profits allow firms greater ability to invest in more capital and increase
employment, stimulating economic growth and a stronger labour
market.
59
Another important angle from which taxation could improve
sustainable business development is in the area of tax incentives.
UNCTAD (2003) defines tax incentives as instruments that reduce the
tax burden of any party in order to induce them to invest in particular
projects or sectors. They are exceptions to the general tax regime and
may include, reduced tax rates on profits, tax holidays, accelerated
depreciation, , investment tax credits, capital allowance, export
processing zones, loss carry forwards for tax purposes and reduced
tariffs on imported equipment, components, and raw materials as well
as increased tariffs to protect the domestic market. A major reason for
tax incentives is to encourage investment and business growth and it is
an important tool employed to develop and sustain industries
(Bariyima, Nangih, Oyedokun, 2018). Studies such as Akinyomi and
Tasies (2011), Ohaka and Agundu (2012), Mayende (2013), Uwaloma,
Ranti, Kingsley and Chinenye (2016) and Twesige and Gasheja (2019)
have empirically established positive effect of tax incentives on
business performance and investments.
CONCLUSION/RECOMMENDATIONS
The paper looked at the link between taxation and sustainable business
development. It observed that sustainable business development is
guaranteed when business operate under fiscal policies that will
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
THE NEXUS BETWEEN TAXATION AND SUSTAINABLE BUSINESS DEVELOPMENT
support increases profitability. Notable areas where taxation can
support sustainable business development include simplicity,
efficiency and equity. These are basic principles that should guide
establishment and administration of our tax policies. Shifting of tax
burden from businesses to final consumers by laying more emphasis on
consumption tax than income tax will also assure the sustainability of
businesses in Nigeria. In addition, introduction of tax incentives and
creation of awareness on such windows will assist in improving
sustainable business development in our dear country.
REFERENCES
Akinyomi, O. & Tasie, C. (2011).The impact of tax incentives on the
performance of small scale enterprises. Journal of Accounting
Research. 1(1), 183-188.
Artiz, S. & Meier, K. J. (2012).Taxes, incentives, and economic
growth: Assessing the impact of pro-business taxes on U.S.
State Economies. A Paper presented at the National Meeting of
the American Political Science Association, New Orleans,
Louisiana. Retrieved from https://www.ssrn.com/abstract
=2107522
Bariyima, D. K., Nangih, E & Oyedokun, G. E. (2018). Tax disincentives and business growth in Nigeria. Journal of Taxation
and Economic Development. 17(1), 69-111.
Ezugwu, C. I. & Akubo, D. (2014). Analysis of the effect of high
Corporate tax rate on the profitability of corporate
organisations in Nigeria – A study of some selected corporate
organisations. Mediterranean Journal of Social Sciences. 5(20),
310-321.
Mayende, S. (2013). The Effects of Tax Incentives on Firm
Performance: Evidence from Uganda Journal of Politics and
Law. 6(4), 95-107.
Munyanyi, W. & Chiromba, C. (2015). Tax incentives and investment
expansion: evidence from Zimbabwe's tourism industry. ADminister 27, 27 – 51.
Ocheni, S. I (2015). Impact analysis of tax policy and the performance
of small and medium scale enterprises in Nigerian economy.
Strategic Management Quarterly. 3(1),71-94 DOI
http://dx.doi.org/10.15640/smq.v3n1a3.
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TAX MANAGEMENT AND COMPLIANCE
CHAPTER THREE
TAX MANAGEMENT AND COMPLIANCE
ADEGBENRO Saheed Aderemi
Lead City University, Ibadan
+2348064648303 &+2348055540280
ABSTRACT
This paper seeks to examine Tax Management and Compliance in order
to minimize tax exposures and compliance with Tax obligations and
therefore involves goods knowledge of Tax legislation, strategies to tax
management, tax consultant/ adviser, in tax management equation, tax
consulting, tax planning, tax compliance and the profitability of the
business and importance of tax planning, tax evasion and tax
avoidance.
INTRODUCTION
Tax management is all about professionally handling of taxes in order
to minimize tax exposures, whilst operating within the ambit of all
relevant tax laws
Many Taxpayers get into troubles with tax authorities for several
reasons such as:
a. Failure to file the appropriate tax returns in a timely manner
b. Under-declaration of income in tax returns
c. Failure to remit deducted taxes
d. Improper application of tax laws
e. Failure to comply with relevant provisions of tax laws, etc.
63
Tax management is the ultimate solution to the above tax problems.
Often times, individual and corporate Taxpayers consider it a waste of
money to engage a Tax expert to help manage their tax matters. They
failed to see the bigger picture that for every N500,000 paid to a tax
consultant, a tax saving of over N7,000,000 is achieved, translating
into a cost of 7% or less to achieve a huge tax saving.
STRATEGIES OF TAX MANAGEMENT
Tax management relates to management of finances for payment of
tax, assessing the tax credits. Tax management has nothing to do with
planning to save tax; it is just related with operational aspect of
payment of tax i.e. while managing taxes, it is expected to make timely
payment of taxes without running out of money and comply with all the
provisions of such tax law.
Tax management therefore involves good knowledge of tax legislation,
tax treaties, Integrated Tax Administration System (ITAS) e-filing
platforms, tax payment processes, tax return forms, and tax payers
guide
Effective tax management entails:
(a) Business process
a. Proper Record Keeping – It is required by law to maintain
good records. This among other things will discourage the tax
authorities from raising best of judgment assessment which
most times will be more than what a taxpayer would have
paid if records were properly kept.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX MANAGEMENT AND COMPLIANCE
b. Treatment of FIRS Correspondence/Tax documents as
priority – This must be taken seriously and attended to
promptly and professionally, as tax correspondences are
time-bound
c. Business Financing Method – Financing businesses with
loan/debt is cheaper than using equity. Interest on loan is tax
deductible. This option should be taken advantage of. Care
should be taken however that loans are promptly repaid as and
when due.
(b) Accounting and Tax Strategy
a. Invest in basic tax knowledge. If you want to run a successful
Business, then a little knowledge in tax should be considered.
b. Engage tax expert. The use of auditors/tax adviser is not an
option when preparing and filing returns. This will save the
business a whole lot of money
c. Take advantage of tax planning opportunities and incentives.
Some examples of these incentives will be discussed in
subsequent articles.
(c) Voluntary Tax Compliance.
a. The cheapest form of tax compliance is voluntary/selfcompliance. The FIRS operates a self-assessment regime
where a taxpayer can assess himself to tax and file returns on
that basis.
65
b. Use of tax amnesty. For example, the recent Voluntary Assets
and Income Declaration Scheme (VAIDS) initiative by the
Federal Government.
TAX AUDIT
It is also statutory that the relevant tax authority will visit every other
year for tax audit. Tax audit is to confirm that the tax paid under the
voluntary compliance regime is correct, adequate, and paid as when
due. If the tax paid is not adequate, it means it will be made to pay more
with penalty and interest.
Payment as when due means you have to pay your tax within the
statutory time stipulated for payment of such tax. A taxpayer may have
paid adequately but paid after such stipulated time, in which case,
penalty and interest will apply.
TAX CONSULTANT/ADVISER, IN TAX MANAGEMENT
EQUATION
Tax consultants monitor and anticipate changes to tax legislation and
respond quickly with advice specific to their clients' particular
commercial requirements. Their function includes:
Work schedule of the tax consultant:
a) Tax Planning: Helping businesses and individuals create
strategies for dealing with tax and prepare for their future in the
financial market
b)
Tax Avoidance: Advising and consulting with clients in order to
provide advice about tax legislation, e.g. ensuring businesses and
assets are properly structured to minimise the incidence of
taxation
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX MANAGEMENT AND COMPLIANCE
c)
Advising on employee tax incentive schemes, eg share options,
share ownership trusts, tax-efficient employee benefits and the
creation of employee benefit trusts
d)
Advising on aspects of property transactions, including
acquisitions of foreign property, and the use of tax efficient
structures in property deals, including the effective use of
partnerships and co-ownership structures
e)
Calculating tax liability, ensuring compliance is completed
speedily and efficiently, and submitting tax returns and
associated documents by the appropriate deadlines.
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
All these activities of the tax consultant in collaboration with the tax
payer is what is called Tax Management.
EXISTING TAX LEGISLATION IN NIGERIA
The following is curled from FIRS – Nigeria website. The knowledge
of the existence and contents of these tax laws is necessary to both the
tax payer and the tax consultant. This is the basis of all the
jobs/assignments that the tax consultants carry out.
The following are the existing tax legislation in Nigeria, as at 2016:
1) Associated Gas Re-Injection Act
2) Capital Gains Tax Act
3) Companies Income Tax Act
4) Deep Offshore and Inland Basin Production Sharing Contracts
Act
5) Tertiary Education Trust Fund Act
6) Federal Inland Revenue Service (Establishment) Act
7) Income Tax (Authorised Communications) Act
8) Industrial Development (Income Tax Relief) Act
67
Industrial Inspectorate Act
National Information Technology Development Act
Nigerian Export Processing Zones Act
Nigeria LNG (Fiscal Incentive Guarantees and Assurances) Act
Oil and Gas Export Free Zones Act
Personal Income Tax Act
Petroleum Profits Tax Act
Value Added Tax Act
Stamp Duties Act
Taxes and Levies (Approved List for Collection) Act
Casino Act
Reviews, amendments and modifications to tax legislations are
continuous, evolving with global best practices and in keeping with the
local socio-economic realities. The review and amendment of tax
legislation is in keeping with the formal tax amendment process as
provided for in the Nigerian constitution.
As a result of the need to continuously review and amend tax
legislation, the following tax laws were amended in the respective
years indicated here-under:
1. Companies Income Tax Act – 2007
2. Value Added Tax Act- 2007
3. Personal Income Tax Act – 2011
The Petroleum Industry Bill (PIB) is presently before the National
Assembly and when passed into law will replace the Petroleum Profits
Tax Act. In addition, there is an on-going process to overhaul all
existing tax laws and the Service has consequently initiated the Tax
Law Redrafting Project to achieve this.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX MANAGEMENT AND COMPLIANCE
Tax management is making conscious efforts to manage the tax
processes for taxpayers' benefits. It involves mastering the tax laws and
by that knowing:
1. Which taxes are payable and period covered,
2. The time for payment,
3. Where to pay,
4. Which tax authority to pay to,
5. Relevant laws, regulatory bodies, and professional standards,
6. Relevant penalties ( if defaulted)
7. Relevant incentives and how to claim them,
8. When, why, and where to make objections, etc.
Tax Planning is an exercise undertaken to minimise tax liability
through the best use of all available allowances, deductions,
exclusions, exemptions, etc., to reduce income.
The above list eminently reinforces the need for engagement of a tax
consultant, who will:
1. Ensure you have your TIN, ( Tax Identification Number)
2. Ensure you have your VAT registration number
3. Keep your tax payment time table,
4. Make your tax computations,
5. Make your tax returns,
6. Obtain your Tax Clearance Certificates,
Tax Consulting Tax Planning, Tax Compliance and the Profitability of
the Business
With the plethora of tax legislation and the pressure faced by
businesses to grow their turnover and hence maintain reasonable
profitability, small businesses are often caught in the web of not tax
compliance issues.
69
Tax planning can be defined as an arrangement of one's financial and
business affairs by taking legitimately in full benefit of all deductions,
exemptions, allowances, and rebates so that tax liability reduces to a
minimum. In other words, all arrangements by which the tax is saved
by ways and means which comply with the legal obligations and
requirements and are not colourable devices or tactics to meet the
letters of law but the spirit behind these, would constitute tax planning.
Tax planning is a broader term which requires management of affairs in
such a way that results in the reduction in minimization of tax liability.
Tax planning is not possible without tax management. It refers to the
compliance of statutory provisions of law. Tax Management includes
(i) Deduction of taxes at source
(ii) Payment of tax and self-assessment
(iii) Payment of tax on demand
(iv.) Maintenance of accounts
(v)
Audit of accounts
(vi.) Payment of assessed duty or fees, bonus and commission to
employees etc
(vii) Filing of return of income
(viii) Documentation and maintenance of tax files etc.
(ix) Review of order received from tax Authorities.
Minimization and reduction of Tax Litigation, Queries, Penalties etc
a) Productive investment from saved payment in taxes to grow and
expand business
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
b)
c)
d)
TAX MANAGEMENT AND COMPLIANCE
Reduction in cost by give them opportunity to sell cheaper, do
more volumes, grow profits
Healthy growth of economy
Employment generation by creating a pool of funds available for
new investment and employment.
Importance of Tax Planning
We present the following points when planning for tax
a) Claimable deductions, allowances and relief are statute driven
and must be utilized within period allowed by law. Claims may
not be allowed outside time recognized by law. Claims lapse.
b) Without Tax Planning, the tax payer may be open to tax penalties
since room for tax
c) Avoidance and tax evasion is being closed with government
focusing more on tax as a revenue source.
i. Government has presented tax incentives to encourage
investments in specific sectors of the economy, without tax
planning, taking advantage of the incentives may be difficult.
ii. Growing profits means increase tax payments. It stands to
reason that tax planning will be required to minimize tax
payment legitimately.
iii. Tax Panning positions a company to bear direct and indirect
taxes, plan expenses,
iv. Capital assets buying, sales promotion.
v.
Capital Assets Purchase with the use of Cash from Reserves,
Leased or bought on Hire
71
vi. Purchase have tax implication, tax planning can help to
direct.
vii. Savings from Tax Planning is considered money earned in
these days of recession
Essential of Tax Planning
a. Tax Payer must have current knowledge of Tax Laws, recent
Court decisions, Tax Circulars, Clarifications by Tax Authorities.
b.
The Tax Payer must be prepared to disclose all material
information and filing same with the Tax Authorities. Penalties
for concealment are worse.
c.
Tax planning strategies must not only comply with the law but
must be seen to comply with the spirit of the law. Tax planning
device must be valid and ethical.
d.
Corporate Planning, Strategic Planning, Project Planning,
Operational Planning involve tax considerations must be part of
Tax Planning
TAX EVASION AND TAX AVOIDANCE
Tax Evasion:
Tax evasion is the attempt by a Tax Payer to reduce his tax liability by
falsely suppressing income or exaggerating expenses and any other
deliberate manipulations to reduce tax liability. It is punishable by law.
Tax evasion may involves stating an untrue statement knowingly,
submitting misleading documents, suppression of facts, not
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX MANAGEMENT AND COMPLIANCE
maintaining proper books of accounts of income earned (if required
under the law) omission of material facts in assessments etc.
wrong tax rates, rules which may expose them to additional tax
liabilities when the Tax Man come calling.
Dishonestly claims of benefit and incentive under the statute by
making false statements
Furthermore, because of knowledge gaps, due date for filing State and
Federal Taxes may also expose companies to penalties and interest, in
addition to taxes they may not have adequately provided for in their
books of account. In such cases, payment of such interests and
penalties could affect the company's cash flow and threaten its
corporate survival.
Refusal to record Sales for Tax Purposes
Claiming bogus expenses, bad debts and losses etc
Charging personal expenses as business expenses, e.g., car expenses,
telephone expenses, travelling expenses, medical expenses incurred
for self or family may be shown in the account books as business
expenses.
Submission of fake receipts for charitable donations for claiming
deduction under law
Failure to disclose capital gains on sale of asset
Tax Consultant Tax Planning, Tax Compliance
Why Some Tax Payers fail in Tax Compliance Tax Management
In some cases, the problem may be that proper accounting records may
not have been maintained by the company with the results that
computation of appropriate taxes and payment to relevant tax
authorities may become difficult.
In other instances, having proper knowledge of applicable rates for
taxes could also limit compliance by companies as they may apply the
73
In addition to the above, due to lack of proper knowledge of tax
incentives available to the taxpayer, some taxpayer would rather be
involved in tax evasion which is a criminal attempt to evade tax where a
simple tax avoidance strategy would have sufficed.
Similarly, compliance problems may arise due to the failure of the
company to understand tax implication of business transaction they are
involved in from time to time. It then becomes too late for them to
correct errors that may have exposed them to higher tax liabilities.
Also, tax compliance may require that companies are advised to devise
their transaction in such a way as to avoid tax disadvantages where
possible.
In a similar vein, there are tax consequences of adopting a business
structure, partnership, joint ventures which if only the tax payers
knows this, and they would be able to conveniently manage to the best
interest of such companies.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX MANAGEMENT AND COMPLIANCE
Some businesses have not been able to comply with our tax laws due to
what they see as complexity and costs they have to incur when they
have to engage tax consultants with filings.
REFERENCE
Another difficulty in compliance relates to the penalties of failure to
comply. Where penalties like that of failure to file Value Added Tax on
Due Date is punitively prohibitive, it becomes difficult for the
company to comply with the result that some companies have
practically have to wind up without being liquated with promoters
simply registering a new company to come evade liability of noncompliance over time.
Technical Notes & manuals, 10/03
In spite of the above scenarios, our tax laws only recognize the
taxpayer who when they possess the adequate knowledge of the tax
laws can file that tax returns without the tax consultant, structure their
transactions to avoid or minimize tax liabilities. This is in addition to
the taxpayer filing its tax returns on due date and avoiding penalties
thereon.
Biber, E. (2010). Revenue Administration, Tax payer AuditDevelopment of Effective Plans IMF
Folarin, F. (2018) Tax audit exercise: when will FIRS adopt risk based
approach in Nigeria, as cited in: https://www2.deloitte.
com/ng/en/pages/ tax/articles/inside-tax-articles/tax-auditexercise-when-will-FIRS-adopt-risk-based-approach-innigeria.html
Oyedokun, G. E. (2019). Imperatives of Tax Audit and Investigation.
Lagos: Aaron & Hur Publishers.
Tax Consulting Firms can help with tax planning, tax management, tax
compliance issues and keep from the radar of the tax authorities while it
remain a good corporate and private citizen paying taxes promptly. It is
also saved from Tax Risk, Litigation; cash and positioned to invest tax
savings for growth, expansion, reduced production cost, increased
sales volumes and profitability.
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TAX COMPLIANCE AND ITS CHALLENGES IN NIGERIA: THE PRACTICAL PERSPECTIVE
CHAPTER FOUR
TAX COMPLIANCE AND ITS CHALLENGES IN NIGERIA:
THE PRACTICAL PERSPECTIVE
OGBONNA Udochukwu Godfrey
Rhema University, Aba, Nigeria
Kellyogbo2004@yahoo.com
INTRODUCTION
Tax compliance can be defined as a process whereby a tax payer
(individual or corporate) voluntarily calls for tax assessment and pays
the total amount of tax assessed without objection or hesitation within
the period allowed by law. Total Tax compliance all over the world
could be difficult because no one wants to pay tax willingly. It is not
enough for a tax payer to pay his/her tax, without recourse to time.
Section 41 of PITA 2011 as amended specifies that all taxable persons
are expected to file his/her returns without notice or demand not later
than 31st of March each year. Similarly, section 81 specifies that an
employer must file the annual returns of all emoluments paid to their
employees in the preceding year.
In the practical sense of it, total tax compliance has been hindered by
several factors which has been x-rayed below:
1. Lack of tax Culture in Nigeria
Most Citizens of Nigeria has not imbibed the culture of paying their
taxes as and when due. This could be attributed to late emphasis on tax
compliance by government which was as a result of oil boom. At that
time one President of Nigeria was quoted as having boasted that the
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problem of Nigeria wasn't money, but what to do with it. Tax revenue
was totally neglected because there was ''too much money''.
Consequently, no conscious effort was made to persuade Nigerians to
be tax compliant.
2. Non-Provision of adequate Infrastructure by Government
In my years of serving as the Chief Executive of the Internal Revenue
Service of Abia State, it was discovered that people will always relate
going to pay their taxes to infrastructural development. Tax payers will
pay more taxes when they see that government used the previous taxes
paid for infrastructural development. For instance those that live in the
area where their roads are built will though not willingly pay their taxes
than those whose roads are bad. In his research, Wardana (2017)
discovered that majority of infrastructure variables have positive
impact on tax performance indicators which includes compliance with
tax reporting and tax payment.
3. Ill Advise by Tax Consultants
My experience for several years as the Executive Chairman of Internal
Revenue Service exposes a lot of unethical practises by consultants,
who confuse their clients and come to argue the tax laws in order to
assist their clients to evade tax payment. There are situations where tax
consultants even come to 'pass ball' to the IRS in order to bring down
the tax liabilities of their clients.
4. Lack of Patriotism
The lack of love for the country/state is one of the things that hamper on
adequate tax compliance. Lack of care for the country's development
and selfish interests affect full tax compliance. People latch in on non-
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provision of amenities by Government to hold back their civic
responsibilities/obligations to the State.
full well that no man pays tax smiling, there should be proper
machinery put in place for enforcement of the tax laws. This includes a
handshake between the tax authorities and the Judiciary, as no
enforcement can take place without the courts. There must be
collaborations in the area of training, provision of tools like the tax laws
to the revenue courts for quick dispensation of tax matters. It is noted
that most tax cases stay in courts for a minimum of two years before
decisions are taken. This doesn't encourage tax compliance by the
taxpaying public. A judgement against a tax evader will encourage
compliance by not less than ten people.
5. Ignorance of Officials of Organizations
Most organisation officials ignore calls from tax authorities for tax
compliance. Letters from the tax authorities encouraging individuals
and organisations alike are trashed without knowing the implications
of such in law.
6.
Engagement of Non-Professionals/ lack of training of Tax
Officers
Most organisations extend tax responsibilities to those that do not
know anything about tax laws. A situation where nontax professionals
are engaged to carry out tax functions is unacceptable. It is equally
instructive to state that training is a sine-qua- non for tax and nontax
persons. Organisations need to know about tax laws and their rights
with respect to tax compliance, hence frequent training is
recommended for individuals and organisations alike.
7. Non-Monitoring of Compliance by Tax Authorities
Tax authorities most times wait for tax audit before demanding for
adequate compliance. It is instructive to note that monitoring of
organizations has been neglected for audit. The tax authorities must put
things in place to make individuals comply without being punished.
Teams should be dispatched monthly to make sure that organisations
and individuals comply with tax laws rather than wait for a year or two
for tax audit.
9. Obsolete Tax Laws
In many countries, amendments to tax laws go along with the budgets
for passage into law to enable implementation of that year's budget. In
the case of Nigeria, tax laws are not amended till after eight to ten years.
By so doing, so many tax laws will be obsolete and cannot drive the
present realities on ground. Tax law is a fiscal tool and should be made
to align with fiscal policies regularly.
8. Non-enforcement of the Tax Laws by Tax Authorities
Enforcement of the tax laws is the fulcrum of tax compliance. Knowing
10. Archaic Ways of Collection/Assessment
It is unfortunate that tax authorities (Local Governments inclusive) still
use barbaric means of tax assessment and collection. A situation where
tax collectors use clubs and sticks with road blocks to collect money
from people on the road is condemnable. There should be modern ways
of tax collection. Tax authorities must adopt automation as a veritable
means of collection. Tax authorities must reduce the sale of revenue
windows to tax collection agents. They must have a platform for
collection of taxes themselves and all collections must be channelled
into the authorities' collection accounts. Government must do
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everything possible to provide power for automation of all tax
activities, ranging from assessment, collection, to accounting (end to
end).
equally contention on who collects revenue between the Internal
Revenue Service of various States and Ministries/ agencies.
Government must put proper collection platform in place for ease of
compliance.
11.
Corruption
My experience reveals that people have impression that money can buy
anything in Nigeria. Doing the right thing is not a norm any more.
Falsification of records is common in taxation issues. Reduction in
income of tax payers so as to pay lower tax is common amongst tax
payers. Tax officers and tax payers collude to fleece government of
legitimate revenue. The understanding that issues can always be
'sorted' makes tax compliance difficult.
12. Multiple/Double Taxation
Multiple and double taxation repels compliance. Tax payers will want
to know what to pay collectively in a year, to enable them pay.
Situations where many demand notices come from various sources for
collection is not healthy. There must be a way of consolidating tax
collection for ease of collection. The number of taxes to be paid should
be compressed as long as the money enters into one purse.
13. Rivalry amongst Government Agencies
The various arms of Government have their list of taxes to be collected
from various categories of tax payers. It is observed that most of these
taxes are the same. For instance, operational permit collected by local
government is the same as business premises levy from the state.
Haulage fee is same as loading and offloading. In some States, agencies
are created and charged with responsibilities of collecting the same
taxes and/or levies collected by some Ministries. The worst aspect of it
is that the burden of payment is shifted to the same tax payers. There is
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14.
Lack of Political Will on the path of Government
Amongst all the observed points above, the political will of the Chief
Executive (Majorly the Governors in the States and The President at the
Federal level) is very paramount. If the revenue authorities don't get the
support of the CEOs then all other efforts will be in futility.
Inconsistency in tax policies does not make for ease of compliance. It is
the political will that will encourage the revenue authorities to enforce
compliance. The CEO is the chief revenue officer and must discharge
this responsibility without fear or favour. No legal person must be
shielded from tax payment. Tax is law and the law must take its course.
15. Advocacy/Communication Gap.
Since nobody pays tax smiling, every strategy must be put in place to
woo tax payers for total compliance. Advocacy is one of the veritable
means of persuading tax payers to comply with the tax laws. The
taxpaying public must be made to know what obtains in the tax system.
They must know their rights and obligations. New ideas must be
communicated to them. There must be tax advocacy and education.
The things that the taxes are used for must be laid bare in the public
domain as to encourage compliance. If people must comply
voluntarily, they must know.
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CHAPTER FIVE
REFERENCES
WardanaArief Budi (2017). The Impact of Basic Infrastructure on Tax
Effort: A case Study of Munincipalities/Regencies in Indonesia.
International Institute of Social Studies, The Hague,
Netherlands.
UNCTAD (2003). The financial grants to encourage investment and
employment in non-traditional sectors. New York: UNCATAD.
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE
TAX COMPLIANCE AMONG NIGERIANS
AGBETUNDE Lateef Ayodele
ABSTRACT
Uwaloma U., Ranti, U.O., Kingsley, A., & Chinenye, A.N. (2016). Tax
incentives and the growth of manufacturing firms in Nigeria.
The Social Sciences. 11(7), 1338-1342.
This study examined culture and tax compliance of individual
taxpayers in Nigeria. Data were collected in a survey of Nigerians
through a self-administered questionnaire on taxpayers from two
purposively selected states from each of its three major cultural groups;
Hausa, Igbo and Yoruba. Hofstedes' cultural dimensions were used to
analyse the respondents' characteristics, while process definition of tax
compliance was adopted in drawing proxies to measure tax
compliance. A total of 1,200 respondents were randomly selected for
the study. Data were electronically processed and analysed with SPSS
23 software using parametric and non-parametric statistics. Results
revealed that, generally culture exerts significant influence on tax
compliance of individual taxpayers in Nigeria and that each of the
Hofstede's cultural dimensions is found to show strong influence on tax
compliance. Specifically, each of “power difference”, “masculinity
“and “uncertainty avoidance” dimensions is found to have positive
influence on tax compliance but “individualism” dimension showed
negative influence on tax compliance. The study also established
significant relationship between some tax compliant factors and each
of the cultural dimensions testifying that some policy implication
findings were established in the result. From these findings, the study
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recommended policy formulation strategy considered appropriate for
each tax jurisdiction based on its dominant culture, which if adopted
would tremendously assist in ensuring effective taxation in Nigeria as
well as other tax jurisdictions with similar cultural features.
objectives to achieve this broad objective are to: (1) assess level of tax
compliance among individual taxpayers in Nigeria; (2) measure how
each of the tax compliance factors affects tax compliance of individual
taxpayers in Nigeria; (3) measure each of the Hofstedes' cultural
dimensions along three major cultures/tribes in Nigeria; (4) assess
effect of culture generally on tax compliance of individual taxpayers
across Nigeria and (5) assess relative influence of each of the
Hofstede's cultural dimensions on tax compliance of individual
taxpayers across Nigeria.
Keywords: Tax compliance, Culture, Hofstede cultural dimensions,
Tax compliance determinants, developing economy.
Introduction
Governments need to generate adequate revenue to discharge their
fiduciary responsibilities to citizens. This public revenue can be raised
from several sources of which taxation is considered to be the most
reliable and sustainable one. However, citizens naturally do not
voluntarily oblige to honestly pay taxes, thereby reducing the volume
of potential revenue. Despite several measures by government to meet
this challenge, researchers still find tax non-compliance to be
prevalent, especially in developing economies (Akintoye & Tashies,
2013; Beale & Wyatt, 2017; Chude & Chude, 2015; Devos, 2014;
Fakile, Adegbie & Faboyede, 2014; Kira, 2017; World Bank/Pwc,
2017). According to Daniel, Akowe and Awaje (2016), noncompliance
still continues to be increasing over years, thereby threatening the
efficiency and effectiveness of governance. Review of literature to date
however, shows no consensus of opinions on tax compliance, either as
a phenomenon or on its determinants, making it a fertile area for
research (Alabede, Zainol & Kamil, 2011; Beale & Wyatt, 2017;
Devos, 2014; Loo, Evans & McKerchar, 2010; McKerchar & Evans,
2009).
This study therefore examined culture and tax compliance among
taxpayers in developing economy focusing on Nigeria. Specific
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This study contributes to tax compliance theory by expanding Fischer's
model. The work is able to bring up empirical comparative evidences
from Nigeria, a developing African country, which has been noticed to
be lacking by authors like Chau and Leung (2009). The issue of cultural
influence on tax compliance is also given clearer picture as more
evidences come to confirm earlier findings on the issue, and some
refute some earlier findings thereby revealing the riddles surrounding
tax compliance. The study, by using intra-country population to
examine within country differences, adds to few studies on Hofstede's
dimensions in this aspect.
This study would help governments, policy makers and tax authorities
in the areas of policy formulation and efficient tax administration. It
would assist in understanding and appreciating the relevance of
cultural values to tax compliance. The results from this study would
also be of immense benefits to the government by enhancing their
efforts in the area of revenue generation. The results explain taxpayers'
attitudes towards the entire tax system that could be taken into account
when attempting to explain non-compliance so as to minimise
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resistance from taxpayers. This will help governments to be in a better
position to obtain greater levels of voluntary compliance thereby
effectively reducing the tax gap.
from another”. Savignon and Sysoyev (2002) see it as the formation of
a system of symbols, norms, belief, meanings etc. which is transferred
from one generation to another. Aluko (2003) conceptualised culture as
the aggregation of attitudes, values, norms, style, consumption and
general world view of life; it is perception, expression and utility by a
people that identify and distinguish them from other people. It is a
universal phenomenon acquired over time varying from one society to
another (Aluko, 2003).To Ogbonna (2010), culture is a comprehensive
concept that embraces almost all factors that shape an individual's
behaviour. It is a key term in explaining the existence and nature of
social order (Aluko, 2003).Stern (1983) in Ogbonna (2010) broadly
divided culture into material and non-material aspects. Material culture
is overt and explicit comprising of every visible or concrete acquisition
of man such as buildings, dressing or handicrafts. They are directly
observable as the cultural products of any society. On the other hand,
non-material aspects of culture consist of the values, norms,
knowledge, philosophy, languages, or morals shared and transmitted in
a society, including all behavioural traits exhibited among a group. The
focus of this study is on the non–material culture as it affects tax
compliance behaviour.
Tax Compliance
Tax Compliance naturally entails “true reporting of the tax base, correct
computation of the liability, timely filing of the return, and timely
payment of the amounts due to tax authorities” (Franzoni, 1999;
OECD, 2010). Noncompliance amounts to taxpayers' “failure to follow
the provisions of the tax” (Eiya, Ilaboya & Okoye, 2016). These could
be failure in filing tax return, misreport of income or allowable
deductions or tax due (Serkan, Tamer, Yuzba & Mohdali, 2016). It may
be due to unintentional error as well as intentional fraud. Taxpayer may
technically meet their obligations but compliance may be in question
due to differences in interpreting the law and may include overpayment
of tax. According to James and Alley (2004) in Palil (2010) noncompliance includes both tax evasion and some forms of tax avoidance.
Tax evasion is “the attempt to reduce tax liability by illegal means”
(James & Alley, 2004). On the other hand, tax avoidance implies
reducing tax liability by legal means and methods (James & Alley,
2004). It is “taxpayers' creativity to arrange his tax affairs in a proper
manner based on law and regulation” … so as to “reduce his tax bill,
and still be acceptable” in view of the tax laws (Kasipillai, Aripin &
Amran, 2003). Altogether, these actions amount to reduced tax revenue
to the government.
Culture
Hofstede (1991) defined culture as “the collective programming of the
mind and differentiates members of one group or category of people
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Hofstede Cultural Framework
Hofstede (1996) examined culture under four dimensions and
explained its degree of influence on individual behaviour within the
society. These are Power Distance, Uncertainty Avoidance,
Masculinity, and Individualism. In high power distance culture,
authority is bestowed on those within the peak of the hierarchy, with
distinct dichotomy in social class, were citizens depend on leaders. In a
collectivism society, interest of the group has utmost precedence over
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the interest of individuals. Individuals therefore give loyalty to the
group while the group takes care of them in return. Uncertainty
Avoidance centres on how people in a society perceive treats of a new
situation and its uncertainties and ambiguities. Low uncertainty
avoidance cultures react positively to changes, new concept adoption
and vice versa. Masculinity cultures are characterized with aggressive
goal behaviour, high value for material acquisition, money and
assertiveness. Femininity (opposite of masculinity) cultures, on the
other hand, are characterized with passive goal behaviour, high value
for social relevance and great concern for others' welfare.
improved taxpayer education and advertising incentives for compliant
(Feld, Schmidt & Schneider, 2007).
Theoretical Review
Theoretically, approaches to tax compliance study have been broadly
divided into economic deterrence theory and the behavioural theories
which embraced social and fiscal psychological theories (Frey & Feld,
2002).
Meanwhile, results of empirical studies found this deterrence theory's
prediction insufficient to explain level of taxpayers' compliance in
reality. Given average audit probability, noncompliance probability
and level of risk aversion, taxpayers still appear to be more honest than
expectations, making empirical proof of its validity rather too weak
and less clear (Andreoni, Erard, & Feinstein, 1998; Kirchler,
Muehlbacher, Kastlunger & Wall, 2007; Slemrod, 2007). Hence, the
need to look beyond rationality was established.
Economic Theory
Philips (2011) traced this theory to the application of Becker's (1968)
theory of crime where “rational expected-utility maximizing”, “moral
profit seekers” will only comply to tax law if the associated benefits of
complying are greater than the estimated cost if caught (Chauke
&Sebola, 2016). The term “deterrence” is used based on assumption
that taxpayers inherently will not comply to pay tax but are “deterred”
from non-complying solely by “the risk of audit, detection, and
penalty”. The use of deterrence model can take punitive and/or
persuasive measures. Punitive measures can be in form of increasing
the detection probability and/or tax rate or imposition of tougher
penalties. Persuasive measures may be in form of giving increased and
Behavioural Theories
These were postulated to meet the challenges of economic theory by
bringing views from psychological and sociological views to
incorporate other actors in the tax compliance process. Example of
behavioural theory adopted in this study is the “Theory of Planned
Behaviour” (TPB). The TPB was developed in by Ajzen (1991) as
extension of Ajzen and Fishbein's (1980) “Theory of Reasoned
Action”. It sees subjective norms as individuals' beliefs of referents'
approval of their specific behaviour (Bobeck, Robin & John 2007 in
Devos, 2014). A common proposition of the TPB is that individuals'
behavioural intentions are formed based on sociological factors like
personal norms, social norms, societal norms and peer influences
(McKerchar & Evans, 2009). These norms play significant influence
on tax compliance behaviour (Beesoon & Soondram, 2016; Bello &
Danjuma, 2014). These referents include family members, friends and
work colleagues, whom individuals compare themselves with or refer
to. Subjective norms could therefore serve as “social pressures” on the
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taxpayer to either comply or evade taxes. The best prediction of
behaviour is assumed by asking people if they intend to behave in a
certain way. On this understanding, one needs to understand the
determinants of behavioural intention. These determinants are
hypothesized as attitudes, subjective norms and perceived behavioural
control, which in turn predict the behaviour. Attitudes are opinions of
the individual; the subjective norms are opinions of others; and the
perceived behavioural control refers to self-efficacy of the individual
towards the behaviour.
Incorporating Culture into Tax Compliance Model
A very early study by Strumpol (1969) established influence of culture
on tax evasion/compliance. Chau and Leung (2009) later attempted to
draw research attention to relevance of culture to taxpayers'
compliance behaviour. The authors reviewed extant literature on
Fischers' tax compliance model to suggest expansions to the model by
introducing culture therein. The argument is that culture, manifesting
through social norms and ethical values would influence the attitudes
and perception of taxpayers towards compliance. Literature showed
that most of the responses to this came from several studies, mostly
outside Sub-Africans countries, like Porcano, Tsakumis and Curotela
(2010), Riahi-Belkaoni, (2009), Richardson (2008), Torgler (2003) as
well as Tsakumis, and Curatola and Parcono (2007). Specifically, De
Mooj (2004) in Devos (2014) established that individualism and power
distance are mutually dependent and that power distance is not
important in the ethical decision making (see also Smith & Hume, 2005
in Devos, 2014). Tsakumis et al. (2007) found cultural dimensions to
have significant influence on tax compliance of individual taxpayers.
Tsakumis, et al. (2007) was later expanded by Richardson (2008) by
adding three more variables measured at the level of individual
taxpayer to those examined. Porcano, et al. (2009) went further to
examine national cultural dimensions and four country level variables
that measure country's underlying economic factors and tax evasion of
50 countries bringing out differences between developing and
developed economics.
Tax Compliance Models
Review of literature shows various groupings for tax compliance
models. Some of these models are interconnected, while some evolve
from earlier ones (Ali, Fjeldstad & Sjursen, 2013). According to
Philips (2011), extensive research on reason for tax evasion started
with the theoretical studies of Allingham and Sandmo (1972).
Research was then dominated by the rational economic view which
claimed that taxpayers rationally seek to maximise their individual
benefits by evading taxes when the benefits of evasion outweigh its
costs, without having concerns for ethics. Subsequent empirical
studies however established that tax compliance seems to depend on
other numerous factors beyond this traditional economic view (Alm
&Torgler, 2011). According to these new findings, taxpayers act on the
basis of their moral and ethical beliefs and are influenced by social
consensus about the morality or acceptability of tax evasion (Wenzel,
2004, 2007). Modern studies now incorporate psychological and
sociological factors into the model thereby bringing other actors into
the compliance process.
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Hamid (2013) examined influence of culture in the ethical decision
making incorporating the Hofstede's (1980) Cultural Dimensions to
expand the TPB with a sample of 119 tax professionals using online
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survey. The study found that attitudes towards tax compliance,
subjective norms, perceived behavioural control, as well as
masculinity and uncertainty avoidance significantly influence tax
compliance intention. The author explained the consistency of the
findings with Bobek and Hatfield (2003), Smith and Hume (2005) and
Hamid (2012), as well as the contradictions with Westerman, Beekun,
Stedham, and Yamamura (2007).
ethical reasons significantly vary across culture. Ubesie and Edeh
(2016) also found that Nigerians perceived that cultural norms and trust
in traditional institutions have significant impacts on tax compliance.
Similarly, Agbetunde, Ojediran and Fadipe (2016) got similar results
from their cross-cultural assessment of procedural justice and fiscal
exchange among Nigerians.
Coming to studies on Nigeria, Agbetunde (2004) and Somorin (2015)
observed that colonialists in Nigeria noticed existence of cultural
diversities among the major tribes in Nigeria. This knowledge arguably
formed the basis for differences in the implementation times, forms
and types of taxation introduced in each of the three regions. The Hausa
culture was observed to be greatly influenced by the widely practiced
Islamic religion to have a well-developed tax system. This made it
possible for colonialists to just “consolidate and codify the existing
taxes” in the northern region as early as 1902. This was followed by the
south in 1918; sixteen years later (Agbetunde, 2004; Somorin, 2015).
Despite the delayed enactment of the Tax Ordinance in the East for 26
years, a strong resistance was met resulting in the popular “Aba
Women Riot” in 1929. Main reason adduced was that customs and
tradition of Igbo culture does not give to Igbo chiefs, the type of respect
that Hausas and Yorubas give to their Emirs/Sultans and Obas. More
so, the Igbos was living in small communities mostly without
constituted authority making coordination difficult.
Agbetunde, Adedokun and Fadipe (2015) also empirically surveyed
ethical reasons for tax evasion across Nigerian major cultures using
500 individual taxpayers as respondents. The study found that the
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From this review one could infer that serious study on compliance
literature commenced over six decades ago especially in developed
countries with very few ones made in developing economies. These
studies identified several interrelated factors having tendency to
influence tax compliance. These include economic/deterrence factors,
sociological factors, psychological factors, and cultural factors.
Specific to culture, either in form of ethnicity as a group identification
factor or as a way of life, review showed the research is still young.
Further development are been suggested to incorporate additional
variables like cultural, moral and situational variables so as to have
more elaborate encompassing model. Based on the identified gaps in
this analysis, the current study intends analysing culture and tax
compliance.
The conceptual framework designed for this study is illustrated in
Figure 1 showing tax compliance as the dependent variable, while
culture is the independent variables. Culture, is postulated to be
influencing social norms and ethical values. The duos have influences
on the attitudes and perceptions of individuals, which resultantly
would influence their tax compliance decision.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CULTURE:
INDIVIDUALISM
POWER DISTANCE
UNCERTAINTY
AVOIDANCE
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
TAX
COMPLIANCE
Figure: Research's Conceptual Framework
Source: Author (2019)
TC = f {IND, MAS, PD, UA}
TC = β0 + β1IND + β2MAS + β3PD + β4UA + ? i
Where;
TC = Tax Compliance
IND = Individualism
MAS = Masculinity
PD = Power Difference
UA = Uncertainty Avoidance
β0 = intercept of the model
β1- 4 = Coefficient of the independent variables
METHODOLOGY
The study focused on developing economy with particular attention on
Nigeria, a developing African country. Nigeria is made up of over three
hundred and fifty ethnic groups and cultures with more than 500
languages (Ogbonna, 2010). Despite this diversity one can still identify
three major cultures drawn from the three dominant ethnics in Nigeria.
These are Hausa-Fulani, Yoruba, Igbo/Ijaw and the minorities. These
formed the focus of the study.
The study adopted descriptive and expo-facto designs using survey
method to collect qualitative and quantitative data (Ogunbameru &
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Ogunbameru, 2010; Sanders, Lewis & Thornhill, 2009). Major
stakeholders in personal income taxation in Nigeria were purposefully
surveyed comprising of individual taxpayers, tax administrators and
tax consultants/auditors out of which 1,200 were randomly selected.
This sample was selected from Oyo and Osun states for Yoruba, Kano
and Sokoto states for Hausa as well as Abia and Imo states for Igbo.
Relevant literatures were consulted from several secondary sources.
Primary data was sourced mainly through structured questionnaire
which ensured orderly and proper wording to ensure that data was
collected without influencing the respondents (Ogunbameru &
Ogunbameru, 2010; Sekaran & Bougie, 2010). In designing the
questionnaire, indirect non-personal requests were sought to avoid
bias. This was necessary as it is found that respondents in researches
like tax compliance study often tend to overstate their compliance
(Andreoni, et al., 1998; Armah-Attoh & Awal, 2013). The
questionnaire was administered on the respondents in their natural
environments through the assistance of prior-tutored research
assistants who have adequate understanding of the culture and
languages of the respondents. This was necessary to enhance easy
access to respondents and ensure getting objective and reliable
responses in a relatively informal setting such that respondents would
be relatively relaxed.
To confirm the validity of this construct, draft of the instrument was
peer reviewed and necessary adjustments were made (Andreoni, et al.,
1998; Armah-Attoh & Awal, 2013). The reviewers comprised of five
academic from each culture to ensure deep and comprehensive
assessment of the instrument's validity. A pilot test was carried out in
the month of February 2018 before the actual survey in June, July and
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RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
August 2018.Reliability test gave Cronchbatch Alpha of 0.787
showing 79% reliance can be placed on the data. Data collected was
analysed using parametric and non-parametric statistics. This involved
simple percentages, cross tabulations, and ranking as well as logistic
regression because some of the variables are dichotomous.
Table 1: Analysis of Level of Tax Compliance
Level of Tax Compliance along Cultures in Nigeria
Analysis of results on Table 2 indicates that compliance level across the
three cultures were similar. Ranking of the statistics however showed
that Yorubas were found to be most compliant followed by Hausa and
then Igbos.
Results and Discussions of Findings
Level of Tax Compliance among Individual Taxpayers in Nigerians
Responses presented on Table 1 shows that respondents on average
partially agreed (57.4%) that taxpayers are compliant to tax payment
terms (3.6660 mean, 1.35200 variance) this is considered too low a
level for sustainable revenues generation effort of the government.
Detailed analysis shows that respondents are not complying with
paying “within time due” as well as “at required rate” (3.8167 mean
with1.6616 variance and 3.8956 mean with 1.6114 variance
respectively) On average, taxpayer also expressed that they were
claiming allowances they were not entitled to and looking for
opportunity to reduce their tax liabilities (3.8457 mean with 1.59638
variance and 3.6255 mean with 1.60610 variance respectively).
Mean
Std Dev.
Remark
TC1 Paying at Appropriate Time
3 8167
1 66155
Partially Compliant
TC2 Paying taxes at Required Rate
3.8956
1.61143
Partially Compliant
TC3 NOT claiming Allowances Not Entitled
3.8457
1.59638
Partially Compliant
TC4 Not seeking opportunities to evade taxes
3.6255
1.60610
Partially Compliant
TC5 Disclosing Income from All Sources
3.3960
1.72892
Partially Non-compliant
TC6 Disclosing Total Amount of Income
3.3427
1.69833
Partially Non-compliant
TC7 Registration with Tax Authority
3.5080
1.74586
Partially Compliant
3.6660
1.35200
Partially Compliant
Tax Compliance
Table 2: Compared Mean of Tax Compliance along the Three Culture
Group Statistics
Ethnicity
Tax
Hausa
Compliance Igbo
Yoruba
N
Mean
Remark
Ranking
132
3.7197
Averagely High Compliance
2nd
146
3.4247
Averagely High Compliance
3rd
173
3.7572
Averagely High Compliance
1st
Source: Survey (2019)
Hofstede's Cultural Dimensions along Nigerian Cultures
Table 3 presents the result of mean values for perception of respondents
on each of the cultural dimensions. The national average shows that
Nigerian taxpayers are adjudged to be partially strong on both power
difference (4.085) and individualism (4.348) dimensions, to be strong
on uncertainty avoidance (4.7394) but partially weak on masculinity
(3.167) dimension. This implies that Nigerians on average are more
feminine in nature but close to average in power difference and
individualism but more on uncertainty avoidance thus risk averse.
Source: Extract from SPSS Output (2019)
97
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
Table 3: Compared Means of Cultural Components along Ethnicity
(3.167). The ranking pattern here is similar to that of masculinity
dimension. On examination of each cultural group, all the three
cultures were found to be partially weak.
Ethnic
Hausa
Power Difference
Individualism
Masculinity
Mean
Rank
Mean
Rank
Mean
Rank
Mean
Rank
4.1678
2nd
4.2786
3 rd
3.0845
3r d
4.7394
1st
Partially Strong
Igbo
3.8389
3r d
Partially Strong
Yoruba
4.2197
1st
Partially
Partially
Strong
Weak
2 nd
4.3061
3.1849
Partially
Partially
Strong
Weak
1 st
4.4709
3.2978
partially
Uncert Avoid
Strong
2nd
4.6376
Strong
1st
4.7386
Partially Strong
Strong
Others
4.1333
1667
2.7
5.2
Average
4.0848
4.3476
3.1673
4.7364
Partially
Partially
Partially
Strong
Strong
Weak
Weak
3rd
2nd
Strong
Strong
Source: Extract from SPSS Output (2019)
Further analysis of the cultural groups along power difference on Table
3 shows that perceptions of all three cultures were found to be partially
strong. Although the scores were found to be very close to one another,
Yoruba culture was found to have highest values (4.220), followed by
Hausa culture (4.1678) while Igbo culture has the least value (3.839).
The ranking on individualism and masculinity dimensions were found
to be similar. On individualism dimension, national average shows
respondent are partially strong. Yoruba culture was found to be strong
(4.471) on individualism, while Hausa and Igbo cultures shows they
are partially strong (4.279 and 4.406) on individualism dimension.
National average perception on masculinity was partially weak,
National average perception and that of each of the individual cultural
group were found to be strong on uncertainty avoidance dimension.
Despite the closeness in the scores for the three tribes, Hausas were
found to be strongest (4.7394), followed by Yorubas (4.7386). The
implication of this result is that all the three cultures are expected to be
risk averse, reluctant to change, rule/law compliant. This suggests that
deterrence measures would therefore be more effective strategy to
achieve high level of tax payer's compliance.
Influence of Culture on Tax Compliance
The result of regression analysis presented on Table 4 shows that the
combined influence of the four cultural dimension examined is 8.5%
(Adjusted R2 = 0.085). This implies that cultural dimensions have
positive influence on tax compliance of individual Taxpayers in
Nigeria. The result was also found to be significant.
Table 4: Regression of Cultural Dimensions against Tax Compliance
Unstandardized Coefficients Stand. Coeff.
Model
B
Std. Error
1 (Constant)
1.611
.443
Power Difference
.152
.057
Individualism
-.164
.067
Masculinity
.151
Uncertainty Avoidance
.350
T
Sig.
3.637
.000
.123
2.648
.008
-.119
2.426
.016
.041
.176
3.674
.000
.066
.244
5.310
.000
R2 = 0.094; Adjusted R2 = 0.085; F()= ; p = 0.000
a.
Dependent Variable: Tax Compliance
b.
Predictors: (Constant), Uncertainty Avoidance, Power Difference, Masculinity, Individualism
Source: SPSS Output (2019)
99
Beta
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
Influence of Individual Cultural Dimensions on Tax Compliance
expected to have respect for authority therefore ready to follow rules
and regulation. This suggests any deterrence measure applied would be
effective to induce tax compliance. A similar positive association is
found between economic factors and individualism dimension
suggesting that the more a society is on individualism dimension the
more effective the economic factors. That is, such a society need more
of deterrence measures to ensure taxpayers' compliance, since people
high on individualism will work towards personal gain maximisation
in their cost benefits trade off.
Considering the individual influence of each of the cultural
dimensions, results of all of them were found to be significant. This
suggests that reliance can be placed on the potential of the results for
generalizations and prediction. Furthermore, the relationship revealed
that each of power difference, masculinity and uncertainty avoidance
showed positive influence on tax compliance. This suggest that the
higher the taxpayers on any of these dimensions, the more tax
compliant they are. It is also noted that uncertainty avoidance showed
the highest influence with value of 0.350 followed by power difference
giving 0.152 then 0.151 from masculinity. Individualism dimension
however, showed a negative relationship (-0.164) showing that, the
higher most of the taxpayers on individualism dimension, the lower the
general compliance to taxes. This agrees with apriori expectation that
people high on 'collectivism' i.e. low on individualism, are expected to
be willing to contribute to collective purse to finance pubic
programmes and policies of government. Generally, all these results
are in line with rational thinking.
Tax Compliance Factors and Cultural Dimension
Result of the correlation presented on Table 5 established that positive
significant relationship between economic factors and each of power
difference and individualism dimensions. This implies that association
of economic factors with either of the two dimensions is reliable
enough to serve as basis for making inferences. It is therefore expected
that society high on any of power difference and individualism
dimensions would perceive economic factors as critical determinant of
tax compliance. This result is considered reasonable and to be
explained based on the fact that society high on power difference is
101
For fiscal exchange, a positive significant association is also
established with uncertainty avoidance dimension. This implies that a
society high on uncertainty avoidance dimension will be tax compliant
when government ensures tax payers are getting fair value from the
state on each amount they pay as tax. Such a society would also
appreciate governments that consider their need when deciding the
type of project to execute. A reverse but significant relationship is
found in fiscal exchange factors and masculinity culture dimension.
This suggests that fiscal exchange strategies would give a negative
effect in a society high on masculinity. Any society high on this
dimension is naturally found to be less concerned with feminity nature
of care; they cherish/appreciate authoritarian nature. On this note result
confirms the natural reasonable expectation that a society high on
masculinity will not be induced to be compliant by considering their
views or preferences but would be ready to comply with rules from
authoritarian government.
Group identification factors are found to have significant positive
association with power difference, individualism and masculinity
102
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
dimensions. This suggests that group identification factors will be
effective in society high on each of them. The implication is that a
society high on any of them would need government to “respect” and
honours issues relating to their tribe or religion. The relationship of
sociological factors with individualism and uncertainty avoidance are
found to be significant but not significant with power difference and
masculinity. The relationship is found to be direct suggesting that
persons high on sociological factors are associated with high level of
individualism and uncertainty avoidance, suggesting that government
needs to focus attention on the social norms as it will be bad if tax
noncompliance is the norms in the society, because this would have
adverse effect on the existing compliant persons.
Comparative treatment is found to have significant association with
each of power difference, masculinity and uncertainty avoidance
dimensions. This suggests comparative treatment to be a critical tax
determinant factor in a society high on any of masculinity, power
difference and uncertainty avoidance dimensions. This suggests that in
a society high on power difference, tax administration must treat
taxpayer as “king”, since they are customers interacting with the tax
officials during tax administration. It is however observed that, the
association between comparative treatment and either of power
difference and uncertainty avoidance is positive (direct) but it is
negative in case of masculinity dimension. The implication of this is
that undue treatment from tax administrators would be misinterpreted
by taxpayers thus resulting to adverse influence on tax compliance, all
they appreciate is authoritarian, rule dolling culture which characterize
the masculine dimension.
103
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
Table 5: Correlation of Tax Compliance Factors with Cultural Dimensions
Power Diffc Individual
Economic
Masculinity
Uncty Avoidc
Correl. Coeff .090*
.097*
-0.044
0.06
Sig. (2-tailed
0.048
0.033
0.333
0.186
Remark
Significant
Significant
Not Signif
Not Signif
0.035
-.218 **
.117*
0.907
0.45
0.000
0.010
Remark
Not Sign
Not Signif
Significant
Significant
Correl. Coeff
.117*
.189**
.304 **
0.075
0.011
0.000
0.000
0.100
Significant
Significant
Significant
Not Signif
.147**
0.002
.256**
0.966
0.001
0.964
0.000
Remark
Not Signif
Significant
Not Signif
Significant
Correl. Coeff
.099*
0.061
-.096 *
.118**
0.031
0.186
0.037
0.01
Significant
Not Signif
Significant
Significant
0.089
-0.046
.189**
0.731
0.055
0.317
0.000
Not Signif
Not Signif
Not Signif
Significant
Correl.Coeff. 0.005
Fiscal
Sig. (2-
Exchange
tailed)
Group
Sig. (2-
Identification
tailed)
Remark
Correl. Coeff 0.002
Sociological
Sig. (2-
Factors
tailed)
Comparative
Sig. (2-
Treatment
tailed)
Remark
Correl. Coeff 0.016
Political
Sig. (2-
Legitimacy
tailed)
N
Source: Extract from SPSS Output (2019)
Political legitimacy has significant association with uncertainty
avoidance alone, and not with any other dimension. The direction of
the relationship is a direct association, testifying that a society high on
104
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
uncertainty avoidance dimension will be characterized by perception
of political legitimacy as a critical determinant of tax compliance. In
order to enhance tax compliance, it is therefore essential for authority
in such environment to pay attention to governments accountability
and ensure taxpayers have trust in government with adequate level of
trust a society characterized with risk averseness would be compliance.
considered more risk averse them the Igbos. Therefore, strategies
like increase in any of tax rate, penalties or frequency/degree of
audit (deterrence) would be more effective and appropriate, since
people are found to be risk averse. Table 6 contains the suggested
strategies for specific jurisdiction based on which cultural
dimension it is found to be strongest.
Under the individualism dimension, it is observed that none of fiscal
exchange, comparative treatment and political legitimacy factors is
found to have significant association. This implies that a caution sign is
flagged for authorities to draw more of their tax compliance measures
towards other strategies to ensure more productivity in their
inducement efforts. The direction of the caution sign in the case of
masculinity dimension is turning away the attention from economic,
sociological and political legitimacy factors. This implies that they
should be regarded as secondary measures to supplement those factors
found to have significant association. On the dimension of uncertainty
avoidance, it is found that economic and group identification are
factors that do not have significant association with uncertainty
avoidance dimension. The implication is that less attention should be
directed to both economic and group identification factors, in favour of
other factors like sociological, political legitimacy and fiscal exchange
factors.
Table 6: Appropriate Strategies for Each Cultural Dimension
If the results presented on Table 5 are considered along with those on
Table 3, it will be advisable for authorities in Nigeria to concentrate
more on the Hausas and Yorubas than Igbos when pursuing tax
compliance inducement policies and strategies. Each of the two tribes
was found to be higher on uncertainty avoidance dimension, hence
Source: Author (2019)
105
Cultural Dimensions
Recommended Strategies (in order of importance)
Power Difference
1.
Group Identification
2.
Comparative Treatment
3.
Economic Factors
1.
Group Identification
2.
Sociological
3.
Economic Factors
1.
Group Identification
2.
Fiscal Exchange
3.
Comparative Treatment
1.
Sociological
2.
Political Legitimacy
3.
Comparative Treatment
4.
Fiscal Exchange
Individualism
Masculinity
Uncertainty Avoidance
CONCLUSION
The study examined culture and tax compliance among taxpayers
across cultures in Nigeria. The result of the empirical survey revealed
that culture exerts significant influence on tax compliance of
106
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
individual taxpayer sin Nigeria. Each of Hofstede's cultural dimensions
is also found to show strong influence on tax compliance. Specifically,
each of power difference, Masculinity and uncertainty avoidance
dimensions is found to have positive influence on tax compliance
suggesting that the higher a society is on any of the three dimensions,
the more tax compliant individuals therein. However, individualism
dimension showed a negative influence on tax compliance, suggesting
that the more individualistic people in a society is, the less they are tax
compliant and vice versa.
RECOMMENDATIONS
Based on the findings from the study, it is recommended that an
appropriate strategy should be adopted for each tribe based on the
cultural dimension it is found to be strongest. The study therefore
recommends that Nigerian governments and other relevant
stakeholders should ensure that recognition is generally given to
culture in tax policy formulation, law enactment and administration in
order to achieve maximum result. Furthermore, each of the Hofstede's
dimensions should be given necessary considerations in all the phases
of taxation, especially by the tax authorities at all tiers of government.
On average Nigerians are found to be strongest on the uncertainty
avoidance dimension, it is recommended that relevant authorities in
Nigeria should pursue the following strategies in order of priority;
Sociological, then Political Legitimacy, next Comparative Treatment,
and finally Fiscal Exchange. The same apply to each of the component
cultures in Nigeria. Specifically, it is recommended that the Federal
Board of Inland Revenue and government authorities at the federal
level should on aggregate give priority attention to fiscal exchange
factors, followed by sociological factors before comparative treatment
factors and lastly political legitimacy factors in their tax system.
Similarly, authorities at the state and local government levels in Hausa
dominated tax jurisdictions should given utmost preference to
sociological factors, then political legitimacy factors, before
comparative treatment and lastly fiscal exchange factors.
The study also conclude that significant relationship is established
between economic factors and each of power difference and
individualism dimensions; between fiscal exchange and each of
masculinity and uncertainty avoidance dimensions; between group
identification factors and each of power difference, individualism and
masculinity dimensions but not with uncertainty avoidance; between
sociological factor exhibit significant relationship with each of
individualism and uncertainty avoidance dimensions alone.
Comparative treatment factor has significant relationship with
uncertainty avoidance, power difference and masculinity dimensions
but not with individualism. Political legitimacy factors was found to
show significant relationship with only uncertainty avoidance
dimensions but no significant with each of the others. These findings
are consistent with findings from studies from non-African
jurisdictions like Tsakumis et al (2007), Porcano et al (2009) and
Hamid (2013).
107
Based on the fact that Igbo and Yoruba cultures exhibit closely similar
nature, it is recommended that tax authorities and governments within
tax jurisdictions that are dominated by either Igbo or Yoruba people
should give highest preference to fiscal exchange factors over and
108
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
RELEVANCE OF CULTURE IN ENSURING SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
above all other factors in their tax policy formulation, tax law
enactments and tax administration policies. Next due recognition
should be given to sociological factors, then comparative treatment
factors before legitimacy factors. It is when these are ensured that
effective taxation could be guaranteed without much resistance from
the taxpayers.
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ENHANCING TAXATION AS ALTERNATIVE TO OIL
CHAPTER SIX
ENHANCING TAXATION AS ALTERNATIVE TO OIL
SOMORIN Olateju Abiola
School of Postgraduate Studies,
Caleb University, Imota, Lagos, Nigeria
ABSTRACT
In recent times, the government of Nigeria in a quest to diversify the
economy and increase tax revenue have introduced numerous
measures to widen the tax base at the domestic level and
internationally. The objective of this paper is to examine how tax
revenue from Non-oil can be enhanced in Nigeria. The method
employed in this paper is exploratory. The paper found out that the new
measures embarked upon by all the Tax Authorities in Nigeria have
impacted positively on revenue generated from especially non-oil and
if the tempo is sustained, there will be increase in the tax to GDP ratio
of Nigeria which has been described as “dismally low”. Accordingly,
the focus of this paper is to examine measures that can bring about a
viable alternative to oil and recommend steps that will improve the tax
to GDP Ratio.
INTRODUCTION
Quite a number of Tax Authorities have been developing strategies and
approaches to improve the non –oil tax revenue collection and even
recovery processes, so that they have a robust revenue yield. Given the
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recent unstable nature of oil revenues globally, the three tiers of
Governments have in the last few years noted the need to diversify
sources of revenue generation so that funding of Government budgets
will not be affected.
Consequently, several initiatives have been put in place to actualize
this need. Indeed, Findings revealed that the monthly allocation
accruing to the 36 states and Federal Capital Territory (FCT), Abuja,
from the Federation account has dwindled due to the fall in crude oil
prices and related reasons.
Taxation is key to development because it provides a reliable and
predictable source of revenue for government expenditure
(Olowonomi, 2000). It provides governments with the steady funding
required to finance the infrastructure on which economic development
and growth is based.
KEY TERMS
Taxation, Oil Revenue, Non-Oil Revenue and Non-Tax Revenue
Oil Revenue
Two main sources of federal government revenue exist namely; oil and
non-oil revenue. Oil revenue means revenue relating only to oil and it
used to be the most important source of revenue to the federation
account. Includesa) Crude oil sales proceeds,
b) Petroleum Profits Tax (PPT),
c) Royalties, Licenses, oil permits, gas flare
d) Signature Bonuses payable by the producing companies upon
allocation of
oil blocks and collectible by DPR; and
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Tax Inversion Penalty (TIP) payable along Petroleum Profit Tax
(PPT) when operating cost is excessive
dependency on oil and also achieve fiscal and balance of payments
viability over the period (Yesufu, 1996).
Non-Tax Revenue
Refers to the revenue obtained by the government from sources other
than tax. e.g. fees, fines and penalties, surplus from public enterprises,
grants and gifts and deficit financing.
From 2014 to 2016, economic growth slowed down and the oil price
shock of 2014 was an abrupt wake up call for countries dependent
solely on oil revenues. Many of these countries had become
complacent and neglected reforms that are required to diversify their
economies.
WHY ECONOMIC RECOVERY?
Overview of the Nigerian Economy
Obandan and Dimowo, (2000) noted that the global oil market had
started showing increasing signs of volatility since the 1970's. In 1982,
an emergency Stabilization Act was introduced to address the
economic crises. It failed to halt the drift, as the economy slumped even
further between 1983 -1985 as Budget deficits were recorded between
1982 and 1985. Balance of payments difficulties were also experienced
over these years.
According to Ahmed, then Governor, Central Bank of Nigeria, (1987) “The policy measure taken between 1982 and early 1986… were not
only unsuccessful but also led to a situation of drastic short supply of
industrial inputs, plant closures… and price inflation.”
A budget deficit of N 8,804.3 million was recorded in 1986.
Accordingly, in 1986, the federal government introduced a Structural
Adjustment Programme (SAP), in a bid to arrest the deteriorating
economic situation, with a fiscal policy thrust to restructure and
diversify the productive base of the economy, in order to reduce
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Nigeria experienced her first recession in over 20 years in 2016 during
which period virtually all the major sectors of the economy was
severely affected by the plunge in crude oil prices, decline in oil
production, and the reduction in non-oil exports, all of which
contributed to the acute scarcity of foreign exchange. In view of the
prevailing circumstances, Nigeria's government, which depends
largely on revenues from oil, acknowledged the need to reduce the
economy's oil dependency, setting up a number of initiatives aimed at
diversifying the economy.
2017- Budget of Economic Recovery and Growth
Concerning the recovery of the economy, the Government termed the
2017 Budget, the Budget of Economic Recovery and Growth.
Consequently, the Federal Government released its Economic
Recovery and Growth Plan (ERGP), a medium term plan for 2017 to
2020, which among others aims to improve access to finance, address
ambiguous and inconsistent regulations, reduce wastages, combat
corruption and upgrade infrastructure.
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Its main focus is essentially on broadening the tax base rather than
increasing tax rates. Ultimately, the plan is poised to restore economic
growth, build a globally competitive economy and invest in Nigerians
by driving social inclusion, job creation, youth empowerment and
improved human capital. It should be emphasized that the goal of the
FGN is to have an economy with low inflation, stable exchange rates
and diversified inclusive growth.
WHY LOOK FOR AN ALTERNATIVE TO OIL
The significant decline in the prices of crude oil has adversely affected
the total revenue of government (Afuberoh& Okoye, 2014). The
Federal allocation has dropped significantly following the crash in oil
prices in 2015.,and the loss of one of our foremost customers; the
United States of America, following her discovery of Shale Oil. As
noted by (Adenugba & Ogechi, 2013; Nnanseh & Akpan, 2013), the
continuous decline in the price of crude oil as well as oil theft has led to
a decrease in the funds available for Federation Account Allocation
Committee (FAAC) and its dire consequences on the three tiers of
Governments.
2018 Budget of Consolidation
In a similar fashion, the 2018 budget is geared towards building on
economic recovery and achieving sustainable economic growth in the
medium term, while ensuring increase in non-oil revenues and capital
expenditure. In view of the under performance of the 2017 budget
implementation, the FGN is now taking steps to ensure the full
implementation of the budget.
Non-oil revenue baseline assumptions
Non-oil revenue projections are guided by expected growth in non-oil
output and improved efficiency in revenue collection in respect of
custom duties, companies' income tax and the Value Added Tax which
is projected to hit N90.48 trillion in 2018 compared to the estimated
target of N83.84 trillion for 2017. Additionally there is expected 42%
increase in VAT collection in 2018.
With regard to amnesty proceeds, it is expected that FGN's efforts to
expand the tax net through VAIDS, a tax amnesty programme, will
yield substantial improvements in remittances to the consolidated
revenue fund in the medium term.
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In essence, Government at various levels are finding it extremely
difficult to finance relevant infrastructure for economic growth
(Afuberoh &Okoye, 2014). Tax to Gross Domestic Ratio (GDP) of
Nigeria is currently about 6%, which is far lower than 34% in most
developed OECD countries according to the Nigerian Bureau of
Statistics (2017).
Recent figures from the National Bureau of Statistics (NBS) on the
internally generated revenue by the 36 states showed that apart from
Lagos and few States, most states cannot survive without the monthly
statutory allocations, which is largely funded from crude oil sales and
federally –collected taxes by the Federal Inland Revenue Service
(FIRS)and the Nigerian Customs Service (NCS).
Several countries are currently taking several measures to increase
their internally generated tax revenue which essentially is from nonoil. One of such measures is the shifting of focus from oil revenue to
non-oil.
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CHALLENGES OF TAX ADMINISTRATION
said it was due to the tax rules being unclear and compliance process
being too complex while 7.5% said it was due to poor enforcement by
tax authorities. The Minister of Finance had noted that “whatever did
not get stolen, got wasted leaving very little for development. Last year
we spent N64bn on travels but only N19bn on roads”.
Cash Based Transactions
With payment in cash, small-sized firms or businesses in cash is one of
the mechanisms by which individuals and entities hide assessable
profits. By this, they are able to manipulate their turnover for tax and
are also able to eliminate all third parties information that may lead to
additional tax payment.
Complicated tax System
Without a simplified tax, tax administration becomes a herculean task.
It is hoped the Office of Tax Simplification will soon be established by
the Ministry of Finance.
Ease of Doing Business
The World Bank ranked Nigeria 169 out of 189 countries in its 2015
report on the ease of doing business globally, with a total of 938 hours
per year required for a firm to file all requisite taxes. This filing period
is one of the highest rates in the world. Botswana (140 hours), Burkina
Faso (140 hours), New Zealand (70 hours), Ireland (76 hours). Lack of
adequate manpower Nigeria has improved in this area.
Capacity Building
Some tax officials lack the requisite skill and capacity to detect, audit or
even properly enforce where there is need to.
Corruption and Taxpayers Money Not Seen To Be At Work
According to a 2016 survey conducted by PwC to find out why many
Nigerians do not pay tax, Oyedele revealed the results which indicated
that 70% of participants cannot see taxpayers' money at work, 22.5%
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Taxes and Levies Collected Illegally
Some individuals notably thugs and touts at markets and motor parks
collect levies from citizens under the guise of working for Local
Governments.
Underground Economy:
The hidden or underground economy is usually taken to mean any
undeclared economic activity. Others include Poor record keeping,
Multiplicity of Taxes, inequitable distribution of VAT proceeds etc
CAN NON-OIL TAX REVENUE BE THE ALTERNATIVE?
The function of indirect tax such as the value added tax (VAT) as
revenue generating tool in developing countries has been studied.
Relying on the findings of previous studies by profound scholars, one
can safely agree that VAT, non oil revenue on its own is a reliable
alternative to oil tax revenue. Let us examine some of the studies.
Ayuba (2014) analyzed the impact of non-oil direct and indirect tax
revenue on economic growth from 1993to2012inNigeria.Theresults
showed the existence of a positive relationship and impact of non-oil
tax revenue on the economic growth in Nigeria. Olatunji (2009) did a
study on the effectiveness of the administration of VAT to improve
government revenue and boost economic growth in Nigeria. The study
showed a positive correlation between VAT and GDP.
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Ebiringa and Emeh (2012) examined the impact of various taxes on the
economic growth in Nigeria, using a time period of 1985-2011. Results
showed that customs and excise duties was negatively related to gross
domestic product, implying that an inverse relationship existed
between customs excise duties and economic growth in Nigeria.
STRATEGIES TO PROMOTE NON-OIL TAX REVENUE
Bakare, Onaolapo, Aworemi and Ajala (2013) found a positive and
significant relationship between the VAT and output growth in Nigeria.
Their findings showed that Value Added Tax has statistically
significant effect on revenue generation in Nigeria. The study
concluded that Value Added Tax has the potential to assist in the
diversification of non –revenue sources, thereby providing sufficient
funds for economic growth and reducing over reliance on oil for
revenue.
Izedonmi and Okunbor (2014) empirically examined the contribution
of VAT to the development of the Nigerian economy. It used time series
data on the Gross Domestic Product (GDP), VAT Revenue, Total Tax
Revenue and Total (Federal Government) Revenue from1994 to
2010.The data were analyzed using multiple regression modelling.
Their findings showed that VAT Revenue accounted for
92%significantvariations in Nigeria's GDP. It showed a positive but
insignificant correlation between VAT Revenue and GDP.
Okoli and Matthew (2015), examined the extent to which VAT had
contributed to Nigeria's total federally- collected revenue and its
position among the other tax components from1994- 2012. Using the
Error Correction Model (ECM) for the analysis, results revealed that
VAT was the second long term source of the total federally collected
revenue.
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FIRS FOCUS ON NON-OIL
In line with the Federal Governments initiatives to refocus from the
over-dependence on revenues from the oil & gas sector, the FIRS in
late 2015 began to pay more attention to increasing collection from
non-oil sources to enable Nigeria execute her development policies.
Automation of Revenue Collection through Information Technology
The Federal Inland Revenue Service (FIRS) introduced six (6) new
electronic tax services (e-services) namely e-Registration, e payment
of stamp duties, e-receipts generated for taxes paid through the new eTax Payment, e filing and etc which platform enables taxpayers apply
for, receive and verify authenticity of their electronic tax clearance
certificates (e-TCC).
Integrated Tax Administration System (ITAS)
The ITAS provides an integrated platform where all taxes pertaining to
the FIRS can be filed electronically at the click of a button and from the
comfort of the taxpayers' office or home. The e-Filing application is a
component of the ITAS.
VAT Collect Initiative (FIRS):
Technology was also introduced to block leakages and improve
efficiency in collection through the introduction of AUTO-VAT
Collect Platform where VAT is captured at the source for all key sectors
such as Aviation, Telecommunications, Power, Hospitality, Ecommerce and Financial services amongst others.
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Implementation of the Government Integrated Financial Information
System (GIFMIS)
tax regime to tackle tax evasion and address Nigeria's revenue
challenges.
GIFMIS is a platform that facilitates deduction and remittance of
Withholding Tax and VAT on all contracts. The platform was applied to
ensure that Ministries, Departments and Agencies remit taxes
promptly.
South Africa, Canada, Indonesia, France, Italy and the Netherlands,
among others, have had their fair share of same too. While it is known
as tax amnesty in Indonesia, in South Africa, it is known as Voluntary
Disclosure Programme (VDP) and Special Voluntary Disclosure
programme (SVDP). In Canada, it is VDP. The VDPs have been found
to generate substantial amount for those governments. In Canada, it
was reported that $1.3 billion was realized 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) realised about $10 billion in taxes, interest and penalties since
2009. So far, the Federal Government of Nigeria had earned over N30
billion from the scheme while over 500 prominent Nigerians with
properties and Trusts abroad are already being invited to determine
their tax compliance status at home.
Taxpayer Education Campaigns
Sustained taxpayer education campaigns are being rendered in
English, Ibo, Yoruba, Hausa and Pidgin on key national televisions
networks, national newspapers, and radio and online...
Federal Enlightenment and Engagement Tax Teams (FEETT)
FEETT carries out engagement and enlightenment of taxpayers
nationwide to increase registered taxpayers.
Waiver of Penalty and Interest:
FIRS granted a pardon for 2013-2015 to all defaulting taxpayers,
provided that such taxpayers come forward to declare their
indebtedness and present a payment plan on the outstanding tax
liability acceptable to the service.
Voluntary Assets and Income Declaration Scheme VAIDS)
This is another form of tax amnesty introduced to increase non-oil
revenue and promote tax compliance. VAIDS, in line with global best
practice on disclosure of information and declaration of assets was
designed to encourage voluntary disclosure of previously undisclosed
assets and income for the purpose of payment of all outstanding tax
liabilities to boost revenue collection. VAIDS was introduced as a new
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Pasting of Non-compliance stickers
Over 15,000 non-compliance stickers were pasted on identifiable
business premises, and recalcitrant taxpayers were enforced upon.
Extensive Nationwide tax audit exercise
The audits are being carried out on a sector -by -sector basis and in
collaboration with experienced tax and audit firms who are facilitating
gathering data from taxpayers' records.
6
Strategies adopted By State Governments/SIRS
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ENHANCING TAXATION AS ALTERNATIVE TO OIL
ABIA STATE
i.
In 2013, Abia state Government introduced a revenue generating
method known as Consolidated Assets and Resources Inventory
System [CARIS].
ii. The system entails the enumeration of all buildings in all
communities in the whole of the 17 Local Government Areas of
the state, and the identification of the purpose for which each
property is used, commercial or residential.
JIGAWA
a) The state carried a tax payer survey during which it discovered
50,000 potentials tax payers that were not captured.
b) Tax Mobile Court established in each of the senatorial district of
the state to ensure strict tax compliance.
BAUCHI
a) Introduced various payment systems through banks in order to
ease tax collection payments and block leakages and wastages.
b) Agreement with banks to have POS systems deployed to
Ministries, Departments and Agencies, (MDAs), to ease tax
collection and payments.
c) Strengthened its audit capacity to ensure that every tax including
personal income taxes are promptly paid
CROSS RIVER STATE
a) Introduced maritime tax on ships anchoring on its water fronts
b) Taxes are also placed on trucks conveying solid minerals.
EDO STATE
•
Use of electronic platform that would collect revenue by POS
or revenue scratch cards, for those who do not have ATM
cards.
GOMBE
Automation of the state's tax collection mechanism aimed at blocking
the leakages in the system. Issuance of e receipts closed all MDAs
revenue accounts and opens a Treasury Single Account, (TSA), with
commercial banks.
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LAGOS
Lagos State has enacted a new Land Use Charge Law to generate more
revenue.
i.
The LIRS established over 35 mini tax offices in markets and
other commercial zones,
ii. Introduction of the Self-Assessment Filing System for
individuals, the first State to do so for individuals in Nigeria.
iii. Overhauling of the informal sector by grouping them into three
categories of tax payers.
(a) Market men/women, artisans,
(b) Micro, small and medium-scale enterprises and
(c) Domestic staff. These categories of people are to remit one per
cent of what they earn into government's coffers.
Introduction of new payment platforms, POS, online and other
electronic multi-modal systems to make payments easier
KANO STATE
The strategy has improved generation such that the state ranked second
in the country in terms of generation and utilization of IGR after Lagos
State.
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SOKOTO
In Sokoto State, among innovations is total migration of revenue
collection to Pay Direct Platform and introduction of three per cent
consumption tax in all hotels, eateries and event places.
The JTB TIN will subsequently replace the current separate Taxpayer
Identification Number (TIN) system used by the federal and states tax
authorities and every taxpayer will ultimately be required to possess
and use only the JTB TIN.
KWARA
Introduced a standing agreement of 30/70 sharing formula of the
revenue collected for the Local Council Areas (between the KWIRS
and the local governments, 70 per cent is for the LGs while 30 per cent
is for the KWIRS).
Revised National Tax Policy
When the new National Tax Policy (NTP) is fully implemented, it is
expected that it will address key challenges confronting the Nigeria tax
system such as low tax to GDP ratio, fragmented database of taxpayers,
weak structure for exchange of information and multiplicity of taxes
and revenue agencies.
OGUN
Ogun State government created alternative sources of revenue one of
which is the payment of toll by taxi operators and the commercial
cyclists popularly refer to as “Okada.” Each taxi operator now pays
N150 into the coffers of the government, while the Okada operators
pay N200 per day.
JOINT STRATEGIES BY FIRS AND SIRS
Collaboration
Collaboration in the areas of tax payer registration, data sharing,
exchange of information, joint audits to improve efficiency and tax
yields, capacity building through joint training programs and exchange
of personnel. Not less than 29 states Internal Revenue Service have
exchanged their data with FIRS for effective monitoring. Members of
the Joint Tax Board signed a Memorandum of Understanding (MoU)
with the States Board of Internal Revenue Service to carry out joint
audit and enforcement exercises.
133
Some of the changes introduced by the new tax regime into our tax
system:
1. Establishment of an Office of Tax Simplification for continuous
improvement to tax legislation and administration;
2. Development of Key Performance Indices for Nigeria to attain a
top 50 position on the global index of ease of paying taxes by
2020 and sustain the ranking;
3. Administrative framework for amnesty and whistle blowing as
part of the strategies for curbing tax evasion and widening the tax
net
4. Political parties are to be mandated to articulate, and make public
their tax agenda before and during election campaigns.
Strategies Introduced Through Amendments to Tax Laws
Tax laws have been amended from time to time to stimulate revenue
generation to all the three tiers of Government.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
Personal Income Tax (Amendment) Act (No.115) 2011.
i. Introduction of Consolidated Relief Allowance
ii. Widening of the tax band and adjustments to the rates
iii. Removal of tax immunity enjoyed by the President, Vice
President, Governors and their Deputies.
iv. Increase in fines for offences committed under the Act
Value Added Tax (Amendment) Bill 2015
The VAT Amendment Bill seeks a significant upward review of all the
fines and penalties. If the Bill is passed into law, defaulting taxpayers
will be liable to steeper penalties.
I.
For tax evasion the Bill also proposes an increase in prison
sentences from a term 'not exceeding' 3 years to a term 'not less
than' 3 years.
ii.
iii.
in Section 8, Failure to register N10,000 (first month) and
N5,000 (subsequent months) proposed to be increased to
N100,000 (first month) and N50,000 (subsequent months)
Section 32 – Failure to register which is presently only N5000
under the existing VATA 2007, will be N100, 000 if the bill is
passed.
Stamp Duties Act (Amendment) Bill, 2017
The (Amendment) Bill, seeks to expand the scope of the Stamp Duties
Act and address the current ambiguities in the law .If passed, there will
be:
•Imposition of stamp duty on all forms of agreements; Increase in
threshold for receipts; Substantial increase in applicable
penalties; and the Bill will legalise the current practice as directed
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ENHANCING TAXATION AS ALTERNATIVE TO OIL
by the Central Bank of Nigeria whereby banks charge stamp
duties on deposits.
OTHER STRATEGIES
Plan to Review the tax compliance records of contractors
The Federal Government is set to review the tax compliance records of
contractors who were awarded contracts and received payments from
the Federal Government and its MDAs in the last seven years.
OECD INVITES ALL INTERESTED COUNTRIES TO JOIN
GLOBAL EFFORTS TO CLOSE INTERNATIONAL TAX
LOOPHOLES- FEBRUARY, 2016
The OECD on 23 February 2016 invited all interested countries that are
not members of the OECD to join the forum to close international tax
loopholes.
ILLLICIT FLOW OF FUNDS (IFFs)
Illicit financial flows (IFFs) are illegal movements of money or capital
from one country to another. Nigeria is collaborating with other
Developing and developed countries to tackle IFFs.
COUNTRY BY COUNTRY REPORTING
To address international tax avoidance and evasion, 31 countries
(including Nigeria) signed the Multilateral Competent Authority
Agreement (MCAA) for the automatic exchange of Country-byCountry reports. With this action, Nigeria is now entitled to receive
CbC reports of multinational enterprises (MNEs) having their
headquarters in one of the other MCAA partner countries. The CbC
reports will include information such as a summary of income earned
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ENHANCING TAXATION AS ALTERNATIVE TO OIL
and taxes paid, and the number of employees deployed by MNEs
across the different jurisdictions of operation in a tax reporting period.
exchange of tax and financial information among 101 tax
jurisdictions and enhance Nigeria's ability and those of the other
countries to curtail tax avoidance and evasion as well as share
financial data.
vi. The VAIDS generated almost 30 billion naira.
vii. Lagos State alone raked in N25billion revenue in December
2017.
Platform for Collaboration on Tax
The Platform for Collaboration on Tax is a joint effort launched in April
2016 by the International Monetary Fund (IMF), the Organisation for
Economic Co-operation and Development (OECD), the United
Nations (UN) and the World Bank Group (WBG). The Platform is
designed to intensify the cooperation between these organizations on
tax issues.
OUTCOME OF STRATEGIES
FIRS recorded impressive collection from N3.3 trillion in 2016 to
N4.03 trillion in 2017. It is even more commendable that out of the
sum of the N3.3 trillion collected in 2016, N2.14 trillion was accrued
from non-oil receipts this shows clearly that tax revenue is an
alternative to oil. The 2016 collection was done in a period when oil
prices dipped per barrel and when the value of shares and stocks on the
Nigerian Stock Exchange (NSE) slid.
Increased efficiency in tax administration
i.
The introduction of e-filing via the Integrated Tax Administration
System (ITAS) has brought about reduced compliance cost on the
part of the taxpayers
ii. The Enforcement Department of FIRS recovered a cumulative
sum of N8, 031,297,835.54.
iii. By the end of 2016, 814,000 new corporate taxpayers had been
registered. Over N120 billion accrued from the exercise;
iv. Increase in revenue yield from the audits.
v. The signing of the two instruments will give Nigeria automatic
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RECOMMENDATIONS AND WHAT ELSE CAN BE DONE TO
MAKE TAX REVENUE REMAIN A VIABLE ALTERNATIVE
TO OIL REVENUE
Take Taxation as Business and treat The Taxpayer as King,
Taxpayers are the primary focus of all Tax Authorities all over the
world, due to the significant role they play in the tax system and to a
large extent in a buoyant economy. The taxpayer should be the centrepiece of any tax reform. Above all, the taxpayer should be “treated as
KING”, no taxpayer, no assessment, no tax revenue and no growth.
Taxation and Good Governance: The Social Contract
Imperative”.
According to Cristina Bodea and Adrienne LeBas (2013), the duo
remarked that “This social contract imposes obligations on both
parties: citizens are expected to pay taxes, regardless of their degree of
support for the sitting government; in exchange, states are expected to
provide public goods”.
The World Bank in its 1992 report entitled “Governance and
Development”, sets out its definition of good governance as “the
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ENHANCING TAXATION AS ALTERNATIVE TO OIL
manner in which power is exercised in the management of a country's
economic and social resources for development”.
CURB Corruption
The issue of corruption is still perennial in the country; it reduces the
confidence and trust of the people in discharging their civic
responsibility as contained in Section 21(f) of the 1999 Constitution
(Constitution of the Federal Republic of Nigeria, 1999). In Nigeria
today, the people are their own government because they provide for
themselves, the basic public goods which ought to be provided by the
government with taxpayers' money. Many Nigerians would ask, why
pay to a common purse when individuals and enterprises still play the
roles of government – generating their own power, drilling personal
boreholes, paying outrageous school fees to send their children to
school privately and making contributions to fix roads?
The Tax and Good Governance Project is aimed at identifying links
between corruption, money laundering and tax crimes.
Conducive Political Environment
One of the major conditions for tax compliance is a conducive political
environment. Taxpayers comply readily with the tax laws when they
have the assurance that the government that is imposing the tax is for
them and their perceived interest and well-being are protected.
Review Obsolete Tax Laws
Government should quickly fulfil its promise of reviewing all the
obsolete laws that guide the collection of taxes. Government should
leverage on the 'stupendous' wealth of some people to generate revenue
to boost the economy. To this end, wealth tax may be introduced.
Address the issue of Multiplicity of Taxes by reducing the number of
taxes imposed by each level of government to not more than 10.
Undertake VAT Compliance Review which involves an examination of
transactions recorded through a VAT return to determine if:
VAT was over or under claimed,
The correct VAT rate has been applied,
Invoices are compliant for VAT purposes,
VAT has been accounted for correctly on intra-community acquisitions
and services subject to the reverse charge mechanism; and
Correct rate has been used. In a country with more than two or more
rates, the correct VAT rates are used to calculate the VAT deducted.
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SIMPLIFY THE TAX SYSTEM AND CONSIDER FLAT TAX
CONCLUSION
Nigeria's economy which is the largest in sub-Saharan Africa is still
recovering from the big blow that hit it when the country plunged into
recession in 2016. Despite constant efforts by the government to
address the country's perennial economic problem through the
Economic Recovery and Growth Plan (ERGP), it appears that the
country is still struggling with a low growth rate. However, with the
latest projection, there is renewed hope that the country will bounce
back despite its current economic woes.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
REFERENCES
Leyira, C. M., Chukwuma, E., & Asian, A. U. (2012). Tax System in
Nigeria – Challenges and the Way Forward. Research Journal
of Finance and Accounting, 3 (5), ISSN 2222-1697 (Paper)
ISSN 2222-2847 (Online). www.iiste.org
Myles, G.D.(2000).Taxation and economic growth. Institute of Fiscal
Studies.21 (1), 141-168
Olatunji, O. C. (2009).A review of value added tax (vat) administration
in Nigeria Medwell Journals.3 (4),61-68.
Onaolapo, A.A., Fasina, H.T., &Adegbite, T.A. (2013). The analysis of
the effect of petroleum profit tax on Nigerian economy. Asian
Journal of Humanities and Social Sciences.1 (1),1-12.
Onaolapo, A. A., Aworemi, R.J.,& Ajala, O.A. (2013). Assessment of
value added tax and its effects on revenue generation in Nigeria.
Internal Journal of Business and Social Science.4 (1), 220-225.
ENHANCING TAXATION AS ALTERNATIVE TO OIL
Philosophy (PhD) In Accounting, Babcock University, Ilishan
Remo, Ogun State, Nigeria
Saheed, Z. S.,Abarshi,J. A.,&Ejide,I.S.(2014).Impact of petroleum tax
on economic growth in Nigeria(1970-2012).International
Journal of Education and Research, 2(11), 297-308.
Canada Revenue Agencyhttps://www.canada.ca/en/revenue-agency/
news/2018/02/the_canada_revenueagencyislaunchingthe2018
taxfilingseason.html accessed on 21/7/18
http://www.accaglobal.com/africa/en/member/member/accountingbusiness/2017/01/insights/africa-tax.html
(Ventures Weekly Review)http://venturesafrica.com/imf-positiveabout-nigerias-gdp-growth-in-2019/ accessed on 21/7/18
http://pwcnigeria.typepad.com/files/pwc-tax-alert_nigeria-signs-mliand-crs_aug2017.pdf
https://www.taxbackinternational.com/our-services/vat-review.html
on 31/8/17
Olowononi, G.D. (2000). An Evaluation of Revenue Allocation
Formula in Nigeria. NCEMA Policy Analysis Series, 6(2), pg.
107-140.
www.vanguardngr.com/2017/04/fg-provided-n1-75tn-extrastatutory-bailout-fund-states-budgit/
Oyedele, T. (2016). Guess how many Nigerians pay tax and how our
government spends the money. Retrieved from https://www.
pwc.com/ng/en/assets/ pdf/tax-watch-june-2016.pdf
http://gifmis.gov.ng/gifmis/?view=featured
Oyebanji D.O. (2017) Indirect Taxation and Economic Growth.
Seminar Paper Submitted to the Department Of Accounting,
School Of Management Sciences, In Partial Fulfilment Of The
Requirements For The Award Of Degree In Doctor Of
141
http://www.firs.gov.ng/etax-payments/
http://www.jtb.gov.ng/
http://thenationonlineng.net/integrated-tax-administration-systemitas/
https://www.proshareng.com/news/Taxes%20&%20Tariffs/FIRSintroduces-six-Electronic-Tax-services/35130
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
Tax Default: FIRS Seals Companies in Lagos, Kano, Onitsha.
Retrieved from
http://www.thisdaylive.com/index.php/2016/08/17/tax-default-firsseals-companies-in lagos-kano-onitsha/
CHAPTER SEVEN
MULTIPLICITY OF TAXES IN NIGERIA
DADA, Samuel Olajide
Department of Accounting
Babcock University, Ilishan Remo, Ogun State, Nigeria
adas@babcock.edu.ng;
ABSTRACT
Following the emergence of multiplicity of taxes in the Nigerian fiscal
landscape, the Joint Tax Board (JTB) had taken a number of steps to
curb the phenomenon. However, such efforts have recorded partial
success. Like a cat with nine lives, multiplicity of taxes has refused to
die and continues to wreak havoc on stakeholders, average citizens,
businesses and even households in Nigeria. This paper examines,
among other things, the meaning of multiplicity of taxes, its causes,
impact on tax compliance and revenue yield. It also discusses the
growing debate on the need to streamline the number of taxes in
Nigeria in view of the low yields of many of the taxes. This study also
examines the stability of businesses under the current tax regime with
emphasis on the hospitality industry. In this regard, the
recommendations of the 2003 Tax Study Group were briefly
considered. The paper considers the extent to which multiplicity of
taxes really exist in Nigeria, why the problems persist and concludes
with what the writer considers as the appropriate solutions. The issue
of multiple tax practices has always generated and continues to
generate controversy among the tiers of Government in Nigeria.
Whereas tax practitioners and government agencies claimed the
143
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
existence of tax laws and policies governing the taxes and levies
collectible by each tier, a regime of illegal tax collections still subsists.
Survey data obtained from the responses of 209 respondents with the
aid of a structured questionnaire were used to provide empirical
evidence of the effects of multiple tax practices on taxpayers'
compliance attitudes. Findings from the correlation analysis revealed
that multiple tax practices significantly affect taxpayers' compliance
attitude, and that multiple tax practices in Nigeria are corollaries of
corruption, poor tax administration, greed and unfair revenue
allocation formula. Hence, we suggest a distinct dichotomy of the
different taxes collectible by each tier of Government. This will
significantly aid an efficient and effective tax system in Nigeria.
disincentive to business and commercial activities. Payment of normal
taxes in one part of the country on goods is not an assurance of not
paying similar taxes on the same goods en-route its destination across
the country. Branded company vehicles that have advertisement taxes
paid on them in one local government may be required to pay such
taxes in all the local governments they are operating, even if moving
across without any business being transacted. Goods being transported
from one state into other states are being taxed along states that these
goods are transversing under various taxes by each state or local
government. Various names were given to these taxes- agriculture tax,
environment tax, pollution tax ad hoc tax, movement tax amongst
others.
Keywords: Multiple taxes, taxpayers, attitude, Nigeria, efficient,
effective
The running of government organs cannot be effectively carried out if
funds are not available. The major sources of funds to run these organs
by most governments all over the word are through taxes collected.
These taxes can be direct or indirect. The statutes in Nigeria clearly
provide the types of taxes that are collectible by each arm of
government. Tax revenues of Federal government are not supposed to
be collected by the local or state governments. Also the revenues meant
for the local and state governments are not to be collected by Federal
government (Sanni, 2006).
The telecommunication industry has got more than its fair share in
respect of multiple taxes being thrown on the helpless corporate
Nigerian citizenry. Ministries, Departments and Agencies (MDA) are
collecting taxes from the industry with the aim of generating revenues
internally. Charges are imposed not only by these MDAs but by
community development areas, resident areas and Area Boys (Udabah,
2002). These are repeated for every base station in all the 36 states and
the Federal Capital Territory. Most of these taxes are collected without
any legal basis. Failure to pay often result in vandalization of
equipment which result to poor quality of services rendered. The belief
is that as the telecommunication industry is making higher profit than
any other sectors of the economy, there is a ready-made and easy source
of internally generated revenues.
According to Agbor (2013), issues of multiple taxes on the same goods
and services by different organs of government have become a
These multiple taxes imposed by MDAs and other various
organizations inhibit good economic environment needed for
INTRODUCTION
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MULTIPLICITY OF TAXES IN NIGERIA
commerce and trade (Ojobo, 2013). Manufacturing firms paying
various types of taxes in states and local governments; private
businessmen paying same types of taxes on the same products or
services being moved across the country and individuals being
subjected to various taxes are operating in environments not conducive
for real economic growth. Are there justifications for these
multifarious taxes being thrown to the economic community? Are
there not better alternative ways of generating revenue without
necessarily flouting the laws of the land? What are the long-term
effects of these multiple taxes on the economy and the tax system?
Government Council. This definition seems to be too narrow to the
extent that it implies that multiplicity of taxes occurs only with regards
to state and local taxes.
Abiola (2012), opined that following the emergence of multiplicity of
taxes in the Nigerian fiscal landscape, the Joint Tax Board (JTB) had
taken a number of steps to curb the phenomenon. However, such efforts
seem to have recorded little success. Like a cat with nine lives,
multiplicity of taxes has refused to die but continues to impact
negatively on stakeholders, average citizens, businesses and even
households in Nigeria. This paper examines, among other things, the
meaning of multiple taxes, causes, impact on tax compliance and
revenue yield. It also discusses the implications of multiple taxations,
the growing debate on the need to streamline the number of taxes in
Nigeria in view of the low yields of many of the taxes. In this regard, the
recommendations of the 2003 Tax Study Group were briefly
considered.
WHAT IS MULTIPLE TAXATION
According to the National Tax Policy Document (2012), multiple
taxation occurs where the tax, fee or rate is levied on the same person in
respect of the same liability by more than one State or Local
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According to Abiola (2012), from the general usages of multiplicity of
taxes by stakeholders, it can be said to manifest in at least four ways:
First, it refers to the various unlawful compulsory payments being
collected by the local and state governments without appropriate legal
backing through intimidation and harassment of the payers. Collection
of it is characterized by the use of stickers, mounting of road blocks,
use of revenue Agents/Consultants including Motor Park tout. This
constitutes illegal taxes imposed by MDAs.
Second, it refers to situations where a taxpayer is faced with demands
from two or more different levels of government either for the same or
similar taxes. A good example here is the administration of the Value
Added Tax (VAT) and Sales Tax simultaneously; the imposition of
levies for Environmental Impact Assessment (EIA) by the Federal
(through National Environmental Standards and Regulations
Enforcement Agency - NESREA) and State (through their various state
agencies) governments.
Third, the term refers to a situation where the same level of government
imposes two or more taxes on the same tax base. A good example is
payment of Companies Income Tax, Education Tax and Technology
Levy by the same company on the same income.
Fourth, it refers to cases whereby various government agencies impose
taxes in the form of fees or charges.
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The definition of multiple taxation will not be complete without
examining the definition adduced by the Nigerian Communication
Commission Industry Working Group (IWG) on Multiple Taxation.
According to the Industry Working Group multiple taxation includes
the incidence of more than one Tax, Levy, Charge, Fee or other
payments imposed on the same infrastructure, operations, or events by
the same or different MDA's and other stakeholders; and the
multiplication of nuisance taxes, levies, charges and fees.
dependence of the States on revenue from the Federation Account was
so much that most States did not have functional Board of Internal
Revenue (BIR). A few States began to farm out their tax administration
to private consultants in such a manner that eventually sidelined the tax
administrators within the civil service. (Odusola, 2006)
Notwithstanding the above, it suffices to say however that multiple
taxation is not synonymous simply with being taxed at different levels
of government. Kiabel (2011) opined that in a federal system of
government, it is typical to have federal, state and local government
taxes. This truism was lucidly expressed in the National Tax Policy
Document thus:
Multiple taxation in Nigeria first needs to be defined before it is
tackled. The word multiple connotes “numerous”, “several”, “various”
etc. A certain level of multiplicity is unavoidable in a Federal structure
as each tier of government may want to charge certain taxes, fees,
charges as may be applicable. The only aspect of multiplicity that is
avoidable and for which the Constitution itself abhors is that where the
tax, fee or rate is levied on the same person in respect of the same
liability by more than one State or Local Government Councils.
EVOLUTION OF MULTPLICITY OF TAXES IN NIGERIA
Multiplicity of taxation began to rear its ugly head in Nigeria in the late
1980's when revenue accruing to states and local government from the
Federation Account began to dwindle. Regrettably, the degree of
149
The consultants started by reviewing the rates and fees payable for
different governmental services ostensibly to reflect the economic
realities. In some cases, the rates and fees were skewed too high. For
instance business premises levy and development levy were imposed
on certain corporate bodies arbitrarily without legal basis. A dose of
dynamism was introduced into tax enforcement during this era.
Notwithstanding that some of their practices were unorthodox and
raised serious issues of rule of law; the revenue objective was
paramount to the States. The States therefore did not take any serious
action to address the concerns of taxpayers.
In the words of Attama (2014), as part of the responses to curb the
menace of multiplicity of taxes, the Joint Tax Board (JTB) drew a list of
taxes collectible by each tier of government. The list was largely
ignored by States who were in dire need of boosting their revenue. The
list was eventually given a legal backing vide the Taxes and Levies
Approved List for Collection Act (popularly known as Act No. 21).
One of the immediate effects of Act No. 21 was that no State could
charge more than the prescribed amount under the law for the
development levy, business premises levy and business premises
renewal levy. Subsequently, the Personal Income Tax Act was
amended to establish a Board of Internal Revenue for each State and
prescribes the composition for the Board. In furtherance of the
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MULTIPLICITY OF TAXES IN NIGERIA
provisions, all the States eventually constituted their BIR. These
developments undoubtedly posed serious challenges for the operation
of the consultants but certainly not sufficient to eliminate their
activities. Since the hunters have learnt how to shoot without missing,
the birds have also learnt how to fly without perching. The Consultants
had to devise new methods by moving their operations to the offices of
the relevant tax authority and get their staff to be issued the
Identification card of the relevant tax authorities. In order to fulfill the
letters of the law, assessments were prepared by the consultants for the
signature of the Chairman or other relevant officers of the Board of
Internal Revenue. (Oseni, 2014)
remuneration and lack of motivated staff. Following the reform of the
FIRS, a few States led by Lagos State have restructured their BIRs
under their State Laws towards improved efficiency.
Adebisi and Gbegi (2013) explained that the consultants were able to
penetrate the system through appropriate reward for their political
patrons. While the big tax consultants were operating at the State level,
those who were not fortunate to get patronage at the State level tried
their luck at the local government level. In the course of time, the
activities of tax consultants spread virtually throughout all the states
and local government councils in Nigeria. In order to check this
development, PITA was amended to establish a Revenue Committee
for each local government and prescribed their composition. A Joint
State Revenue Committee was also established for each state
comprising the head of the Revenue Committee of each local
government. The Joint State Revenue Committee was to play at the
State level the kind of role that JTB is playing at the federal level.
At the State level, although all the States have since constituted their
Board of Internal Revenue, most of them are still plagued with myriads
of problems including poor funding, lack of infrastructure, poor
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DOUBLE TAXATION VERSUS MULTIPLE TAXATION
There is a thin line of difference between the two concepts. Although
similar yet not the same and is hereby differentiated below.
Organization for Economic Co-operation and Development (2005)
defined Double Taxation as the imposition of comparable taxes in at
least two countries on the same taxpayer with respect to the same
subject matter and for identical periods. This may occur if one country
claims taxing authority based on the residence or the citizenship of the
taxpayer, while another country postulates taxing authority based on
where the income originates. Another potential source of two-fold
taxation could be the fact that both countries claim either a certain
taxpayer as a resident or that an income arises within its country.
Double taxation also occur where a country levies tax on an income
that has already been taxed in the same or another country (Business
Dictionary, 2013). In such situations, there is a defined arrangement
which allows relief to be granted to the tax payer for the earlier tax paid
or to which he may be liable. Specific arrangements are made with a
view to preventing such multiple taxes or to provide relief against it.
On the other hand, Multiple Taxation is a phenomenon which describes
an income that is subjected to tax more than once, often by two or more
different authorities in a way that may be unfair or illegal (Ojeka,
2011). Illegality and unfairness distinguish multiple taxation from
double taxation. The former often have the characteristics of being
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
unfair and also illegal. Multiplicity of taxes connotes paying similar
taxes on the same or substantially similar tax base. No relief is granted
on multiple taxes since it is illegal and initio.
APPROVED TAXES AND LEVIES
In order to reduce the multi-dimensional problems arising from the
multiplicity of taxes at state and local government levels and to create
an investor – friendly tax regime, the federal government enacted the
Taxes and Levies (Approved List for Collection) Decree 1988
amended as Taxes and Levies (Approved List for Collection) Act, CAP
T2 LFN 2004 to spell out the taxes and levies that can be collected by
the different tiers of government.
Part I - Taxes to be collected by the Federal Government
a) Companies’ income tax.
b) Withholding tax on companies, residents of the Federal Capital
Territory, Abuja and non-resident individuals.
c) Petroleum profits tax.
d) Value added tax.
e) Education tax.
f) Capital gains tax on residents of the Federal Capital Territory,
Abuja, corporate bodies and non-resident individuals.
g) Stamp duties on bodies corporate and residents of the Federal
Capital Territory, Abuja. (Now being administered by the Federal
Capital Territory Internal Revenue Service)
h) Personal income tax in respect of:
a. Members of the Armed Forces of the Federation;
b. Members of the Nigeria Police Force;
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MULTIPLICITY OF TAXES IN NIGERIA
c.
d.
Residents of the Federal Capital Territory, Abuja; and
Staff of the Ministry of Foreign Affairs and non-resident
individuals.
Part II - Taxes and Levies to be collected by the State Government
a. Personal income tax in respect of:
i. Pay-as-you-earn (PAYE); and
ii. Direct taxation (self-assessment).
b. Withholding tax (individuals only).
c. Capital gains tax (individuals only).
d. Stamp duties on instruments executed by individuals.
e. Pools betting and lotteries, gaming and casino taxes.
f. Road taxes.
g. Business premises registration fee in respect of:
a) urban areas as defined by each state, maximum ofa. N10, 000 for registration, and
b. N5, 000 per annum for renewal of registration; and
b) ii. rural areasN2, 000 for registration, and
N 1, 000 per annum for renewal of registration.
h. Development levy (individuals only) not more than N100 per
annum on all taxable individuals.
i.
Naming of street registration fees in the state capital.
j.
Right of occupancy fees on lands owned by the state government
in urban areas of the state.
k. Market taxes and levies where state finance is involved.
Part III - Taxes and Levies to be collected by the Local Government
a. Shops and kiosks rates.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
b.
c.
d.
e.
f.
TAXES AND LEVIES (APPROVED LIST FOR COLLECTION)
ACT – AMENDED WITH MORE POWERS TO THE STATE
GOVERNMENT
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
Tenement rate.
On and off liquor licence fees.
Slaughter slab fees.
Marriage, birth and death registration fees.
Naming of street registration fee, excluding any street in the state
capital.
Right of occupancy fees on lands in rural areas, excluding those
collectible by the federal and state governments.
Market taxes and levies excluding any market where state finance
is involved.
Motor Park levies.
Domestic animal licence fees.
Bicycle, track, canoe, wheelbarrow and cart tees, other than a
mechanically propelled truck.
Cattle tax payable by cattle farmers only.
Merriment and road closure levy.
Radio and television licence fees (other than radio and television
transmitter).
Vehicle radio licence fees (to be imposed by the local government
of the state in which the car is registered).
Wrong parking charges.
Public convenience, sewage and refuse disposal fees.
Customary burial ground permit tees.
Religious places establishment permit fees.
Signboard and advertisement permit fees.
155
According to Adebiyi (2016), the Federal Government, acting through
the office of the then Minister of Finance and Coordinating Minister of
the Economy (the Minister), Dr. Ngozi Okonjo-Iweala, on May 26,
2015, amended the Taxes and Levies (Approved List for Collection)
Act, Cap. T2, Laws of the Federation of Nigeria, 2004. The
amendment, which came into force on the 26th of May, 2015, was
effected mainly on the Schedule to the Act. The amendment was made
by the Minister pursuant to the powers conferred on the Minister by
section1 (2) of the Act.
Part II of the Schedule to the Act covers taxes and levies a State
government can collect. While Part II of the Schedule to the Act was
amended by introduction of new taxes and levies (items 12 - 25), Part I
and Part III of the Schedule, covering taxes and levies the Federal
Government and Local Government can collect respectively only saw
the introduction of one item each.
Below are items introduced under the amendment to the Act:
PART I (Taxes/Levies collectible by the Federal Government)
“National Information Technology development Levy” included as
item 9
PART II (Taxes/Levies collectible by the State Government)
Item 7 is amended and now reads thus: “Business premises
registration fees in respect of urban and rural areas which includes
registration fees and per annum renewals as fixed by each state”
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
-
WORK ABILITY OF MUTIPLE TAXATION
Various multiplicities of taxes prevalent in Nigeria occur in the
following ways:
Items 12-25 were also inserted in the list and the following
taxes/levies are provided for: Land Use Charge, Hotel, Restaurant
or Event Centre Consumption Tax, Entertainment Tax,
Environmental (Ecological) Fee or Levy, Mining, Milling and
Quarrying Fee, Animal Trade Tax, Produce Sales Tax, Slaughter
or Abattoir Fees, Infrastructure Maintenance Charge or Levy, Fire
Service Charge, Property Tax, Economic Development Levy,
Social Services Contribution Levy and Sign ages and Mobile
Advertisement.
PART III- (taxes/levies collectible by the Local Government)
“Wharf Landing Charge, where applicable” was included as revenue
collectible by the Local Government.
A fourth schedule (PART IV) has also been introduced to the Act. Part
IV contains six different taxes/levies harmonized among the States and
Local Governments. The six taxes are:
A single inter-state road taxes sticker for any vehicle within
Nigeria;
A single Haulage fee payable at the points of loading in the State
of departure and a single Haulage fee payable at the points of
discharge of the goods;
Wharf Landing fee;
A single parking permit sticker;
Fire service levy
Road worthiness certificate fee
This part also states that the Federal Fire service can only collect levies
in the FCT and Road worthiness certificate should be provided by the
State in which the vehicles operate.
157
Issues in respect of paying taxes more than one occasion in respect of
profits from the same business in the same period were classified as
multiple taxations. In 1993, Education tax was introduced in Nigeria to
fund the deteriorating educational system. Assessment of education tax
goes together with the company income tax. The law regulates 2% tax
on the assessable profits of companies. The National Information
Technology Development Agency (NITDA) Act, LFN 2007 stipulates
a levy of 1% on the profit before tax of GSM service providers and all
Telecommunication Companies, Cyber Companies and Internet
providers, Pension Managers and pension related companies. Banks
and other financial Institutions and Insurance companies were also
included. This provision according to Abiola and Asiweh (2012)
amounts to duplications and multiplicity of tax since these companies
equally pay tax as required by Companies Income Tax Act (CITA)
Value Added Tax, Sales Tax and Hotel Consumption Tax which are all
based on sales. These are obvious contradictions in respect of taxes
collected by all the tiers of government in Nigeria.
Payment of ground rent or business premises and later demanding for
tenement rates/land use charge are all moving spaciously towards the
multiple taxation syndromes.
The issue of multiple taxation is more pronounced in the
telecommunication, hospitality, manufacturing, and transportation
businesses. For instance, operational permits are collectible only from
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MULTIPLICITY OF TAXES IN NIGERIA
kiosks and shops but bigger outfits after paying for business premises
are also forced to pay for operational permits.
Multiple taxation also manifest in the signpost/advert tax. The
jurisdiction for collection of this tax is the local government, but the
state also collect tax on the same heading (even before the amendment
of the Act that empowers them thereafter).
Banks (already licenced by CBN and registered with CAC) with many
branches are now being forced to obtain opening permit from CBN (at
a cost) before such a branch can open for business.
While all the companies' cars (either branded or not) are also expected
to compulsorily obtain (at a cost) local government emblems/permit on
annual basis despite the renewal of car particulars and payment of
signage/advert fee if the cars are branded.
VARIOUS SHADES OF MULTIPLE AND ILLEGAL
TAXATION WITH EXAMPLES
Micah & Umobong (2012) gave the followings as the various forms or
shades of multiple taxation. They are explained with practical
examples.
ILLEGAL TAXES & LEVIES
Any tax or levy outside of what the Act provides is illegal. Consider the
following instances:
a) In 2009, the Imo State Ministry of Petroleum and Environment
introduced an Environmental Audit Review and Certification Fee
of N30, 000 per site without the backing of any known law. It is a
known fact that the statutory responsibility for the conduct of an
Environmental Audit under the Environmental Impact
Assessment (EIA) Act rests with the Federal Ministry of
159
Environment (FME) or its enforcement agency – and
telecommunication Operations pay EIA for every Site they put
up. Thus, not only was this fee illegal, it amounted to double
taxation. (Business Day Newspaper, October 15, 2010. p38)
b)
Cross River State Internal Revenue Service demanded (from
owners of Masts) for the payment of the sum of N510, 000,000.00
(Five Hundred and Ten Million Naira) purportedly for the amount
of cell site revenue due to the state for the period 2005 – 2010.
Aside from the fact that there was no legislation for this demand,
one might wonder what parameter was used to arrive at this
amount demanded. (http://www.vanguardngr.com/ on Monday
December 9, 2013)
c)
Delta Sate Ministry of Environment demanded from Airtel
Nigeria the payment of the sum of N276, 000,000.00 as
Ecological Tariff. (Business Day Newspaper March 4, 2012, p.
27).
d)
Katsina State Urban Development Authority demanded the sum
of N755, 000.00 as Building Permit and EIA fee (that should be
collected by federal government). (Vanguard News, November
29, 2013)
e)
Abia State Infrastructural Development Fund Board demanded
N19, 000,000.00 (Nineteen Million Naira) from Airtel as
infrastructural development levy – what class of tax is this?
f)
Lagos State introduced Land Use Charge when tenement rate was
still in force.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
g)
MULTIPLICITY OF TAXES IN NIGERIA
Ogun State also introduced Consumption tax in addition to Value
Added Tax being collected by the FIRS.
claim of N755million as owed by Airtel for Signage and Advert
placement. (Daily Post News, April 14, 2014 p. 21).
ARBITRARY INCREASES
One of the cardinal principles of taxation is the certainty of the tax; thus
a tax payer is entitled to know and determine in advance how much he
is obligated to pay and in what circumstance. Against this principle,
what is prevalent in circumstances where taxes or levies are legal, the
amounted demanded is typically arbitrary and without recourse to the
provisions of law. Increases are also usually imposed annually or
otherwise, without a known parameter for their determination. For
instance:
ILLEGAL AND INAPPROPRIATE ASSESSMENTS
Government at all tiers tends to use Consultants for the purpose of
improving internally generated revenue. These consultants are paid a
percentage of what they are able to generate. Unfortunately, the end
result is that consultants dream up taxes or levies that are unknown to
law and utilize thugs and unscrupulous security personnel and indeed
engage task forces employing states security services to enforce their
collection. Examples include:
i.
ii.
Fees for Aviation High Clearance Certification (AHCC) of masts
and towers erected by telecommunications companies were
increased by as much as 1000 – 4000% in 2005. The new AHCC
regime was expanded to cover masts and towers all over the
country irrespective of their proximity to airports as was the
previous regime, so that the increase was even more impactful
than as depicted by a rate increase. (Business Day Newspaper,
March 4, 2012 p. 27).
The Bauchi State Government set up the Bauchi State Signage
and Advertisement Agency (BASSAMA), a peer company of the
Lagos State Signage and Advertising Agency (LASSAA), to
collect advert and signage fees for advertising in the State. Based
on this, Airtel received a demand which basically counted any
location with the company's sticker, parasols, and canopies
(whether or not the company owns the location) and arrived at a
161
a)
Abia State Environmental Protection Agency engaged Yagazie
Nigeria Limited to demand N300, 000.00 (Three Hundred
Thousand Naira) per new site for Environmental Support Fee and
EIA Registration. (Premium Times, June 12, 2014 p. 19).
b)
Bayelsa State Ministry of Environment engaged Denjef Nigeria
Limited to demand the sum of N3, 000,000.00 from each Telecom
Operator as Effluent Discharge and Turbidity Levy. (The Sun
Newspaper, May 14, 2015 p. 32).
c)
Imo State Environmental Transformation Commission
(ENTRACO) demanded from Airtel the sum of N262.4 Million
for Pest/Vector Controls fee and Fumigation Charges for the year
2008 –2011 and Imo State Town Planning Authority demanded
the sum of N720.000.00 per site as permit fees. (Daily Post News,
April 14, 2014 p. 21).
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
ILLEGAL ENFORCEMENT AND EXTRA- JUDICIAL
ACTIVITY:
Fasoto (2007) noted that the collection of taxes and levies, legal or
illegal, is usually done by applying unsophisticated and legally
unsanctioned methods. This includes arbitrary site or office closures,
physical attacks, intimidation and arrest of personnel or threats of these
and seizure of equipment, among others.
INAPPROPRIATE LEGISLATION:
Izendomi (2011) mentioned that Governments, especially at the State
and Local levels, come under the guise of federalism to insist on
exercising authority within their locale. While they should ordinarily
have authority to exercise such powers, the law places a limitation to
the extent that where a federal legislation has covered the field, State or
Local Governments can no longer legislate on the same issue.
Proceeding still leads to inappropriate, typically excessive legislation
and an abuse. Examples include:
Several States have across the country have employed and continue to
exploit this approach to extract monies from operators. For
telecommunications companies, this is particularly damaging because
they deny the affected operators access to their facility sites for routine
maintenance and fuelling. This invariably results in network outages,
congestion and exacerbation of the quality of service situation as
facilities run out of fuel or otherwise fail for lack of maintenance or
fault rectification.
Multiple-regulation (of the same aspects of telecommunications
operations) by two or more MDAs presents the hazard of regulatory
intervention by these entities working at cross purposes to the
detriment of the affected operator. It is common place for instance to
have a telecommunications operator receive a Stop Work Order from a
State or Local MDA over a Right of Way (RoW) approval granted by a
State or Federal MDA. It is indeed common place to have State and
Local Environmental MDAs reject an EIA Certificate issued by the
Federal Ministry Environment (FME) to insist instead on the
telecommunication operator processing same with them. This
occurrence is typified by the demands in Kaduna State by the Kaduna
State Urban and Property Development Authority (KASUPDA) who
insisted on conducting its own EIA (Labode, 2013).
163
The Lagos State Infrastructure Maintenance and Regulatory Agency
(LASIMRA) Act, 2004 which sought to regulate telecommunications
infrastructure in Lagos State was declared illegal by the Federal High
Court. As reported by Dongbon-Memsem (2007), 'this was the basis of
the Suit in Registered Trustees of Association of the Licensed
telecommunications Operators of Nigeria & ors Vs. Lagos State
Government & Ors where the court held thus:“ the State House of
Assembly have no right to make laws that are similar or identical to that
of the National Assembly…if this law is allowed to subsist there will be
confusion in the telecom industry…the whole purpose of this law is
just to generate revenue for the State Government simplicity. That is
taxing the telecom operators indirectly … [for] the NCC Act has
covered the field'.
Urban Furniture Regulatory Unit (UFRU) is a body established by the
Lagos State Ministry of Physical Planning and Urban Development, to
regulate the activities of telecoms operators, Internet Service Providers
(ISPs) and banks, in the area of masts and towers installations without
regard to the Lagos State Urban and Regional Planning and
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
Development Law, 2010 and other regulations made pursuant to the
law. Sanni (2006) reported that NCC has kicked against plans to
impose yearly levies on telecommunications Operators by UFRU
which has similar mandate with that of IMRA (which the court
declared illegal).
TAXES AND LEVIES PAID BY PRIVATE SCHOOLS IN
LAGOS STATE
Nwokoro (2013) lamented that the burden of multiple and illegal
taxation on privately-owned schools in Lagos is heavier. According to
Developing Effective Private Education Nigeria (DEEPEN), a UKIDfunded programme in Lagos, privately owned schools pay as much as
20 different taxes and levies to operate in one of Nigeria's most
investor-friendly states, Lagos. The taxes and levies as highlighted by
DEEPEN are: Waste Management (LAWMA), Radio/TV Charge,
PAYE, Business Premises, Land Use Charge, Signage (LASAA),
Annual Dues, Name search, Lagos State Education, Management
System (LASGEMS), Vehicle documentation – school bus,
Development Levy, Safety Pack, Online registration, Tenement Rate,
Fumigation Levy, Fire Service, Special Permission Levy, Parking Lot,
Exam board, Ministry of Environment charge, Sports Centre levy,
Mobile advert and Local government levy.
All of these are imposed on the school fee which is the only source of
income to the schools.
CAUSES OF MULTIPLE TAXATION
Anagor (2013) identified the following as causes of multiple taxation
in Nigeria.
1. Many Ministries, Departments and Agencies (MDAs) impose
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MULTIPLICITY OF TAXES IN NIGERIA
arbitrary taxes and levies in order to shore up their dwindling
internally generated revenues.
2.
The financial desperation of local governments since their
revenues is being withheld by the state governments.
3.
States have even usurped the taxes assigned to the local
government when the Constitution requires them to delegate the
administration of some States taxes to the local governments. It is
sad to note that a Development levy of just N100 is being
collected by the States. Without intending to play the devil's
advocate, how then do we expect the local government to survive
in this kind of stifling fiscal environment? (Izedonmi, 2010)
4.
The reality today is that the States and Local Governments are
attempting to take their own shares of the revenues of corporate
bodies through the back door in form of illegal taxes and levies.
Consider the present system, whereby a company pays its income
tax to the Federal Government (FIRS) to the detriment of the State
and Local Government where it is located. Is this an efficient
structure?
5.
Unfair/Unfavourable revenue allocation formula
6.
Dwindling of State income from the federation account.
7.
Unhealthy State rivalries
8.
Political patronage, a source of reimbursing so called political
god-fathers
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
9.
ARGUMENTS IN SUPORT OF MULTIPLE TAXATION IN
NIGERIA
Poor equipping and training of revenue agencies staff and Greed
on the part of tax officials.
10. Poor tax administration
11. Corruption among tax officials
MULTIPLE TAXATION AND TAX COMPLIANCE
Anaesoronye (2013) defined Tax compliance as the obedience to the
provisions of the tax laws. Compliance is not a one-way traffic flow.
Both the tax authority and taxpayers are obligated to comply with the
provisions of the law. There is non-compliance when taxes are imposed
arbitrarily, administered without following set rules or standards and
people are subjected to penal sanctions without due process. An
absolute compliance would mean that the taxpayer, tax authority and
their advisors would do the right thing at the right time.
Multiplicity of taxes serves as a disincentive for compliance. Since no
one pays tax with smile, taxpayers will seek either a fair and fowl
means to avoid payment of tax especially where there is incidence of
multiple taxes. This is particularly true in an environment such as ours
where the tax culture is low.
A tax system is supposed to be simple in order to aid compliance.
Regrettably, the reverse is usually the case in most countries. Where the
tax system is unnecessarily complex, it increases the cost of
administration for government and cost of compliance for the
taxpayers. The current thinking is that a complex tax system is neither
in the interest of government nor the taxpayers. (Odusola, 2006)
167
Abiola (2012) argued (under three points) that the lacuna in the tax laws
and its implementation indirectly gave support for the pervasiveness of
multiple taxation in Nigeria.
Foremost, the Taxes and Levies (Approved List for Collection) Act No.
21 gives a false impression that there are 39 taxes (and 61 as amended)
in Nigeria. A careful consideration of its provisions will reveal that it is
not a taxing statute since it deals with the “power to collect” and not
“power to impose” taxes. This position is reinforced by the language of
the statute which employed words and phrases such as “collecting”,
“collects”, “shall collect. In view of the above, it is submitted that the
Taxes and Levies has never been and is presently not relevant for the
purpose of determining the extent of taxing power of government
under the 1999 Constitution. Any attempt to either trace the power of a
government or lack of it to impose a particular tax or levy to the Act will
be misdirected.
Secondly, 'the drafters of the Tax and Levies (Approved List for
Collection) Act seem to be at a loss on the basic distinction between a
tax and other related terms such as fees and charges. How else can one
explain the inclusion of several user charges and licensing fees
contained in the Schedule? From the administrative perspective, it is
counter-productive in our view to describe payments made in exchange
for direct benefit as taxes in view of the general aversion for taxes.
(Abiola 2012)
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
Lastly, it would appear that the listing of 20 items collectible by Local
Government in “Taxes and Levies Act” is one of the factors that goaded
the local government councils into the inordinate drive for revenue
through those items. For example, while parking fee should ordinarily
be collected on “pay as you go” basis, the fact that it features on the Act
has given it a semblance of a tax which some of the local governments
then leverage upon as the basis of serving assessment notices on
corporate bodies as parking fees. The same approach has been adopted
for several other items in Part III of the Schedule to the Act.
4.
These (the hazardous climate brought about by multiple tax)
invariably combine to limit or constrain tax revenues to
government from direct and indirect value addition as well as
wider economic impact of the sector on the economy (Ejiro,
2013)'.
5.
Multiple taxation increases tax evasion rate and as such it causes
loss to treasury. (Anagor, 2013)
6.
Multiple taxation has negative effect on SMEs' survival as '80%
of Nigeria SMEs die before their 5th anniversary'. Atawodi and
Ojeka (2012) also asserted that taxes for SMEs have been more
harmful than beneficial as they increase running costs and slow
down growth.
7.
Ojobo (2013) affirmed that there are more than 500 taxes and
levies imposed by various tiers of government in Nigeria apart
from those approved by Taxes and Levies (Approved list of
Collection) Act. These invariably drive up the cost of doing
business and destroy investors' confidence. He further stated that
multiple taxation is more common in the Local Government than
other tiers of governments.
8.
Multiplicity of taxes infringes and underscores the cardinal
principles of taxation – Certainty, Simplicity, Equality and
Convenience. A taxpayer is entitled to know and determine in
advance how much he is obligated to pay and in what
circumstances'. (Oseni, 2014)
9.
Multiple taxation creates room for unauthorized persons to get
involved in the collection of taxes and levies (probably for
IMPLICATIONS/EFFECTS OF MULTIPLE TAXATION
Tax scholars (practitioners and academia) gave the following
implications of multiple taxation in Nigeria. They include:
1.
The incidence of multiple taxation disregards the provision of the
Taxes and Levies (Approved Rates for Collection) Act, 2004
which provides the taxes and levies collectible by the various tiers
of government. It therefore constitutes illegal and inappropriate
taxation and legislation. (Ifeuko, 2008)
2.
Multiplicity of taxes makes investment climate tempestuous as
investors are not sure the extent to which their incomes would be
taxed. There are cases of large corporate entities that have moved
their operations out of some States or from Nigeria to neighboring
countries on account of multiplicity of taxes and rising cost of
doing business in Nigeria. (Dangote, 2001)
3.
It inhibits growth and penetration; stifles the telecommunication
industry growth; and limits the creation of value chain that is
beneficial to socioeconomic development.
169
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
themselves and not the government). For instance, the Daily
Champion (October 15, 2010), cited by Federal Inland Revenue
Service (FIRS),: According to the paper, residents of Aba have
flayed the increasing menace of touts, parading themselves as
government tax agents to extort unsuspecting persons.
10. Display of lawlessness in the process of tax collection contrary to
the procedures laid down in the relevant tax laws for tax
collection, some states and local governments utilize the services
of security personnel and thugs to force taxpayers to pay taxes
and levies. Sometimes business premises are shut down without
prior notice or court order (Bassey, 2013).
TAX HARMONIZATION
Tax Harmonization is the act of making taxes identical or at least
similar in a region.
According to Lymera (2002), the question of tax harmonization
concerns the conflict between the demand for different tax policies
across countries and the pressure fo r tax uniformity that arises because
economies are highly integrated due to international mobility of
capital, goods and services, and perhaps, labours. The question would
not arise if economies were segregated so that differences in the tax
system were irrelevant (except perhaps through a “demonstration
effect”), nor would it arise if there were no incentives for countries to
have different tax systems.
In European Union, Tax harmonization as a process of approximation
of national tax systems of Member States has been focused first of all
on harmonization of indirect taxes (value added tax and excise duties)
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MULTIPLICITY OF TAXES IN NIGERIA
and later on harmonization of direct taxes (recent last decades on
corporate taxes through CCCTB – Common Corporate Consolidated
Tax Base). (Schon, 2003)
The following countries are practicing the harmonized tax system:
1. European Union Countries – on VAT
2. Canada – Harmonized Sales Tax (HST)
3. USA
4. Greece
Despite this trend towards this economic integration, national
governments maintain the viewpoint, possibly an illusion, of setting
independent tax policies, although the constraints imposed on such
policy making by international considerations have been increasingly
recognized.
Among the most important pressures for tax harmonization in the
presence of economic integrations are the followings:
a) International mobility of factors and income
b) Overlapping tax jurisdictions
c) International Tax avoidance and tax arbitrage
d) Strategic consideration in the setting of tax policies
THE BENEFITS OF TAX HARMONIZATION
1. It leads to Production Efficiency
2. Avoidance of Tax Arbitrage
3. Simplicity of Tax Administration and Compliance
4. Avoidance of multiple taxation
5. Avoidance of tax competition
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
RECOMMENDATIONS ON ERADICATING MULTIPLE
TAXATION
Based on the implications of multiple taxation as examined by this
paper, the following recommendations are made:
1. The Joint Tax Board in the course of discharging its statutory
functions should embark on new mass awareness campaign on
tax compliance and to advise Federal Government to prevail on
the state and local governments to desist from collection of
multiple taxation from organizations and individuals.
5.
The governments (Federal, State and Local) should develop a
strong base for taxpayers, streamline collection mechanism and
stop multiple taxes which is a reprieve to the industrial sector and
the entire economy.
6.
Undergoing a critical review of the basis of the division of taxing
powers in Nigeria under the Constitution as a way that will
guarantee the ability of each level of government to raise its
independent revenue to meets its responsibilities.
7.
The States should make available to the local governments all the
revenue from the Federation Account and fund the activities of
the local governments
8.
Ensure that the Ministry of Local Government and the House of
Assembly play their oversight functions very well on the
activities of the local government.
9.
Pronouncing a directive that makes the use of tax consultant by
any tier of government illegal and arresting those who are
involved in collection of taxes that are not backed by any law.
2.
3.
4.
The Joint Tax Board should embark on public enlightenment in
respect of multiple taxation to educate taxpayers to know what
they are supposed to pay and what they should not pay, if they are
asked to pay something that is not backed by the law, they are free
to enforce non-payment by going to the court.
The Joint Tax Board and the committee set up by the National
Economic Council (NEC) should find workable solution to the
problem of multiplicity of taxes. This could be achieved by
engaging all stakeholders and legislative provisions in a holistic
discourse in order to enable them understand the magnitude and
dimensions of the problem and come out with recommendations
that will help Nigeria to have a more investment-friendly tax
regime.
The Joint Tax Board and Committee should approach the task
with a multipronged strategy such that barriers to a harmonized,
easy to administer tax regime are eliminated at the three tiers of
government particularly the state and local governments in the
country.
173
10. To induce voluntary compliance, the government should be more
responsive to the welfare needs of the citizens. The Nigerian tax
system can effectively generate more revenue if only the citizens
have the trust and confidence in the authority. For example, Lagos
state in the recent time is generating huge revenue due to the fact
that many corporate bodies and individuals feel that they can
visibly feel the development impact of their contributions.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
MULTIPLICITY OF TAXES IN NIGERIA
11. There should be a harmonization of all the different taxes
according to the approved list of taxes collectible by each tier of
government to minimize multiple tax practices in Nigeria. In
addition, there should be collaboration among different
government agencies and parastatals on tax administration.
c.
Both taxes will concentrate on the formal sector of the economy;
d.
Each State will have a tax authority while there will be a federal
tax authority to take care of the Federal Capital Territory (FCT);
e.
12. Following the recommendations of the 2003 Study Group with
possibly some modifications to reflect the realities of the present
time.
Both taxes will be administered in each State by the state tax
authority while the federal tax authority will administer both at
the FCT,
f.
Local government will have no taxing power in the new tax
system;
An Overview of the Recommendations of The 2003 Study Group – A
new tax system
As enshrined in the Main Report of the Study Group on the Nigerian
Tax System in Nigeria Tax Reform in 2003 and Beyond, the Study
Group recommended that:
All the existing taxes in Nigeria should be abolished and replaced by
only two taxes (a unified tax administrative structure for Nigeria)
imposed at the rate of 10 per cent
i.
Income tax (covering both individuals and corporate entities) and
ii. Expenditure tax (covering all expenditures).
The features of the proposed taxes are as follows:a. Both taxes will be internal and there will be no external taxes of
whatever description, for example, import duties, export duties,
etc. Non-tax measures will be relied upon for anti-dumping
purposes;
b.
The liability for income tax will be determined by residence of
taxpayers while that of the expenditure tax will be determined by
location of spending;
175
The new tax system is predicated in the following argument.
i.
Those taxes of all description are ultimately on either income or
expenditure. The argument is that it makes for simplicity to have
two broad-based taxes instead of having a bewildering number of
mushroom taxes that produce little or nothing;
ii.
Broad-based income and expenditure taxes will be more difficult
to evade;
iii.
While some of the existing taxes are not significant sources of
revenue they continue to contribute to administrative cost;
iv.
Complex tax system may benefit tax consultants but it is a drain to
taxpayers and economy;
v.
It will remove the problem of multiplicity of taxes at the local
government level;
vi.
Allowances, exemptions, concessions, waivers, tax holidays and
other such preferential devices not only make taxes unduly
complex, they also create enormous avenues for abuse,
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
corruption, tax avoidance, avoidable increase in the cost of
administration, and
vii. The exemption of informal sector is justified on the basis that the
operators are atomistic in scale and keep no record. Their
exemption does not mean that they will escape taxation
altogether as they will pay expenditure tax when they enter the
formal sector to make purchases and buy at prices which already
reflect expenditure tax.
The Constitution will be amended to accommodate the new tax system.
Also, a Technical Committee was recommended to be set up to work
out the details of the new system.
Perhaps due to the radical nature of the proposal, its effect on
entrenched interests and the general reluctance to change, the above
recommendations were rejected by the Federal Government.
Against this background, the far reaching recommendations by the
2003 Tax Study Group are worth reconsidering with necessary
modifications to reflect the realities of the present day economy.
SUMMARY AND CONCLUSION
No doubt, 'taxation is a sure revenue-generating tool, an important
stabilization policy tool and a unique instrument for enhancing
economic growth and development' (Musgrave & Musgrave, 2006).
Hence, this study revealed that the presence of multiple tax practices in
Nigeria significantly affect taxpayers' compliance attitude. It equally
revealed that the Nigerian tax system at present is characterized with
multiple tax practices, illegalities, corruption and multi-faceted
complexity.
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MULTIPLICITY OF TAXES IN NIGERIA
The issue of multiple taxations was examined in this paper. Various
literatures in respect of multiple taxations evolution especially in
Nigeria were examined. Double taxation which is often mixed up with
multiple taxations was clarified. The causes and implications of
multiple taxation were discussed. The Taxes and Levies (Approved
Rates for Collection) Act, 2004 (as amended) clearly stipulates the
types of taxes collectible by the three tiers of government but caution
was thrown to the winds and all sort of fees and taxes were introduced
in attempt to increase their revenues. Brutal forces were used to collect
these unauthorized taxes and where construction is ongoing, stop work
orders are issued.
Multiplicity of taxes was viewed in the light of tax compliance and tax
yield and it was critically seen that both are affected by the lingering
and awful practice. With the various types of taxes being collected by
all government agencies in the country, the environment is clearly not
conducive to investors. Hazardous and tempestuous climatic business
conditions were created in the economy much than could be borne by
present and potential investors.
Furthermore, other findings of this study proposed that multiple tax
practices in Nigeria are corollaries of poor tax administration as well as
corruption, greed on the part of tax officials and unfavorable revenue
allocation formula among the three tiers of government. Moreover, this
study offers some recommendations that when carefully considered
and followed through, multiple taxation will be a thing of the past and
our tax policies and administration will run smoothly.
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MULTIPLICITY OF TAXES IN NIGERIA
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IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
CHAPTER EIGHT
IMPACT OF VALUE ADDED TAX ON ECONOMIC
GROWTH IN NIGERIA
MUHIBUDEEN Latifat and ABDULKADIR Abba Hafiz
Department of Accounting
Yusuf Maitama Sule University, Kano - Nigeria
±2348030487274; ltmltmltm@yahoo.co.uk
ABSTRACT
The study aimed at assessing the impact of value added tax on
economic growth in Nigeria. Secondary data was employed in the
study. The Data were analyzed using descriptive statistics, correlation,
linear regression analysis and simple percentage in which two
hypotheses were tested in null form. The result of the analysis was
tested at 5% level of significance. As a model of logical sequence, the
research design adopted for this study is the time serial data analysis
research design. The choice of this design is hinged on the nature of the
study. The data were extracted from Central Bank of Nigeria statistical
bulletins, Nigeria Bureau of Statistics publications and World Bank. It
covers the period of eighteen years (18) years from 2001 2018.The
finding of the study shows VAT has significant effect on Gross Domestic
Product a measure for the Economic growth in Nigeria. Therefore, this
hypothesis was not supported. The study recommends that Nigerian
Tax Authority should improve tax revenue collection as improving it
would translate to improved GDP visa vis the Nigerian economy since
the result shows positive and significant relationship between the two.
Key Words: VAT, GDP, ECONOMIC, GROWTH
185
INTRODUCTION
Taxation is one of the most important revenue generation mechanisms
in any given economy. It is one of the main sources of government
revenue; which is obtainable from different sources. Government has
the mandate to impose tax via its various regulations. An efficient and
effective tax system is capable of ensuring the basic necessities and
services in the country. Taxes are used to achieve economic growth,
achieve equity in income and wealth distribution and maintain
equilibrium in the economy. Taxes are not only the most traditional
means through which governments generate revenue; they are also the
most reliable and predictable. One of these taxes is Value Added Tax
(VAT) (Nasiru, Haruna &Abdullahi, 2016). Traditionally, taxes are
classified into direct and indirect taxes. Direct taxes are those type of
taxes in which its liability is determined with direct reference to the tax
paying ability of the taxpayer like, “personal income tax, company
income tax, petroleum profit tax, capital transfer tax, capital gains tax,
inheritance tax, wealth tax”, etc; while in the case of indirect taxes such
an ability to pay is assessed indirectly. Examples of indirect taxes in
Nigeria include entertainment tax, and the subject of this study: Value
Added Tax (VAT), which replaced the sales tax. Appah (2010).
Value Added Tax (VAT) is an indirect tax levied on goods and/or
services as a percentage of their value added. The consumer pays VAT
on purchases in addition to the normal prices; the seller then pays the
government the value of the VAT collected on sales less VAT they have
paid on purchases inputs. VAT is levied in many countries. It was
introduced in Nigeria on the 1st of January 1994 under Decree 102 of
1993. In developing countries, VAT has become a major source of
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
revenue; it has become an important contribution to total government
tax (Ajakaiye, 2000). The impressive performance of VAT in virtually
all countries where it has been introduced clearly influenced the
introduction of VAT in Nigeria (Omokhuale, 2016).
the level of impact value added tax has on the Nigerian economy. The
data used for this study were extracted from Central Bank of Nigeria
statistical bulletins, Nigeria Bureau of Statistics publications and
World Bank. The paper is divided into five sections. Section one
introduce the study, section two reviewed related literature, section
three discussed methodology and section four presented the results,
while five concluded and provided recommendations for the study.
Value added tax has been adopted by several countries of the world
because of the growing concern about economic efficiency and tax
simplicity in a competitive and integrated world economy. The
undisputed contribution of VAT to total government revenue in
countries where it has been in existence influenced the government
decision in 1993 in Nigeria to introduce VAT to replace the sales tax
which has been in existence prior to the time. The Federal Inland
Revenue Service (FIRS) stated that VAT is easy to administer and of
course very difficult to evade. Despite the contributions and huge
revenue generated through VAT, the federal, state and local
governments complain of insufficient fund to embark on projects and
the citizens have always lamented of poor infrastructural facilities,
unemployment, low capita income etc which have resulted to poor
standard of living, crime rate and other social problems has been on the
increase. Nigeria is still listed and regarded as a third world country. A
situation of this nature entails asking, what is the relationship between
VAT and Gross domestic product. However, Extensive studies have
been done on various aspects of the operation of Value Added Tax
(VAT) in Nigeria but not much appear to have been done in study VAT
contribution to GDP in the recent time.
The aim of the study was to analyze the value added tax (VAT) and its
impact on the Nigerian economy covering the period from 2001-2018.
This period is considered enough to provide useful result to ascertain
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LITERATURE REVIEW
This section of the study is divided into three sub-sections, conceptual
framework, review of related empirical studies and theoretical
framework; the conceptual framework present issue in VAT in general,
the review of related empirical studies present empirical literature
related to the study and the theoretical framework theories relevant to
the study.
Conceptual Framework
This sub-section reviews the concept of economic growth, Value
Added Tax (VAT) and traces the background Administration of VAT in
Nigeria. Value Added Tax (VAT) is a type of consumption tax that is
placed on a product whenever value is added at a stage of production &
at final sale (Kamruddin-parvez, 2012). VAT is a consumption tax
levied at each stage of the consumption chain and borne by the final
consumer of the product or service. Each person is required to charge
and collect VAT at a flat rate of 5% on all invoiced amounts, on all
goods and services not exempted from paying VAT, under the Value
Added. Bird (2016) defined value added tax as a multi stage tax
imposed on the value added to goods and services as they proceed
through various stages of production and distribution and to services as
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
they are rendered which is eventually borne by the final consumer but
collected at each stage of production and contribution chain.
textile, clothing, carpet and rug, beer, wine, liquor, soft drinks, treated
water, cigarette and tobacco, vehicles and their spare part excluding
commercial vehicles and their spare parts, perfumes and cosmetics
(including toiletries), soap and detergent, mining and mineral, office
furniture and equipment, electrical materials of description.
Therefore, VAT is simply a levy on goods and services that provide
additional value to the final consumer of such good and services.
Administration of VAT in Nigeria
VAT Act of 1993 (then Decree) section 7(2) states that VAT shall be
administered and managed by the Federal Board of Inland Revenue
(FBIR) but shared by the three tiers of government in Nigeria from
1999 to date as follows: Federal Government 15%, State Government
50% and Local Government 35%. To ensure VAT's effective
administration, certain amendments were made on the existing tax
structures in Nigeria. According to Odusola (2006) the amendments
includes inter alia: Reduction of the personal income tax burden
through increased tax allowances, and reduced tax rates, Monetization
and taxation of fringe benefits, Deduction of R & D expenditure from
the gross earnings of companies, Extension of tax-free status to
companies in rural areas and granting of incentives based on the
infrastructure available in the areas, Reduction of company tax rate
from 40 to 35 percent and subsequently to 30 percent and Payment of
petroleum profit tax in dollars.
Taxable Goods and Services
The under listed are the taxable goods and services under Decree 102 of
1993 (Oyebanji, 2010).
Goods: All goods manufactured and assemble in Nigeria, goods
imported into Nigeria, second hand goods, household furniture and
equipment, petroleum and petroleum products, jewel and jewelry,
189
Services: All services rendered by financial institutions to their
customers, accounting services, the provision of report, advice,
information or similar technical service in the following areas:
Management, financial and taxation, Recruitment, staffing and
training, Marketing research, Public relation and Advertising
Exempted Goods and Services
Goods: Medical and pharmaceutical products, basic food items, books
and educational materials, baby products, newspapers and magazine,
commercial vehicles and their spare parts, agricultural equipment,
products and veterinary medicine
Service: Medical service, service rendered by peoples and community
banks and mortgage institutions (Tabansi, 2011).
Concept of Economic Growth
Economic growth refers to the increase in output of an economy's
capacity to produce goods and services needed to improve the welfare
of the citizens of the country (Jibir & Babayo, 2015).Jhingan (2003)
posits that economic growth as the process whereby the real per capital
income of a country increases over a long period of time, and is
measured by the increase in the amount of goods and services produced
in a country. Zhattau (2013) is of the view that economic growth is the
basis of increase prosperity and it comes from accumulation of more
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
capital and innovations which lead to technical progress, this idea is
similar to Saleemi (2005) growth model who sees economic growth in
terms of growth in total GDP due to increase in population, technical
progress and investment. Economic growth is overtime increase in the
ability to provide economic goods to a populace in a particular country
(Silman, 2014). Udoffia & Godson (2016), highlights that Economic
growth implies the expansion of a country's productive capacity. It
refers to an increase in the amount of goods and services produced in a
country over a period of time. Also Salami, Apelogun, Omidiya &
Ojoye (2015) describes economic growth as the sustained increase in
per capita national output or net national product over a long period of
time. According to them, economic growth occurs when a nation's
production possibility frontier shifts outward. This study however,
view Economic growth as mainly enhanced by the expansion of
infrastructural facilities, the improvement of education and health
service, the encouragement of foreign local investments, low cost
housing, environmental restoration, and the strengthening of the
agricultural sector. The approach consists of simulating the economy
by addressing the nations forecast needs.
Onaolapo, Aworemi & Ajala (2013) examined the impact of value
added tax on revenue generation in Nigeria. Secondary Source of data
was sought from Central Bank of Nigeria statistical Bulleting (2010),
Federal Inland Revenue Service Annual Reports and Chartered
Institute of Taxation of Nigeria Journal. Data analysis was performed
with the use of stepwise regression analysis. Findings showed that
Value Added Tax has statistically significant effect on revenue
generation in Nigeria.
Empirical Review
Fredrick & Okeke (2013) examined the impact of value added tax on
investment growth in Nigeria. Time series data on investment,
government expenditure, real exchange rate, real interest rate and trade
openness from the central bank of Nigeria statistical Bulletin (CBN)
were analyzed, using multiple regression analysis. The results showed
that Value Added Tax has significant effect on investment growth in
Nigeria.
191
John & Suleiman (2014) investigated the impact of value added tax on
the economic growth of Nigeria. Ordinary Least Square technique was
employed to test the hypotheses formulated. The result showed that
VAT contributes significantly to the total tax revenue of government
and by extension the economic growth of Nigeria. VAT revenue growth
had consistent increase though it was not that explosive.
Madugba & Joseph (2016) examined the relationship between Value
added tax and Economic development in Nigeria. The study covered
18 years period between 1994 and 2012. Multiple regressions were
used to analyse the data gotten from Central Bank of Nigeria (CBN)
Statistical Bulletin of various years. The result of the multiple
regressions showed a negative significant relationship between value
added tax revenue and Gross domestic product. Also, the result showed
a positive significant relationship between Gross domestic product and
Total consolidated revenue.
Nasiru, Haruna & Abdullahi (2016) examined the impact of VAT on the
level of economic activities in Nigeria from its inception to 2014. The
study used secondary data which was analyzed using Johansen (1988)
co-integration test. The quarterly data ranged from 1994 Q4 to 2014
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
Q4. The study found evidence of a significant positive impact of VAT
on economic growth. In the same vein, other government revenues,
which included all oil receipts and other receipts into the federation
account other than VAT, were also found to be positively related to
economic growth during the study period.
Theoretical Framework
Omokhuale (2016) evaluated the contribution of Value Added Tax
(VAT) to Nigeria economy from 2000 - 2012. Data were collected from
Central Bank of Nigeria (CBN) statistical bulletin and Federal Inland
Revenue bulletin. Ordinary Least Square techniques were used to
estimate the model, which revealed a strong positive significant
relationship between Value Added Tax and Nigeria economy. Thus,
VAT has a significant impact on economic growth, OTR benefits Gross
Domestic Product. Thus, VAT has a significant impact on economic
growth in Nigeria and in total tax revenue.
Safiyya (2017) investigated the impact of value added tax on the
economic growth of Nigeria. Ordinary Least Square technique was
employed to test the hypotheses formulated. The finding of the study
shows GDP has significant effect on VAT. Therefore, this hypothesis
was not supported. Therefore the study recommends that Nigerian
economy should consider total tax revenue as the means of improving
Nigerian economy since the result shows positive and significant
relationship.
All the studies even though similar in approach vary in their outcome,
require further more current study to validate or debug the existing
research
193
Theories of Taxation
The theory of VAT can be traced to the works of Wilhelm von Siemens,
who proposed it as an alternative to the German turnover tax
(Onwuchekwa & Aruwa, 2014). Since VAT is a subset of the entire tax
system in Nigeria, it becomes imperative to look at the basic theories
surrounding taxation (Ofishe, 2015). The theories reviewed in this
study included the following: Expediency Theory and Benefit
Received Theory.
The Expediency Theory: This theory was posits that every tax proposal
must pass the test of practicability. It must be the sole consideration
weighing the authorities in choosing a tax proposal. Economic and
social objectives of the state as effects of a tax system should be treated
as irrelevant. According to Adam (1776) cited in Adam Smith Institute,
every tax proposal must pass the test of practicality and that must be the
only consideration government authority should consider in choosing a
tax policy.
The Benefit Received Theory: This theory holds that individuals
should be taxed in proportion to the benefits they receive from the
governments in public services and that taxes should be paid by those
people who receive the direct benefit of the government programs and
projects out of the taxes paid. It was developed in the seventeenth
century by English philosophers Thomas Hobbes (1588-1679) and
John Locke (1632-1704), and Dutch jurist Hugo Grotius (1583-1645)
(Saleemi, 2005).
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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Therefore, this study adopt the benefit received theory as this can be
easily linked to the benefits VAT payers get for paying VAT in exchange
for economic growth in the form of improve GDP.
Meade's Neo classical model of economic growth: Okoye, & Gbegi,
(2013) posited that Professor J.E. Meade constructed a neo-classical
model of economic growth which is designed to show the way in which
the simplest form of economic system behave during a process of
equilibrium growth. In the model, the net output produced depends
upon four factors: (i) the net stock of capital available in the form of
machines. (ii) the amount of available labour force. (iii) The
availability of land and natural resources, and. (iv) the state of
technological knowledge which continues to improve through time.
Theories of Economic Growth
The emergence of economic growth theories can be traced back to
Adams Smith's Wealth of Nations. In Smith's view, economic growth
of a nation strictly speaking, 'wealth of Nations' depends on the
division of labour and is limited by the limits of division of labour. The
Smithian view was later superseded by the view of Richardo, Malthus
and Mill. The growth theories suggested by these great economists are
collectively called classical theory of economic growth. And then,
during the nineteen thirties and forties, R.F. Harrod and Dumar
developed a path breaking theory of economic growth-the capital
accumulation theory of economic growth, popularly called HarrodDomar growth model. The theories of economic growth can be
examined under the Harrod-Domar theory of growth, Kaldor model of
distribution, Pasinetti model of profit and growth, Joan Robinson's
model of capital accumulation, Meade's Neo Classical model of
economic growth and the Solow model of long run growth. The above
models of economic growth or theories are reviewed as follow:
Harrod-Domar Theory of Growth: The Harrod Domar models are
based on economic growth on the experiences of advanced economists.
They are primarily addressed to an advanced capitalist economy and
attempt to analyze the requirements of steady growth in such an
economy. Harrod -Domar assign a key role to investment in the process
of economic growth. But they lay emphasis on the dual character of
investment.
195
The Solow model of long-run growth: The neo-classical model was an
extension to the 1946 HarrodDomar model that included a new term:
productivity growth. Important contributions to the model came from
the work done by Solow and by Swan in 1956, which independently
developed relatively simple growth models. Solow's model fitted
available data on US economic growth with some success. In 1987
Solow was awarded the Nobel Prize in Economics for his work.
The above theories are in consonance with the assumption of economic
growth in this study, consequently they are theories adopted for the
study
METHODOLOGY
This section deals with the methods used in collecting, analyzing and
interpreting the data for the study.
Research Design
As a model of logical sequence, the research design adopted for this
study is the time serial data analysis research design. The choice of this
design is hinged on the nature of the study.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
Population of the Study
The population of the study is government tax revenue from VAT, the
total tax revenue and gross domestic product as published in various
government financial reporting bulletin from the years 2001-2018.
two variables. The main objective of this method of determining
correlation is to find out the extent to which two sets of ranking are
similar or dissimilar (Tahir, 2012). For the purpose of this study
Pearson correlation coefficient was used in other to determine the
relationship between the values added tax (VAT) and Nigerian
economy.
Sample Size and Sampling Techniques
The sample size covers the period from 2001- 2018 pooled for 18 years.
For the purpose of this study, purposive sampling technique is adopted
in the selection of the sample, because it is considered most appropriate
for a research of this nature based on the knowledge of the population,
in line with the purpose of the researcher.
Sources and Method of Data Collection
The researcher used secondary source of data for the purpose of this
study. The data were extracted from CBN statistical bulletins, NBS
publications and World Bank covering 18 years from 2001-2018.
Techniques of Data Analysis
For the purpose of presentation and discussion of the result of data
generated in the course of this research, the following analyses were
carried out.
Regressions
This is a technique of determining the impact of independent variable
on the dependent variable. The relationship is expressed as an equation
that predicts a response variable from a function of regressor and
parameters (Tahir, 2012). For this study the ordinary least square
technique was used to analyze the value added tax (VAT) and its impact
on the Nigerian economy. Hence the model is:
In GDP = b0t+ b1 In VATt + b2 In TGRt +mt
Where, VATt = Value added tax during period t
GDPt = Gross domestic product during period t
TGRt = Total government revenue within the sample period
mt = Error term.
Descriptive Statistics
The descriptive statistics were employed to organize and summarized
the data with a view of reducing the cumbersomeness and making it
meaningful and comprehensive (Tahir, 2012). In this study, the
descriptive statistics used are mean, standard deviation, minimum
values and maximum values.
This section presents and discusses the result of the data analysis. The
section starts by presenting the data and analysis of the results obtained
from descriptive statistics in tabular form followed by correlation
analysis result and regression result.
Correlation
This is a technique of determining the degree of relationship between
Discussion of Results
The descriptive statistics shows the mean and standard deviation of the
197
DATA ANALYSIS AND RESULT DISCUSSION
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
each independent variable from the mean and standard deviation of the
dependent variables
Correlation result
Table 4.1 Descriptive Statistics of Explained and Explanatory
Variables
Variable
Obs
Mean
Std. Dev. Min
Max
YEARS
18
2009.5 5.338539 2001
2018
TGR
18
1192662 359081.4 793699
1977142
VAT
18
5.0009
5.8009
1016974
1.9410
GDP
18
6.2607
1.2308
74176
3.9408
Source: Researchers computation 2018
Table 4.1 depicts a descriptive statistics result of the dependent and
independent variables. A total of 18 observations were recorded. The
table depicts the mean and standard deviation with minimum and
maximum range of the dependent and independent variables. The
dependent variable GDP (Gross Domestic Product) has a mean of
6.2607at a maximum point of 3.9408and minimum point of 74176 with
standard deviation of 1.2308 which shows that there is much variation
between the Variables. Value added tax has a mean of 5.0009 at a
maximum point of 1.9410 and minimum point of 1016974 with
standard deviation of 5.8009 showing that there is much variation on
value added tax. The Total government revenue within the sample
period (TGR) has a mean of 1192662 at a maximum value of 1977142
and minimum of 793699 with standard deviation of 359081.4 which
shows that there is much difference in the variable.
Variables
GDP
VAT
TGR
GDP
1.0000
0.7911
0.7642
VAT
TGR
1.0000
0.8651
1.0000
Sources: Researchers computation 2018
Table 4.2 shows the correlation results of dependent variables GDP and
the independent variables VAT and TGR. The relationship between the
dependent variable GDP and independent variable VAT is positive with
a value of 0.7911 which shows that the higher the VAT the higher the
GDP. That is for every 79Kobo increase in VAT, the GDP is likely to
increase by N1.The relationship between GDP as the dependent
variable and TGR as independent variable positive with a value of
0.7642 this elucidates that all things been equal the higher the TGR the
higher the GDP. That is for every 76Kobo increase in TGR the GDP is
likely to increase by N1.
Regression Analysis
GDP
VAT
TGR
_cons
R-square
Coef.
.0109787
108.8792
-1.2208
0.6511
Std. Err.
.0064612
104.3796
9.9607
t
1.70
1.04
-1.23
P>t
0.110
0.313
0.239
[95% Conf.
-.002793
-113.6006
-3.3408
Source: Researchers computation Using Stata version13.0, 2018
Table 4.3 depicts the regression results of the model. The model
consists of dependent variable (GDP) and independent variables (VAT
199
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
and TGR). The impact of independent variable VAT on dependent
variable GDP is positive with coefficient value of .0109787, explaining
that an augment in VAT while other variable remain constant will lead
to a rise in GDP by over 100%:
insignificant relationship between TGR and GDP. Consequently, the
null hypothesis raised which state:
The impact of independent variable TGR on dependent variable GDP is
positive with coefficient value of 108.8792, explaining that an augment
in TGR while other variable remain constant will lead to a rise in GDP
by over 100%. The multiple coefficient of determination R-square is
0.6511, this means that 65.11% change in GDP was due to changes in
independent variables VAT and TGR while the 35.99% was caused by
other factors not mentioned in the model.
H02:
revenue (TGR) and gross domestic product (GDP) of Nigeria.
Where the result shows that, TGR has insignificant effect on GDP.
Therefore, this hypothesis was supported also.
However, the findings of this study is in line with the findings of
Omokhuale, (2016), Nasiru, Haruna and Abdullahi, (2016) revealing
that there is strong positive significant relationship between Value
added tax and Nigeria economy and also this study revealed significant
relationship between Value added tax and Nigeria economy.
Hypotheses Testing and Discussion of Findings
From the two (2) predicting variables, VAT and TGR have significant
impact on GDP. The relationship between GDP and VAT said to be
insignificant with a p-value of 0.110 this implies that, there is positive
and insignificant relationship between VAT and GDP. Therefore, the
null hypothesis raised which state:
1.
Ho1: There is no significant relationship between value added tax
2.
(GDP) on the total revenue (VAT) of Nigeria.
Where the result shows that, VAT has insignificant impact on GDP.
Therefore, this hypothesis was supported.
However, with regards to TGR as the last explanatory variable under
the study, results show positive and insignificant relationship with
GDP, at a p-value of 0.313. This implies that there is positive and
201
There is no significant relationship between total government
CONCLUSION AND RECOMMENDATION
On the basis of the literature review, data analysis and interpretation,
the researcher comes to the following conclusions;
There is positive and significant relationship between Total Tax
Revenue and Value Added Tax.
There is positive and significant relationship between gross
domestic product and value added product.
Based on the above conclusion, the researcher recommends that
Nigerian Tax Authority should improve tax revenue collection as
improving it would translate to improved GDP visa vis the Nigerian
economy since the result shows positive and significant relationship
between the two.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
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Tax and its Effects on Revenue Generation in Nigeria. International
Journal of Business and Social Sciences, 4(1): 220 – 225.
Adegbie, F. F., Jayeoba, O. &Kwabai, J., D. (2016). Assessment of
Value Added Tax on the Growth and Development of Nigeria
Economy: Imperative for Reform. Accounting and Finance
Research.'5(4).
Ajakaiye, O.D. (2000). Macroeconomic Effect of VAT in Nigeria: A
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Equilibrium Analysis. African Economic Research Consortium.
Nairobi: Kenya
Akhor, S. O. & Ekundayo, O. U. (2016). The Impact of Indirect Tax
Revenue on Economic Growth: The Nigeria Experience.
Igbinedion University Journal of Accounting,
Bassey, O.U.(2013).Company and Personal Income Tax of Nigeria.
Chartered Institute of Bankers Press, Lagos.
Chigbu, E. E. (2014). A Cointegration of Value Added Tax and
Economic Growth in Nigeria: 1994-2012. International Journal
of Management Sciences and Business Research.
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Dwivedi, D. N. (2004). Managerial Economics. 6 Ed: Vikas
Publishing House PVT Ltd., New Delhi.
Fredrick, O. A. &Okeke, M. N. (2013).Value Added Tax and
Investment Growth in Nigeria: Time Series Analyses. IOSR
Journal of Humanities and Social Science (IOSRJHSS).18(1).28-31.
203
Jhingan, M. L. (2003).Advanced Macroeconomic Theory
11thEd.Vrinda Publications (P) LTD Delhi.
Jibir, A. &Babayo, H. (2015).Government Expenditure and Economic
Growth Nexus: Empirical Evidence from Nigeria (1970-2012).
IOSR Journal of Economics and Finance (IOSR-JEF).6(2).6169.
John, C. O. & Suleiman, A. S., A. (2014). Value Added Tax And
Economic Growth in Nigeria. European Journal of Accounting
Auditing and Finance Research.2 (8).62-69.
Kamruddin-parvez, M. N. A. (2012). Effects of VAT and Tax on
Economy: An Analysis in the Context of Bangladesh. Research
Journal of Finance and Accounting, 3(7).64 – 70.
Kuznets, P., S. (1972). Characteristics of Modern Economic Growth.
Economics Exposed.com.
Madugba, J.U. & Joseph, U. B. A. (2016). Value Added Tax and
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Development and Economic Sustainability, 4(3)1-10.
Nasiru, M. G., Haruna, M., A. &Abdullahi, M., A. (2016). Evaluating
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IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA
Odusola, A. (2006). Tax Policy Reforms in Nigeria. The World
Institute for Development Economics Research (WIDER).
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of Value Added Tax (VAT). Advances in Environmental
Biology 6(2): 916 – 919.
Salami, G. O. Apelogun, K.H., Omidiya, O., M., &Ojoye, O., F.
(2015).Taxation and Nigerian economic growth process.
Research Journal of Finance and Accounting.Vol. 6(10), pp. 93101.
Ofishe, O. W. (2015). The Impact of Value Added Tax on Economic
Growth in Nigeria (1994 - 2012). Research Journal of Finance
and Accounting.6 (23).
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Okoye, E., J. &Gbegi, D., O. (2013). Effective Value Added Tax: An
Imperative for Wealth Creation in Nigeria. Global Journals Inc.
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Omokhuale, I. (2016). Evaluation of the Contribution of Value Added
Tax to the Nigeria Economy. EPRA International Journal of
Economic and Business Review. 4(2): 1 – 16.
Onaolapo, A. A., Aworemi, R., J. &Ajala, O. A. (2013). Assessment of
Value Added Tax and Its Effects on Revenue Generation in
Nigeria. International Journal of Business and Social
Science.4(1).
Onwuchekwa, J. C. &Aruwa, S., A., S. (2014). Value Added Tax and
Economic Growth in Nigeria. European Journal of Accounting,
Auditing and Finance Research, 2(8):62-69.
Saleemi, N. A. (2005). Taxation I Simplified. (5 ed). Saleemi
Publications Limited, Nairobi.
Salman, A. Y. (2014). Value Added Tax and Economic Growth of
Nigeria: An Empirical Investigation. Unpublished Master's
Thesis Presented to the Department of Accounting, Faculty of
Business Administration, Imo State University, Owerri Nigeria.
Sanni, A. (2012). Current Law and Practice of Value Added Tax in
Nigeria. British Journal of Arts and Social Sciences.5 (2):186 –
201.
Safiyya (2017).The Impact of Value Added Tax on Economic Growth
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Kano
Udoffia, D. T. & Godson, J. R. (2016).The Impact of Federal
Peter, O., I. &Adesina, O., O. (2015).Indirect Taxes and Economic
Growth in Nigeria.EKON.MISAO I PRAKSA DBK.GOD
XXIV.2 :( 345-364).
Rostanmi, A. Nourbakhsh, F. &Akbarian, H. (2012). Impact of Fiscal
Policy on Economic Growth in Iran with Emphasis on the Role
207
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TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
CHAPTER NINE
TAX REFORMS AND SUSTAINABILITY OF SMALL AND
MEDIUM SCALE ENTERPRISES IN NIGERIA
HASSAN, T. A. and ADEBAYO Adegboyega
Department of Business Education,
Tai Solarin University of Education, Ijagun, Ogun State
hassantolani@gmail.com; +2348034777854
adebayoadegboyega64@yahoo.com;
+23408053538099; +2348094621702
ABSTRACT
The study examined the impact of tax reform on sustainability of small
and medium scale enterprises in Nigeria spanning between 1990 and
2017. Correlation research design was used. The contribution of SMEs
in RGDP was used as indicator for SMEs sustainability. Company
Income Tax and Value Added Tax were used as proxies of tax reforms.
The data was collected from Central Bank of Nigeria (CBN) statistical
bulletin (various issues). OLS was used to determine the impact of
explanatory variables on endogenous variable. Serial correlation test
was also conducted using Breusch-Godfrey Serial Correlation LM
Test. The findings indicated that there is direct relationship and impact
between tax reforms (Value Added Tax and Company Income Tax) and
SME sustainability. It was recommended that effort should be made to
intensify and sustain the tax reforms in Nigeria. Two critical areas that
must be looked into are the multiplicity of taxation and the high
corporate income tax. Tax reform should be conscientiously directed
towards SME investment stimulation in Nigeria.
209
Keywords: Tax Reforms, Value Added Tax, Company Income Tax,
SME Sustainability
Word Counts: 177
INTRODUCTION
The sustainability of small and medium scale enterprises have been of
concerned to collective authority around the world particularly
developing nations, Nigeria included. Successive governments in
Nigeria have shown interest in supporting small and medium scale
enterprises (SMEs) by policies formulations and establishment of
various schemes and specialized financial institutions to provide
suitable financial support and policy directives to the sector. The
promotion of small and medium scale enterprises by governments is
based on the recognition, that a strong, successful and growing small
and medium enterprises sector is credible bedrock of growth and
development for any country. However, in spite of efforts by the
government to ensure the growth of SMEs in Nigeria, the sector is
counter affected by other key factors, which require keen attention. The
role of government is to create the rules and frameworks in which
businesses are able to operate favorably in the society but from time to
time government changes these rules and frameworks, thus creating
room for more taxation on businesses and thereby, forcing businesses
to change the way they operate. SMEs are thus acutely affected by
government policies. To this extent, tax reforms that reduce the tax rate
and eschew multiplicity of taxation will not only improve the
investment climate, but leverage investment capacity by beefing
internal fund for SMEs. Tabet and Onyeukwu (2019) stated that tax
reforms are designed to serve three functions. They are: amendatory
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
function, the innovative function and the revenue function. While the
amendatory role attempts to correct weakness in the tax system, the
innovative function attempts to introduce something new in the tax
regime and the revenue role attempts to beef up public tax generated
revenue by broadening the tax base and preventing tax evasion and
avoidance. Even, the extent to which these functions sustained small
and medium scale enterprises (SMEs) in Nigeria yet to be ascertained.
i.
Statement of the Problem
Despite previous government policies in Nigeria, SMEs are subjected
to several tax levies at all the levels of government. This has the
concomitant outcome of raising cost of production, making locally
produced goods loose international competitiveness and prevent interstate commerce. It has been observe that the corporate income tax rate
is so high that it creates investment disincentive effect, since it erodes
private investment profit. In Nigeria, the investment rate has been so
low with investment constituting less than ten percent of the GDP. It
has been a great concern to all and sundry to promote the welfare of
SMEs and that the vital sub –sector has fallen short of expectation. The
situation is more disturbing and worrying when compared with what
other developing and developed countries have been able to achieve
with their SMEs. This study is an attempt to examine the impact of tax
reform on sustainability of small and medium scale enterprises in
Nigeria.
Purpose of the Study
The main purpose of the study was to examine the impact of tax reform
on sustainability of small and medium scale enterprises in Nigeria.
Specifically, the study examined the:
211
ii.
Impact of Company Income Tax on small and medium scale
enterprises.
Impact of Value Added Tax on small and medium scale
enterprises.
Questions
i.
What is the impact of Company Income Tax on small and medium
scale enterprises?
ii. What is the impact of Value Added Tax on small and medium
scale enterprises?
Hypotheses
Ho1: There is no significant impact of Company Income Tax on small
and medium scale enterprises in Nigeria.
Ho2: There is no significant impact of Value Added Tax on small and
medium scale enterprises in Nigeria.
Empirical Evidence
Tabet and Onyeukwu (2019) examined the impact of multiple- taxation
on small and medium scale enterprise finance performance in Nigeria,
particularly Abuja metropolis. A total of two hundred (200)
questionnaires were administered. The hypotheses were tested using
ANOVA (analysis of variance) at 5% significance level. It was found
that the majority of the respondents strongly agreed with all the
questions posed with regards to the effects of multiple- taxation and
disproportionate multiple- taxation on the finance performance of
SMEs in Abuja. The study concluded that there is strong correlation
between Multiple-taxation and the financial performance of SMEs in
Abuja, Nigeria; there is also strong correlation between
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
Disproportionate multiple taxation practices constitute a major
challenge in the budgetary and planning performance of SMEs in
Abuja, Nigeria.
each variable to the growth effect of SMEs. The study found that there
was a significant correlation between taxation and SMEs' growth.
Udofot and Etim (2017) examined the relationship between tax
policies evidenced by tax revenue and SMEs contribution to economic
development of Nigeria from 1980-2015. It was motivated by growing
importance of SMEs following the importance they weird in the area of
employment, utilization of resources, development of managerial and
entrepreneurial skills, linkage effect between sectors, among others.
Data for the study were extracted from CBN Annual reports and
accounts for GDP which proxy Economic growth and Federal Inland
Revenue Service (FIRS) on tax components. The analyses were carried
out using correlation and regression analysis with results showing
standard coefficient. The overall correlation coefficients (r) show
0.997, coefficient of determination (r2) 0.995, R2 -adjusted 0.994
implying a strong positive relationship between the variables studied.
Feyitimi, Odelabu, Lawal and Obisesan (2016) examined tax
incentives and the growth of SMEs in developing economy. The study
employed descriptive design, thus, primary data was collected on
variables contributing to tax influence and their effect on the growth of
SMEs. A sample of 100 respondents representing a percentage of
targeted population enterprises in the production sector of Osun State
Industrial area was selected through Stratified and Simple Random
Sampling techniques. Data collected through questionnaires,
interviews and observations when necessary was analyzed using
ordinary least square regression model to estimate the contribution of
213
Nwokoye and Rolle (2015) examined the investment implication of the
series of tax reforms in Nigeria, particularly the tax reforms of 2003
and National tax policy of 2012. Annual time series data spanning the
years (1981-2012) were utilized. Preliminary diagnostic test was
conducted to examine whether the estimated model satisfies the OLS
assumptions. The result of the estimated OLS model shows that tax
reform as proxies by VAT and CIT, both positively and significantly
stimulates investment in Nigeria.
Erajbhe and Omoye (2014) examined the effect of SME characteristics
on tax compliance cost in Nigeria. Specifically, it investigates the
effect of Business age (LIFET), Outsourcing (OUTS), Employee size
(WRKS), Export status (FOT), Turnover (TURO), Industry class
(INDCLAS) and Distance to tax office (DISTANCE) on tax
compliance costs for Value Added Tax (VAT) in Nigeria. The study
utilized the survey research design using questionnaire as the research
instrument and primary data as the data type. The population consists
of all registered SME's in Nigeria as at the study period. A sample of
750 taxpaying SMEs across the six (6) geo-political zones of Nigeria
was used for the study and this was done using the purposive sampling
technique. 597 responses were received out of which 574 were
adjudged valid. Our analysis revealed that the effect of LIFT, TURO,
INDCLAS, DISTANCE and WRKS on Tax Compliance Costs of VAT
(CVAT) is negative while the effect of FOT and OUTSOURCING
appear to be positive. However, none of the variables appear to be
significant going by their t-ratios and this suggests that SME attributes
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
do not impact significantly on CVAT in Nigeria. The study concludes
that the porosity of the tax system coupled with the fact that the
activities of SME's in developing countries are domiciled within the
shadow economy may explain the insignificance of SME attributes in
determining and hence in predicting tax compliance costs.
This suggests that SME sustainability and tax reform may be directly
related.
METHODOLOGY
Presentation of the Results
SME = -1.378039 + 0.704363 VAT + 2.226481 CIT
(0.836407)
The study made used of correlation research design. Secondary method
of data collection was used. The contribution of SMEs in RGDP in
Nigeria was used as indicator for SMEs sustainability. Company
Income Tax and Value Added Tax were used as proxies of tax reform.
The data was collected from Central Bank of Nigeria (CBN) statistical
bulletin (various issues) spanning from 1990-2017. OLS was done to
examine the impact of explanatory variables on endogenous variable.
Meanwhile serial correlation test was also conducted using BreuschGodfrey Serial Correlation LM Test. In the light of the discussions in
previous sections the variables used in the specification of the model to
be tested empirically is specified in a functional form as follows:
SMES = f(VAT, CIT) …………………………………………. (i)
SMES = a + b VAT + c CIT + u ………………………………. (ii)
Where SMES = Small and medium enterprises sustainability, VAT =
Value Added Tax, CIT = Company Income Tax, u = stochastic
variables/terms, a, b. and c = parameters to be investigated.
A-Priori Expectation
This section predicts the likely relationship between exogenous and
endogenous variables of the study.
dSMES/dVAT
> 0 ………………………..… (iii)
dSMES/dCIT
> 0 …………………....………….. (iv)
215
(1.265883)
(-1.647570)
(1.266323)
(0.556420)
(1.758226)
R2 = 0.655086
Fstat = 23.74091
DW = 1.638294
R-2 = 0.627493
Serial Correlation Test
Breusch-Godfrey Serial Correlation LM Test
F-statisti c
0.130758
Prob. F(2,26)
0.8780
Obs* R-squared
0.358493
Prob. Chi-Square(2)
0.8359
INTERPRETATION OF THE RESULTS
The coefficient of the estimate parameters for Value Added Tax (VAT)
is 0.704363. This indicated that there is direct relationship between
Value Added Tax and SME sustainability which conformed to a-priori
expectation. This means about 70% variance in SME sustainability is
been accounted for by Value Added Tax. The standard error of Value
Added Tax is (1.265883) while half of the coefficient of the variable is
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
(1/2 x0.704363 = 0.3521815). Using the rule of thumb, since the half of
the coefficient of the variable (0.3521815) is less than the standard
error of the coefficient (1.265883), the variable is statistically
significant. The t-statistics calculated for SME sustainability is
(0.556420) while the t-statistics from the table (critical t-test) is
0.48256 at 5% level of significance. Since the t-calculated (0.556420)
is greater than the t-table (0.48256) at 5% degree of freedom, the null
hypothesis is hereby rejected and the concluded that there is significant
impact of Value Added Tax on small and medium scale enterprises in
Nigeria.
measure and that the explanatory variables which are Value Added Tax
and Company Income Tax only accounts for about 66% variation on
SME sustainability. Whereas, the remaining 34% cannot be explained
by the explanatory variables (Value Added Tax and Company Income
Tax) and those 34% variations are other factors that could affects SME
sustainability in Nigeria which were not captured on the content of the
study model.
The f-statistics measure the joint variation between dependent and
independent variables. The f-statistics calculated is (23.74091), while
that f-statistics from the table is 1.986 at 5% degree of freedom. Since fstatistics calculated is greater than f-statistics from the table (23.74091
>1.986), thus, it is statistically significant and acceptance of alternative
hypothesis (H1). In addition, the Durbin Watson statistics calculated is
1.638294which approximately equal to 1.6. This shows that there is
serial auto-correlation in the model formulated.
The coefficient of the estimate parameters for Company Income Tax
(CIT) is 2.226481. The result shows that there is positive relationship
between Company Income Tax and SME sustainability which
conformed to a-priori expectation. The standard error of Company
Income Tax is (1.266323) while half of the coefficient of the variable is
(1/2 x2.226481= 1.1132405). Using the rule of thumb, since the half of
the coefficient of the variable (1.1132405) is less than the standard error
of the variable (1.266323),it is statistically significant. The t-statistics
calculated for Company Income Tax is (1.758226) while the t-statistics
from the table (critical t-test) is 0.48256 at 5% level of significance.
Since the t-calculated (1.758226) is greater than the t-table (0.48256) at
5% degree of freedom, it is statistically significant and null hypothesis
is rejected and concluded that there is significant impact of Company
Income Tax on small and medium scale enterprises in Nigeria.
DISCUSSION OF FINDINGS
The coefficient of determination (R2) is 0.655086which is
approximately equal to 66% which indicates a strong positive
relationship. This implies that the regression lines have a strong fit of
The findings indicated that there is direct relationship between Value
Added Tax and SME sustainability. There is positive relationship
between Company Income Tax and SME sustainability which
217
From the result of serial correlation test using Breusch-Godfrey Serial
Correlation LM Test, it is evidence that P-value is 83.6%, which means
it is greater than 5%, meaning that we accept the null hypothesis and
reject the alternative hypothesis which further suggested that tax
reforms in Nigeria as proxies by Value Added Tax and Company
Income Tax have jointly contributed towards small and medium
enterprises sustainability in Nigeria.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX REFORMS AND SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
conformed to a-priori expectation. These findings correlate with
Nwokoye and Rolle (2015) who examined the investment implication
of the series of tax reforms in Nigeria, particularly the tax reforms of
2003 and National tax policy of 2012 and shows that tax reform as
proxies by VAT and CIT, both positively and significantly stimulates
investment in Nigeria. Tabet and Onyeukwu (2019) concluded that
there is strong correlation between Multiple-taxation and the financial
performance of SMEs in Abuja, Nigeria; there is also strong correlation
between Disproportionate multiple taxation practices constitute a
major challenge in the budgetary and planning performance of SMEs
in Abuja, Nigeria. Udofot and Etim (2017) found a strong positive
relationship between tax and SME growth. Feyitimi, Odelabu, Lawal
and Obisesan (2016) found that there was a significant correlation
between taxation and SMEs' growth.
stimulation in Nigeria. Comprehensive vetting of tax levies from
government bodies and states by the federal government to weed out
unnecessary multiple taxation and deregulate disproportionate taxes to
correlate with SMEs incomes and, or consolidating all taxes as a lump
paid directly to an assigned government account in correlation to
income, after which the tax authorities can disseminate according to an
agreed sharing ratio to various government purses instead of having
multiple and closely related taxes at the same time.
CONCLUSION AND RECOMMENDATIONS
If not all, but significant numbers of developing countries including
Nigeria focused more on the sustainability of small and medium
enterprises as economic factors for sustainable development and
growth. This study has examined the impact of tax reform on
sustainability of small and medium scale enterprises in Nigeria, and
concluded based on the findings that there is direct relationship and
impact between tax reforms (proxies by Value Added Tax and
Company Income Tax) and SME sustainability. This study
recommends that effort should be made to intensify and sustain the tax
reforms in Nigeria. Two critical areas that must be looked into are the
multiplicity of taxation and the high corporate income tax. Tax reform
should be conscientiously directed towards SME investment
219
220
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CHAPTER TEN
REFERENCES
Adegbie, F. F., & Fakile, A. S. (2011). Company income tax and
Nigeria economic development. European Journal of Social
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Adereti, S. A., Adesina, J. A., & Sanni, M. R. (2011).Value – Added Tax
and Economic Growth in Nigeria. European Journal of
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Erabhe, E., & Omoye, A. S. (2014). SMEs characteristics and VAT
compliance costs in Nigeria. Mediterranean Journal of Social
Sciences, 5(20), 614-620.
Feyitimi, O., Odelabu, A. T., Lawal, B. A., & Obisesan, S. O. (2016).
Tax incentives and the growth of SMEs in delivery economy.
European Journal of Research and Reflection in Management
Sciences, 4(2), 24-42.
Nwokoye, G. A., & Rolle, R. A. (2015). Tax reforms and investment in
Nigeria. International Journal of Development and Management
Review, 10, 39-51.
Tabet, R., & Onyeukwu, P. E. (2019). Multiple taxation and SMEs
enterprises financial performance in Abuja, Nigeria. World
Journal of Innovative Research, 6(2), 65-82.
Udofot, P. O., & Etim, E. O. (2017). Effect of tax revenue components
from SMEs on the economic growth of Nigeria. Research Journal
of Finance and Accounting, 8(20), 117-122.
221
ALTERNATIVE TAX POLICY CHOICES FOR BUSINESS
SUSTAINABILITY: LESSONS AND PRESCRIPTIONS
By
Chief Mark Anthony C. Dike, FCTI
Managing Partner
Patmos Professionals
Past President
Chartered Institute of Taxation of Nigeria
Being Paper Presented at the
2nd Annual International Tax Conference
Holding at
Babcock University,
Ilishan Remo, Ogun State
Monday, 19th August – Thursday, 22nd August, 2019.
INTRODUCTION
There is a practice that runs through policy signalling and
implementation of policy actions in Nigeria without the exclusion of
tax administration. It is one that is at best, ad-hoc in nature and lacking
in proper guide in terms of procedures and focus. Such unintended
disruptive disposition towards the contemplation of policy choices,
their announcement and eventual transmission into the economic
system is often overwhelmed by noise, which eventually disrupts or
guts the impact of such policy on the economy. A case in point was the
touted deliberate adoption of indirect taxes over direct taxes, as a
matter of tax policy focus, but accompanied by different guises of
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ALTERNATIVE TAX POLICY CHOICES FOR BUSINESS SUSTAINABILITY:
taxing individuals and companies by the tax administration, over and
beyond their fair share of what was due from their individual incomes
and business profits, on the other. If there was ever a tax policy design,
it contradicted it and confused stakeholders in the system, thereby;
blunting whatever impact the indirect tax policy could have had for the
common good.
environmental, economic and regulatory environment, to mention but
a few.
With this immediate predilection of Nigeria's tax policy practice,
which has floundered but somewhat managed to survive over the years,
we proceed to contemplate other evidence-led discourse that follows
here and what remedies that can follow, going forward.
Tax Policy and Business Sustainability – The Contextual Nexus
When we speak in terms of Tax policy, we refer to the selection, by the
government of the types of tax, its quantum, and on whom such taxes
are levied, from the alternatives available. It can be said to be part of the
family of Public policy making which is considered as a definitive
plan, which carefully manages the course of related courses of action
for the purpose of achieving a set out objective. An instant case was the
recommendation by Nwadialor & Ekezie (2016) who unequivocally
advised the government to adopt indirect taxes over its direct
counterpart as a virile policy tool for reasons of its expansionary and
non-distortionary nature.
For Business Sustainability, we must never shy away from the reality
of the various facets of risks to which they are exposed. In Nigeria
particularly, these risks are so daunting such that an average start-up is
thought to have these strands of sustainability only after surviving their
first five years as a business. Factors accounting for business
sustainability include the political, social, technological,
223
These factors have always been on the business radar of organisations.
Delving into some of the mentioned factors may spur an interesting
conversation on their significance. Taking the economic factor under
consideration, a combined state of inflation and high unemployment
can lead to high despondency in the nation thereby heightening the
misery index. This does not forebode well for the social interaction of a
company seen as fledging in the midst of such want and despair. This
has its own latent pressure corporate social engagement more than such
business would have loved to have thereby allowing social investment
displace capital formation for assured growth of the company.
Another important factor is the contribution of power to the successes
and failures of businesses. This elusive commodity has seen businesses
relying on other power sources, which has only increased their
operating expenses far and displaced a substantial part of their capital
budget.
In a nutshell, the fate of businesses lie not only in their internal capacity
to pull their weight and compete in the industrial space they occupy but
in the happenings in the external environment including what is served
up by State and non-state actors.
This is fodder why tax policy and business sustainability are two
important that are as contextually relevant as they are as interdependent
entities for a virile economy.
Perhaps, no further illustration best effuses this relationship than the
now well-referenced Arthur Laffer's theory known as the Laffer curve.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ALTERNATIVE TAX POLICY CHOICES FOR BUSINESS SUSTAINABILITY:
The theory reasoned that increased tax rates were only a short term
policy gain that would hurl in more revenue for the government until it
gets to a time when this is not necessarily the case. The higher tax
region becomes a disincentive to individuals and businesses that are
disinclined to work, thereby counteracting an egregious government's
appetite for more money. This typifies the type of tax policy design risk
businesses face, if they must survive, and equally underscores the need
for appropriate government action in ensuring the health of the
proverbial goose that lays the golden egg.
is paid to questions around the counterintuitive nature of tax policy
implementation with so much noise and low correction factor.
Tax Policy Debates
Several policies, as reeled out by tax authorities have been most
contested in recent times. Their deployment, and whether it satisfies
the overarching goal of government policy, is often a secondary matter
for consideration. In the face of pressures to ramp up revenue for the
state, the much referenced dialogue about the chicken and the egg,
which should come first arises. The question that follows is do
businesses exist for these policies or vice versa. There is no easy
answer to that enquiry as investors badly need government to show its
hand in order to determine the quantum amount of investment such
economy is bound to get. Conversely, an error correction mechanism
must find itself entrenched within the fabrication of such policies in
order to allow ample opportunity for the government to recalibrate and
fine tune these policies for greater impact.
Amidst these tax policy dilemmas, many cases abound that reveals
why a calmer and more predictable approach is better than a 'bull in the
coffee shop' tendency of government and the tax authorities. We shall
consider these instances in the ensuing paragraphs. Particular attention
225
Tax Amnesty Scheme – A Strategic Policy for Enhanced Compliance
We all witnessed the birthing and substantive conclusion of two
principal amnesty periods. One was by the powers exercised by the
Chairman of the Federal Inland Revenue Service with a 45-day
window and the other by the President/Commander-In-Chief of the
Armed Forces of the Federal Republic of Nigeria with a one-year
period. The former was pursuant to the provisions of Section 32(3) of
the Federal Inland Revenue Service Act, Cap. F36, Laws of Federation
of Nigeria, 2004 and Section 85(3) of the Companies Income Tax Act,
Cap. C21, Laws of Federation of Nigeria, 2004 while the latter was
further to the powers conferred by Section 23 (2) (a-b) of the
Companies Income Tax Act, Cap. C21, Laws of Federation of Nigeria,
2004,on the President and Commander-In-Chief of the Armed Forces,
Federal Republic of Nigeria.
These amnesty periods were granted in a time the focus of government
was to diversify her income streams away from the proceeds of crude
oil. While this strategy carried the risk of heavy potential revenue
losses, the central revenue authorities contrasted this policy with that of
turnover yield assessments on existing taxpayer accounts. The system
continued to witness a mixed message of a request for open and honest
communication by the taxpayers, businesses and individuals alike,
with the tax authorities. Meanwhile the tax authorities surreptitiously
imposed additional taxes on existing taxpayers in a message suggestive
of keeping businesses in the trenches they had dug for themselves to
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ALTERNATIVE TAX POLICY CHOICES FOR BUSINESS SUSTAINABILITY:
keep themselves away for those reluctant to engage what was
seemingly an onslaught they could not hope to survive.
experience with this strategy has been much of a mixed fortune. The
presence of necessary institutions and relevant tax and immigration
laws aimed at promoting these initiatives has not been without their
hiccups.
Much of the impact of the amnesty scheme on enhanced tax
compliance remains to be seen to date.
Local Tax Amnesty v International Tax Amnesty
Another extension of the Presidential amnesty is the ongoing Voluntary
Offshore Assets Regularization Scheme (VOARS). Once again, this
strategy left everyone wondering the correlations between VOARS
and VAIDS. What was certain, however, was the fact that they were
both amnesty programmes targeting the Nigerian taxpayer.
Bank Account Freeze by Tax Authorities
Recently, the Federal Inland Revenue Service (FIRS) swooped on the
bank accounts of persons adjudged to be defaulting taxpayers raking in
billions of Naira in Nigeria but not paying the taxes due. They
identified over six thousand seven hundred and seventy two (6,772)
defaulting billionaire taxpayers through records obtained from the
banks of such taxpayers.
Consequently, FIRS notified the banks of affected taxpayers of this
development and in some instances, ordered the banks to freeze the
bank accounts of alleged defaulters.
These orders were not without confusion as to where the powers of tax
authorities ended in deference to the rights of the taxpayers to have
access to their accounts on demand.
Yet, achieving competiveness through the use of incentives was a
strategy contained in the 2012 Nigeria Tax Policy document. Its
efficacy for achieving same has, arguably, been limited.
Alternative Public Policy Models
Contemplating tax policy is just as important as any other policy
formulation and implementation process in the public sector. For
coherence and achievement of impact, the management of its processes
should never be overlooked.
Several public policy models come to mind in the mix of this
discussion:
Bewer & DeLeon (1983) identifies the stages of public policy
formulation to include its initiation, estimation, selection,
implementation and evaluation. For Patton & Sawicki (1993), it
quickly starts from a process of verification, definition and detailing of
the problem. It then progresses to establishing the criteria for
evaluation, pondering and identifying alternatives, evaluating same,
distinguishing among the alternatives and monitoring and evaluation.
Viana (1996), the model comprises of agenda setting, formulation,
implementation and evaluation.
Tax Incentives as strategy for Foreign Direct Investment
The competitiveness of economies always paves the way for attracting
the much needed foreign direct investment into an economy. Nigeria's
227
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ALTERNATIVE TAX POLICY CHOICES FOR BUSINESS SUSTAINABILITY:
Stone (1997) pushes this frontier of knowledge further by identifying
objectives, contemplating the alternatives, predicting consequences of
alternatives, evaluating consequences and selecting the alternative
optimal solution.
CONCLUSION
Articulating policies for signposting the way forward for the tax system
does not come without its price. The government owes it to
stakeholders to set out clear, predictable and understandable processes
for initiating, analysing and deploying these tax policies.
Birkland (2005), however, validates the inclusion of agenda setting as
an alternative to initiation in the public policy dialogue, the model
proceeds further to include policy design and then implementation.
Benoit (2013) further notes the turbulent flow in the public policy
discourse and elaborates this model of engagement, which include
agenda setting, policy formulation, adoption, implementation and
evaluation. It is noted that even for this process to be triggered, there
has to be consensus that a problem exists across the broad spectrum of
stakeholders. Individuals or groups representing individuals will need
to acknowledge the problem, identify its dimensions, propose
solutions and engage in advocacy activities (Ripley, 1985, in McCool,
1995, p. 159).
One thing must remain paramount and above all considerations, the tax
system must achieve the successful contemplation of balancing its net
gains and business sustenance, when these policies are eventually
implemented.
A more dated framework uses a public policy cycle, which entails
problem definition, agenda setting, policy development, implantation
and evaluation.
Whether we agree that the foregoing paragraphs offer clear distinctions
or those offered are mere semantics, an orderly agenda for navigating
and deploying tax policies, in an efficacious manner, is set out. In the
midst of the meteoric gales of policy flip-flops, their relatability and
ample signalling for business decision making must not leave anyone
in doubt.
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CHAPTER ELEVEN
REFERENCES
Benoit, F. (2013). Public Policy Models and Their Usefulness in Public
Health: The Stages Model. Montréal, Québec: National
Collaborating Centre for Healthy Public Policy.
Birkland, T; (2005). An Introduction to the Policy Process: Theories,
Concepts and Models of Public Policy Making. 2nd Edition.
Brewer, G. and DeLeon, P. (1983). The Foundations of Policy
Analysis, Pacific Grove: Brooks/Cole.
TAX INCENTIVES AND FINANCIAL PERFORMANCE OF
MULTINATIONAL FIRMS IN NIGERIA
LAWAL Babatunde Akeem1
2
AYOOLUWA OLOTU Ajayi-Owoeye
1
Department of Accounting & Finance,
McPherson University, Seriki-Sotayo, Nigeria
2
Department of Accounting, Babcock University, Ilishan, Nigeria
ab400level@yahoo.com
ABSTRACT
Tax incentives are considered as tools used to accelerate economic
growth and development of an enterprise. It is a way of minimizing
taxes for business and individuals in exchange for specific desirable
actions or investments. This paper therefore examined the effect of tax
incentives on the financial performance of multinational firms in
Nigeria. The objectives of this paper are to examine the effect of income
tax incentive, effective tax rate incentive and the moderating effect of
firm size on the financial performance of multinational firms in
Nigeria. The study adopted the descriptive research design and the
population of consist of all the multinational firms operating in Nigeria
as at 31st December 2015. Judgmental sampling technique was used in
the study. The sample size of this study comprised of the seven firms
listed on the floor of Nigeria Stock of Exchange. Panel regression
technique was employed to examine the relationship between the
dependent variable and the explanatory variables Plc. The findings of
231
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CHAPTER ELEVENCENTIVES AND FINANCIAL PERFORMANCE OF MULTINATIONAL FIRMS IN NIGERIA
the study revealed that income tax, effective tax rate and firm size have
a significant effect on the financial performance of multinational firms
in Nigeria. The study recommended that provision of tax incentives
should be strengthened to promote development in multinational firms
in Nigeria.
goods and services, individuals and businesses react differently in
response to changes in income, and in relative prices, emanating from
taxation.
Keywords: tax incentive, income tax, effective tax rate, firm size,
financial performance, multinational firms.
INTRODUCTION
Tax is a compulsory levy imposed on the citizens of a country by the
government to raise revenue, levied on the income of individuals or
organizations, on the production costs or sales prices of goods and
services. UNCTAD (2003) defines incentive as 'any measurable
advantage accorded to specific enterprises or categories of enterprises
by (or at the direction of) government'. By this definition, lowering
corporate taxes to firms located in particular region, or firms producing
certain goods and services, is an incentive scheme. In the context of tax,
tax incentive could be an offer to pay less tax, given to people who do
something that the government is trying to encourage.
According to Barnett and Grown (2004), tax policy is at the heart of the
political debate on the level of public services that should be provided
and who should pay for them because taxes are the principal source of
recurring revenue under government control. Besides, taxes are used to
assist in their distribution of wealth and incomes and to regulate
economic activities. To this end, tax policy decisions have different
impacts on different individuals, businesses and the economy at large.
Governments need to develop tax policies and tax systems that are
guided by certain tenets. Since taxation affects incomes and prices of
233
According to Babatunde and Adepeju (2012) government has adopted
more incentives to promote private investment. Most governments
depend on investment promotion agencies, economic development
boards, industrial development agencies, and other investment
promotion commissions to compete globally for critical foreign
investment and the development benefits it brings (Ortega & Griffin,
2009). Philips (2010) observed that tax incentives will not only
generate employment but will motivate the self-employed to
incorporate into limited liability companies. This will lead to improved
profitability of the firm.
According to Fletcher (2002) tax incentives are those special
exclusions, exemptions, or deductions that provide special credits,
preferential tax rates or deferral of tax liability. Tax incentives can take
the form of tax holidays, investment allowances and tax credits,
accelerated depreciation, special zones, investment subsidies, tax
exemptions, reduction in tax rates and indirect tax incentives. Easson
and Zolit (2003) define tax incentives as: “those special exclusions,
exemptions, or deductions that provide special credits, preferential tax
rates or deferral of tax liability”. They argue that tax incentives can take
the form of tax holidays for a limited duration, current deductibility for
certain types of expenditures, or reduced import tariffs or customs
duties.
In addition to reducing or abolishing corporate taxes, Mintz and
Tsiopoulos (2004) states that MENA countries have also offered
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CHAPTER ELEVENCENTIVES AND FINANCIAL PERFORMANCE OF MULTINATIONAL FIRMS IN NIGERIA
incentives such as tax holidays, accelerated depreciation of assets,
exemption from import duties and value added tax and credit for
equipment purchase to attract FDI. According to Jauch (2002),
opinions about the importance of incentives differ, through the EPZ
programme, African countries offer incentives to attract foreign
investment in the form of tax holidays, exemptions on export and
import duties, subsidized infrastructures consider them as a mean to
obtain FDI. Most African countries have concluded bilateral
investment treaties with countries whose main aim is the protection,
promotion of FDI and clarify the terms under which FDI can enter the
host country (UNCTAD, 2014).
LITERATURE REVIEW
Tax incentive is a way of minimizing taxes for business and individuals
in exchange for specific desirable action or investments on their parts.
Tax incentives are meant to encourage those businesses and individuals
to engage in behavior that is socially responsible and or benefits the
community (Boadway&Shah, 1995). The aim of granting tax
incentives to the multinational firms in Nigeria is to improve their
growth and development, thus contributing to the overall economic
developmentof the country. Tax incentives granted are not adequate
enough to increase the financial performance of companies which
could place them at a competitive disadvantage. Government attempts
to influence the financial performance of a manufacturing company
through capital allowances.
The objectives of this study are to examine the effect of income tax,
effective tax rate and firm size on the financial performance of
multinational firms in Nigeria.
235
Theoretical Review
Neo-Classical Theory
Neo-classical economic theory posit that providing tax incentives to
one group of investors rather than another violates one of the principal
tenets of a good tax system, that of horizontal equity. This inequality
distorts the price signals faced by potential investors and leads to an
inefficient allocation of capital (Boadway & Shah, 1995). The
justification most often given for special incentives is that there are
market failures surrounding the decision to invest in certain sectors and
locations, which justify government intervention. Market failures
result in either too much or too little investment in certain sectors or
locations .The key market failures most often cited; Positive
externalities not internalized in the project's rate of return are higher in
certain sectors than in others. Barbour (2005) points out that there are
other purported benefits of tax incentives, such as symbolic signalling
effects and the need to compensate for inadequacies in the investment
regime elsewhere. Provision of investment incentives is in the form of
either tax relief or cash grants. International experience shows that
such incentives play only a minor role in investment decisions. Firms
make investment decisions based on many factors including
projections of future demand, certainty about future government
policy, prevailing interest rates and moves by competitors. In general,
they see incentives as 'nice to have' but not deal breaking. Yet
incentives remain a popular policy for both developed and developing
countries.
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Agency Theory of Tax Incentive
Despite the lack of evidence to support the efficacy or efficiency of
fiscal incentives, governments continue to offer them. Wells, Allen,
Morisset, and Pirnia (2001) argued that tax incentives offer an easy
way to compensate for other government-created obstacles in the
business environment. In other words, fiscal incentives respond to
government failure as much as market failure. It is far harder, and takes
far longer, to tackle the investment impediments themselves low skills
base, regulatory and compliance cost than to put in place a grant or tax
regime to help counterbalance these impediments. Although it is a
second-best solution to provide a subsidy to counteract an existing
distortion, this is what often happens in practice. Agency problems also
exist between government agencies responsible for attracting
investment and those responsible for the more generic business
environment. Whilst investment-promotion agencies can play an
important role in coordinating government activities to attract
investment, they also often argue for incentives without taking account
of the costs borne by the economy as a whole. (Zee, Stotsky & Ley,
2002).
leakage, and provides minimal opportunities for tax planning.
Boadway and Shah (1995) argue that any benefit such as an incentive
allocated by public servants or politicians is potentially open to abuse
and corruption. There is therefore a strong argument that incentives
should be automatically available to all investors who meet a set of
open and transparent criteria.
Normative Theory
Chua (1995) posit that according to this theory every incentive has
advantages and disadvantages, and it is therefore extremely difficult to
determine one set of incentives which work for very different
economies with different challenges and circumstances. Much of
determining what works depends on the circumstance of the economy,
the competence of the tax administration, the type of investment being
courted and the budgetary constraints of the government stimulates
investment in the desired sector or location, with minimal revenue
237
Conceptual Review
According to , a concept is an abstract or general idea or derived from
specific instances. A conceptual framework is a set of broad ideas and
principles taken from relevant fields of enquiry and used to structure a
subsequent presentation. In this study, the conceptual framework has
shown on figure 2.1 shows the relationship of the independent and
dependent variables. The independent variables of this study include
income tax, effective tax rate and the moderating effect of firm size.
The dependent variable under this study is the financial performance
measured by return on equity.
Income Tax Incentive
Return on Equity
Effective Tax Rate
Incentive
Firm Size
Independent Variables
Moderating Variable
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Dependent Variable
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CHAPTER ELEVENCENTIVES AND FINANCIAL PERFORMANCE OF MULTINATIONAL FIRMS IN NIGERIA
CONCEPTUAL FRAMEWORK
Tax incentives can be manipulated to spark of economic growth in a
flexible and responsive economy as the whole scenario can be seen as a
cycle engineered in the first place by taxation.
Role of Tax Incentives
Taxation and tax incentives are generally employed by the government
to play three fundamental roles, which include;
a.
The fiscal role
b.
The socio-political role
c.
The developmental role
The Fiscal Role of Tax Incentives
When government increases the rate and/or base of tax, more money
than before is taken out of the circular flow by way of taxation. This
automatically means that an opposite position will result from a
decrease in the rate or a contraction of the tax base. Manipulation will
either impact positively or negatively on the following:
a. The price of money (i.e. interest rate)
b. The level of savings and/or dis-savings;
c. The level of investment;
d. The level of capital inflows/out flows etc
These four points are variables in the determination of;
a. Industrial expansion; and
b. Capacity Utilization of existing industries.
They determine:
a. The level of available goods and services
b. The price of available goods and services
c. The level of employment earnings, savings/ dis-savings,
investment etc.
239
Fiscal role has not been pronounced in the achievement of Nigerian
taxation since the Nigerian economy is not well monetized. This is
because the Nigerian economy is essentially agrarian and there are a lot
of leakages by way of local “well-to-dos” taking a disproportionately
large part of their cash surpluses outside the economy, while the poor
keep theirs under their pillow and in local ash tills. Hardly had Nigeria
ever considered attaching any tax incentive package to a fiscal need. In
contrast developed countries like USA, Britain, Germany, France, Italy
and Canada vary their tax rates and actualize other tax measures to cure
specific economic problems and the results are nearly always
immediate.
The Socio-Political Role of Tax Incentives
This has to do with the redistribution or even distribution of wealth
among individuals or wealth creation capacities between geographical
components of a country. As regards the first, what is important is not
incentive but the tax design. It has to do with the equity consciousness
of the tax packages of a particular tax design. It has to do with the equity
consciousness of the tax packages of a particular tax regime. The tax
system could be designed such that it takes less from the poor in
proportion to his earnings that it takes from the rich.
Another important element in the social role of tax incentives is using
taxation to discourage the manufacturing, importation or consumption
of “sin goods” such as cigarettes, liquor, Beer, etc or, engaging in “sin
activities” such as gambling, operation of slot machines, Casino,
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brothels, etc. This can be done through the application of
discriminatory rates or promotion of substitutes through tax incentives.
The Developmental Role of Tax Incentives
This is the area on which taxation and tax incentives have concentrated
in Nigeria. All forms of development and growth are predicated on the
availability of reliable amenities. Tax funds are made available to
provide these amenities, which ultimately provide the basis for
economic growth and development. Although Nigeria since
independence has gone a full round in this regard, appreciable positive
result in development does not seem to be realised.
asset. For the purposes of calculation of capital allowance,
investment allowance is given as follows;
(a) Plant &Machinery, 10%
(b) Plant &Machinery used in gas utilization, 15%
iii.
Types of Tax Incentives
Various tax incentives that have been put in place to promote
manufacturing activities include but not limited to the following:
i.
ii.
Capital Allowances
Capital expenditures are not an admissible expense in earning
profits. But capital expenditure often results in the creation of
fixed assets such as plant & machinery, building etc, which are
used for the purpose of earning profits. It is only reasonable
therefore to give some form of relief for the purposes of taxation
in respect of these items of expenditure. Special allowances
usually referred to as capital allowances are designed to provide
this form of relief.
Investment Allowance
This allowance which is given in addition to the capital
allowances (initial and annual) is available only in the first year of
purchase of the asset and is not deductible from the cost of the
241
Rural Investment Allowances
To encourage the location of industries in the rural areas, the
government allows such companies (i.e. those located in the rural
areas) to claim the following as rural investment allowances
under the following circumstances:
No electricity, water, tarred road or telephone
100%
No electricity
50%
No water
30%
No tarred road
15%
No telephone
5%
Note:
a. To benefit, the company must have been incurred capital
expenditure on the above mentioned facilities. The facilities must
be used for the purpose of the business and the enterprise must be
located at least 20 kilometers away from such facilities provided
by the government. The rates claimable above are on each of the
capital expenditure in the first year only and cannot be carried
forward. The allowance is claimed in addition to initial
allowance.
b.
Investment allowance cannot be claimed on the same asset on
which rural investment allowance has been claimed.
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iv.
John (2013) examined the effect of corporate income tax on financial
performance of listed manufacturing firms in Ghana. It was discovered
that there is a significant negative relation between corporate income
tax and financial performance. On the other hand, firms' size, age of the
firm and growth of the firm show a significant positive relationship
with financial performance. The study recommended that firm should
increase their asset size and ensure efficient use of those assets to
reflect in the production turnover of the companies.
v.
Investment tax Relief
A company which has incurred an expenditure on electricity,
water, tarred road or telephone for the purpose of trade or business
carried on by the company at a location which is at least twenty
kilometers away from the ones provided by the government can
enjoy investment tax relief in the year in which the capital
expenditure was incurred and two subsequent years and no more.
That is, the allowances can be claimed for three (3) years only.
The rates claimable are the same with those under “Rural
Investment Allowance”. Pioneer companies cannot claim this
relief.
Investment Tax Credit
This tax incentive has a direct impact on the beneficiary's tax
liability since it is deducted directly from the tax liability. This is
intended to ensure that the tax credit is utilized in business
expansion.
Empirical Review
Olaleye, Riro and Memba (2016) examined the effect of company
income tax incentives on the performance of listed manufacturing
companies in Nigeria. The study adopted the descriptive research
design. The target population of the study was the one hundred and
seventy four listed manufacturing companies in Nigeria. The study
employed the use of primary data via administration of questionnaire.
The findings showed a strong positive linear relationship between
reduced income tax incentives and foreign direct investment. The
study recommended that there was need to conduct a cost benefit
analysis for tax incentives available to various sectors of the economy.
243
Mayende (2013) studied the effects of tax incentives on firm
performance in Uganda. It was revealed that firms with tax incentives
perform better in terms of gross sales and value added than their
counterparts. The education level of managers of firms, firm-size, and
age of the firm have positive impact on firm performance. Government
needs to streamline the provision of tax incentives for better firm
performance.
Njeru and Ndimitu (2015) assessed the effect of tax incentives on
performance among Export Processing Firms (EPZ) in Kenya.
Descriptive research design was adopted for the study. The findings of
the study showed that investments in EPZ firms increased with
increase in sales, profit as well as tax incentives. The study revealed
that the level to which EPZ has benefitted on the following tax
incentives include grant or loan guarantees, corporate income tax
incentives, tax holidays or reduced tax rates, investment allowances,
exemption from import tariffs, exemption from sales and subsidized
financing.
Martina, McCoy, Edgar and Conor (2014) analysed the importance of
corporation tax policy in the location choices of multinational firms.
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The study found a strong negative, but non-linear, effect of taxation on
the likelihood of a destination being chosen. The difference in sectoral
responsiveness of FDI location to taxation has implications for the
composition of the foreign-invested sector and must be taken into
account when policymakers are evaluating taxation considerations.
31st December 2015. The companies comprises of companies from
Agricultural, Conglomerate, Basic Material, Consumer goods,
Healthcare, ICT, Industrial goods, Oil & Gas and Consumer Services
sectors. Judgmental sampling technique was adopted for this study.
The sample size of this study consists of seven firms listed on the floor
of Nigeria Stock of Exchange. They include, Flour Mills of Nigeria, PZ
Cussons Nigeria, Nestle Nigeria, Unilever Nigeria, Cadbury Nigeria,
Chellarams and GlaxoSmithKline Nigeria Plc. The study adapted the
model used by Kawor and Kportorgbi (2014) and Ogundajo and
Onakoya (2016) to ascertain the effect of tax incentive on the financial
performance of multinational companies in Nigeria as follows:
ROE= f (INT, ETR, SIZE)………………………..1
ROEit= b0+ b1INTit + b2ETRi + b3SIZEi+ eit ………….2
Adejare (2015) in his study examined the effect of corporate tax on
revenue profile of firms in Nigeria. Secondary data was used for the
study collected from the Central Bank of Nigeria Statistical Bulletin for
the period of 1993-2013. The study concluded that there was a positive
significant effect of corporate income tax on the revenue profile in
Nigeria that led to an increased growth in the country. The study
recommended that instead of eliminating corporate tax, government
should adjust the tax downwards. The reduced corporate tax should
bring about an increase in the demand for labour and as a result of this
increase; there will be an increase in wages that will also bring about
improvement in the consumption levels in the economy.
Babatunde and Adepeju (2012) examined the Impact of Tax Incentives
on Foreign Direct Investment in the Oil and Gas Sector in Nigeria. The
study found that there is significant impact of tax incentives,
availability of natural resources and openness to trade on FDI in the oil
and gas sector in Nigeria. Also, there is no significant impact of market
size, macro-economic stability, infrastructural development and
political risk on FDI in the oil and gas sector in Nigeria.
METHODOLOGY
Where;
ROEit = measure of financial performance using Return on Earning
(ROE) of firm i at time
INTit = Income Tax payable of firm i at time
ETR = Effective tax rate of firm i at time (The tax rate obtained by
dividing the total corporate tax by its pre-tax earnings.)
SIZEi= Measure of firm size using log of total assets
eit = error term
The descriptive analysis was used in the study to determine the mean,
median and standard deviation as well as of the sample variables. Panel
regression technique was employed to examine the relationship
between a single dependent variable and various explanatory variables.
The study adopted the descriptive research design. The population of
the study is made up of all multinational firms operating in Nigeria till
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RESULTS AND DISCUSSION
the regulatory framework of Nigerian tax laws. Conversely, the mean
value of ROE, ETR and SIZE are closer to the median, suggesting that
the variables are symmetrical and normally distributed.
Descriptive Statistics of Variables
Descriptive Statistics
ROE
INT
ETR
SIZE
Mean
0.239754
13.70699
7.533102
17.31212
Median
0.154404
13.48111
0.345805
17.60249
Maximum
0.724204
15.98989
236.9313
18.60668
Minimum
0.010765
11.64068
0.099405
11.14527
Std. Dev.
0.212479
1.043535
39.92858
1.349492
Skewness
0.931482
0.519853
5.653733
-3.098714
Kurtosis
2.462707
2.708090
32.98733
14.16096
Obs.
35
35
35
35
Source: Authors Compilation (2018)
Table above depicts the mean, median, standard deviation, skewness,
kurtosis of the variables considered in this study. It is observed that the
mean value of all the variables are positive suggesting that the variables
on the average increased over the period studied. Firm size (size) has
the highest mean value of 17.32 while ROE as a measure of financial
performance recorded the lowest mean value (0.23). Effective Tax
Rate (ETR) has a mean value of 7.53; The mean value of ETR depicts
that the firms have ETR is higher than the statutory tax rate that is, the
firms' actual tax liability is lower than their effective tax rate; this is an
indication that tax is properly managed thus resulting into paying less
tax than expected. When ETR is higher than the statutory tax rate, it
reflects tax savings instead of tax loss; this is an indication that firms
have taken advantages of tax planning strategies opened to them within
247
On the other hand, it was observed that all the variables range from
positive to positive value as depicted by the result of the minimum and
maximum. Also, among the variables studied, ETR has the highest
value for standard deviation (39.92) while others were relatively low.
Thus, implying that the effective tax rate of the firms sampled are
highly volatile, unstable and unpredictable. Furthermore, it was
discovered that all the variables are positive skewed except for firm
size. Also, ETR and SIZE are leptokurtic since their value is greater
than three (3) which implies that the variables produces higher extreme
outliers than those of the normal distribution while ROE and INT are
platykurtotic with value.
Hypothesis Testing
Panel Data Regression Result
The result presented below shows the fixed effect model and random
effect model. The Fixed effect is used when there is need to control
omitted variables that differ between cases but not constant over time.
While the random is used when omitted variables may be constant over
time but vary between cases, others may be fixed between cases but
vary over time. Afterwards, the Hausman test is carried out to ascertain
the appropriate model selected for this study.
Hausman Test
Since this study uses panel data and test between using the fixed effect
and random effect. The result of the Hausman Test below (table below)
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CHAPTER ELEVENCENTIVES AND FINANCIAL PERFORMANCE OF MULTINATIONAL FIRMS IN NIGERIA
favours the use of random effect model which gave an appropriate
result for the analysis.
model is fit and can be relied on for decision making. The F-statistics
on the other hand shows that the variables considered have significant
impact on financial performance of the firm sampled.
Effect of Tax Incentive on Financial Performance
Model
Pooled Effect
Fixed Effect
Coefficient Prob. Value Coefficient
Random Effect
Prob.
Coefficient
Value
Prob.
Value
C
-2.1425
0.0000*
-0.895163
0.1544
-1.706752
0.0005*
INT
0.1567
0.0000*
0.078628
0.0625***
0.131504
0.0001*
EFT
0.0001
0.8011
-6.53E-05
0.9069
-2.19E-05
0.9675
SIZE
0.0134
0.4583
0.003330
0.8489
0.008326
0.6187
R-squared
0.631500
0.782965
0.420958
Adj. R-squared
0.595838
0.704832
0.364922
S.E. of regression
0.135080
0.115438
0.118066
F-statistic
17.70826
10.02098
7.512235
Prob (F-statistic)
0.000001*
0.000002*
0.000644*
Source: Authors Computation (2018)
*Significant at 1%, **Significant at 5%, and ***Significant at 10%
The result for the pooled effect, fixed effect and random effect is
reported in Table 4.5 above. As for the results obtained from the pooled
regression models, the coefficient of INT, ETR and SIZE all shows a
positive significant relationship with ROE. This implies that tax
incurred by the firms sampled helps increase their performance which
is measured using return on equity. Similarly, the effective tax rate also
improves performance while as the firm acquires more assets which is a
measure of firm size, the profit of the firm will also increase.
Furthermore, given the value of the r-squared from the pooled
regression analysis, 63% of changes in the explanatory variable are
influenced by the variables considered in this study, this implies that the
249
On the other hand, the result of the fixed effect model shows that
income tax (INT) has a positive effect on the performance of the firms
sampled while effective tax rate (ETR) has a negative effective on
ROE. This suggest that an increase in ETR has a negative effect on
financial performance which is however insignificant at 10%.
Similarly, as obtained under the pooled regression model, firm size has
a positive insignificant effect on financial performance. The r-squared
from the fixed effect model shows that 78% of changes in the
explanatory variable are influenced by the variables considered in this
study, suggesting that the model is fit and can be used for decision
making. The F-statistics on the other hand shows that the variables
considered have significant impact on the financial performance of the
firm sampled.
While the result of the random effect model reveals a consistent result
as what is obtained under the fixed effect model. However, INT is
significant at 1% as against the 10% obtained under the fixed effect
model. Effective tax rate and firm size have a negative and positive
effect on financial performance respectively. The r-squared from the
random effect model reveals that 43% of changes in the financial
performance are influenced by the variables considered in this study,
implying that the model is slightly fit while the F-statistics on the other
hand shows that the variables considered have significant impact on
the performance firm sampled. Furthermore, the above table also
revealed that the constant of each of the model is negative and
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CHAPTER ELEVENCENTIVES AND FINANCIAL PERFORMANCE OF MULTINATIONAL FIRMS IN NIGERIA
significance except for the fixed effect model which was not
significant. It can also be seen from the result obtained above that the rsquare for each of the models is high, with fixed effect model having
value greater than 70% which is high as desired (0.7829). It is also
noteworthy to also mention that the F-statistics for the entire models
were significant.
by Ogundajo and Onakoya (2016) which reported that a change in the
size of the firm result into an increase in the return on asset, thus as the
total assets of the firm increases, there tends to be an increase in its
return on asset. The findings aligned with the reports of Rohaya, Nur
Syazwani and Nor'Azam (2010), Armstrong, Blouin and Larcker
(2012) and Heitzman and Ogneva (2015) which supported the
assertion of political cost theory, implying that large firm has the
ability to manage their tax liability compared to small firms.
DISCUSSION OF FINDINGS
It is observed from the study that the effective tax rate of the firms is
unstable as they fluctuate overtime. The effective tax rate depicts that
the firms have effective tax rate higher than the statutory tax rate, that is,
the firms' actual tax liability is lower than their effective tax rate; this is
an indication that tax is properly managed thus resulting into paying
less tax than expected. When ETR is higher than the statutory tax rate, it
reflects tax savings instead of tax loss; this is an indication that firms
have taken advantages of tax planning strategies opened to them within
the regulatory framework of Nigerian tax laws.
It was also recorded that income tax has a significant positive effect on
financial performance. This is contrary to the findings of Federico,
Edoardo and Gianluca (2016) which showed that taxation exerts a
negative and statistically significant impact on firm performance. It
was also observed that effective tax rate have a negative effect on
financial performance respectively. The positive effect of effective tax
rate and performance aligns with many prior studies such as Ogundajo
and Onakoya (2016) Khaoula, Amor and Ayed (2013).
CONCLUSION AND RECOMMENDATION
From the findings of the study, it is evident that tax incentives have a
significant impact on financial performance of the multinational firms
in Nigeria. Therefore, the study recommended that provision of tax
incentives should be strengthened to promote development in
multinational firms in Nigeria. Also, the stakeholders in tax policy
should consider the economic value of corporate income tax incentive.
These incentives have the capacity to increase the profitability of
multinational firms in Nigeria.
Similarly, firm size also has a negative effect on return on earning as a
proxy for financial performance. This is similar to the result obtained
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TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
CHAPTER TWELVE
TRANSFER PRICING TECHNIQUES AND TAXES OF
ASSOCIATED COMPANIES IN NIGERIA
1
DADA, Samuel O.; 2ABIODUN, Nurudeen O.;
3
BENJAMIN, Rebecca D.; and 4ADEKUNLE, Isoken J.
1, 2, 3
Department of Accounting, School of Management Sciences,
Babcock University, Ilishan-Remo, Nigeria.
4
Department of Accounting, College of Arts,
Social and Management Sciences,
Crescent University, Abeokuta, Nigeria
ABSTRACT
The abusive transfer pricing in which income and expenses are
improperly allocated for the purpose of reducing taxable income is a
challenge. The study investigated transfer pricing techniques and
taxes of associated companies in Nigeria. This study adopted
exploratory research design which involves an in debt review on
conceptual, theoretical and empirical framework. This enabled the
researcher in-depth study of previous studies on the subject matter.
This was found appropriate for this study because this method assists a
researcher access for better understanding and may test the feasibility
of a more extensive study. The findings of this study revealed that
transfer pricing and its compliance has the capacity to improve the
effectiveness and efficiency of tax administration in Nigeria. But poor
administration of transfer pricing policy, lack of administrative
infrastructure and structure, and corruption in Nigeria tax system
257
could undermine the effectiveness and efficiency of transfer pricing
techniques in Nigeria. Implementation of transfer pricing at arm's
length principle between tax payers and parties in multinational
companies is what could guarantees government minimising the risk of
national income loss. Therefore, the study concluded that transfer
prices techniques are significant for both taxpayers and tax
administrations because they impact on the income and expenses and
therefore, taxable profits of associated company in different tax
jurisdictions. Also, that transfer pricing is not in itself illegal or
abusive, but what is illegal or abusive is transfer mispricing,
manipulation or abusive transfer pricing. The study recommends that
Government through the various regulatory bodies must discourage
multinational companies from having internal priorities for transfer
pricing in order to be able to retain much of the profit derived from the
exploitation of her resources and other business activity carried out in
the country.
Keywords: Tax, Transfer pricing, Transfer pricing techniques, Tax
compliance and Proportionate tax
Word Count: 285
INTRODUCTION
Transfer pricing applies to those multinational companies that had
offices, factories, branches, subsidiaries, business activities and
relationship in many different countries. These refers to large
companies which have centres of operation in many countries in
contrast to an international firm which does business in many countries
but is based in only one country, though the terms are often used
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
interchangeably (OECD, 2018).Transfer pricing is the price charged
for goods or services supplied or transferred by one sub-unit of an
organisation to another sub-unit or one member of a group to another.
That is, the reasonable price at which an enterprise transfers physical
goods and intangible property or provides services to associated
enterprises (Obasi, 2015; Smith, 2015).
Price Method, Cost Plus method, Transaction Net Margin method and
Transaction Profit Split method.
The challenge of inappropriate transfer pricing mechanism that boost
the head office profits at the detriment of the associated or subsidiary
companies which operate in other tax jurisdictions remain an issue of
great concern for the multinational companies in Nigeria. In recent
years, there has been increase tension between the multinational
companies and their tax authorities in which the multinational
company views transfer pricing as a cost that can be avoided through
tax planning while the tax authorities determine means to make the
multinationals pay their fair share of taxes to the country from where
the profits are being generated (Bradley, 2015). In Nigeria today, oil
sector is dominated by multinational companies such as Exxon Mobil,
Total, Chevron, Agip and Shell Petroleum Development Company.
Other sectors of the Nigerian economy include Cadbury, Guinness, PZ,
Nestle, Unilever, Procter and Gamble, GlaxoSmithKline, MTN, Airtel
and Reckitt Benckiser. Many multinational companies have
subsidiaries, sub-subsidiaries, associated companies, parent
companies and joint ventures that carry out business activities in many
countries of the world and are therefore subject to the tax authorities of
many different countries(Income Tax (Transfer Pricing Country-byCountry Reporting) Regulations, 2018). Transfer pricing techniques in
this study covered Comparable Uncontrolled Price Method, Resale
250
According to Income Tax (Transfer Pricing) Regulations (2018) the
comparable uncontrolled price method compares the price charged for
transactions between associated enterprises with prices charged for
similar transactions between independent enterprises in comparable
circumstances. If there is any difference between the two prices, then
this might be an indication that the transactions between the associated
enterprises are not at arm's length. Empirical evidence have it that
mechanism involved in transfer of goods and services such as
intangible asset lack available comparable sales data that would
support arm's length transfer price and as such some multinationals
seek to reduce taxes by manipulation of transfer pricing among related
entities (Taylor, Richardson & Lanis, 2015). However, Chinese tax
authorities have gained much transfer pricing expertise over the last
two decades which have increased their transfer pricing audit (Chan,
Lo & Mo, 2015).
The resale price method begins by taking the sale price of a product and
compares this to an independent enterprise of a product purchased from
an associated enterprises and a gross margin is then deducted from this
resale price (Income Tax (Transfer Pricing) Regulations, 2018).
Cost plus method assumed the costs incurred by the supplier in making
the product transferred or services provided to associated enterprises
are ascertained and marked-up. An appropriate mark-up may be
determined by reference to other enterprise in similar independent
supplier earns in comparable transaction or by reference to the mark-up
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
earned in comparable transactions by entirely independent enterprises
(Income Tax (Transfer Pricing) Regulations, 2018).
taxpayers and tax authorities of related companies in different tax
jurisdiction in which the companies and multinational operate.
According to Income Tax (Transfer Pricing) Regulations (2018), profit
split method begins with determining the combined profit that arises
from a business transaction in which the associated enterprises are
engaged. Then, this profit is then split between the associated
enterprises in a manner that reflects the division of profit that would
have been expected between independent companies. The combined
profit or loss attributed to the transactions in which the associated
enterprises participated is allocated to the associated enterprises in
proportion to their respective contributions to that combined operating
profit or loss.
Objective of the Study
The main and specific objective of this study was to evaluate the impact
of transfer pricing techniques on the taxes of associated companies in
Nigeria.
Under the transactional net margin method, the net profit margin that
an enterprise earns from transactions with an associated enterprise is
compared with the net profit margin earned in comparable transactions
with an independent enterprise. An appropriate net margin may be
determined by reference to the net margin that the enterprise earns in
comparable transaction with independent enterprises or by reference to
the net margin earned in comparable transactions by independent
enterprises. The transactional net margin method operates in a manner
similar to the cost plus and resale price methods. However, the
transactional net margin examines the net profits in relation to an
appropriate base and not gross margin on resale or mark-up on costs
(Income Tax (Transfer Pricing) Regulations, 2018).
It is against this background that this study investigated transfer pricing
techniques and taxes of associated companies in Nigeria. This study
aimed to ensure the transfer pricing techniques that benefit both
261
LITERATURE REVIEW
Transfer Pricing
Multinational companies use transfer pricing mechanism to transfer
goods and services between their related or associated companies
worldwide. A transfer price may be determined based on the external
market price for a similar product or it may be based on the cost
incurred in making the product or may be determined through
negotiation between the sub-units or members of a group buying and
selling the product. Transfer prices at which goods and services are
transferred between entities are significant for both taxpayers and tax
authorities as this impact on the income and expenses as well as taxable
profits of related companies in different tax jurisdictions in which the
enterprise and multinational operate. However, the challenge is that
many companies are interested in maximising their head office profits,
hence they may adopt transfer pricing mechanism which boost the head
office profits at the detriment of the associated or subsidiary companies
which operate in other tax jurisdictions (Smith, 2015). As such, transfer
pricing affects the profits on which the affected companies are
subjected to tax. Since associated enterprises transact businesses
among themselves, considerations other than market conditions
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
sometimes dictate the prices at which goods and services are
transferred within the group. This could result in the shifting of profit
from the tax jurisdictions in which they arise to jurisdictions which are
more convenient and beneficial to the head office or group company.
avoidance provision in the tax Acts which empowered the tax
authorities to set aside the prices charged in related party transactions
that are not made at arm's length (OECD, 2013).
Transfer pricing in this study covered the choice of appropriate method
in the calculation at arm's length price and the fairness or how
proportional the taxes of associate companies in Nigeria. According to
Oyedele, Curtis, Sweigart and Smallwood (2013) the arm's length
principle is the foundation of transfer pricing principle as this allows
taxpayers to base their transfer price on the facts and circumstance of
their intercompany transactions as opposed to prescribing an
apportionment or deemed profit approach. Transfer pricing is
important as it gives assurance to minority investor or creditors
interests in corporate subsidiaries (Smith, 2015)
According to Income Tax (Country-by-Country Reporting)
Regulations 2018 transfer pricing method could be deemed
appropriate if the transactions are consistent with the arm's length
principle and applied one of the following transfer pricing methods as
recommended in the guideline issued by OECD: the comparable
uncontrolled price method; resale price method; cost plus method;
transactional net margin method; transactional profit split method and
any other method may be prescribed by regulation made by the service
from time to time. However, it may be difficult to determine and fix
appropriate market prices which will reflect arm's length transactions
due to non-availability of similar product or services to be compared in
the open market. Nigerian tax legislations have not dealt specifically
with the subject of transfer pricing, although there is a general anti263
Transfer pricing could be defined as the inter-company or intracompany pricing arrangements between related business entities on
matters such as transfer of intellectual property, goods, services and
loans among other transactions. Transfer pricing could also be referred
to as the value attached to goods, services and intangibles transferred
between parts of a single organisation or between members of a
multinational group of companies who are associated directly through
management, control or capital (Income Tax (Country-by-Country
Reporting) Regulations, 2018).
Income Tax (Transfer Pricing) Regulation Act of 2012 was signed into
law in August 2012 and gazetted in September 2012. Its
commencement date was 2nd August 2012, but taxpayers are expected
to commence filing of transfer pricing returns from 2013 year of
assessment. Every taxpayer is therefore expected to develop transfer
pricing policy in regard to transfer pricing and control transaction, as
well as treatment of transactions of Permanent Establishment (PE) and
dispute resolution.
Transfer pricing in Nigeria is regulated by the existing tax laws which
are as follows: Section 22 of the Companies Income Tax Act CAP C21
LFN 2018 (as amended); Section 17 of the Personal Income Tax
(amendment) Act 2011; Section 15 of the Petroleum Profits Tax Act
CAP P13 LFN 2004 (amended); Section 61 of the Federal Inland
Revenue (Establishment) Act 2007; and the Income Tax (Transfer
Pricing) Regulation Act of 2018 (the New Regulations which has an
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TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
effective date of 12 March 2018 replaces the Transfer Pricing
Regulations introduced in August 2012.
authority. Taxes are enforced proportional contributions from persons
and property levied by state by virtue of its sovereignty for support of
government and for all public needs. While taxation is the process or
machinery by which communities or groups of persons are made to
contribute in some agreed quantum and method for the purpose of the
administration and development of the society (Somorin, 2012).
Transfer Pricing Techniques
The Organisation for Economic Co-operation and Development
(OECD) embarked on Base Erosion and Profit Shifting project aimed
at ensure alignment with the developments in international tax practice
as it relates to transfer pricing in the bid to mitigate the abuse. Income
Tax (Transfer Pricing) Regulations (2018) specified various transfer
pricing principles and practices all over the world. The Organisation
for Economic Co-operation and Development (OECD) Transfer
Pricing Guidelines provide common transfer pricing methods that are
accepted by nearly all tax authorities. This study considered five
methods employed in transfer pricing.
The comparable uncontrolled price method compares the terms and
conditions of a country transaction to those of a third party transaction
but the limitation is in the area of intangible asset that may not have
similarity with other companies in the industry. Sari and Hunar
(2015)in the study in Indonesia submitted that Indonesia should give
more specific criteria on how to value intangible assets and how to
determine the reasonableness of royalty apart from comparing it with
the competitor or industry.
Taxes
Section 69 of FIRS Act (Establishment) 2007 defined tax to include
any duty, levy or revenue accruable to the government in full or in part.
A tax is a not voluntary payment or donation but an enforced
contribution, a pecuniary burden laid upon individuals, persons or
properties to support the government exaction pursuant to legislative
265
Soyede and Kajola (2006) defined tax as a compulsory extraction of
money by a public authority for public purposes. While taxation is
defined as a system of raising money for the purpose of governance by
means of contributions from individuals or corporate bodies. Also,
according to Ola (1985), taxation is defined as the demand made by the
government of a country for a compulsory payment of money by the
citizens of the country. Tax is a compulsory contribution imposed by
the government and concludes that even though tax payers may receive
nothing identifiable in return for their contributions, they nevertheless
have the benefit of living in a relatively educated, healthy and safe
society.
Chartered Institute of Taxation of Nigeria (CITN) (2002) defined tax is
an enforced contribution of money, enacted pursuant to legislative
authority. They further explained that if there is no valid statute by
which it is imposed then, it is not a tax and a charge is not a tax. Once it
is backed up by written law and it has the other recognized
characteristics of a tax, it remains a tax. Tax is assessed in harmony
with some rational rule of apportionment on persons or property within
tax jurisdiction.
According to Huda, Nugraheni and Kamarudin (2017), there are still
lots of abusing practices dealing with transfer pricing which inflicted
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TRANSFER PRICING TECHNIQUES AND TAXES OF ASSOCIATED COMPANIES IN NIGERIA
national financial loss. In the study of Obasi (2015), transfer pricing
exerts negative effect on economic growth of Nigeria, which implied
that if various transfer pricing methods are not properly applied could
have negative effect on economic growth of a country but did not
consider the fairness of the transfer pricing methods. Multinational
companies in developing countries are constrained by the required
resources to be able to effectively implement transfer pricing (Smith
2015) while Akinleye, Olaoye and Fajuyagbe (2018) uphold that there
is poor administration of transfer pricing tax policy in Nigeria and Isau
(2014) asserted that Nigeria tax system lack administrative
infrastructure and structure, corruption in the tax system and lack of
training for FIRS staffs. These assertions cast aspersion on the fairness
of the application of transfer pricing techniques as they failed to
consider how proportionate the application could be.
Compliance in transfer pricing is based on the three Ds which are
declaration, disclosure and documentation. Compliance with the arm's
length principle is the focal point of all transfer pricing developed
worldwide. According to Oyedele, Curtis, Sweigart and Smallwood
(2013) the arm's length principle is the foundation of transfer pricing
principle as this allows taxpayers to base their transfer price on the facts
and circumstance of their intercompany transactions as opposed to
prescribing an apportionment or deemed profit approach. Compliance
in documentation is also required to prepare transfer pricing
documentation prior to the due date for filling the income tax return.
Tax Compliance
Tax compliance can be described as the act or process of subjecting
one's income or business to the demands of the tax laws. Tax
compliance concept refers to the degree to which taxpayers meet their
obligations under the tax law. According to Fjeldstad and Heggstad
2012, compliance transcends technical issues but the building of
taxpayer's behaviour in which compliance to the spirit of the tax law is
commonly perceived as a positive social value.
Allingham and Sandmo (1972) defined tax compliance as a condition
of taxpayers reporting their actual income where the self-assessment
system that creates an uncertain condition would trigger noncompliance behaviour. While James, Murphy and Reinhart (2005),
defined compliance as a term used to describe the process of complying
with the spirit as well as the letter of the law.
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In addition, the conflicting research findings among the few empirical
studies have rendered the studies inconclusive. Also, the impact of
transfer pricing in terms of transfer pricing technique and the taxes of
the associated companies has received little attention.
Figure 1: Researcher's Conceptual Framework (2019)
Independent Variables (X)
Dependent Variables (Y)
TRANSFER PRICING
TECHNIQUES
TAXES
Comparative
Uncontrolled
Price
Fairness/Proportional
Cost -Plus Method
Gap
Profit Split Method
Transactional Net
Margin Method
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Theoretical Framework
Transfer pricing was initially dominated by modelling in the
approaches of its theoretical development which are economic
modelling based. Seminal economic modelling works of Hirschileifer
(1956) and Gould (1964) were among those of earliest theoretical
approaches in transfer pricing. These modelling provided the transfer
price which will motivate buying and selling divisional managers to
make and transfer internally the level of output that will maximize total
company profits. Economic theory suggests that multinational
companies will maximize global after-tax profits by shifting income to
low-tax and deduction to high-tax jurisdictions (Horst, 1971). Horst
(1971) explored the profit maximization strategy for a monopolistic
firm selling in two markets simultaneously in the presence of transfer
pricing and how the firm reacts to a given set of tariff and tax rates.
However, Horst (1971) submission may not be appropriate in
competitive market business environment.
Proportionate theory
The proportionate principle in taxation was first suggested by Mill and
some other classical economists between 1852 and 1861. The
assumption was that if taxes are levied in proportion to the income of
the individuals, then it will extract equal sacrifice. Mill (1978) further
expounded that if proportionate tax is in practice, and if his actual tax
proposal favoured any group it would be the middle class. Although,
the modern economists disagreed with Mill's position on the premise
that when income increases, the marginal utility of income decreases.
And that the equal sacrifice principle will only hold if the persons with
high incomes are taxed at higher rates and those with low income at
lower rates (Bhartia, 2009).
Musgrave (1972) in his early theoretical contribution submitted that
formula apportionment could mitigate the problem of internal pricing
within multinational corporations. The formula apportionment ensures
that companies cannot evade taxation in the country concern. Major
developments and peculiarities of transfer pricing model during the
period 1990 to 2010 focussed on transfer pricing setting in
monopolistic and oligopolistic markets; analysis and comparison of
the arm's length and formula apportionment approaches; impact of
transfer pricing on the calculation of the export and import price
indexes.
Proportional tax is the taxing mechanism in which the tax authority
charges the same rate of tax from each taxpayer irrespective of their
income. This is on the assumption that since everybody is equal, taxes
should also be charged the same way. This study is anchored on the
modern economist view which is anchored on the premise that when
income increases, the marginal utility of income decreases and that the
equal sacrifice principle will only hold if the persons with high incomes
are taxed at higher rates and those with low income at lower rates.
This study viewed transfer pricing from the perspective that every
associate company among the groups of member of multinational
companies adopt appropriate transfer pricing technique that would not
manipulate their profit level but rather at arm's length where the taxable
income will reflect actual position of the company.
Empirical Review
Several studies have been carried out in relation to transfer pricing all
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over the world with varying desired and much emphasis on the
effectiveness of the regulation, the impact on economic growth among
countries worldwide.
Huda, Nugraheni and Kamarudin (2017) studied the problem of
transfer pricing in Indonesia taxation system, adopted Jurisprudence
research approach which involves the determination of legal sources
and critical analysis on the sources through exploration, inquiry and
interpretation. The research is normative in nature which refers to the
legal norms contained in statutes and judicial decision relating to the
issues that borders on transfer pricing. The finding of the study
revealed that there are still lots of abusing practices dealing with
transfer pricing which inflicted national financial loss. The study
posited that government could minimize the risk of national income
loss from tax sector by imposing the provision of regulation of income
tax on the implementation of arms length principle between taxpayers
and parties with special relationship such as multinational companies
transfer pricing.
Akinleye, Olaoye and Fajuyagbe (2018) investigated effect of transfer
pricing regulations and compliance on tax administration in Nigeria
using descriptive survey research design with the aid of structured
questionnaire, adopted ordered legit regression, Pearson product
moment correlation, variance inflation factor and white
heteroskedasticity test. The questionnaire was administered on 120
staffers of Federal Inland Revenue Service in South-West, Nigeria. The
findings revealed that transfer pricing and its compliance has the
capacity to improve the effectiveness and efficiency of tax
administration in Nigeria. However, the study concluded that there is
poor administration of transfer pricing tax policy in Nigeria.
Beebeejaun (2017) examined the efficiency of transfer pricing rules as
a corrective mechanism of income tax avoidance. The study revealed
that transfer pricing rule has been used as a corrective measure of
income tax avoidance because the onus lies on the taxpayer, the adviser
and their respective tax authorities.
Melnychenko, Pugachevska and Kasianok (2017) examined tax
control of transfer pricing using common scientific and special
methods of knowledge of economic processes and phenomena
dialectical, analysis and synthesising the concept of transfer pricing.
The results of the study revealed transfer pricing as a tool can be use for
optimization of company tax burden and on the other hand the state
incurs losses tax revenue due to tax planning because tax payments do
not go into the budget in full.
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Klassen, Lisowsky and Mescall (2017) examined transfer pricing:
strategies, practices and tax minimisation using survey research design
on tax executives from multinational corporations. The study
categorized the multinational corporations into two groups, that is,
companies focusing on minimizing taxes and companies focusing on
tax compliance. The finding revealed that transfer pricing focusing on
minimizing taxes are greater when higher foreign income, tax haven
use and research and development activities combined with a tax
minimisation strategy while companies focusing on tax compliance
report lower tax reserves than minimising companies. The study
concluded that multinational companies have different internal
priorities for transfer pricing.
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Barker, Asare and Brickman (2017) investigated transfer pricing as a
vehicle in corporate tax avoidance using descriptive research design.
The study concluded that USA needed to close the loopholes used by
multinational corporations to avoid USA taxation and shifting income
to low or no tax jurisdictions and also tightening up current tax laws and
implementing a new minimum tax on foreign earnings.
METHODOLOGY
This study adopted exploratory research design which involves an
indebt review on conceptual, theoretical and empirical framework.
This involves the analysis of implication of a current development or
advances in a field to obtain a general insight or idea about the nature of
the phenomenon or key variable or factor involved. Exploratory
research analyses the data and explores the possibilities of obtaining as
many relationships as possible between different variables without
knowing their end-applications. This enabled the researcher in-depth
study of previous studies on the subject matter. This was found
appropriate for this study because this method assists a researcher
access for better understanding and may test the feasibility of a more
extensive study.
Smith (2015) examined the impact of transfer pricing on financial
reporting: a study of Nigeria using contextual research design. The
findings revealed that government and multinational companies in
Nigeria and those of other developing countries worldwide are
constrained by the required resources to be able to effectively
implement transfer pricing.
Obasi (2015) investigated the impact of transfer pricing on economic
growth in Nigeria using trade mis-invoicing as proxy for transfer
pricing and unemployment variable for economic growth. Considering
long run and short run using con-integration and Granger Causality
found that transfer pricing exerts negative effect on economic growth
of Nigeria.
Isau (2014) examined transfer pricing: the Nigerian perspective in
which he appraised and highlighted major provisions of the income tax
(transfer pricing) regulation 2012 to educate corporate taxpayers in
Nigeria and foreign investors as well as their advisors. The study
concluded that the aim and objectives of multinational companies are
different from those of the host countries; the transfer pricing
regulation 2012 provide a significant leap forward for FIRS but lack
administrative infrastructure and structure, corruption in the tax system
and lack of training for FIRS staffs.
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DISCUSSION OF FINDINGS
Our findings revealed that if transfer pricing techniques are
appropriately applied could enhance economic growth of a nation and
also that if transfer pricing principles and practice are properly applied
would have a positive effect on taxable income of associated
companies in Nigeria. This finding was in tandem with the study of
Akinleye, Olaoye and Fajuyagbe (2018) which submitted that transfer
pricing and its compliance has the capacity to improve the
effectiveness and efficiency of tax administration in Nigeria. But poor
administration of transfer pricing policy, lack of administrative
infrastructure and structure, corruption in Nigeria tax system could
undermine the effectiveness and efficiency of transfer pricing
techniques in Nigeria (Isau 2014 & Smith 2015).
This study also found that transfer pricing administration could have
either positive or negative consequences on economic growth of a
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country and this is in agreement with the findings of Obasi (2015)
which adopted mis-invoicing as a proxy for transfer pricing and
unemployment for economic growth respectively and found that
transfer pricing exerts negative effect on economic growth of Nigeria.
Implementation of transfer pricing at arm's length principle between
tax payers and parties in multinational companies is what could
guarantee government minimising the risk of national income loss and
as such government must compel multinational companies having
internal priorities for transfer pricing (Huda, Nugraheni & Kamarudin
2017 and Barker, Asare & Brickman 2017).
obligation to comply with the requirements of the country-by country
report regulations from the effective date of 1 January 2018. Therefore,
there would be more scrutiny on the figures being reported by
companies within a group especially to assess transfer pricing risks and
related base erosion and profit shifting risks in Nigeria.
Also, this study discovered that objective of multinational companies
differs from country-to-country which is in support of country by
country report requirement. This is also in agreement with the study of
Isau (2014) which appraised the initial provisions of the income tax
(transfer pricing) regulation of 2012.
CONCLUSION AND RECOMMENDATIONS
This study concluded that transfer prices techniques are significant for
both taxpayers and tax administrations because they impact on the
income and expenses and therefore, taxable profits of associated
companies in different tax jurisdictions.
Also, none of the transfer pricing techniques is not in itself illegal or
abusive, but what is illegal or abusive is transfer mispricing,
manipulation or abusive transfer pricing. It is therefore a compliance
obligation and its practices in inter-company transactions expect to
meet arm's length principles.
This paper puts forward the following recommendations:
I.
In order to ensure that transfer pricing techniques benefit both
taxpayers and tax authorities of related companies in different tax
jurisdiction in which the companies and multinational operate,
appropriate transfer pricing techniques must be applied with
strict adherence with the arm's length principles and practices.
ii.
Government through the various regulatory bodies must
discourage multinational companies from having internal
priorities for transfer pricing.
iii.
Also, since the onus lies on the taxpayer, the adviser and their
respective tax authorities, applying appropriate profit level for
every company among members in the group of companies could
assist Nigeria law on transfer pricing to be able to retain much of
the profit derived from the exploitation of her resources and other
business activity carried out in the country.
iv.
Also, that taxable income should be taxed proportionately among
the associate companies so as to retain the profit derived of
related companies in different tax jurisdictions in which the
enterprise and multinational operate and thereby encourage tax
compliance on the long run.
Constituent entities carrying on businesses in Nigeria have an
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REFERENCES
Hirshleifer, J., (1956). Economic of transfer pricing. Journal of
Business, 29, 172-183.
Allingham, M. G. & Sandmo, A. (1972). Income tax evasion: A
theoretical analysis. Journal of Public Economics, 1, 323-338.
Akinleye, G. T., Olaoye, C. O. & Fajuyagbe, B. S. (2018). Effect of
transfer pricing and compliance on tax administration in Nigeria,
ACTA UNIVERSITATIS DANUBIIUS 14 (5), 86-97.
Barker, J., Asare, K. & Brickman, S. (2017). Transfer pricing as a
vehicle in corporate tax avoidance. The Journal of Applied
Business Research, 33 (1), 9-15.
Beebeejaun, A., (2017). The efficiency of transfer pricing rules as a
corrective mechanism of income tax avoidance. Journal of Civil
and Legal Sciences, 7 (1), 237.
Bhartia, H. L. (2009). Public finance. 14th Edition. New Vikas
Publishing House PVT Ltd.
Horst, T., (1971). The theory of multinational firm: Optimal behaviour
under different tariff and tax rates. Journal of Political Economy,
79, 1059-1072.
Huda, M. K., Nugraheni, N. & Kamarudin, K., (2017). The problem of
transfer in Indonesia taxation system. International Journal of
Economics and Financial Issue, 7(4), 139-143.
Income Tax (Transfer Pricing) Regulations, (2018).
Income Tax (Country-by-Country Reporting) Regulations, 2018.
Isau, A. O., (2014). Transfer pricing: The Nigerian perspective.
International Journal of Accounting and Taxation, 2 (2), 23-38.
Jame, S., Murphy, K., & Reinhart, M., (2005). Taxpayer belief and
views: Two new surveys. Australian Tax Forum, 20, 157-188.
Bradley, W., (2015). Transfer pricing: increasing tension between
multinational firms and tax authorities. Accounting and Taxation,
7 (2), 65-73.
Klassen, K., Lisowsky, P., & Mescall, D., (2017). Transfer pricing:
strategies, practices and tax minimisation. Contemporary
Accounting Research, 34(1), 455-493. http://dx.doi.
Org/10.1111/1911-3846.12239.
Chan, K., Lo, A. & Mo, P., (2015). An empirical analysis of the changes
in tax audit focus on international transfer pricing. Journal of
International Accounting, Auditing and Taxation, 24 (2015), 94104.
Melynchenko, R., Pugachevska, K. & Kasianok, K., (2017). Tax
control of transfer pricing. Investment Management and
Financial Innovations, 14 (4). 40-49.
CITN (The Chartered Institute of Taxation) (2002). CITN Nigerian Tax
Guide Statutes, Lagos: The Chartered Institute of Taxation of
Nigeria.
Federal Inland Revenue Service (Establishment) Act, 2007.
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Mill, J. S., (1978). J. S. Mill's Redistribution Policy: New Political
Economy or Old? Economic Inquiry, 16 (4).
Musgrave, P., (1972). International tax base division and the
multinational corporation. Public Finance, 27.
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Obasi, N. N., (2015). The impact of transfer pricing on economic
growth in Nigeria. International Journal of Academic Research in
Business and Social Sciences, 5 (12), 127-138.
Ola, C.S., (1985). Tax Planning and Auditing in Nigeria, University
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Organisation for Economic Co-operation and Development (OECD),
2013. Transfer pricing Guidelines for Multinational Enterprises
and Tax Administration, 34-43.
CHAPTER THIRTEEN
TAX RISK MANAGEMENT
ADEMOLA Olanrewaju
Partner
Ascension Consulting Services
INTRODUCTION
Oyedele, T. Curtis, A., Sweigart, E. & Smallwood, R. (2013). The
impact of Nigeria's new transfer pricing rules on multinational
enterprises. Emerging Issues Analysis, 6958.
Sari, N. & Hunar, R. S., (2015). Analysis method of transfer pricing
used by multinational companies related to tax avoidance and its
consistencies to the arm's length principles. BINUS BUSINESS
REVIEW, 6 (3), 341-355.
Smith, A. O., (2015). The impact of transfer pricing on financial
reporting: A Nigeria study. Research Journal of Finance and
Accounting, 6 (16), 208-218.
Businesses all over the world face different kinds of risks which may be
intrinsic to the business or geographical due to location. Common risks
that businesses face regardless of country of operation include market
risk, liquidity risk, resource risk, material risk, asset risk etc.
Businessmen are often more concerned with the foregoing risks and
pay scant attention to tax risk or the need to manage it. Avoidable tax
liabilities which encroach on a business represent a leakage in the
profits of such businesses. The level of such liabilities determines the
significance of the leakage and impact on bottom line as well as cash
flow. While it is impossible to divorce business from risks (since the
mantra is “no risk, no reward”), knowing the risks provide
opportunities to manage them and improve the probability of creating
and/or enhancing value to shareholders and other stakeholders in that
business.
It is the discretion of managers of businesses to determine whether to
carry out an enterprise wide review for risks or adopt a disaggregated
approach which focuses on addressing each risk as identified or as they
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arise. Whatever the approach, what is not in doubt is that the
assessment of tax risk triggers in the business may be preoperational
and/or post-operational.
iv.
What is the level of debt in the business and is it optimal? Cash is
the oxygen of business. It therefore matters how the business is
funded and whether optimal mix and sources are being leveraged.
An unmitigated or unaddressed tax risk must be recognized for what it
is: a threat to cash flow and leakage to the bottom line. This imposes a
duty on managers of businesses, to acknowledge this risk and take
steps to address it.
v.
What is the level of fiscal incentives in the business? It is possible
from a holistic review of the business operations to determine
whether or not the existing incentive framework is adequate for
the business.
In this regard and with the anticipated increase in revenue drive by tax
authorities (through greater frequency of scheduled tax audits and
investigations), managers of Nigerian businesses must challenge their
approach to the business tax affairs with the following questions:
vi.
What is the effective tax rate of the business relative to
competition? This is important as it may reveal where the
business is dropping the ball relative to its competition. It may
also confirm or deny whether tax efficiency is a priority for the
business.
i.
ii.
What is the strategy of the business? Such a strategy would define
the business's focus and dictate the resource requirements. This
would drive an acknowledgment of the tax function as an
important part of the business and avoid catch up on tax issues by
ensuring that appropriate sensitivity to tax is in the company's
DNA.
What is the fiscal profile of the business? That is, tax position;
actual tax risk triggers; tax assets on the books (unutilized tax
credits, unutilized capital allowances; unabsorbed losses); tax
audit open years; adequacy of tax provisions etc.
iii. What is the compliance level of the business – is it high or low?
Businesses need to understand that a tax audit or investigation by
tax authorities does not necessarily have to result in additional tax
to be paid by the business if appropriate investment is made in the
right things.
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vii. Is the business eligible for tax refund? Yes, tax refund is now
possible upon application and successful completion of the claim
verification tax audit exercise by the tax authorities, in this
instance, Federal Inland Revenue Service (FIRS).
viii. Does the business have a competent tax function? The in-house
tax function must be anchored by a competent and experienced
tax professional supported by other able staff. And where the tax
function is outsourced, then the business must ensure that
appropriate service level expectations are defined.
ix.
Does the business have a proper documentation and retrieval
system? A proper documentation and retrieval system is
necessary. The business' filing and retrieval system/process for
supporting documents in respect of its transactions must be
adequate. A business that has challenges in retrieving the relevant
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x.
supporting documents for its transactions in particular years of
assessment already lets itself down for tax audit/investigation
purposes.
not always the company head or a manager who's to blame. Instead, the
risks may come from other sources within the firm or they may be
external from regulations to the overall economy.
Who is advising the business on tax? Whether or not the company
has a competent in-house tax function, it must periodically
engage with competent tax advisors and tap into their experiences
on the tax issues facing the business.
While a company may not be able to shelter itself from risk completely,
there are ways it can help protect itself from the effects of business risk,
primarily by adopting a risk management strategy.
Given the changes in the current business environment, it is only
prudent for businesses to be proactive in managing the incidence of tax
risks in their operations to avoid bleeding of scarce cash.
1.
TAX RISK MANAGEMENT
TYPES OF RISKS
Tax Risk
Tax risk is the risk that transactions or business relationships may have
unforeseen adverse tax consequences. Tax risk is perceived as potential
underpayments, overpayments, tax penalties and assessments. It also
relates to above the line taxes. It can also be defined as the risk that
companies pay for an incorrect amount of tax, or that the tax positions a
company adopts are out of step with the tax risk appetite that the
directors have authorized or believe is prudent. Examples of tax risks
are inability to meet tax requirements, unexpected cash taxes, and
failure to capitalize on tax savings from business relationship.
Business Risk
Business risk is the exposure a company or organization may face that
will lower its profits or lead it to fail. Anything that threatens a
company's ability to meet its target or achieve its financial goals is
called business risk. These risks come from a variety of sources, so it's
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Business risk is influenced by a number of different factors including:
a) Consumer preferences, demand, and sales volumes
b) Per-unit price and input costs
c) Competition
d) The overall economic climate
e) Government regulations
Companies are exposed to transactional, operational, compliance and
financial accounting risk. These make it increasingly important to
minimize business risk.
Transactional Risk
Transaction risk is the exchange rate risk associated with the time delay
between entering into a contract and settling it. The greater the time
differential between the entrance and settlement of the contract, the
higher the transaction risk, because there is more time for the two
exchange rates to fluctuate.
Despite the lag between agreement and execution, there are strategies
companies can use to minimize any potential loss.
Overview of Transactional Risk
When companies repatriate profits or pay for goods overseas there is a
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time delay in agreeing on the purchase and executing the foreign
exchange transaction to complete the deal. For example, if a U.S.
company is repatriating profits from a sale in the U.K. it will need to
shift British pounds to U.S. dollars. However, there is time between the
decision and the execution and settlement of the deal, this period is
known as transaction risk. In this instance, the risk lies in the GBP/USD
cross rate.
an organization is prepared to accept, combined with the cost of
correcting those errors, determines the organization's risk appetite.
Transaction risk creates difficulties for individuals and corporations
dealing in different currencies, as exchange rates can fluctuate
significantly over a short period. This volatility can be reduced through
many hedging mechanisms. A company could take out a forward
contract that locks the currency rate in for a set date in the future.
Another popular and cheap hedging strategy is options. By purchasing
an option a company can set an "at-worst" rate for the transaction.
Should the option expire out of the money then the company can
execute the transaction in the open market at a more favorable rate.
Operational Risk
Operational risk is the prospect of loss resulting from inadequate or
failed procedures, systems or policies such as employee errors;
systems failures; fraud or other criminal activity and any event that
disrupts business processes.
Most organizations accept that their people and processes will
inherently incur errors and contribute to ineffective operations. In
evaluating operational risk, practical remedial steps should be
emphasized in order to eliminate exposures and ensure successful
responses. Poor operational risk management can hurt an
organization's reputation and cause financial damage. How much loss
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Compliance Risk
Compliance risk is exposure to legal penalties, financial forfeiture and
material loss an organization faces when it fails to act in accordance
with industry laws and regulations, internal policies or prescribed best
practices.
Compliance risk is also sometimes known as integrity risk, many
compliance regulations are enacted to ensure that organization operate
fairly and ethically. The following are the impact of compliance risk;
Legal impact: Regulatory or legal action brought against the
organization or its employees that could result in fines, penalties,
imprisonment, product seizures, or debarment.
Financial impact: Negative impacts with regard to the organization's
bottom line, share price, potential future earnings, or loss of investor
confidence.
Business impact: Adverse events, such as embargos or plant
shutdowns, that could significantly disrupt the organization's ability to
operate.
Reputational impact: Damage to the organization's reputation or
brand—for example, bad press or social-media discussion, loss of
customer trust, or decreased employee morale.
Financial And Accounting Risk
Financial and accounting risk is a material misstatement of a
company's financial statement. Financial or accounting risks typically
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arise from, but not limited to, the following issues/situations;
1. Accounting policies are incomplete, inaccurate, not documented
or clear, etc
2. Training is not adequate,
3. Inadequate internal controls such as not identifying material
weaknesses, improperly designating "significant or key
controls", etc.
4. Accounting resources have not been recruited to fill key
positions.
i)
j)
k)
l)
2.
TECHNIQUES FOR MANAGING TAX RISKS
The management of tax risk is a core issue in any organization. Tax risk
impacts on every aspect of the business either directly or indirectly.
Transactional and operational decisions along with changes in the
market and business' financial position can all affect its tax risk profile.
The ultimate challenge for the tax executive is to provide comfort that
the Tax Risk Management framework is indeed implemented, tested
for compliance and adhered to throughout the organization.
The following are the effective techniques tools in managing tax risks;
a) Having adequate information
b) Key tax process are clearly identified and understood
c) Material risk are identified and assessed
d) Identify risk appetite
e) Ensure key controls are established and operated
f) Issues or events are identified and escalated
g) Carry out remediation
h) Highlight lesson learnt
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Carry assurance test
Have tax returns filed
Follow up and resolve all tax queries
Update team on relevant, changes or new tax laws
Other Key steps to best practice in tax risk management
a. The FIRS approach to risk. The FIRS currently takes a number of
approaches to improving tax compliance, including pre-emptive
and pre- lodgment checks e.g. self-assessment programme
b. Detection by data matching e.g. conduct a program of
verification checks
c. Mitigating the consequences of an audit eg in-depth audit
d. Tax audit insurance claims examples eg what is the tax liability
3. TAX OBLIGATIONS
Tax is a compulsory contribution to State revenue levied by the
government on workers income, business profit, or added to the cost of
some goods, services and transactions. All taxes in Nigeria are
collected by Nigeria's Federal Inland Revenue Service (FIRS).
According to FIRS there are nine (9) types of taxes in Nigeria:
1. Companies Income Tax (CIT)
2. Petroleum Profit Tax(PPT)
3. Value Added Tax (VAT)
4. Personal Income Tax (PIT)
5. Withholding Tax (WHT)
6. Educational Tax (EOT)
7. Stamp Duties (STD)
8. Capital Gains Tax (CGT)
9. National Information Technology Development Fund (NITDF)
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Companies Income Tax (CIT):
Under Companies Income Tax Act you have to pay Companies Income
tax if you are a resident or non-resident company incorporated in
Nigeria.
The payment is done mainly 2 segments of 12-13 phases. The first
segment is the estimated annual return paid not later than February of
each year. The tax due is than paid in 12 months instalments throughout
the year. In case of the accumulated actual tax exceeds the tax paid a
13th month payment can be paid. If the opposite occurs you will get the
refund.
Payment Information: For resident companies and organizationCompanies and organizations prepare and submit their annual selfassessment tax return according to the FIRS specifications. This has to
be done with the proof (e.g. e-ticket issued from the bank) of payment
of the full amount or first instalment of the Tax return. The payments
are made to designated banks.
Value Added Tax (VAT)
Any person or individual, corporate sole, organizations that consume
or buy any taxable product or service will have to pay Value Added Tax
or VAT.
For non-resident companies and organization- Companies make their
tax payment through remittance. Their tax is deducted at the source and
deposited to designated banks. These companies' tax subject to
Withholding Tax (WHT) deduction on their earning in Nigeria this will
be their tax upon filing tax return.
Payment Information: This tax is primarily collected by the seller
when any taxable item or service is sold. The seller then nets off the
VAT and submits it to FIRS through a designated bank. The bank
immediately issues an e-ticket as evidence. When this is presented to
the Integrated Tax Office (ITO) a e-receipt is issued.
Petroleum Profit Tax (PPT)
The Petroleum Profit Tax is subject to any resident company or person
in charge of a non-resident company who are exploring for petroleum
or producing it. This also includes any liquidator, receiver, or agent of
liquidator or receiver of any company carrying on petroleum
operations in Nigeria.
Personal Income Tax (PIT)
Individuals resident in Federal Capital Territory (Abuja), Nigerian
armed force employee, non-resident earning or deriving income from
Nigeria and officers of Nigerian Foreign Service will have to pay
Personal Income Tax.
Payment Information: The Petroleum Profit Tax is a type of pre-paid
tax. You have to prepare and submit your annual tax return to JP
Morgan Chase Bank, within five months of the end of each assessment
year.
Payment Information: Persons who get paid through employment
pay their Personal Income Tax through Pay as You Earn (PAYE)
system. According to PAYE, employers deduct Personal Income Tax
from the salaries of their Employees and pay it directly to FIRS through
a designated bank on behalf of the employee in a monthly basis.
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Withholding Tax (WHT)
The Withholding Tax has no distinction of its own. This tax is only a
mechanism to collect other taxes. Various people may be subject to
Withholding Tax deduction to balance their tax liabilities for different
types of tax. WHT deductions are regarded as advance payments (or
payments on account) of the relevant tax liability that will arise from
the tax returns of the period concerned.
Capital Gains Tax (CGT)
All the companies registered in Nigeria which earn any capital gains or
gains on the disposal of any form of assets whether it is in Nigeria or not
are liable to Capital Gains Tax.
Payment Information: When a person benefits from any payment and
the income is taxable, the Withholding Tax is withheld by the payee. It
is then directly remitted to FIRS through a designated Bank.
Educational Tax (EDT)
All the companies registered in Nigeria, in other words, all the
companies subject to Companies Income Tax (CIT) are also liable to
Educational Tax (EDT).
Payment Information: Educational Tax is also prepared and
submitted with annual self-assessment of Companies Income Tax to
designated Bank.
Stamp Duties (STD)
Items or persons subject to Stamp Duties tax are written documents
relating things between individuals or companies or group of soles.
Stamp Duties may include instruments such as financial transaction,
article of association between companies, statements, deals, bonds etc.
Payment Information: Companies or persons related with the stamp
duties must submit all the instruments to the Stamp Duties Office for
stamping. The duty is paid directly to FIRS through designated bank.
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Payment Information: Capital Gains Tax is calculated and submitted
with Companies Income Tax to FIRS through Designated Bank.
National Information Technology Development Fund (NITDF)
Levy
All the companies in Nigeria, who are operating as GSM provider or
Telecommunication Company, Cyber Company or internet service
provider, bank, insurance etc. and have an annual turnover of N100,
000,000 and above are liable to NITDF Levy.
Payment Information: Companies chargeable, pay the levy with their
Companies Income Tax. The companies have to compute 1% of their
profit and pay it through the designated bank.
VALUE ADDED TAX (VAT) REGISTRATION
Based on the VAT Act, a taxable person is required to comply with
obligations with respect to VAT, some of which have been summarised
below:
a) Registration with FIRS for VAT purposes. While taxpayers obtain
tax identification number (TIN) upon registration with Corporate
Affairs Commission(CAC), they are required to validate their
registration with FIRS, for VAT filing purposes
b) Charge VAT at 5% on all taxable supplies
c) Remit VAT collected from customers to FIRS, through
designated banks
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d)
4. TAX QUERIES AND RED FLAGS
Query in its literal meaning, is the expression of doubt or suspicion that
something is not very correct or that there is a risk in giving approval to
something.
File VAT returns with FIRS not later than the 21st day of the
month following the month of transaction
Disclosure
The National Executive Council [NEC] recently approved in principle,
the implementation of a Voluntary Assets and Income Declaration
Scheme (VAIDS). The Scheme came into effect from May 2017 once
formal guidelines were issued. The Scheme encourages voluntary
disclosure of previously undisclosed assets and income for the purpose
of payment of all outstanding tax liabilities.
The Scheme offers a limited waiver for declaration within the specified
period of time. The Scheme is expected to help expand Nigeria's tax
base and therefore improve the low tax to Gross Domestic Product
[GDP] ratio currently about 6%. It also seeks to curb the use of tax
havens for illicit fund flow and tax avoidance. It is estimated that the
Scheme would generate approximately USD1 billion in tax revenues.
Objectives
Some of the objectives of the Scheme include:
1. Increasing Nigeria's tax to GDP ratio from 6% to 15% by 2020.
2. Broadening the Federal and State tax brackets. Only 214
individual's nationwide payN20 million or more in tax annually.
3. Curbing non-compliance with existing tax laws and discouraging
use of tax havens.
a. Discouraging illicit financial flows and tax evasion
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Tax query is a question or enquiry on the tax payer, based on the tax
return, to prove that the elements of the tax return that possess
suspicion of doubt for its accuracy is indeed correct. As long as the tax
payer proves that the doubts are baseless, his problems on this tax
return are all over. Therefore, it's a thing that is always resolved
amicably.
Tax query originates from the tax office desk examination. As soon a
tax return is made and received in the tax office, such tax return will be
subjected to examination by the tax inspector. One of the focuses of the
examination is to ensure that the return is accompanied by necessary
and complete documents. The inspector will also look for errors and
mistakes in the tax computation and in the accompanying financial
documents. At this time queries are sent out for any error or mistakes or
incomplete documents found. This is the origin of tax queries.
The next question you would like to ask is; what do the tax queries
cover?
Some have been mentioned above, but the tax inspector examines
every tax return and it's supporting documents to ascertain whether a) Tax payer income is complete
b) Tax payer income is understated
c) Tax relieves are not overstated
d) Expenses deducted from the income are wholly, exclusive,
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
i.
ii.
iii.
iv.
v.
necessary, and reasonably incurred in the generation of the
income.
Capital expenditure are included in operating expenses
Tax avoidance programme are in place
Supporting documents for assets and liabilities are in the name of
the tax payer
Private/family expenses are included in the computation
Relevant documents for VAT, Insurance claim, invoices etc. agree
with the financial statements
i. PAYE, With-holding tax, VAT as shown were promptly paid
as stipulated by tax law
ii. Capital expenditure ( depreciation), general bad debts
provisions are included in the computation
iii. Donation are only to the approved bodies and within the ratio
stipulated by law
iv. Loss rule relating to carry forward rules are observed
v. Commencement rule, change of accounting date rules etc are
observed
vi. Related party transactions are adjusted
vii. Transfer pricing policy of the federal government is effected
viii. That return is made within the time limit.
WHAT ARE THE REMEDIES FOR TAX QUERY?
If you don't want to be having tax queries, ensure that a. Appointment of tax advisor/consultant.
b. Complete and authentic financial statements.
c. Proper books of account, with a functional internal control
system
d. Avoidance of relate party transactions
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TAX RISK MANAGEMENT
e.
f.
5.
Expenses and claims are wholly, exclusively, necessarily, and
reasonably incurred for the business.
Prompt returns within the stipulated legal timing
TAX COMPLIANCE AND EFFECTIVE INTERNAL
CONTROL SYSTEM
Tax compliance shows a degree to which a tax payer complies (or fails
to comply) with tax rules of a State or Country. While an effective
internal control system provides reasonable assurance that policies,
processes, tasks, behaviors and other aspects of an organization, taken
together, facilitate its effective and efficient operation, help to ensure
the quality of internal and external reporting, and help to ensure
compliance with set guidelines, rules or laws.
Below are the set controls that can drive effective tax compliance;
1. Adequate and accurate information gathered from the accounting
and other external departments is accurate. Does your tax process
ensure that raw data is referenced back to the trial balance to
ensure there are no material differences
2.
Using accurate and correct tax rates for current and future tax
calculations. Does your tax process ensure that rates used in
calculations have been checked to an external source such as a
current version of Income Tax Act or taxing authority website
(domestic and foreign)?
3.
Accuracy of the tax calculations. How does you tax department
keep abreast of any changes in domestic and foreign tax
legislation? Does your tax process ensure that calculations are
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correct by re-calculating material numbers? Does your
department restrict access to spreadsheets used for calculations?
Are changes made to spread sheets tracked and reviewed
separately to ensure errors do not occur?
4.
5.
6.
7.
Sufficient support for tax contingencies. Does your tax process
ensure that every contingency item is supported amount, a related
taxation year and the rationale for the contingency? Does your
company have to comply with tax requirements?
The books to actual (“BTA”) adjustment are made. Does
your tax process ensure that two separate adjustments are
recorded (i) prior year's tax provision estimate to tax return filed
adjustment and (ii) prior year's tax return filed to the assessed
amount? Furthermore have you considered why there are
significant differences (if any) and can the provision process be
improved to reduce these adjustments.
Accurate and reasonable inputs for future tax balances. The
Decision of whether and where (short or long term) to record a
future tax asset/liability may be partially based on the company's
revenue forecast in specific jurisdictions, financing plans,
planned acquisitions and divestitures, etc. Does your tax process
ensure that tax is involved in these strategic discussions and has
the most current information?
Appropriate authorization and posting of tax entries to
general ledger and tax accounts. This has two parts as payments
into and adjustments between tax accounts (taxing
authority
accounts)
should be properly authorized and
297
reconciled on a monthly basis to ensure balances correct for each
legal entity and taxation year. The second part is to ensure that the
journal entries made to record the payments, adjustments,
accruals, and expense, etc are properly authorized and the general
ledger accounts reconcile to tax working papers.
8.
The income tax balances are recorded according to generally
accepted accounting principles. Does your tax process ensure
there is adequate documentation to support that taxes are
recorded correctly? How does the tax department keep abreast of
changes to accounting for its domestic and foreign companies?
Have accounting tax policies been approved by the chief financial
officer and agreed to by external auditors?
9.
All tax-related figures are used for public dissemination have
been agreed. Does your tax process ensure the tax department
reviews and agrees all other tax-related figures in the books,
annual report and annual information return?
10. Tax Plan Implementation Review is performed on regular basis.
Does your tax process ensure that tax plans implemented have
been appropriately authorized, implemented and measured?
CASE STUDY
Alpha Pic is a registered public limited company with 51% Nigerian
equity holding the remaining equity holding are foreign investors. The
company is a major operator in the Telecom Sectors. Recently
government through its regulatory has announced various reforms in
the sectors to be effective after 30 days of announcement. These are;
a) Introduction of ICT tax of 1 % of after tax profit
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX RISK MANAGEMENT
b)
c)
d)
2.
A.
B.
C.
D.
Tax risk is except
Having positive effect on tax payer
Giving rise to additional tax cost
Administration of tax may be more costly
As a result of changes in existing tax laws
3.
A.
B.
C.
D.
The following are techniques in managing tax risk except
Having adequate information
File no tax return
Key tax process are clearly identified and understood
Material risk are identified and assessed
4.
A.
B.
C.
D.
Business risk is influence by except
Tax payer meeting all tax requirement
Consumer preference
Competition
Government regulation
5.
A.
B.
C.
D.
The CIT stand for?
Contribution income tax
Company interest tax
Connection income tax
Company income tax
6.
A.
B.
C.
D.
Rate of withholding tax on professional fee is?
2.5%
5%
10%
B&C above
Increase in CIT and Education Tax
Increase in employers contribution pension contribution
Increase in stamp duty on dividend pay out to foreign investors
On review of the books by the external auditors it was discovered.
i.
Major transaction with foreign partners on consultancy services
were not captures and no remittance were made. Suddenly they
were major devaluation reform in the economy and these have
affected the exchange rate USD/Pound and other major world
currency.
ii.
iii.
Material error were committed by staff thereby showing material
items payment to suppliers and contractors were not withheld and
remitted to the government
Non-compliance in filing tax returns timely was also discovered.
After the audit exercise, and submission and filing returns. The tax
authorities issued queries on various accounts items and raised back
duty assessment to the company.
Based on all the submissions analyze the risk face by Alpha Plc
TEST QUESTIONS
1. Business risk is except
A. Lower profit
B. May threaten achieving target
C. Increase profit
D. May lead to failure
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX RISK MANAGEMENT
7.
A.
B.
C.
D.
Rate of withholding tax rate on rent is?
20%
5%
10%
B&C above
12.
A.
B.
C.
D.
VAT is chargeable at the point of?
Sales
Consumption
Point of payment
All of the above
8.
A.
B.
C.
D.
Rate of withholding tax rate on foreign dividend is?
10%
15%
5%
20%
13.
A.
B.
C.
D.
The following are exempted from VAT except?
Drugs
Educational materials
Rent on commercial property
Rent on residential property
9.
A.
B.
C.
D.
What is the rate for education tax?
5%
2.5%
10%
2%
14.
A.
B.
C.
D.
What is a penalty for non-filing of VAT returns?
N5.000 flat
N5.000 first month and every subsequent month of default
N10, 000 flat
N15, 000 flat
10.
A.
B.
C.
D.
Education tax is chargeable on?
Net profit
Profit after tax
Assessable profit
Chargeable profit
15.
A.
B.
C.
D.
What is penalties non remittance of WHT?
Blacklist the tax payer
Upon notice 200% pa on unremitted amount
N5, 000 pa for individual
All of the above
11.
A.
B.
C.
D.
CIT is chargeable on?
Chargeable profit
Net profit
Profit before tax
Non-of the above
16. What is the penalty for late filing and submission of audited
accounts?
A. N25.000 for the first month of default
B. N5, 000 for each subsequent month of default
C. Two years imprisonment
D. All of the above
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX RISK MANAGEMENT
17.
A.
B.
C.
D.
Which body is responsible for collection of taxes in the country?
Joint Tax Board (JTB)
Federal Inland Revenue Service (FIRS)
States Internal Revenue Service
B&C above
C.
D.
Petroleum Profit tax
Value Added Tax
18.
A.
B.
C.
D.
The States is authorized to collect the following taxes except?
Petroleum profit tax
Land use charge
Pay as you earn
Withholding tax on remuneration
22.
A.
B.
C.
D.
What is VAIDS?
Volume assets and income declaration scheme
Voluntary assets and income declaration scheme
Value assets and income declaration scheme
Various assets and income declaration scheme
19.
The following are the objectives of VAIDS programmes except
Increase in tax rate
Increase in Nigeria tax to GDP
Broadening the federal and state tax brackets
Curbing non-compliance
A.
B.
C.
D.
Taxes of Federal Capital Territory and that of the armed forces
are collected by;
FIRS
Abuja Municipal Authority
Federal Capita! Territory Authority
Non-of the above
23.
A.
B.
C.
D.
20.
A.
B.
C.
D.
The following are the controls measure to ensure tax compliance
Ensure sources information is accurate
Ensure tax rates are correct
Ensure the accuracies of tax calculation
All of the above
24.
A.
B.
C.
D.
Tax queries are carried out to ascertain
Tax payer income is complete
Tax relieves are not overstated
Supporting documents can be ascertain
All of the above
25.
A.
B.
C.
D.
The following are the remedies for tax queries except
Tax consultant/adviser in place
Embark on public relation
Financial statements are complete and authentic
Keep proper books of account and functional internal controls
21 . The following are taxes collected by FIRS except
A. Companies Income Tax
B. Land use charge
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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ANSWER TO TEST QUESTIONS
1. C 2.A 3.B 4.A 5.D 6.C 7.B 8.C 9.D 10.C 11.A 12B. 13.
C 14. B 15.D 16.D 17.D 18.A 19.A 20.D 21.B 22.B 23.A. 24.D
25.B
REFERENCE
Soyode, L. & Kajola, S. O. (2006). Taxation principals and practice in
Nigeria, Ibadan, Nigeria; Solicon Publishers.
Somorin, O. A., (2012). TEJUTAX Reference Book on the Nigerian
Tax System (Malthouse) Volume2.
Taylor, G., Richardson, G. & Lanis, R., (2015). Multinationality, tax
havens, intangible assets and transfer pricing aggressiveness: an
empirical analysis Journal of International Accounting Research,
14 (1). 25-57.
Zee, H., H., Stotsky, J., G., & Ley, E. (2002). Tax Incentives for
Business Investment: A Primer for Policy Makers in Developing
Countries, World Development, 30(9), 1497-1516.
Carl, P. and Sawicki, D. (1993). Basic Methods of Policy Analysis and
Planning. Englewood Cliffs, NJ: Prentice Hall.
Stone, D. (2002). Policy Paradox. New York: W.W. Norton.
Viana, A. L. (1996). "Abordagens metodológicas em políticas
públicas," in Revista da Administração Pública, 30(2): 5-43.
McCool, D. (1995). Public policy theories, models, and concepts: An
anthology. Englewood Cliffs, NJ: Prentice Hall.
Retrieved from http://www.politicipublice.ro/uploads/understanding
_public _policy.pdf on 08/08/2019.
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IMPERATIVE OF TAX INCENTIVES IN NIGERIA
CHAPTER FOURTEEN
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
OYEDOKUN, Godwin Emmanuel,
BABALOLA Wasiu, and AWOSIKA Mayowa
Faculty of Law, Lead City University, Ibadan, Nigeria
godwinoye@yahoo.com; +2348033737184
INTRODUCTION
In recent years, taxation is regarded as a very fundamental tool that
drives sustainable development and the growth of emerging economies
such as Nigeria. Tax incentives are basically premeditated to attract
new investment into the country and to expend existing ones in priori
industries which is based on the country development plan capable of
stimulating economy growth. The broadening of a country's taxable
capacity is often linked in economic literature to the generous
incentives prevalent in tax system. The debate of exemptions is
imperative since they have a significant impact on the effective tax
base. The provisions of generous exemptions often tend to erode the tax
base, which inversely affects income elasticity of a tax via tax-to-base
elasticity.
According to Osoro (1993), the importance of taxation as a veritable
tool of economic growth and development depends on a proper tax
system which has the capacity to generate revenue through tax. This
implies that the tax system must be efficient and effective. This can be
achieved through various tax incentives. Tax incentives have the
307
potentials of attracting both local and foreign investment if properly
harnessed. It is however unfortunate that most developing countries
like Nigeria have not been able to exploit the effectiveness of tax
incentives because of the need, perhaps, to meet the desires of the
electorates and the poor management of tax system. However,
considering tax incentives as a stimulator to revenue generation
implies that incentives may not be available to all citizens but rather
must be tailored to crucial sector of the economy. This would
emphasize to a large extent why in most developing country, where tax
incentives are especially common, are targeted at attracting foreign
direct investment and rarely to domestic investors.
The desirability of using tax incentives to facilitate new investment is a
necessary condition for developing an avenue for managing the
unsustainable fiscal deficits in Nigeria. Thus, effective tax systems are
not only central to promoting economic growth but also crucial for
achieving macroeconomic goals.
In this regards, this paper discusses principles of taxation and tax
incentives, the productivity impact of tax revenue generation on
Nigeria economy and Implications of tax incentives on the Nigerian
economy.
Principle of Taxation and Tax Incentives
In order to properly understand the subject matter, it is imperative that
we remind ourselves about the meaning of the focal word 'TAX'. Tax
has been defined as 'a monetary charge imposed by the Government on
persons, entities, transactions and properties to yield revenue.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
Taxation is undoubtedly a veritable instrument for national
development. Apart from being a major source of revenue for
government to provide goods and services needed by the people, tax
policies, can and do facilitate economic growth and job creation
through its impact on investment and capital formation in the economy.
In this respect, reform of the tax system that ensures effectiveness,
equity, and efficiency are indispensable conditions for a healthy public
finance.
conditions to invest in their domestic economy (Fakile & Adegbile,
2011; Kaplan, 2001).
What is Tax Incentives?
Tax incentives according to Philip (1995), can be described as
deliberate reduction in tax liability granted by government in order to
encourage particular economic units (e.g. corporate bodies to act in
some desirable ways (e.g. invest more, produce more, employ more,
export more, save more, conserve less, pollute less, and so on). Any tax
is amenable to being modified to create a tax incentive. The reduction
in tax liability, which a tax incentive constitutes, can be achieved
through a reduction in tax rate, reduction in tax base, and so on.
Uronma (2013), defined tax incentives as relief's granted to tax payers
or industries in the form of set-offs from the total income before tax
liability is determined. It could be in form of tax holidays or waivers. It
is established by legislations or statute authorizing such payment of
tax.
Tax incentives sometimes, called fiscal incentives) are the end-result of
policies that are part of the tax system which is common in developing
countries, and usually established by governments in order to grant
multinational companies and foreign investors more attractive
309
Forms of Tax Incentive Scheme
The tax incentives enjoyed by the individuals and companies which
their profit or income is accruing in, derived from, brought into or
received in Nigeria include:
A. Capital allowance incentives:
Capital expenditure is not an admissible expense in earning profits. But
capital expenditure often results in the creation of fixed assets, such as
plant or machinery, building etc. which are used for the purpose of
earning profits. Kiabel (2012). It is only therefore reasonable to give
relief for the purposes of taxation in respect of these items of
expenditure. Special allowances usually referred to as capital
allowances are designed to provide this form of relief. When a fixed
asset is put into use by a business, its value gets eroded as a result of
physical wear and tear, the passage of time or as a result of
obsolescence. Moreover, income tax laws supported and strengthened
by accounting practice, do not allow the cost of creating these assets as
direct debits or charges against the profit of the business. It therefore
becomes reasonable for the taxpayer to set aside some portions of the
profit annually with which to replace the asset in question once its
usefulness has expired.
Conditions for Granting Capital Allowances
For capital allowances to be granted on qualifying capital expenditure,
the following conditions must be satisfied:
i.
The assets must be owned by the person claiming the allowance.
ii. The asset must be owned by the person claiming the allowance.
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IMPERATIVE OF TAX INCENTIVES IN NIGERIA
iii.
a.
It is charged at the required percentage on net value (i.e. Cost less
Initial Allowance)
b.
It considered the number of useful years of the asset as
(100/Annual Allowance Rate) e.g. for asset with 25%, the
number of useful life shall be 100/25 given 4years.
c.
It is charged annually i.e. every year of assessment usually 12
months
d.
It is prorated for the number of months in basis period in the year
of assessment (usually in the first year)
e.
Where a new asset is acquired in the year with basis period less
than twelve months, the first Annual Allowance will be prorated
based on the number of months. Thereafter, the annual allowance
from the second year to the end of the useful life shall be in any of
the following computational options:
i Use of Equal Value with the Tax Written Down Value
(TWDV) i.e.TWDV/n-1
iv.
v.
The asset must be in use in the trade, business, profession or
vocation at the end of the basis period in respect of which a claim
is made.
The company or person must make a claim for capital allowances
to the relevant tax authority
Where applicable, an 'acceptance certificate' for the asset issued
by the Factory Inspectorate Division of the Federal Ministry of
Labour must be produced.
Types of Capital Allowances
Initial Allowances
This type of capital allowance as espoused by Kiabel (2012) refers to
allowance granted a business which has incurred qualifying Capital
Expenditure in the year of Assessment in which the asset representing
such expenditure was first put to use for the purpose of the business.
The following are the major characteristics of the allowance:
i.
ii.
iii.
iv.
It is charged directly on cost at the applicable rate
It is charge once in the life of the qualifying capital expenditures
It is not prorated regardless of the date of acquisition in the year of
assessment. However, Initial allowance is pro-rated only where
there is an element of private use of the asset.
It is claimable in full irrespective of the length of the basis period
during which the asset was first put into use.
Annual Allowance
Annual allowance is granted every year to a business owing an asset
that was used for the purpose of the business. The following features
are necessary for application of Annual Allowance (A.A):
311
ii Use of Actual Annual Allowance i.e. (Cost less Initial
Allowance)/Number of years. It is to note that this
computation write off the TWDV at the end of the useful life.
Balance Adjustment
A balancing adjustment could arise upon the disposal of a qualifying
capital expenditure. There are two types of balancing adjustments.
a)
Balancing Charge: This is obtained where the sales proceeds on
disposal is higher than the TWDV of the qualifying capital
expenditure but less than initial cost at the time of disposal (N
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
sales > TWDV). A balancing charge is treated as additional
taxable income. A balancing charge to be subjected to tax should
not exceed the maximum capital allowance previously claimed
on the qualifying capital expenditure. The capital allowance
previously claimed prior to the disposal is the difference between
the cost of acquisition and TWDV as at the time of disposal.
b)
Balancing Allowance: Balancing allowance arises where the
sales proceed on disposal is less than the TWDV on disposal. A
balancing allowance is treated just like the initial allowance and
annual allowance, which are used to reduce tax liability.
Investment Allowance
It is an addition allowance which is granted on plant and equipment
used for a business at the rate of 10% of the costs. An Investment
allowance has the following features:
a. It is an additional allowance to both the initial allowance and the
annual allowance.
b. It is claimed only once in the year incurred.
c. If claimed but not utilized in any particular tax year, it will not be
carried forward because it will be treated as lost. An example is a
year in which loss is sustained, because there is no tax liability on
a loss.
Rural Investment Allowance
Rural Investment Allowance was introduced effective from 1993 year
of assessment. This new allowance is granted to companies that incur
expenditures on the provision of such facilities such as electricity,
water, tarred road or telephone where such facilities are not provided
by the government in the area where the business is located. For the
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IMPERATIVE OF TAX INCENTIVES IN NIGERIA
allowance to be granted the facilities on which the expenditure is made
must be for the purpose of the trade or business and must be located at
least 20 kilometres away from such facilities provided by the
government.
Rates of Rural Investment Allowance
No electricity, water, tarred road or by government
100% expenditure
No electricity by government.
50% of the expenditure
No water by government.
30% of the expenditure
No tarred road by government.
15% of the expenditure
No telephone by government.
5% of the expenditure
B. Pioneer Status Incentive
According to Vincent (2017), the pioneer status incentive is tax holiday
given to companies for a period of time, to encourage the growth and
development of the Nigerian economy. A new company or an existing
company with an expansion plan may apply for a certificate of pioneer
status which lasts for 3 years and is renewable upon application for 2
years. It may also be a seven-year tax holiday in respect of industries
located in economically disadvantaged local government areas of the
country.
The Nigerian Investment Promotion Commission (NIPC) is the body
in charge of administering this incentive. The NIPC has published a list
of pioneer industries, that is, industries that qualify to apply for the
pioneer status incentive.
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List of Pioneer Industries/Products
S/NO
1
Industries
Products
Cultivation, Processing and Preservation
of food crops and fruits
Preserved canned foodstuff and fruits,
tea, coffee, refined sugar, tomato
puree/juice etc.
2
Integrated dairy production
Butter, cheese, fluid milk and powder,
ice cream (by products, livestock, minor
edible products).
3
a) Deep sea trawling and processing
b) Coastal fishing and shrimping
Preserved sea foods, fish and shrimps,
fishmeal
4
Mining lead, zinc, and iron and steel from
iron ore
Iron and steel products
5
Manufacture of iron and steel from Iron ore Iron and steel products
6
The smelting and refining of non-ferrous
base metal and the manufacture of their
alloys
Refined non-ferrous base metal and
their alloys
7
Mining and processing of barytes,
bentonites and associated minerals
Barytes, bentonites and associated
minerals
8
Manufacture of oil well drilling materials
containing a predominant proportion of
Nigerian raw materials
Barytes, bentonites and associated
minerals
9
The manufacture of cement
Cement, clinker
10
Manufacture of glass and glassware
Sheet glass, pharmaceuticals and
laboratory glass wares
11
Manufacture of lime from local limestone
Lime
12
Quarrying and processing of marbles
Marbles and processed marbles
13
Manufacture of ceramic products
Refractory and heat insulating
constructional products, laboratory ware
14
Manufacture of basic and intermediate
i) Basic and intermediate organic chemical;
ii) Basic and intermediate in-organic chemicals;
iii) Fertilizers;
iv) Petro-chemical;
v) Caustic soda and chlorine
vi) Pesticide and insecticide
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15
Formulation and manufacture of
pharmaceuticals
Pharmaceuticals, health vitamins
16
Manufacture of yeast, alcohol and
related products
Yeast, industrial alcohol and related products
17
Manufacture of paper pulp
Paper pulp
18
Manufacture of yarn and man-made
fibres
Yarn and synthetic fibres
The Government may also direct that an industry be categorized as
pioneer and therefore qualify for up to 5 years' tax holiday if:
a. the industry is not being carried on in Nigeria on a scale
suitable to the economic requirements of Nigeria; or there are
favorable prospects of further development in Nigeria of that
industry; or
b. it is expedient in the public interest to encourage the
development or establishment of such an industry and the
products of the industry to be a pioneer product
A pioneer status may also be granted if the new investment provides for
some level of support and alignment to the efforts of the government in
terms of poverty alleviation, by direct and indirect employment of
more Nigerians. An applicant for the pioneer status must be a body
corporate, registered in Nigeria; and must have incurred capital
expenditure of not less than N10 million. The NIPC recently released
pioneer status incentive regulations. These regulations came into effect
on 30 January, 2014. In this regulation, there is an additional charge; a
service charge of 2% based on estimated tax savings derived from the
five-year financial projections of the Company. This amount is to be
paid to the NIPC.
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Benefits of Pioneer Status Incentive
i.
Tax free dividends paid during the tax holiday: Dividends are the
returns payable to investors/shareholders of a company. These
dividends are subject to withholding tax (WHT) before
distribution to investors/shareholders. The WHT deducted from
the dividend, reduces the amount received by the
investors/shareholders. When a company has pioneer status,
these dividends are not subjected to WHT. As a result, the
investor/shareholder receives the full amount of dividends due.
v. Tax off-sets
vi. Roll over relief
vii. Investment
ii.
iii.
iv.
Tax holiday: This enables the company to make reasonable levels
of profit within its formative years or initial period of expansion.
The profits made are expected to be ploughed back into the
business.
Capital allowances: Capital allowances are tax deductions
allowed on the costs of a company's assets. These deductions are
granted in replacement of depreciation. They are used to reduce a
company's profits which may be subject to tax, thus reducing the
tax payable.
Loss Relief during Pioneer Status: Any loss sustained during the
pioneer status shall be carried forward to the first year of
assessment of the new business.
Other forms include:
i.
Explorative incentives
ii. Life Assurance Policy Premium
iii. Pension and Provident fund.
iv. Consolidated Relief Allowance
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Objectives of Tax Incentives
Tax incentives according to Donald (1980:72), are meant to encourage
and stimulate the economic activities of enterprises and investments. It
is simply fiscal policies that are employed by the government to revive
rehabilitate and stabilize individuals and corporate bodies.
Government also uses the incentives at the same time to channel some
specific economic activities towards the vital or desired sectors of the
economy where they are considered less active or entirely not existing.
Okelie (1995:2) asserted that Nations economy can be healthy through
generous tax incentives to corporate tax payers to invest scarce
resources into valuable projects, the profitability of which many not
likely materialize until about three to five years' time.
Philips (1969) noted that “Tax incentives will not only generate
employment but will motivate self-employed to incorporate into
limited liability companies (Ltd)”.
Otumba (1995) budget revealed that, “tax incentives are measures used
to stimulate private investment but such measures cannot work
effectively if the economy is not resilient and properly solidified to
absorb these incentives schemes”.
“Some of these structural criteria to which tax incentives devices may
be addressed include:
i.
Development of Domestic market,
ii.
Balanced Regional Development,
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iii.
iv.
v.
vi.
vii.
3)
Import duties relief which exempted selected pioneer companies
from paying import duties on imported inputs; and
4)
Approved user scheme, under which import duties were refunded
to approved enterprises, which imports in the export-tuned
production.
Reduction in Unemployment,
Better utilization of Existing capital,
Diversification of output,
Balance of payment consideration,
Re-direction of investment pattern”.
Tax Incentives and Nigeria Economy
The inception of tax incentives in Nigeria is traceable to the inception
of British Administration in the territory, when all sorts of reliefs,
allowances, and tax holidays were granted to British Companies and
individuals as an attraction to establish trade links with the country.
Specifically, tax incentives for industrial development came on stream
in 1958 and included:
1)
Pioneer companies' relief, which exempted companies operating
in pioneer industries from payment of company income tax for
initial period of 3years subject to extension of 2 years on
approval of the President as follows:
i. for a period of one year and thereafter for another period of
one year commencing from the end of the first period of
extension; or (termed 1year: 2periods)
ii. for one period of two years. (termed 2years: 1period)
(Please note that this is valid for companies in the urban areas.
However, companies in rural areas enjoy the status up to 7 years);
2)
Companies Income Tax relief which gave capital allowances
regarding investments in machinery, building, loss carry-forward
facility, etc.;
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Generally, tax incentives have operated under the following sub-heads
in Nigeria:
i.
Tax holidays
ii. Investment allowance
iii. Rural investment allowance
iv. Tax free interest
v. Deductible capital allowance
vi. Research and development
vii. Tax-free dividends
viii. Tax treaties
ix. Reliefs and allowances; and
x. Capital allowances
However, there continues to be robust debate as to whether tax
incentives in Nigeria are real or not. While the government sectors are
of the opinion that there are noticeable incentives, most sectors of the
Nigerian economy especially, the manufacturing sectors and the
operators of the tax free zones are of the considered opinion that the
incentives remain academic exercise in view of abundant multiplicity
of taxes, uncertain incentive tax regimes and subtle withdrawal of such
incentives through ambiguous tax legislations and enforcement.
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Enacted Tax Incentives Law
Tax laws provide various incentives to companies carrying on
businesses and these incentives may be granted on industry basis or on
tax type. The tax incentives contained in the Order as signed into
Nigeria law in 2012 can be classified under the following headings:
iv.
Companies engaged in agricultural production are now eligible to
an initial tax free period of five years which may be renewed for
an additional three years, subject to satisfactory performance of
the agricultural production. This is a significant incentive for
companies investing in the agricultural sector and if properly
harnessed should see investments pour into small, medium and
large companies in the sector.
v.
Agricultural and Agro allied Machinery: All agricultural and
agro-industrial machines and equipment to enjoy 1% duty.
vi.
Agricultural Credit Guarantee Scheme Fund (ACGSF)
administered by the Central Bank of Nigeria: Up to 75%
guarantee for all loans granted by commercial banks for
agricultural production and processing.
Sectorial Incentives
Industry
a. Small companies (i.e. those with not more than a gross turnover of
? 25 million in a year) are exempted from CIT and minimum tax
payments. In addition, the tax rate for medium-sized companies
(i.e. those with a turnover of between ? 25million and
? 100million) has been reduced to 20%.
b.
Dividend from companies in manufacturing sector with turnover
of less than N1 million is tax-free for the first five years of their
operation. Dividends derived from manufacturing companies in
petrol chemical and liquefied natural gas sub-sector are exempted
from tax.
Agriculture
i.
Companies in the agro-allied business do not have their capital
allowance restricted. It is granted in full i.e. 100%
ii.
The payments of minimum tax by companies that make small or
no profits at all do not apply to agro-allied business.
iii. Agro-allied plant and equipment enjoy enhanced capital
allowances of up to 50%.
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vii. Interest Drawback Program Fund: 60% repayment of interest
paid by those who borrow from banks under the ACGS, for the
purpose of cassava production and processing provided such
borrowers repay their loans on schedule.
Solid minerals
The following incentives are available in the solid minerals sector:
i.
3 to 5 years' tax holiday;
ii. Low income tax of between 20% and 30%;
iii. Deferred royalty payments depending on the magnitude of the
investment and the strategic nature of the project;
iv. Possible capitalization of expenditure on exploration and
surveys;
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
v.
Extension of infrastructure such as roads and electricity to mining
sites;
vi. The holder of a mining lease shall, where qualified, be entitled to:
a. Depreciation or capital allowance of 75% of the certified true
capital expenditure incurred in the year of investment and
50% in subsequent years
b. Investment allowance of 5%
c. Exemption from payment of customs & import duties
d. Expatriate quota & resident permit for approved expatriate
personnel
vii. In addition to roll-over relief under the capital gains tax (CGT),
companies replacing their plants and machinery are to enjoy a
once-and-for-all 95% capital allowance in the first year with 5%
retention value until the assets is disposed, 15% will be granted
for replacement of an asset.
Petroleum
The incentives in this sector are granted to companies that are into joint
ventures with the Nigerian National Petroleum Corporation and have
signed Memorandum of Understanding. The incentives are:
a. Guaranteed minimum margin of USS2.50 bl;
b. Accelerated capital allowances which provides that the capital
allowances can be carried forward indefinitely;
c. Graduate royalty rates approved for oil companies.
d. Petroleum Investment Allowance (PIA) is granted to a company
in respect of any asset for the accounting period. The ITA is
graduated as follows:
i. On shore – 5%
ii.Off shore in depth of up to 10m – 10%
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IMPERATIVE OF TAX INCENTIVES IN NIGERIA
iii.
iv.
Off shore in depth of between 100-200m – 15%
Off shore in depth of over 200m – 20%
Tax incentives to gas industry
In view of the enormous potentials in this sector, Government has
approved the following fiscal incentives:
Gas production phase
a. Applicable tax rate is the same as the company income tax which
is currently at 30%
b. Capital allowance at the rate of 20% per annum in the first four
years, 19% in the fifth year and the remaining 1% in the books
c. Investment tax credit at the current rate of 5%
d. Royalty at the rate of 7% on shore and 5% off shore
Gas Transmission and Distribution
i.
Capital allowance as in production phase
ii. Tax rate as in production phase
iii. Tax holiday under pioneer status
NG Projects
a. Applicable tax rate under PPT is 45%
b. Capital allowance is 33% per year on-straight line basis in the first
three years with 1% remaining in the books
c. Investment tax credit of 10%
d. Royalty 7% on-shore 5% off-shore, tax deductible
Gas Exploitation (Upstream Operation)
Fiscal arrangements are reviewed as follows:
a. All investments necessary to separate oil from gas from reserves
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into suitable product is considered part of the oil field
development.
b.
c.
Capital investment facilities to deliver associated gas in usable
form at utilization or transfer points will be treated for fiscal
purposes as part of the capital investment for oil development.
Capital allowances, operating expenses and basis for assessment
will be subjected to the provisions of the PPT Act and the revised
Memorandum of Understanding (MOU).
Gas Utilization (Down Stream Operations)
a. Companies engaged in gas utilization are to be subjected to the
provisions of the Companies Income Tax Act (CITA);
b. An initial tax free period of three years, renewable for an
additional two years;
c. Accelerated capital allowances after the tax-free period in the
form of 90% with 10% retention in the books;
d. 15% investment capital allowance, which shall not reduce the
value of the asset;
use gas i.e. power plants, gas to liquids plants, fertilizer plants,
gas distribution/transmission plants;
3.
The initial tax holiday is to be extended from three years to five
years;
4.
Gas is transferred at 0% PPT 0% Royalty;
5.
Investment capital allowance is increased from 5% to 15%;
6.
Interest on loan on gas project is to be tax deductible provided that
prior approval was obtained from the Federal Ministry of Finance
before taking the loan; and
Telecommunications
Government provides non-fiscal incentives to private investors in
addition to a tariff structure that ensures that investors recover their
investment over a reasonable period of time, bearing in mind the need
for differential tariffs between urban and rural areas. The tariff
structure as approved by the regulatory authority, Nigerian
Communication Commission, also provides adequate cross-subsidy
between the profitable trunk and local calls of the urban and nonprofitable operation of the rural areas.
In 1998, the government approved additional incentives to support the
gas industry in the following areas:
1. All gas developmental projects, including those engaged in
power generation, liquid plants, fertilizer plants, gas distribution /
transmission pipelines are taxed under the provisions of
Companies Income Tax (CITA) and not the Petroleum Profit Tax;
Other Incentives in place are:a. Manufacture/installation of telecommunications related
equipment is considered as pioneer activity. As a result, they
enjoy 3 to 5 years' tax holiday.
2.
b.
All fiscal incentives under the gas utilization downstream
operations since 1997 are to be extended to industrial projects that
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Taxes and duties do not exceed those charged on essential
electrical goods. Energy Among the incentives put in place by
Government to encourage investors in the sector are:
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
a. Tax holiday of 3 – 5 years is granted to companies that
manufacture products like Transformers, meters, control
panels, switch gears, cable and other electrical related
equipment, which are considered pioneer products /
industries;
i)
b. Power plants using gas are assessed under the company
income tax act at a reduced rate of 30%.
Incentives under the Value Added Tax Act:
Import of several items exempted from value added tax. Exported
goods and Import and Export Duty Exemptions services also exempted
from value added tax and Reductions. Import and export duty
exemptions and reductions are available for several items. List of
exempt items and rates is reviewed annually based on economic
considerations and developments in the Nigeria economy.
Tourism
The following incentives have been put in place to encourage domestic
and foreign investors' participation in the tourism industry in Nigeria:
i.
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
The tourism sector was accorded preferred sector status in 1999.
This makes the sector qualify for incentives (available to similar
sectors of the economy) such as tax holiday, longer years of
moratorium and import duty exemption on tourism related
equipment.
ii.
Provision of basic infrastructure that is, road, water, electricity,
communications etc to centre of attraction. Some states have
specific areas as tourism development zones thereby making
acquisition of land easier.
iii.
Provision of land for tourism development at concessional rates.
iv.
Availability of soft loans with long period of moratorium.
Transport
The following incentives are in place to encourage investment in the
sector:
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Shipbuilding, repairs and maintenance of vessels, boat, barges,
diving and underwater engineering services, aircraft
maintenance and manufacturing are considered pioneer
products. As a result, they enjoy 3 -5 years' tax holiday depending
on location.
Exemption from value added tax Sections 2 & 3 First Schedule VAT
Act list the goods and services exempted from VAT:
Part 1. Goods
a) All medical and pharmaceutical products;
b) Basic food items; (additives (honey), bread, cereals, cooking
oils, culinary herbs, fish, flour, starch, fruits (fresh or dried), live
or raw meat, poultry, milk, nuts, pulses, roots, salt, vegetables,
water (natural water and table water).
c) Books and educational materials;
d) Baby products;
e) Fertilizer, locally produced agricultural and veterinary medicine,
farming machinery and farming transportation equipment;
f) All exports;
g) Plants and machinery imported for use in Export Processing
Zones;
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h)
Plants, machinery and equipment purchased for utilization in gas
down-stream petroleum operations; and
Tractors, ploughs and agricultural equipment and implements
purchased for agricultural purposes.
less than 183 days in Nigeria during a 12 months' period and their
income is subject to tax in their home country. The Minister of Finance
also has wide powers to grant exemptions to any person based on a
treaty entered into with Nigeria.
Part 2. Services
a) Medical services;
b) Services rendered by Community Banks, Peoples' Bank and
Mortgage institutions;
c) Plays and performances conducted by educational institutions as
part of learning; and
d) All exported services
Tax credit allowable against tax payable on income derived from
outside Nigeria
i)
Introduction of ? 25million revenue threshold for taxable persons
required to register for VAT and file returns. Anyone who does not fall
within the threshold above would be exempted from registering,
remitting, issuing tax invoice and collecting VAT. The threshold of
? 25million within the calendar year will reduce the tax compliance
burden for small companies. It is expected that the revenue authorities
would provide further guidance on the administration of this provision.
Exemption of assets sold in a restructuring exercise
The Act exempts assets sold or transferred to a related party in a
restructuring exercise provided such assets are not sold by the
acquiring company within 365 days after the date of restructuring. This
welcome development will aid group restructuring in Nigeria.
Incentives under the Personal Income Tax Act:
Non-Nigerian employees of foreign companies in Nigeria may be
exempt from tax in Nigeria, where they spend a cumulative period of
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Section 11 PITA: where a resident derives income from a source
outside Nigeria and the income is brought into Nigeria through
Government approved channels, he shall be allowed a tax credit
against the tax payable by him, but the tax credit shall not exceed the
proportion of his total tax for the year of assessment which that income
derived from outside and brought into Nigeria bears to his aggregate
income chargeable to tax in Nigeria.
Consolidated relief allowance
Section 33 (1) PITA allows a Consolidated Relief Allowance of
N200,000 subject to a minimum tax of 1% of gross income whichever
is higher, with the balance taxable in accordance with the Income table
in the Sixth schedule to this Act
Returns not to be filed where income is N33,000 or less
Section 43 PITA: no return of income shall be filed by a person whose
only source of income in any year of assessment is employment in
which he earns N33,000 or less from that source.
Exemption of interest on loan granted by banks
Section 19(7) PITA: exempts interest on any loan granted by a bank to
a person engaged in:
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a.
b.
capital gains tax on disposal of assets, except such proceeds are
brought into Nigeria.
agricultural trade or business; and
the fabrication of any local plant and machinery.
Exemption of dividend from tax
The Third Schedule PITA lists incomes exempted from Personal
Income Tax Paragraph 25 of the Third Schedule PITA exempts some
dividends from tax:
(a)
Dividends paid to a person by a company incorporated in Nigeria,
provided that: the equity participation of the person in the
company paying the dividends is either wholly paid for in foreign
currency or by assets brought into Nigeria between 1 January
1987 and 31 December 1992; and of the person to whom the
dividends are paid owns not less than 10 per cent of the equity
share capital of the company.
(b) For the purpose of the exemption referred to in 1), the dividend
tax-free period shall commence from the year of assessment
following the year in which the new capital is brought into
Nigeria for the real purpose of the trade or business in Nigeria of
the company paying the dividends and shall continue for five
years if the company paying the dividends is engaged in
agricultural production within Nigeria or processing of Nigerian
agricultural products produced within Nigeria or production of
petrochemicals or liquefied natural gas, and in any other case, the
tax-free period shall be limited to three years.
Incentives under the Capital Gains Tax Act:
Foreign companies carrying on business in Nigeria are exempted from
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Exemption on retirement benefits schemes
Section 28 CGTA: a gain shall not be a chargeable gain if income is
accrued:
a) as part of any superannuation fund (retirement or benefits fund)
approved under Section 20 PITA;
b) as part of any national provident fund or other retirement schemes
established under the provisions of any Act or enactments for
employees throughout Nigeria;
c) of any of those funds that is exempt under paragraph (w) of the
Third Schedule of PITA and;
d) as a result of the disposal of a right to, or to any sum payable out of
any superannuation fund.
Exemption of gains accruing on securities, stocks, shares
Section 30 CGTA: gains accrued to a person from disposal by him of
Nigerian Government securities, stocks and shares shall not be
chargeable gains
Tax exemption on proceeds re-invested
Section 33 CGTA: gains accruing to unit holders in a trust in respect of
disposal of securities, shall not be chargeable on tax provided the
proceeds are re-invested
Double taxation relief
Section 41 CGTA: Any arrangement set out in an order made under
Section 38 PITA and Section 45 CITA so far as they provide (in
whatever terms) for relief from tax chargeable in Nigeria on capital
gains by virtue of this section, have effect in relation to CGT.
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Infrastructure Tax Relief (ITR):
The relief claimable shall be 30% of the cost of providing completed
infrastructure/facilities of a public nature, for use by the company and
the public except where it is impracticable to be used by the public or an
exemption from public use has been obtained from the Minister of
Finance. The qualifying infrastructure (facilities) include power/
electricity, roads and bridges, water, health, educational and sports
facilities and others as may be specified by an order issued by the
Minister of Finance. The relief shall be treated as additional
deduction/expense in arriving at the assessable profit of the company.
Any amount that cannot be utilized is available for carried forward for a
maximum of two assessment periods. This relief appears to be a
duplication of the Rural Infrastructure Relief in Section 29 of CITA,
except that the qualifying infrastructure has been expanded in the order
and the limitations in Section 29 (such as the nearness to Government
infrastructure), which are not mentioned in the order. This means that
companies can claim both reliefs within the same tax return.
minimum net employment of 5 new employees (counting two
employees from the same immediate family as one). Such employees
must be Nigerians in first-time full- time employment by the company
and must be retained for a minimum of 2 years from the year of
assessment the employees were first employed. Also, this relief must
be utilized in the year of assessment in which the company qualifies
and any unutilized amount cannot be carried forward.
Employment Tax Relief (ETR):
The relief claimable is 5% of the assessable profits of a company
subject to a maximum of 100% of the gross salaries of the qualifying
employees. The relief is available if the company has a minimum net
employment of 10 employees (counting two employees from the same
immediate family as one).
Work Experience Acquisition Programme Relief (WEARP):
This relief is claimable at the rate of 5% of the assessable profits of a
company subject to a maximum of 100% of the gross salaries of the
qualifying employees. The relief is available if the company has a
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Incentives under the Tax Free Zones and Export Processing Zones:
There are laws creating tax free zones and export zones, which exempt
companies operating in those areas from tax obligations in Nigeria for
operations carried out in the zones Companies are required to register
before enjoying the benefits and all activities must be performed
exclusively within the zones - activities outside the zones will be
subject to tax. Tax free status is continuous as long as activities are
restricted to the zones.
Some of the incentives are as follows:
i. Complete tax holiday for all Federal, State and Local Government
taxes, rates, custom duties and levies.
ii.
One-stop approval for all permits, operating licences and
incorporation papers.
iii. Duty-free, tax-free import of raw materials for goods destined for
re-export.
iv.
Duty-free introduction of capital goods, consumer goods,
components, machinery, equipment and furniture.
v.
Permission to sell 100% of manufactured, assembled or imported
goods into the domestic Nigerian Market.
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IMPERATIVE OF TAX INCENTIVES IN NIGERIA
vi. When selling into the domestic market, the amount of import of
import duty on goods manufactured in the free zones is calculated
on the basis of the value of the raw materials or components used
in assembly not the finished product.
viii. Philippines; and
ix. Romania.
vii. 100% foreign ownership of investments.
viii. 100% repatriation of capital, profits and dividends.
ix. Waiver of all import and export licenses.
x.
Waiver on all expatriate quotas for companies operating in the
zones.
xi. Prohibition of strikes and lockouts.
xii. Rent-free land during the first 6 months of construction.
Government may however review the status of the zones based on
economic considerations.
Nigeria's Double Tax Treaty:
This network offers significant incentives to investors; there is
considerable room for further expansion subject to development of a
clear tax treaty strategy. Nigeria has existing treaties with:
i.
UK;
ii. France;
iii. Netherlands;
iv. Belgium;
v. Pakistan;
vi. Canada;
vii. Czech Republic;
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Criticism of Tax Incentives
According to Easson and Zolt (2002), the following are among the
more common abuses associated with practice and implementation of
tax incentives:
Double – Dipping
Many tax incentives, especially tax holidays, are restricted to new
investors. In practice, such a restriction may be ineffective and may be
counter-productive. An existing investor that plans to expand its
activities will simply incorporate a subsidiary to carry on the activity,
and the subsidiary will qualify for a new tax holiday.
Transfer Pricing
Transfer pricing has been described as “the Achilles heel of tax
holidays,” though it can be a problem with other forms of investment
incentives as well. The tendency is to think of transfer pricing as a
phenomenon that occurs internationally in transactions between
related enterprises in different countries. Transfer pricing can also take
place in a single country where an investor has two or more operations
within a country or where the investor derives income from more than
one activity. If one of those operations, or one type of income, enjoys a
tax preference, profits will tend to be allocated to the preferred activity.
Abuse of Duty-Free Privileges
A common investment incentive takes the form of an exemption from
customs duty on imported equipment. The risk is that, once imported,
items may be resold on the domestic market. A partial solution is to
336
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
restrict the exemption to those assets that are contributed to the charter
capital of the enterprise. Even so, it may be necessary to verify
periodically that the assets remain in the enterprise.
designed. This can be proven by close examination of the following
points as enumerated by Osememe (2004):
Over-Valuation
Over-valuation is a constant problem in any tax system. Tax incentives,
however, may provide additional temptations to inflate the values of
assets. For example, where a tax holiday is conditional upon a certain
minimum amount being invested, the value of assets contributed to the
new firm can be manipulated to achieve the target figure. Sometimes
this is done legitimately. For example, firms may purchase machinery
rather than lease property from independent lessors.
Asset Stripping and “Fly-By-Night” Operations
Many countries mostly developing countries have experienced
problems with “fly-by-night” operators that take advantage of tax
incentives to make a quick, tax-free, profit and then disappear to begin
operations in some other country that offers tax privileges. This
problem most often arises with the use of tax holidays and export
processing zones. A further problem sometimes occurs where a foreign
investor acquires control of an existing local enterprise, sometimes as
part of the privatization process, at a relatively low price. Instead of
contributing new capital to modernize the enterprise, the investor strips
it of its useful assets and simply disappears.
Implication of Tax Incentives on Nigeria Economy
Despite criticisms, tax incentives are inevitable and favoured by large
scholars as a means of allocating resources and stabilizing the effect of
market forces on production and consumption, if they are efficiently
337
i. Special Sectors
Government at times stimulates a particular sector of the
economy by giving or allowing generous tax incentives to
attract investors in that sector. This could be seen in the case of
pioneer companies and agricultural sectors.
ii. Voluntary Compliance
By the granting of tax incentives to companies to engender
voluntary compliance which gives rise to increased revenue to
the government. The reduction in the rate of tax or the increase
in the capital allowance rate will enable companies to avoid
avoidance strategy and hence comply
iii. Inflation
By the use of tax incentives, the purchasing power of consumer
in an inflationary economy is enhanced. This leads to the
increase in the real income of the consumer because of the
enhanced value of their disposable income.
iv. Protectionism
The potent use of tax incentives to protect local industries is not
limited to Nigeria. The United States of America for instance
has little of Japanese cars. This is a way of protecting local
automobiles in the USA. As a result, tax incentives are one of
the weapons of protecting local industries as it will make their
prices cheaper than the imported ones.
338
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
v. Investment
Investment tends to be encouraged by a series of special
measures of which tax relief and incentives are inclusive. Tax
incentives are normally used by the government to induce
investors and to widen the profit margin of companies. With
investment in place, as a result of tax incentives, they will
increase or widen profit margin of companies through reduction
in various tax liabilities.
However, in spite of various benefit embedded in tax incentives
implementation, tax incentives should be carefully considered before
they are granted in view of the argument that they may be viewed as
violating some principles of good taxation. For instance, it is generally
professed that incentive:
i.
ii.
iii.
iv.
discriminate in favour of a particular sector;
require imposition of a heavier tax burden on other sectors to
cover the tax shortfall arising from the grant of incentives to the
favoured sector;
complicate the tax system due to the additional cost and time
required to monitor the beneficiaries of such incentives in order to
avoid possible abuse; and
may not be beneficial to the economy especially where the tax
forgone exceeds the anticipated benefits from granting the
incentives.
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
companies and individuals carrying on business in Nigeria. Thus, it is
crystal clear that without adequate tax incentives no firm can usefully
achieve the objectives for which it is being established especially at
development stage considering the high cost of production in Nigeria
owing power challenges and absence of other infrastructural facilities.
This paper, however, has been able to show how imperative the effect
of tax incentives is in firms' development, and its enormous impact on
Nations economy.
However, in view of the various criticisms, Government may
rationalize the number of tax incentives in order to restrict them to
those that will benefit the entire economy. The process of granting and
renewing incentives, waivers and concessions must be transparent and
sector focused and not arbitrary or only granted to specific companies
or individuals only. The Government may also seek input from relevant
sectors of the Nigerian economy and populace in the determination of
the desirability or otherwise of such incentives.
CONCLUSION
As a tool of enhancing the growth of the economy, the federal
government has promulgated tax laws conferring incentives on
339
340
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
IMPERATIVE OF TAX INCENTIVES IN NIGERIA
REFERENCES
Philips O.A. (1969), The Significance of Nigerian's Income tax relief
Incentives, The Nigerian Journals, of economic and Social
studies, 11(2), 1-11.Proceeding of 8th annual London business
research conference imperial college, London, UK, .8-9 July,
2013.
Afuberoh, D & Okoye, M. (2014). The impact of taxation in revenue
generation in Nigeria: A study of federal capital territory and
selected states. Journal of Public Administration and
Management Research, 2(2), 22-47.
Asaolu, T, Olabisi, J, Akinbode, S. O. & Alebiosu, O. N. (2018). Tax
revenue and economic growth in Nigeria. Scholedge
International Journal of Management and Development, 5(7),
72-85.
Compedium of investment incentives in Nigeria, (2017). 1st edition
Cornelius, M. O., Ogar, A. & Oka, F. A. (2016). The impact of tax
revenue on economic growth: Evidence from Nigeria. IOSR
Journal of Economics and Finance, 7(1), 32-38.
Finance Act 2019
Siyanbola, T., Adedeji, B., Adegbite, F. F. & Rahman, M. M. (2017).
Tax incentives and industrial/economic growth of sub-Saharan
African states. Journal of Advanced Research in Business and
Management Studies, 7(2), 78-90.
Uwaoma, I. & Ordu, P. A. (2016). The impact of tax incentives on
economic development in Nigeria. International Journal of
Economics, Commerce and Management, 5(3), United
Kingdom.
Uzoka, P. U. & Christian, O. (2018). Effect of tax revenue on economic
growth in Nigeria. International Journal of Social Sciences and
Management Research, 4(7).
George, T. P. & Bariyima, D. K. (2015). Tax incentives and foreign
direct investment in Nigeria. IOSR Journal of Economics and
Finance, 6(5), 10-20.
Kiabel, B. D. (2001). Tax Incentives as a tool of Economic
Developments, Paper presented at the Mandatory Continuous
Professional Education (MCPE) programme of the Institute of
Certified Public Accountants of Nigeria (ICPAN), Port
Harcourt.
Oriakhi, D. E. & Osemwengie, P. K. (2013). Tax incentives and
revenue productivity of the Nigerian tax system. International
Journal of Development and Economic Sustainability, 1(1), 3144.
341
342
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
CHAPTER FIFTEEN
TAX ASSESSMENT AND THE STATUTE OF LIMITATION:
AN APPRAISAL
EIMUNJEZEJoseph 1,
JAWANDOMojisola2 and OKOLIEChisom3
1
Partner in the Firm's Tax, Banking and Finance
And Corporate Advisory Teams,
Udo Udoma & Belo-Osagie, Lagos, Nigeria
+ 234 (0) 803 548 4988; joseph.eimunjeze@uubo.org
2
Senior Associate in the Firm's Tax,
Power and Corporate Advisory Teams,
Udo Udoma & Belo-Osagie, Lagos, Nigeria
+ 234 (0) 808 718 2569; moji.jawando@uubo.org
3
An Associate in The Firm's Tax,
Banking and Finance and Capital Market,
Udo Udoma & Belo-Osagie, Lagos
Nigeria, + 234 (0) 813 649 0458; chisom.okolie@uubo.org
Tax assessment is, however, a delicate process seeing that it is applied
to the income of persons (natural and artificial). On the basis of this,
the legal framework for taxation in Nigeria has stipulated the procedure
to be followed by tax authorities in determining the amount and value
of tax to be paid by a taxpayer and means of resolving disputes which
may arise from such process. The legal framework also stipulates the
time frame within which tax authorities could raise an assessment of
tax and for the settlement of tax disputes. This article seeks to analyse
the clarity or otherwise, and the adequacy, of the provisions of the
Nigerian law on tax assessment and the application of statute of
limitation to same.
1.
TYPES OF TAX ASSESSMENTS
Tax assessment could be described as the procedure for determining
the tax liability of, and the amount of tax payable by, a taxpayer. We
have discussed the various types of tax assessments under Nigerian law
below.
Self-Assessment
ABSTRACT
Under self-assessment, the taxpayer calculates the tax due using the
In recent times, the Nigerian government is shifting its focus from oil as
a sole source of revenue towards other sources of revenue, particularly
the generation of revenue from taxation. As a result, the government is
focusing more on taxation of the formal and informal sectors of the
economy. In this regard, tax assessment is an essential part and tool of
the Nigerian tax system given that it is the process of determining the
taxable profits of a company and the revenue to be derived by the
government from the imposition and collection of tax.
343
procedure set out in the relevant tax law2 or regulation3, pays over the
tax due into the designated bank account of the relevant tax authority
(RTA) and file income tax returns by the use of the prescribed forms4
and evidence of tax payment to the RTA on or before the due date5.
2
Companies Income Tax Act 2004 (Chapter C23) Laws of the Federation of Nigeria 2004 (as amended by the Companies Income Tax
(Amendment Act 2007) (CITA 2004), Personal Income Tax Act 2004 (Chapter P8) Laws of the Federation of Nigeria 2004 (as amended by
the Personal Income Tax (Amendment Act 2011) (PITA 2004), Petroleum Profits Tax Act 2004 (Chapter P13) Laws of the Federation of
Nigeria 2004 (PPTA 2004), Federal Inland Revenue Service (Establishment etc.) Act 2007 (FIRS Act 2007) etc.
3
Tax Administration (Self-Assessment) Regulations 2011.
4
ibid reg 4.
5
ibid reg 3.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
Best of Judgement Assessment (BOJ)
Other forms of Assessment
BOJ is a form of tax assessment conducted by the RTA on a taxpayer
based on estimated profit or profit perceived to be fair and reasonable.
This method of assessment is usually conducted where the taxpayer
does not file return to the RTA. It can also be conducted where the
taxpayer filed a return, but the RTA has reason to believe the returns
filed by the taxpayer does not provide complete and accurate
Other forms of assessment include assessment based on a taxpayer's
which is based on the income of the company from all sources10, excess
dividend tax assessment which applies where a company declares
dividend to its shareholders when it has no tax payable as a result of no
total profits or total profits which are less than the amount of dividend
information as to the state of affairs of the tax payer6.
paid 11etc.
Additional Assessment
1.
This form of assessment is utilized where the RTA is not satisfied with
7
the information provided by a taxpayer . The RTA will, in exercising
its discretion, request the taxpayer to furnish it with such information
that will enable it to determine the tax liability of the taxpayer and, in
appropriate circumstances, impose additional tax liability on the
taxpayer.
returns, minimum tax assessment9, assessment based on turnover
The Practice for the Assessment of Various Taxes in Nigeria
Companies Income Tax
The primary legislation which governs the taxation of companies in
Nigeria is the CITA 2004 and it is administered by the Federal Inland
Revenue Service (FIRS). Companies' income tax is imposed on the
profits of a Nigerian company accruing in, derived from, brought into
or received in Nigeria. It is payable at the rate of 30% of the assessable
profits of a company12.
Jeopardy/Protective Assessment
These assessments are raised on the ground of expediency. If the RTA
is of the opinion that such assessments are necessary for any reason of
urgency, which may include instances where a case referred to the RTA
for ruling is yet to be determined; payment being made to a taxpayer
who had hitherto been evading tax; imminent escape by a taxpayer to a
foreign country; or in all other cases of emergency8.
A Nigerian company pays tax on its worldwide income while a nonNigerian company pays tax on profits derived from or accrued in
Nigeria. The taxable profit of a company is the assessable profit which
is the difference between the total profit earned by a company less the
allowable deductions and capital allowance provided under the CITA
200413. Assessable profit in any given year of assessment is the profits
9
CITA 2004, s 33.
CITA 2004, s 30.
11
CITA 2004, s 19.
12
CITA 2004, s. 40.
13
CITA 2004, s 31.
10
6
CITA 2004, s 65; PITA 2004, s 54; PPTA 2004, s 54.
CITA 2004, s 66; PITA 2004, s55; PPTA 2004, s 36.
8
Para 3.6 of the FIRS Information Circular No. 2006/04 dated February 2006.
7
345
346
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
of the year immediately preceding the year of assessment.14
Companies engaged in petroleum operations in Nigeria are not
governed by the provisions of the CITA 2004; they are governed by a
FIRS.21 The CITA provides for self-assessment of companies. A
company is required to file a self-assessment return to the FIRS within
6 months of the end of its accounting period.
15
different law.
16
The CITA 2004 provides for self-assessment of companies.
A
company is required to file a self-assessment return to the FIRS within
6 months of the end of its accounting period. The FIRS can request for
additional information or assessment where necessary.17 The FIRS is
empowered to carry out a BOJ assessment where a company fails to file
its return within the prescribed period and fails to request for extension
18
of time within which to file its returns. The FIRS shall cause to be
served on an assessed company a notice stating the total profit, the
taxpayer, the place at which the payment should be made and a
statement that the taxpayer has the right to dispute the assessment.19 In
addition, the FIRS Act 2007 provides that any person who fails to
deduct or pay tax to the RTA within 30 days from the time the duty to
deduct arose or the date the amount was deducted, commits an offence
and shall upon conviction be liable to pay the tax withheld in addition
to a penalty of 10% of the tax withheld per annum and interest at the
prevailing Central Bank of Nigeria monetary policy rate and
imprisonment for a period of not more than three years.20 Where there
is no objection or pending appeal, tax charged by an assessment must
be paid within 2 months of receiving notice of assessment from the
With regards to the payment of tax, every company is required to pay a
provisional tax of an amount equal to the tax paid in the previous year
of assessment not later than 3 months after the commencement of a
given year of assessment (YOA) in a lump sum.22 This implies that the
provisional tax paid may be equal to, greater or lesser than, the tax
charged by an assessment. Where the tax charged is less than the
provisional tax paid, the taxpayer will have to make an additional
23
payment, however it is expected that the RTA will make a refund to the
tax payer if the provisional tax paid by the tax payer exceeds the tax
charged by an assessment. Presently, the practice is that the RTA
records the excess sum as tax credit and carries forward such payment
into the next year of assessment.
The limitation period for tax assessment under the CITA 2004 is 6 years
24
after the expiration of the relevant accounting period. The CITA 2004
however does not specify a time limit within which the FIRS may
assess a company to tax where any cases of fraud, wilful default, or
neglect has, in the opinion of the FIRS, been committed by the
company.25
Personal Income Tax
The PITA 2004 imposes personal income tax on the income of
14
CITA 2004, s 29.
PPTA 2004.
16
CITA 2004, s 53.
17
CITA 2004, s 66.
18
CITA 2004, s 65.
19
CITA 2004, s 69.
20
FIRS Act 2007, s 40.
15
21
CITA 2004, s 77(2).
CITA 2004, s 77 (1).
FIRS Act 2007, s 23.
24
CITA 2004, s 66.
25
ibid.
22
23
347
348
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
individuals – employees and self-employed. The PITA 2004 allows for
the following reliefs before tax is deducted from an income:
consolidated relief allowance, National Housing Fund Contribution,
National Health Insurance Scheme, Life Assurance Premium, National
Pension Scheme and Gratuities. After the reliefs have been deducted,
the balance of the income will be taxed at a rate that is between 7% -
required to deliver a return or give notice of his income if the
assessment is considered necessary for any reason of urgency. The
FIRS Act 2007 also provides a penalty for failure to deduct or pay tax to
24%.26
In relation to self-employed taxpayers, the PITA 2004 allows for selfassessment in the form prescribed by the Minister of Finance.27 Here a
taxpayer is required to file an income tax return within 90 days from the
commencement of each year of assessment with the RTA of the State in
which the taxpayer resides with a true and correct statement in writing
containing the amount of income from every source of the year
preceding the year of assessment calculated in the form prescribed
under the PITA 2004.28 The form of return shall contain a declaration
made by or on behalf of the taxpayer that the return is a true and correct
statement of the income computed in accordance with the provisions of
the PITA and that the return is true and complete.
The RTA can request for additional information or assessment if it
deems it necessary.29 The RTA is empowered to carry out a BOJ
assessment where a taxpayer fails to file its return within the stipulated
time frame provided and fails to request for extension of time within
the RTA as at when due.31
On the other hand, in relation to employees, the PITA 2004 requires
their employers to deduct tax from each of the employees'
remuneration and to remit the tax deducted to the RTA in the State
where each employee is resident.32 An employer is required to remit the
tax deducted to the RTA on behalf of the employee by the 10 day of the
following month33 and to file consolidated returns for all its employees
by the 31st day of January each year. 34
The limitation period for tax assessment under the PITA 2004 is 6 years
35
after the expiration of the relevant accounting period. However, the
PITA 2004 did not specify a time limit within which the RTA may
assess a taxpayer to tax where any cases of fraud, wilful default, or
neglect has been committed by the taxpayer, consequently, the RTA can
carry out an assessment on a taxpayer at any time.
Petroleum Profit Tax
The PPTA 2004 and the Deep Offshore and Inland Basin Production
36
Sharing Contracts Act (PSC Act 2004) impose petroleum profits tax
30
which to file its returns. However, the RTA can proceed to assess a
taxpayer before the expiration of the time within which the person is
31
Text to n 19.
PITA 20-04, ss. 81 – 82.
33
Pay As You Earn (PAYE) Scheme Regulations 2002, s. 7.
34
PITA 2004, s. 81(2).
35
PITA 2004, s 55.
36
(Chapter D3) LFN 2004
26
32
PITA 2004, s 33; PITA 2004, sch 6.
27
PITA 2004, s 44.
28
PITA 2004, s 41.
29
30
PITA 2004, s 55.
PITA 2004, s 54.
349
350
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
on companies engaged in petroleum operations.37 The rate of tax is
pay tax to the RTA within a specified period and does not do so commits
38
39
40
between 50% , 65.75% and 85% of the company's chargeable
profits.
Companies chargeable to tax under the PPTA 2004 are required to pay a
percentage of their taxes monthly and to submit all accounts and
computations within 5 months of the end of the accounting period to
41
a punishable offence 44.Tax for any accounting period is payable in
equal monthly installments. Tax for any accounting period together
with a final statement of the tax payable shall be due and payable within
21 days after the service of the notice of assessment of tax for such
accounting period.
the FIRS . The FIRS can demand for further information with regards
The limitation period for tax assessment under PPTA 2004 is 6 years
to accounts submission by giving notice to the company42. Upon
delivery of the accounts and particulars to the FIRS, the FIRS shall
either accept same and make an assessment accordingly or refuse to
assess same and proceed to estimate the amount of the tax to be paid by
such company for that accounting period and make an assessment
after the expiration of the relevant accounting period45. The PPTA
2004 however does not specify a time limit within which cases of fraud,
wilful default, or neglect has been committed by the company may be
43
accordingly .
Upon the expiration of the time allowed to a company for delivery of
accounts and information stated above, the FIRS will proceed to assess
such a company with the tax for the accounting period. The FIRS
thereafter will serve a notice of assessment on the company which shall
contain a statement on the accounting period of the company, amount
of the company's chargeable profit, assessable tax and chargeable tax
charged and assessable upon the company, the place at which payment
of tax should be made and informing the company of its right to dispute
the assessment. In addition, any person who has the duty to deduct or
37
V E Kalu, 'Nigeria's PPTA 2004: An Assessment'
<www.nigerianlawguru.com/articles/oil%20and%20gas/NIGERIA%92S%20PETROLEUM%20PROFITS%20TAX%20ACT,AN%20ASSESSMENT.pdf>
accessed 17 August 2019.
38
PSC Act 2004, s. 3.
39
PPTA 2004, s 21(2).
40
PPTA 2004, s 21(1).
41
PPTA 2004, s 30(2).
42
PPTA 2004, s 31.
43
PPTA 2004, s 35 (3).
351
46
addressed .
Value Added Tax
Value added tax (VAT) is imposed on the supply of all taxable goods
47
and services at the rate of 5% with the exception of certain goods and
services specified in the Value Added Tax Act (Chapter V1) LFN 2004
(as amended by the Value Added Tax (Amendment) Act 2007) (VAT
Act 2004) which are either exempted or zero-rated. Unlike other tax
laws discussed above, the VAT Act does not have provisions for
assessment. According to the VAT Act, payment of VAT is borne by a
consumer but collected by the supplier of the goods and/or services
referred to as taxable person by the VAT Act48. Such a supplier is
required to include VAT on its invoices to the consumers49. VAT is
administered by the FIRS.
44
Text to n 19.
PPTA 2004, s 36.
PPTA 2004, s 36 (4).
47
VAT Act 2004, s 4.
48
VAT Act 2004, s 12.
49
VAT Act 2004, s 14.
45
46
352
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
A taxable person is required to file a complete return of all taxable
goods and services purchased or supplied by him during the preceding
month to the FIRS on or before the 21st day of the month following that
in which the purchase or supply was made failure of which the FIRS
shall have access to the best of its judgement, the amount of tax due on
the taxable goods and services purchased or supplied by the taxable
Tertiary education tax is administered by the FIRS.
person50. Failure to remit tax during the taxable period attracts a sum
equal to 5% per annum (plus interest at a commercial rate) of the tax
due to be added to the tax due and the provisions of the VAT Act 2004
relating to the collection and recovery of unremitted tax, penalty and
interest shall apply. In addition, the FIRS Act provides punishment for
a person who fails to deduct or pay tax to the RTA within the specified
period51.
The VAT Act does not contain any provision on limitation period within
which the FIRS can assess the tax payer in circumstances where it is of
the opinion that the taxpayer has not been assessed/ has been assessed
at a lower amount than it ought to have been charged. Consequently,
the FIRS can carry out an assessment on a taxpayer at any time.
Tertiary Education Tax
The TET Fund Act does not specify the limitation period for
assessment of tax due under it, however, it states that the relevant
provisions of the CITA 2004 and the PPTA 2004 in this regard shall
apply to the tax due under the Act.
Stamp Duty
Stamp duty is payable on instruments. It is governed by the Stamp
Duties Act (Chapter S8) LFN 2004 (SDA 2004) and administered by
the RTA. The federal government collects stamp duties on instruments
in which a company is one of the parties while the state government
53
collects the duty on instruments executed by only natural persons.
Stamp duty rates could be nominal or ad valorem. Nominal rate is a
fixed rate while ad valorem rate means that the rate to be paid depends
on the instrument and the value of the transaction charged. Instruments
liable to nominal or ad valorem duty are to be stamped within 40 days
of execution or 30 days respectively.
The limitation period for recovery of duty, fine or interest or other
payments due to the government under the SDA 2004 is 5 years from
54
The Tertiary Education Trust Fund (Establishment, e.tc.) Act 2011
(TET Fund Act 2011) imposes tertiary education tax at the rate of 2%
on the assessable profits of Nigerian companies. The assessment for
companies' income tax and the petroleum profit tax of a company is
52
done concurrently with that for the tertiary education tax.
the date that the obligation to stamp the instrument arose. The FIRS
Act 2007 provides that any person who has the duty to deduct or pay tax
to an RTA but fails to do so is liable to punishment.55 Although the SDA
2004 provides that failure to stamp a document liable to ad valorem
duty is, among other things, an offence, it does not specify a time limit
within which an action can be brought against the offender. Since it is
50
53
51
54
SDA 2004, s 4.
SDA 2004, s 114.
55
Text to n 19.
VAT Act 2004, s 18.
Text to n 19.
52
TET Fund Act 2011, s 2(1) (a).
353
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
described as an offence by the SDA 2004, the general provision of
criminal law that limitation period does not apply to offences would
also apply here. In addition, the SDA 2004 does not make provisions
for where fraud has been committed by the company. Notwitstanding
that the SDA 2004 did not make such an offence, the position of the law
accrues.62 The CGTA 2004 is silent on the application of limitation
period where fraud, willful default, or neglect on the part of the tax
payer is discovered. This may be interpreted to mean that limitation
period will not apply in this situation.
that limitation period does not apply to fraud will apply.
56
Capital Gains Tax
The Capital Gains Tax Act (Chapter C1) LFN 2004 (CGTA 2004)
imposes capital gains tax (“CGT”) on gains realised from a disposal of
chargeable assets at the rate of 10%57. Such chargeable assets may be
corporeal or incorporeal and it does not matter that such asset is not
58
situated in Nigeria. Where the taxpayer is a non-resident company or
individual, the tax will only be levied on the amount received or
59
brought into Nigeria. Chargeable gain is the difference between the
sum that the asset is disposed and the cost of acquisition of the asset,
expenditure incurred on the improvement and expenses incidental to
the realization of the asset. CGT is administered by the FIRS.60
Although the CGTA 2004 does not stipulate any penalty for failure of a
taxpayer to deduct and/or remit CGT to the RTA, the general penalty
provisions in the FIRS Act seem to have captured such a taxpayer.
61
No claim shall be made in respect of any chargeable gain more than 6
years after the end of the year of assessment in which that gain
2.
RESOLUTION OF ISSUES ARISING FROM TAX
ASSESSMENT
Procedure
In Nigeria, disputes arising from tax assessments are resolved through
administrative channels and litigation. Tax disputes have been held by
the Nigerian courts to be outside the purview of arbitration and other
alternative dispute resolution mechanisms as they pertain to the
revenue accruing to the sovereign government.
The same dispute resolution process applies to any dispute in respect of
all the taxes discussed above. Tax disputes can be commenced either
by the taxpayer or by the RTA.
Tax assessment disputes usually arise when the tax payer does not
agree with the assessment made by the RTA and file a notice of
objection to the assessment within the prescribed period of 3 days.
Such aggrieved tax payer may apply to the RTA by a notice of objection
in writing within 30 days of the service of notice of assessment on the
taxpayer to review and revise the assessment made upon it. Such
notice of objection shall contain the grounds of objection to the
assessment. On receipt of such notice, the RTA may either revise the
56
See the case of Arowolo v Fabiyi SC/70/1995. See also Nwankwo v Nwankwo (2017) LPELR-42832 (CA).
CGTA 2004, s 2.
CGTA 2004, s 4.
59
M L Nwaeze, 'Capital Gains Tax in Nigeria: Exemptions and Reliefs' <www.hg.org/article.asp?id=21396> accessed 17 August 2019.
60
CGTA 2004, s 43.
61
Text to n 19.
57
58
355
62
CGTA 2004, s 42(3).
Esso Petroleum and Production Nigeria Ltd &SNEPCO v NNPC Unreported Appeal No. CA/A/507/2012; delivered on 22nd July, 2016. See also
Shell (Nig) Exploration and Production Ltd & 3 Others v Federal Inland Revenue Service Unreported Appeal No. CA/A/208/2012; delivered on
31st August 2016.
64
FIRS Act 2007, 2007, s.59.
63
356
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
assessment and issue a revised notice of assessment or refuse to revise
the assessment and issue a notice of refusal to amend. If the RTA revise
the assessment and the person who has objected to an assessment
agrees with the RTA as to the correct amount of the tax chargeable the
tax assessment shall become payable by the taxpayer. Where the
person objecting however disagrees with the RTA as to the amount of
tax chargeable, the RTA may further revise the assessment using its
best judgment or issue a notice of refusal to amend to such a person.
Where the RTA has issued a notice of refusal to amend, the taxpayer
could either pay the assessed amount or file an appeal against the
assessment at the Tax Appeal Tribunal (TAT).
practitioners authorized by him. Any proceeding before the TAT is a
judicial proceeding, the TAT shall be deemed to be a civil court, thus if
the TAT discovers in the course of its adjudication evidence of
possibility of criminality, the TAT is mandated to pass such information
to the appropriate criminal prosecuting authority, for instance, to the
Attorney General of the Federation and Minister for Justice. More so,
all processes filed are to be served personally on the respondent, unless
an order for substituted service is granted by the TAT. Upon receipt of
the filed documents, the respondent has 30 days within which to file its
opposition.
Appeal to the Tax Appeal Tribunal
A person who is aggrieved by the decision on assessment made by the
RTA may file an appeal against such decision to the TAT within 30 days
from the day on which a copy of the decision which is been appealed
against is made, accompanied by the relevant fees. The TAT may
entertain an appeal after the expiration of the specified 30 day period if
it is satisfied that there is sufficient cause for delay. Where a notice of
appeal is not served within the specified period and there is no justified
cause for delay, the assessment of the RTA will become final and
conclusive. Appeals before the TAT are public and the onus of proving
that the assessment complained of is in excess shall be on the appellant.
An appellant shall either appear in person or through one or more legal
Upon determination of the appeal by TAT, notice of the tax chargeable
under the assessment as determined by the TAT shall be served upon
the relevant taxpayer. An award or judgment of the TAT shall be
enforced as though it is a judgment of a high court. Except for the
provisions relating to time within which to appeal after a notice of
refusal to amend is issued to a taxpayer, provision of statute of
limitation shall not apply to any appeal brought before the TAT.
Federal High Court (FHC)
Any person not satisfied with the decision of the TAT may appeal
against such decision on points of law to the FHC upon giving notice in
writing to the secretary to the TAT within 30 days after the date on
which such decision was delivered. A notice of appeal filed here must
set out the grounds of law on which the appellant's case is based.
65
FIRS Act 2007, para 17(1) of sch 5.
FIRS Act 2007, para 18 of sch 5.
FIRS Act 2007, para 20(3) of sch 5.
68
FIRS Act 2007, para 12 of sch 5.
69
E Uwah , et. Al , 'Nigeria' <https://thelawreviews.co.uk/edition/the-tax-disputes-and-litigation-review-edition-6/1167729/nigeria> accessed
17 August 2019.
70
ibid.
66
67
357
71
FIRS Act 2007, para 17(1) of sch 5.
FIRS Act 2007, para 23 of sch 5.
73
E Uwah, et. Al (n 64).
74
1999 (as amended).
72
75
Canada (National Revenue) v JP Morgan Asset Management (Canada) Inc., <https://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/63847/
index.do> accessed 17 August 2019.
358
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
Upon receipt of the notice of appeal, the secretary of the tribunal shall
transmit the notice of appeal and along with all exhibits tendered at the
hearing before the TAT to the Chief Registrar of the FHC.
Extent of Limitation Period
Court of Appeal
An appeal against the decision of the FHC at the instance of either party
shall lie to the Court of Appeal.
Supreme Court
The FIRS Act 2007 is silent on the right to further appeal to the
Supreme Court against the decision of the Court of Appeal. Whatever
is the intention of the legislature in this regard, it can be validly argued
that an express provision for further right of appeal to the Supreme
Court may be an unnecessary repetition as appeal will always lie to the
Supreme Court against the decision of the Court of Appeal except
where the constitution provides otherwise. This position is by virtue of
section 6(6) of the Constitution of the Federal Republic of Nigeria
which provides that the judicial powers vested in, among other courts,
the Supreme Court shall (a) extend to all inherent powers and sanctions
of a court of law; (b) shall extend to all matters between persons, or
between government or authority and to any person in Nigeria, and to
all actions and proceedings, for the determination of any question as to
the civil rights and obligations of that person.
As discussed above, the limitation period for taxes is generally 6 years,
but that does not apply to cases of fraud, wilfil default or neglect in the
failure to pay tax or to pay the appropriate amount of tax. In such cases,
the RTA could issue an assessment for tax or additional tax at anytime.
There is no provision in the limitation laws that apply in Nigeria in
relation to taxes. Therefore, recourse would always be had to the
relevant tax law. The RTA usually rely on the above carve out (fraud,
wilfil default or neglect) to assess taxpayers to tax after the period of 6
years from the year of assessment. There has been cases of abuse of
this discretionary power by the RTA.
In the canadian case of Canada (National Revenue) v JP Morgan Asset
Management (Canada) Inc., 2013 FCA 250, JP Morgan Asset
Management (Canada) Inc., (“Taxpayer”) failed to withhold tax under
Part XIII of the Act in respect of fees paid to a related non-resident of
Canada during 2002-2008. The Canadian Revenue Authority (CRA)
assessed the Taxpayer for tax in respect of the above stated years. The
Taxpayer filed notices of objection to the assessment and a notice of
application for judicial review in the Federal Court alleging inter alia
that the Minister's failure to follow policies was an abuse of discretion.
The Taxpayer pleaded that at first the Minister had audited its 2007 and
2008 taxation years with a view to imposing Part XIII tax upon it only
for those years. After the CRA had completed its audit, it decided to
76
E Kfroft, 'Tax Controversy & Litigation', <www.blakes.com/English/WhatWeDo/Practices/Tax/Pages/Blakes-Tax-Update-October-2013.aspx>
accessed 31 July 2018.
77
Sutton v U.S. Dep't of Housing and Urban Dev., 885 F.2d 471, 475 (8th Cir. 1989)
(citing Frigsby v U.S. Dep't of Housing and Urban Dev., 755 F.2d 1052, 1055 (3d Cir. 1985)
78
A Elekiju, 'Tax Litigation: Paradigm Shift on Notice of Refusal to Amend Assessment
(NORA)'<www.google.com/search?q=Oando+Supply+%26Trading+Limited+v.+FIRS+%282011%29+4+TLRN+113.&ie=utf-8&oe=utf-8&client=
firefox-b-ab#> accessed 23 May 2018.
359
79
(2011) 4 TLRN 113.
Stabilini Visioni v FBIR, (2009) 13 NWLR (Pt 1157) 200; Cadbury (Nig.) Plc v FBIR, (2010) 2 NWLR (Pt 1179) 561.
81
TSKJ II Construces v FIRS, Suit No. FHC/ABJ/TA/11/12.
82
Standard Trust Bank Plc v Chief Emmanuel Olusola(2007) 9 CLRN 41.
83
Nigerian National Petroleum Corporation v Tax Appeal Tribunal Suit No.FHC/L/CS/630/2013.
84
Appeal Nos CA/L/1144/2015 and CA/L/1145/2015.
80
360
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
expand the audit to include several earlier years. The Taxpayer pleaded
that this was an improper exercise of discretion because it was contrary
to the CRA's own administrative policies, which, according to the
Taxpayer, would have limited the assessments to the current year and
the two immediately preceding years. The court stressed that, in the
circumstances of the case, the Minister had not exercised any
discretion independent of the assessment. Therefore, there was no
discretion that could be and was abused. The court stated that the word
“may” as used in section 227(10) of the Income TaxAct did not vest the
Minister/the CRA with a general, sweeping discretion not to assess tax.
Rather, it allowed the Minister/the CRA to forego making a formal
assessment of Part XIII tax in situations where the tax was properly
withheld and remitted.
Flowing from the above, we are of the opinion that a taxpayer in
Nigeria should be able to raise the issue of abuse of dicretionary power
by the RTA for the judiciary to adjudicate upon. Abuse of discretion
has been equated with an action that is arbitrary, capricious, or clearly
erroneous. Given this lacuna in the law, it is suggested that while cases
of fraud may have no limitation period because they are criminal in
nature, cases of wilful default or neglect should not be reopened after 6
years. In that case, the inaction and/or lack of taking diligent steps by
the RTA (including deemed acquiescence and effluxion of time) will be
deemed to have set the taxpayer free. This will create a level of
certainty on the power of the RTA to raise an assessment and to always
act timeously.
Challenges
The tax laws specified time limits within which an aggrieved person
may carry out some acts less the tax assessed by the RTA becomes final
and conclusive. However, the laws do not stipulate a similar timeframe
for tax authorities to promptly carry out their duty while addressing a
tax payer's grievance. How then can an RTA be held to a reasonable
level of responsibility in the performance of its duty - particularly its
duty of timely correspondence with the taxpayer especially where time
is of grave importance to the taxpayer?
The court in Oando Supply &Trading Limited v FIRS in addressing
this stated that appeals can only be against a 'decision' or an 'order', an
assessment entails both a decision and an order. Thus, a taxpayer
challenging an assessment is a person aggrieved within Paragraph
13(1), of the fifth Schedule of the FIRS Act and the TAT can deem a
decision to have been made by the FIRS where the FIRS omits for too
long to respond one way or another. Their omission must be
interpreted, or deemed, as a refusal to amend decision.
A major concern with the jurisdiction of TAT is that the conferment on
the TAT of exclusive jurisdiction to settle all disputes arising from the
operation of the tax laws administered by the FIRS by virtue of Section
59 of the FIRS Act 2007 seem to be at variance with section 251(1) (a),
(b) and (c) of the 1999 Constitution which confers exclusive
85
D. Onozure, 'Appeal Court Upholds Tax Appeal Tribunal Jurisdiction to Determine Dispute' <www.vanguardngr.com/2017/04/
appeal-court-upholds-tax-appeal-tribunal-jurisdiction-determine-disputes/> accessed 17 May 2019.
86
(2017) 33TLRN.
87
Constitution of the Federal Republic of Nigeria 1999 (as amended), s 6(6).
(Chapter 132) LFN 2004 (as amended)
M. Dugeri, 'The Challenges of Resolving Tax Disputes in Nigeria' <https://mikedugeri.wordpress.com/2014/06/24/the-challenges-ofresolving-tax-disputes-in-nigeria/> accessed 23 May 2018.
88
89
361
90
For instance, the Limitation Law of Lagos State.
C Enechi and L Akinbolajo, 'Is There Really A Statute of Limitation in the Nigerian Tax System?'
<https://drive.google.com/file/d/1fmmspZd76TmtdicTt16Qi5dsoMd-2dn3/edit> accessed 24 May 2018.
92
Limitation Law of Lagos State, (Chapter L84), Laws of Lagos State 2015, s.8.
93
ibid.
94
CITA 2004, s 66; PITA 2004 s 55; PPTA 2004, s 36.
91
362
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
jurisdiction on the FHC in respect of civil causes and matters relating to
the revenue of the government of the federation. In other words, the
matters that the TAT has jurisdiction over have been argued to fall
within the exclusive jurisdiction of the FHC and that unless and until
the Constitution is amended, the jurisdiction of the TAT over those
matters is unconstitutional.
conflict between the jurisdiction of the FHC and that of the TAT. The
court ruled that the TAT is a ministerial body which is setup by the
Minister of Finance for the administrative resolution of tax disputes.
On this note, the court clarified that the TAT is a condition precedent
before instituting an action/appeal at the Federal High Court.
It is instructive to note that in time past the courts have relied on the
arguments above to declare as null and void the provisions establishing
VAT-Tribunal; and latest judicial developments on this controversy
have further compounded the confusion. While some judges have held
that the establishment of the TAT is unconstitutional, some hold that
TAT and the Federal High court have coordinating jurisdiction others
have also held that TAT does not encroach on the jurisdiction of the
FHC. The later view is the most recent take of the court on this matter.
In 2017, the Court of Appeal in Nigerian National Petroleum
Corporation v Tax Appeal Tribunal upheld the position of the lower
court that TAT has jurisdiction over tax disputes. The reason for the
court's decision is that institution of tax appeals at the TAT before
approaching the Federal High Court was merely a condition precedent
to approaching the Court and that in any event, the decisions of the TAT
could be reviewed and quashed by the Court upon an application for
judicial review or appeal to that Court.
The Court of Appeal also affirmed its stance on this issue in TSKJ v.
FIRS where it quashed the decision of the FHC and held that there is no
Another concern with the resolution of tax disputes at the TAT bothers
on the issue of restriction on the right of appeal against decisions of the
TAT. The FIRS Act 2007 provides that appeal against the decision of
the Tribunal lies to the FHC “on points of law” and further appeal lies to
the Court of Appeal. This provision on the surface of it seems to imply
that no appeal shall lie against the decision of the tribunal to the FHC
other than on a point of law. It appears then that the intention of the
legislature is to bar appeal on point of facts since experts constitute the
members of the TAT. The argument against this provision is that it
offends the constitutional right of a litigant to appeal against the
decision of a lower court to a higher court. There are opinions that by
Section 28 of the FHC Act which states that, “The Court shall have
appellate jurisdiction to hear and determine appeals from -(a) the
decisions of Appeal Commissioners established under the Companies
Income Tax Act and the Personal Income Tax Act in so far as applicable
as Federal law....”, the Federal High Court has an appellate jurisdiction
over matters emanating from the TAT and as it is usual practice,
appellate courts only hear matters on grounds of law and not of fact.
Presently the TAT takes the place of the appeal commissioners.
95
C Enechi and L Akinbolajo (n 37).
CAMA 2004, s 332.
97
PPTA 2004, s 44; FIRS Act 2007, s.34; CITA 2004, s 87(1); PITA 2004, s 78(1).
98
Micheal Arowolo v Chief Titus Fabiyi SC/70/1995.
99
United Bank of Africa v Osok (2016) LPELR-40110 (CA).
100
Solomon v Monday (2014) LPELR-22811 (CA). See also Ezekiel Okoli v Morecab Finance (Nig) ltd S.C. 73/2002.
96
363
101
Evidence Act, 2011, ss 135 and 136.
Evidence Act, 2011, s 138.
103
PPTA 2004, s 49; CITA 2004, s 90; PITA 2004, s 83.
104
PITA 2004, s 83; CITA 2004, s 90; PP TA, s 49.
105
PPTA 2004, s 43; CITA 2004, s 76; PITA 2004, s 66.
102
364
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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As interesting as the arguments against the constitutionality of the TAT
may seem, if accepted, they act as a drawback on the real aim of
establishing the TAT and make nonsense of recent tax reform efforts of
the government. The TAT was established to encourage specialty, and
speed, in the resolution of tax disputes the tribunal is expected to be
made up of person with vast knowledge and understanding of tax laws,
practices and issues. Arguing for a return of the jurisdiction over
federal tax disputes to the FHC on grounds of amendable legislative
lapses is a regressive approach to law reform and economic
development given the era we are in.
are various limitation periods for different subject matter claims. For
instance, actions based on simple contracts, recovery of debts and
arrears of interest, tortuous malfeasance and so on, must be
commenced within a period of 6 years of the occurrence of the injury,
loss or damage.
4.
GENERAL LIMITATION PERIOD IN NIGERIA
Limitation period requires that a lawsuit must be commenced within a
specific period of time from when the injury or omission, causing the
damage or loss, arose or occurred, failing which, the right of action
therein becomes statute barred. In Nigeria, the limitation period for
various actions is provided for in the limitation laws of various states of
the federation. In determining whether a cause of action is statute
barred or not recourse is had to when the cause of action arose. The
primary purpose of having a limitation law is to ensure that all claims
are diligently and promptly.
A further essence for the limitation law is to guarantee finality in
litigation. Ignorance of the existence of limitation period to instituting
an action is not a defence to a claim that is already statute barred. There
106
Appeal No. TAT/LZ/CIT/076/2014.
PPTA 2004, s 43; CITA 2004, s 76; PITA 2004, s 66.
108
PPTA 2004, s 43; CITA 2004, s 76; PITA 2004, s 66.
109
(1960) N.M.L.R. 100.
110
1 NTC 71.
5.
LIMITATION PERIOD FOR TAX CLAIMS UNDER
NIGERIAN TAX LAWS
Assessments – Period and Statute Bar
Limitation Period for RTA
In the Nigerian tax system, the statute of limitation refers to the
maximum period after which the RTA can assess a taxpayer to tax in
respect of a certain year of assessment. With the exception of the SDA
2004 which provides for 5 years, most Nigerian tax legislations contain
similar provisions for the period of time within which the RTA can
impose additional tax assessments on a taxpayer 6 years after the
expiration of a year of assessment, where the RTA discovers or is of the
opinion that tax has not been assessed, or has been under-assessed.
The implication of the above is that the RTA only has 5 or 6 years (as the
case may be) after the relevant accounting period to assess a taxpayer to
additional tax. In particular, the CITA, the PITA and the PPTA further
provide that where any form of fraud, willful default or neglect has
been committed in connection with any tax imposed by such laws, the 6
years limitation would not apply. The RTA can therefore institute an
investigation into the affairs of the taxpayer at any time. There are
111
PPTA 2004, s 43; CITA 2004 S 76; PITA 2004 s 66.
PPTA 2004, s 43; CITA 2004 s.76; PITA 2004 s 66.
'What is the IRS Statute of Limitations or Deadline for Action on Back Taxes?' <https://tax.findlaw.com/tax-problems-audits/what-is-theirs-statute-of-limitations-or-deadline-for-action-on-.html> assessed 17 August 2019.
114
ibid.
107
112
113
365
366
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
arguments that the exclusion of fraud, wilful default or neglect from the
application of the 6 years limitation period erodes the principle of
certainty in the tax system. More so with regards to companies, the
Companies and Allied Matters Act (Chapter 20 LFN) 2004 (CAMA
2004) mandates companies to keep their books of records (which is
what the taxman requires to conduct his assessment) for 6 years and as
such the companies may no longer have the means to prepare their
defence.
Going by the provision of the Evidence Act 2011, he who asserts must
bears the burden of proof, it is the duty of the RTA to establish its case
where it alleges fraud. In the case of a company that may have
disposed its records after 6 years, the law will be commanding the
impossible if it asks such company to furnish the RTA with its records if
the suit against it is instituted after 6 years and the RTA needs them as
evidence. In such an instance, it is left for the RTA to provide means of
establishing its assertion. What may also seem to be a problem ability
of the accused to defend itself if it wished to rely on its records which it
may have discarded. The burden of proof must be discharged beyond
reasonable doubt .
Furthermore, tax is a debt owed to the government and the process of
recovering same is in a civil suit if it ever gets to litigation, little wonder
it has the same limitation period for recovery as a debt under the
limitation laws. However, matters such as fraud fall within such
matters which must be specifically pleaded and proved, and statute of
limitation is inapplicable to it so far the defrauded party was ignorant of
the fraud when it occurred. Proof of fraud must be beyond reasonable
doubt both in criminal and civil proceedings. This is because where
fraud is alleged in a civil suit it is deemed that an allegation of crime is
been made in a civil matter. To this end, Nigerian courts have (in a
plethora of cases) defined fraud to mean “a willful act on the part of
anyone, whereby another is sought to be deprived, by illegal or
inequitable means, of what he is entitled to. Fraud for the purposes of
civil law includes acts, omissions and concealments by which an undue
and un-conscientious advantage is taken of another”.
115
'Self-Assessment Tax Return' <www.gov.uk/self-assessment-tax-returns/deadlines> accessed 17 August 2019.
'Assessing Time Limits: Tables of time limits for relevant taxes: Corporation Tax' <www.gov.uk/hmrc-internal-manuals/compliancehandbook/ch56200> accessed 17 August 2019.
117
'Time Limit for Tax Assessment, Claims and Refunds'<www.rossmartin.co.uk/penalties-a-compliance/compliance/347-time-limits-forassessment-and-claims> accessed 17 August 2019.
118
ibid.
119
ibid.
120
'Tax Period'<http://taxsummaries.pwc.com/ID/India-Individual-Tax-administration> accessed 19 August 2019.
121
'Individual- Tax Administration' <http://taxsummaries.pwc.com/ID/South-Africa-Individual-Tax-administration> accessed 17 August 2019.
116
367
In addition, an allegation of fraud (no matter how minute) is a serious
issue that can taint one's image and goodwill. We therefore suggest that
in order to create a fair balance and prevent abuse of the unlimited time
given by the laws on issues concerning fraud and so on, the taxman
should only be permitted to utilise this avenue provided by the relevant
statutes 6 years after the expiration of a year of assessment of the tax in
question if it is able to establish and prove that it has a case against the
tax payer before a court of competent jurisdiction.
Repayment of Excess Tax Paid
The PITA, the CITA and the PPTA provide that no claim for repayment
of any tax overpaid shall be allowed unless it is made in writing within
6 years next after the end of the accounting period to which it relates.
What this means is that the affected taxpayer must request for a refund
of excess tax paid within the stipulated time frame less the taxpayer
122
'Corporate Tax Administration' <http://taxsummaries.pwc.com/ID/South-Africa-Corporate-Tax-administration
368
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
will be forever banned from bringing a claim for repayment of such
sum.
(d) Where a taxpayer who objected to an assessment made upon him
fails to agree with the RTA on the amount of tax to be assessed, the
RTA shall serve the person with an assessment arrived at
according to its best judgement. The assessment of the RTA will
be final and conclusive if the taxpayer fails to lodge an appeal
within the stated time frame or refused extension of time by the
court. In Aboud v Regional Tax Board the Nigerian Supreme
Court held that where no appeal had been lodged against an
assessment within the statutory time permitted by law, the
assessment shall become final and conclusive for all purposes of
the law as regards the amount of the chargeable income. Also, in
Anosike v Tax Assessment Authority (Abakaliki) it was held that
where a notice of appeal was filed within time, but with a wrong
tribunal contrary to law, the effect is the same as if no notice had
been filed in the first place.
When is an Assessment Final and Conclusive?
An assessment is final and conclusive in the following instances:
(a) If a taxpayer who has paid income tax for a year of assessment
alleges that an assessment made on him for that year was
excessive by reason of some error or mistake in a return,
statement or an account made by him or on his behalf for the
purpose of the assessment, he may, at any time not later than 6
years after the end of the year of assessment within which the
assessment was made, make an application in writing to the RTA
for relief. The decision of the RTA in this regard is final and
conclusive.
(b) Where the taxpayer fails to lodge an objection within the
specified timeframe after being served with notice of assessment
by the RTA. In Olokun Picsces Ltd v FIRS one of the issues for
determination was whether the company filed a valid objection
within 30 days as provided under Section 76 of the CITA. The
TAT held that the company filed its objection within the 30 days'
time frame and as such the assessment of the RTA is subject to
appeal and not final and conclusive.
(c) Where a taxpayer who objected to an assessment made upon him
in the notice of assessment by the RTA subsequently agrees with
the RTA as to the amount of tax liable to be assessed.
369
(e) Where due notice for a further appeal is not given within the stated
time frame, the assessment arrived at by the adjudicator shall be
final.
(f)
Where an assessment is given on appeal.
Tax Audit and Investigation – Time Bound
Tax audit entails an examination of taxpayer's records to ascertain
compliance with the relevant tax laws and regulations of Nigeria. Tax
audit and investigation is provided for under the relevant statutes.
Given that companies are mandated to keep their records for just 6
years and the time limitation for assessment of tax by tax authorities as
stated in earlier sections, we opine that tax audit and investigation can
370
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
be carried out within a 6 year period from the date of submission of the
relevant returns. Where however the RTA suspects fraud, neglect or
willful default, an investigation may be conducted without any time
limit bearing in mind the factors discussed above.
stretched out to 6 years from the date the return is filed or deemed filed,
whichever is later. Additionally, where it can be established that an IRS
officer establishes that a taxpayer filed a fraudulent return, or willfully
attempted to evade tax, or failed to file a return, then no limitation
would apply.
The Role of the Courts
The role of the courts in tax assessment arises when there is a dispute to
be settled. As seen above, the courts have been actively involved in
making judicial pronouncement on tax matter brought before them.
The courts have in some instances left the taxpayers and tax authorities
confused by churning out conflicting decisions. This has helped in
creating further uncertainty with regards to interpretation of the
provisions of the tax laws.
6.
COMPARISON WITH OTHER JURISDICTIONS
Application of Statue of Limitation in the United States of America
(“USA”)
In the USA, tax is administered by the Internal Revenue Service
(“IRS”). The IRS is barred from assessing taxes on a tax payer after 3
years from the due date or the date, on which it was filed, whichever is
later. A return is considered to be filed on the due date of the return if it
was filed on or before its due date. A return not filed on or before the
due date is considered not to have been filed. An assessment is said to
have been carried out when an IRS officer signs a certificate of
assessment indicating the amount payable by the tax payer. An
extension of 6 months can be secured where there is a substantial
omission of gross income on the return (more than 25 percent).In these
circumstances, the time limit for the IRS to make its assessment gets
371
In relation to litigation, the IRS has a period of 10 years to file suit
against a taxpayer to collect previously assessed tax using the
considerable resources at its disposal, which include levies and wage
garnishments.
Application of Statue of Tax Limitation in the United Kingdom (“UK”)
In the UK, the tax year commences on 6th April and ends on the 5th
April of the preceding year. The tax authority in the United Kingdom is
Her Majesty's Revenue and Customs. Corporation tax is to be filed
with the UK tax authorities within 12 months of the end of each
accounting period. The normal time limit for assessment of corporate
tax, capital gains tax, income tax, pay as you earn (“PAYE”) and VAT is
4 years. For careless behaviour, the time limit is set as 6 years for
corporate tax, capital gains tax, income tax and PAYE while the time
limit for VAT is 6 years for cases involving a loss of income tax brought
about deliberately by the tax payer, the tax limitation period is 20 years
following the end of the tax year under corporate tax, capital gains tax,
income tax, PAYE and VAT.
Repayments of tax will be made in respect of claims made outside the
statutory time limit where an over-payment of tax has arisen because of
an error by the tax authority or another Government Department, and
where there is no dispute or doubt as to the facts.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAX ASSESSMENT AND THE STATUTE OF LIMITATION: AN APPRAISAL
Application of Statue of Limitation in India
particular, this work advocates for judicial intervention in cases where
the taxman intends to reopen a tax assessment on the basis of fraud so
that the taxman who may have failed to act diligently may not abuse the
unlimited time frame in the laws for reopening an assessment in cases
of fraud, willful default or neglect and also cause gross inconvenience
to a tax payer by drawing him into the past. Therefore, to create a fair
balance in tax administration and to prevent abuse of the unlimited time
given by the tax laws, the taxman should only be permitted to utilise the
unlimited timeframe provided by the laws for established cases of
fraud by tax payers. The RTA should be diligent and act timely in
carrying out tax assessment.
The statute of limitations for reassessment of corporate tax and
personal income tax ranges from 5 years to 17 years from the end of the
relevant tax year. Any balance of tax due on the basis of the return must
be paid on a self-assessment basis before the return is filed. Both
personal income tax and corporate tax return will be treated as
defective if the tax liability along with interest is not paid on or before
the date of submission of the tax return.
Application of Statue of Limitation in South Africa
The corporate tax year is the same as the company's financial year and
returns must be submitted within one year from the end of the
company's tax year while tax year for individuals end in February.
There is no stipulated process for tax audit thus the tax authority can
depend on any factor to commence an audit process. Tax returns
submitted that have been assessed may not be reopened after a period of
3 years from date of assessment by the tax authority or 5 years if it is a
self-assessment by the taxpayer, unless there has been fraud,
misrepresentation, or non-disclosure by the taxpayer. The prescription
period may be extended by three years in the case of an assessment by
the tax authority or by two years in the case of self-assessment in
respect of certain complex matters, such as transfer pricing and general
anti-avoidance cases.
7.
CONCLUSION AND RECOMMENDATIONS
This article has examined tax assessment in Nigeria and the application
of limitation period law to same. In so doing, certain relevant tax laws
and judicial decisions which bothered on the topic were discussed. In
373
It is recommended that we borrow a leaf from the USA by making the
time frame for commencing action in court for tax disputes larger than
the timeframe set out for administrative means of settling tax
assessment disputes.
The USA's practice of lifting the bane of
limitation period off over repayment of excess tax to the taxpayer in
instances where such error is the fault of the tax authority is worth
emulating in Nigeria.
Finally, we also canvass that the value of TAT, as a specialised tribunal,
cannot be overestimated. As such, the constitution should be amended
to recognise the TAT as a special court so as to remove the 'Sword of
Damocles' which currently hangs on its 'fragile head'.
Ohaka, J. & Agundu, P. U. C (2012). Tax Incentives for Industry
Synergy in Nigeria: A Pragmatic Proprietary System Advocacy.
African Research Review . 6 (3), 42-58 DOI: http:// dx.doi.
org/10.4314/afrrev.v6i3.3
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TAXATION PLANNING AND COMPLIANCE: A NORMATIVE APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
CHAPTER SIXTEEN
TAXATION PLANNING AND COMPLIANCE: A NORMATIVE
APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
IKOTUN Sabic Idowu, SHONUBI Akeem Olalekan
and AJALA, Olufunmilayo Adekemi
1&2 Department of Business Administration,
McPherson University, Seriki-Sotayo, Nigeria
3
Department of Banking &amp; Finance,
The Polytechnic of Ibadan, Nigeria.
ikotunsi@gmail.com; ikotunsi@yahoo.com
toward multiple taxation as well as conflicting tax payment into the
three tiers of government are confronting challenges that have great
impact on the Nigerian economy. Therefore, using fundamental
approach of education in the development of taxation planning,
perhaps, may in still effective and efficient collection nationwide in
Nigeria. It is against this background this article discusses taxation
education as veritable approach of taxation's planning national
development. More importantly that Vincent (2014) posited education
as a means of stimulating sustainable development in all facets of
economy. The paper mainly relied on secondary data sources and
personal observation with approach of structural and content analysis.
The paper provides guide-posts as follows:
INTRODUCTION
CONCEPTUAL CLASSIFICATIONS
Taxation and education have been considered as being central to socioeconomic activities as well as growth and development worldwide
(Ikotun, 2017). Government use taxation as a machinery to accomplish
some economic objectives through fiscal policies in order to achieve
economic development and growth (Musgrave & Musgrave, 2004).
Likewise, education is becoming increasingly important in the aspect
of socio-economic development, besides education is veritable source
of propagating individual lifestyle system's development. Therefore,
looking at taxation education as avenue of achieving national
development, through its planning agenda is quite desirable. It is
therefore foresee that nations can use taxation planning agenda through
incorporation into educational curriculum. There are overwhelming
efforts of nations to stimulate economic development through taxation,
despite high rate of tax eviction in Nigeria (Akanle, 1991). Also, efforts
i) Taxation Education
The concept of taxation education is recent and emerging, and it must
be relevantly be conceptualized. Chuenjit (2014) defined taxation
education as proper enlightenment to adequate information about tax
related issues which can make citizens to be more encouraged,
obligatory responsible, civic and tax payer. Ikotun (2017) sees taxation
education as education curriculum mainly designed for taxation related
orientation and programme for the proper understanding of citizens.
Isaac (2015) established a significant impact of government taxation
policy on sales, revenue and treasury that must be articulated by all
sundry with both a positive and negative effects. No doubt important of
taxation education is indirectly emphasized. Besides, this suggests key
areas which potential tax payers can be educated or trained to develop
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TAXATION PLANNING AND COMPLIANCE: A NORMATIVE APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
their orientations and knowledge on taxation. In this regard, areas of
taxation need to be enlightened in real sense of it in our society.
collective decisions and strives for comprehensiveness in policy and
programme of its achievement. Osaze (1991) posits planning as whole
process of determining what purpose to pursue and the means of
attaining predetermined activities as well as the mechanism for
monitoring results. In essence, planning is necessary and essential
within the framework of the relationship between humanity and his
activities for the maximum benefit achievement.
ii) National Development
The term national development is conceived as the main focus of
government in the areas of citizens' welfare, security, safety and
protection as well as equitable distribution of incomes or revenues in
order to have attainable standard of living. However, for a nation and
society to be enjoyed and transformed economy, taxation is quite
relevant. In this regard new era institutions will be required. Therefore,
transforming taxation through education is required in the framework
to create and sustain a context that maximizes its achievement
orientations through human capacity, organizational capabilities and
contribution to social well-beings. Transformic society via taxation
will no doubt have the capacity to facilitate multiple levels of
development and growth in the context of national agenda. If this will
align with core values and unifying purpose as the national
development. More importantly that nation with good equitable
distribution of incomes are in the most advantageous position, to
facilitate unprecedented advances for society and resolve highly
complex problems based upon their capacity, to mobilize resources.
Therefore for national development enrichment taxation education is
quite desirable.
iii) Planning
Planning is defined on basis of management approach, according to
Friedman (1964) as primarily a way of thinking about social and
economic problems, thereby oriented predominantly toward the future.
Therefore, planning is deeply concerned with the relation of goals to
377
THEORETICAL FOUNDATION
This article is hinged on the principles of development economic
theories and taxation theories. Development economic theories
encapsulate a lot of the theories either from classical and modern
theories. Among these theories are participatory development, selfreliance, modernization, etc. while theories of taxation comprise of
equality of sacrifice, ability to pay, benefit and diffusion theory.
However, participatory development theory is used among
development economic theories while all theories of taxation are used
to anchor discussion.
1. Participatory Development Theory
The participatory development theory can be traced to the Robert
Chamber in 1993, with fundamental principles which are used to
involve people in the decision-making of the development process.
The principles are offered as an intermediary between the
philosophical roots of society, critical pedagogy and current practice
using tool such as participatory action research, participatory rural
appraisal, and appropriate technology. Participatory theory represents
a move from the global, spatial coverage and top-down strategies that
dominated early development initiatives to more locally sensitive
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TAXATION PLANNING AND COMPLIANCE: A NORMATIVE APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
approaches. Therefore, participatory development theory is a
involvement which holds that human beings personal contribution to
their development make a real development of their desire or choice.
Furthermore, theory posits that key to sustainable development is
participation and involvement of beneficiaries according to Anaeto and
Margaret (2012). The theory is relevant to this paper in sense that
taxation education can create conscious mindset for people, as
individual citizens must have knowledge of concept and roles of
taxation through education thereby facilitate national development
agenda.
iv.) Benefit Theory
Benefit theory is developed by Erik Lindahi. Benefit theory operated
on principle that taxes are to be imposed on individuals according to the
benefit conferred on them. In this regard, the more benefit a person
derives from the activities of the state, the more the person should pay
to the government treasury. Although, this is subjective as there is no
direct quid pro quo in the case of a tax. The theory is relevant for the
scheme of work to be developed under taxation education in order to
know classification of taxpayers and taxes.
ii) Equality of Sacrifice Theory
The theory establishes that taxation should involve an equal sacrifice
for every individual, since government needs to raise revenue from a
variety of sources to finance public sector expenditures. The theory is
relevant because it will enable citizens to know importance of taxation
in the country, particularly when it is channelled through education.
iii) Ability to Pay Theory
Ability to pay theory is premised on principle that those who have more
resources (wealth) or earn higher incomes should pay more taxes. In
essence, the principle asserts that the amount of tax levied on an
economic entity shall be directly proportional to the ability of the entity
to pay taxes. According to the Bhartic (2009), theory posits that there
should be tax collection formula, based on taxpayers or citizens
capacity to pay less or more, on income generation capacity. The theory
is important because it educates capacity of taxpayers which can be
more expatiated during the taxation education, besides that ability to
pay can be controversial.
379
v) Diffusion Theory
Diffusion theory is premised on principle of multiplier effects because
under perfect competition when a tax is levied, it gets automatically
and equally diffused or absorbed throughout the society. In this regard,
the theory postulates that when a tax is imposed on a commodity or
service by a state, it passes on to consumers automatically, thereby
causing unending implications, whereas every individual bears burden
of tax, according to this ability to bear it. The theory is relevant in order
to provide framework of conflict management in the taxpayers which
could be authenticated through taxation education.
Conceptual Framework of Discussion
It is imperative that from background discussion of conceptual
clarifications and theoretical foundation, we proposed a conceptual
framework of discussion for taxation education, planning and national
development as a model. The model is important because it established
taxation education as a independent variable, planning as a
intermediate variable, and national development as a dependent
variable. In this case, other dynamic of interactions can be determined.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAXATION PLANNING AND COMPLIANCE: A NORMATIVE APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
Figure 1: The Research Model
managing the economy, and there are payments for some basic
expenditure, like salaries and wages, construction, finance of
education, health, judiciary, and general state services and institutions.
Taxations are compulsory levy on the resident of a country as imposed
by the government. Taxes are paid by individual under personal tax act
and by business organization under company insure tax act. Also taxes
can be classified into two as:
Planning
Taxation
Education
National
Development
Source: Author's Research Model
Nexus between Taxation and National Development
National development in Nigeria, like in other countries of the world is
normally achieved through instrument of monetary and fiscal policies.
However, government uses various fiscal principles, in order to
achieve rapid economic growth, particularly, in the general price
stability, full employment, balance of payment equilibrium, protection
of local industries and manufacturing sector, aggregate demand level
and finally in the increase of national income and output level. Taxation
systems are used by governments all over the world to achieve a variety
of objective. Akande (1991) highlighted objective of taxation as
follows – maximization of government revenue yields attainment of
equity (both vertical and horizontal), and the promotion of economic
development. Furthermore, a good tax system should be able to
accomplish efficient, fair, and equitable in burden distribution and
macro policy objectives.
More importantly as stated earlier the instruments used by the
government in fiscal policy are government expenditure and taxation.
The government expenditure is incurred expenses as a result of
381
(i) Direct taxes are levied on an individual and corporate
organizations which cannot be shifted to any other such as pay as
you earn (PAYE).
(ii) Indirect taxes are levied on goods and services with implication
that tax burden can be shifted in whole or in part by producer to the
consumer; for instance, value added tax (VAT). Therefore,
government basically used revenues from taxation to promote
national development.
Dimension of Taxation Education in Planning Curriculum Design
It is imperative to point out that there are strong commitments to have
effective and efficient taxation system worldwide and from
philosophical existence, educational approach seems to be better
perspective and orientation of seeing taxation as a tool of speed up
socio-economic development of nation. Particularly as UNESCO
(2008) posit that education is a necessity for all that is “every person
shall be able to benefit from educational opportunities designed to meet
their basic needs” (Ikotun, Kabuoh & Onaderu, 2018). These needs
comprise both essential learning expression, numeracy and problem
solving and the basic learning content (such as knowledge, skill value
and attitudes) required by human beings to be able to survive and
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TAXATION PLANNING AND COMPLIANCE: A NORMATIVE APPROACH OF EDUCATION FOR NATIONAL DEVELOPMENT
develop their full capacities as well as to live and work in dignity, to
participate fully in development and improve the quality of their lives
and finally to make inform decision and continue learning.
Benefits of Planning Educational Approach to Taxation
It is important to point out that every nation needs to determine purpose
of education and how and when education policies shall be designed
and operated. Therefore, possible benefit of planning education
taxation in Nigeria can be succinctly put as follows:
(i) Taxation education promote awareness of taxation from
grassroots to the national level, especially from primary
education to tertiary level if there are adequate planning for all
sundry and citizens in the country.
Therefore, in order to have educational approach in the system of
taxation, planning is quite imperative through the curriculum design.
Curriculum is a formal academic plan for exercising learning and
teaching in society, particularly in schools, colleges and other citadels
of learning. Gurthrie (2002) stated that curriculum planning and design
must follow this procedures: goals for learning students (skills,
knowledge and attitudes), content (the subject matter in which learning
experiences are embedded), sequence (the order in which concepts are
presented), learners (instructional methods and activities),
instructional resources (material and settings), evaluation (methods
used to assess students learning as a result of these experiences), and
adjustment to teaching and learning process based on experience and
evaluation. In addition, Ken, Thomas and Hughes emphatically stated
that planning educational curriculum considers and reflects needs of
the society, besides they mentioned a six-step approach to curriculum
development: (i) problem identification and general needs assessment;
(ii) targeted needs assessment; (iii) goals and objectives; (iv)
educational strategies; (v) implementation; and (vi) evaluation and
feedback. It is against this background that it is important to approach
taxation planning and compliance from content or processes of
education, particularly as frequently ask question why people are not
paying taxes can be capture in both teaching and learning taxation
processes, orientation and importance in all spheres of national
development.
383
(ii) It has the capacity to create dimensional socio-economic
development and growth.
(iii) It has the potential to reduce or eradicate poverty and inequalities.
(iv) It may assist in the national orientation values and promotes
national ethics.
(v) Taxation education may provide an opportunity for
empowerment and capacity building on specialist of taxation
education.
CONCLUSION AND RECOMMENDATION
Taxation education is necessary and essential in the national agenda as
it will facilitate multi facets socio-economic development. No doubt,
taxation education will also promote adequate awareness,
enlightenment and necessary information relating to the taxation.
More importantly that consciousness of taxation significance will be
instilled in the mindset of citizens. Therefore, taxation education
should be planned and implemented in the primary education
curriculum development up till tertiary levels in the country.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CHAPTER SEVENTEEN
REFERENCES
Akanle, O. (1999). Nigeria income tax and practice. Centre for
Business and Investment Studies Limited, Nigeria, pp. 4-5.
Bhartia, A. L. (2009). Public Finance. 14th edition. Vikas Publishing
House Ltd., New Delhi.
Friedman, J. (1964). Regional planning as a field of study in Friedman
J. and Alonso, W., Regional development and planning. MT
Press, p.61.
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA)
CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
2004 (as amended)
SOMORIN Olateju Abiola
School of Postgraduate Studies,
Caleb University, Imota, Lagos, Nigeria
INTRODUCTION
Ikotun S. I., Kabuoh, M. N. and Onaderu, E.T. (2018). Factors
influencing entrepreneurship education among tertiary
institution students in south-western Nigeria. Caleb Journal of
Social and Management Science, 4(1), pp. 8-26.
Ikotun, S. I. (2017). Rationale for taxation education in Nigerian
society. A paper presentation at Oshodi/Isolo Local Government
Area for SMEs' operators.
Isaac, K. K. (2015). Effects of government taxation policy on sales
revenue of SMEs in Uasin Gishu Country, Kenya. International
Journal of Business and Management Invention, 4(2), pp. 29-40.
Musgrave, R. A. and Musgrave, P. B. (2004). Public finance in theory
and practice. Tata Mc-Graw Hill, New Delhi, India.
A company becomes a legal entity as soon as it is incorporated and is
treated under the Nigerian law as an artificial person, separate and
distinct from its shareholders. The incomes or profits of a company are
taxable (except specifically exempted) either under the Petroleum
Profits Tax Act (PPTA) Cap P13 LFN 2004 as amended or the
Companies Income Tax Act (CITA) CAP C 21 LFN 2004, as amended,
depending on whether the company is engaged in petroleum operations
or non-petroleum operations respectively. Thus, incomes of oil
exploration and production companies are subjected to tax in
accordance with the provisions of the PPTA but the oil marketing
companies, the refineries, petrochemical companies, oil servicing
companies, gas distribution and marketing companies are taxed under
the CITA.
In addition to the companies' income tax, all incorporated companies
are required to pay 2% of their assessable profit into an Education Tax
Fund. This is charged by virtue of the Tertiary Education Tax Act.
Pioneer companies, whilst in their pioneer period are not treated under
385
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
the CITA but under a separate legislation, the Industrial Development
(Income Tax Relief) Act, CAP 17. Where the assets of companies are
disposed, they do not come within the scope of the CITA, they are
treated under another legislation known as the Capital Gains Tax Act.
The employees of companies pay their income tax under the Personal
Income Tax Act. The Cap C 21 LFN 2004 as amended remains the
current and the principal tax law for taxation of limited liability
companies and public limited companies.
in respect of penalties. For the first time in the history of companies'
income tax law in Nigeria, failure to furnish a return, to keep the
required records, the furnishing of incorrect returns by omitting or
understating any income was made criminal offences punishable with
fine or imprisonment or both.
This paper is in four parts, A, B, C and D. The first part provides some
background notes on the Act. Part B is on the structure of the Act, while
C focuses on essential sections of the Act. Section D provides the
current status of Act.
(References to tax laws in this publication are from the Laws of the
Federation of Nigeria (LFN) 2004 as amended)
PART A
BACKGROUND NOTES ON THE ENACTMENT OF
COMPANIES INCOME TAX ACT
Prior to the enactment of the Companies Income Tax Act in 1961, there
was a law known as Income Tax Ordinance 1943 listed as chapter 92
Laws of Nigeria,( 1948 edition) which laid the foundation for the
present day legislation on income tax throughout the country. The
Ordinance
was enacted to consolidate and amend the 1940
Ordinance, thus repealing the 1940 Ordinance. It also taxed income
which “accrued in, derived from, received in or brought into” Nigeria
such as profits from business, trade, profession or vocation for
whatever period. The major changes introduced by the Ordinance were
387
In 1957, the colonial authorities established the Raisman Fiscal
Commission to examine the jurisdiction and powers of the various tiers
of government in Nigeria and to look into fiscal issues in the country.
The Commission submitted its report in June 1958. One of the
principal recommendations was that the Federal Government
should have exclusive jurisdiction on corporations 'and
companies' taxes as well as on taxation of non-resident persons,
and also to enter into double taxation agreements with other
countries. On accepting the recommendations, section 70 (i) of
the 1960 Constitution conferred exclusive jurisdiction upon the
Federal Government to impose taxes on the income and profits of
companies. The Companies Income Tax Act No.22 was thus
enacted in 1961. This Act repealed the Income Tax Ordinance,
CAP. 85 laws of Nigeria 1958 which itself repealed the Income
Tax Ordinance, 1943.
The Board of Inland Revenue (FBIR) was established in 1958, under
the Income Tax Ordinance of 1958. With the enactment of the
Companies Income Tax Act (CITA) of 1961, the name 'Nigeria Federal
Inland Revenue' was changed in 1961 to Federal Board of Inland
Revenue (FBIR) under section 4 of that Act. FBIR operated then as one
of the Departments in the Federal Ministry of Finance. FBIR retained
that name until 2007 when it was changed to FIRS Board under the
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
Federal Inland Revenue Service (Establishment) Act. This was due to
the 2004 Reform.
Income Tax Act 1961 as amended shall cease to have effect with
respect to tax on income or profits of companies for all years of
assessment beginning after the 31st day of March 1977.”
Amendments to the CITA 1961
The CITA 1961 has been amended by the following legislation:
a) Income Tax (Amendment) Act 65 of 1966
b) Finance (Miscellaneous Taxation) Act 47 of 1967
c) Finance (Miscellaneous) (Taxation Provisions) Decree NO. 47 of
1972
d) Income Tax (Miscellaneous Provisions) Act 17 of 1973
e) Decree No 28 of 1974, Income Tax (Miscellaneous Provisions)
f) Finance (Miscellaneous Taxation Provision) Act 15 of 1976
(abolished super tax with effect from 1st April, 1972); and
Companies Income Tax Decree 1979 No. 28
In 1979, an important transformation took place. The Companies
Income Tax Decree 1979 No. 28 was enacted. The Decree was signed
by General O. Obasanjo; head of the Federal Military Government,
Commander-in-chief-of the Armed Officers, Federal Republic of
Nigeria on 12th day of July 1979. It was a codification of all the
Companies income tax enactments since 1961. The decree was in 13
parts with 79 sections and 5 Schedules. The Explanatory Note 1 of the
Gazette No. 33, Vol. 66, and 19th July, 1979 specified that “the decree
repeals and re-enacts, with sundry amendments the Companies Income
Tax Act 1961 as amended and generally has effect from 1st April
1977.” While section 7(5) of the Decree imposed stiff penalties for
obstruction or the use of violence against any officers of the Board,
section 40(1) made it obligatory for every company to file an annual
audited account. Note 3 of the Gazette specified that “Companies
389
Amendments to Companies Income Tax Decree 1979 No. 28
The 1979 Decree has been amended by seven Finance (Miscellaneous
Taxation Provisions) Decrees. They were:
•Finance (Miscellaneous Taxation Provisions) Decree No 98 of
1979;
•Finance (Miscellaneous Taxation Provisions) Decree No 4 of
1985
(The scope of the taxes to be deducted at source was expanded to
cover all investment incomes and services such as consultancy,
technical and management, the basis of computing capital
allowances changed from reducing balance to straight line
method; capital allowances claimable were restricted to 75% for
manufacturing business and 66% for other businesses.)
•Finance (Miscellaneous Taxation Provisions) Decree No 12 of
1987
(rate of tax reduced from 45% to 40%., made it obligatory for
companies to file detailed tax computations and schedule of
capital allowances., introduced a new classification of Capital
Expenditure referred to as qualifying Research and Development
expenditure, introduced the concept of Franked Investment
Income
•Finance (Miscellaneous Taxation Provisions) Decree No 31 of
1989;
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
Covered by gazette No. 79, Vol. 76 Dated 8th December, 1989
Government Notice No. 692
operational arm of FBIR. The Act also created the office of the
Executive Chairman for the Board.
•Finance (Miscellaneous Taxation Provisions) Decree No 55 of
(The Decree established the operational arm of the Board now known
as the Federal Inland Revenue Service (FIRS) and introduced the term
'Executive Chairman”
•Finance (Miscellaneous Taxation Provisions) Decree No 30 of
1996;
1989;
•
•Finance (Miscellaneous Taxation Provisions) Decree No 21 of
1991;
(Scope of Taxable Income Widened, Power to Enter and Search
Premises inserted and introduced Pre-operation levy)
•Finance (Miscellaneous Taxation Provisions) Decree No 63 of
1991.
Profits or gains on short term money instruments such as Treasury
Bills, Federal Government Securities, and Debenture Certificates
became taxable. Abolished excess profit tax. Filing of Tax
Returns Made Mandatory, Introduction of Self-Assessment
System to Corporate Taxpayers
Companies Income Tax Act CAP 60 LFN 1990 and its
Amendments
All the amendments to Companies Income Tax Decree No. 28 of 1979
were codified into CAP 60 and listed in the 1990 Laws of the
Federation. It took effect retrospectively from 1st April, 1977. CAP 60
has also been amended by six other Decrees:
•Finance (Miscellaneous Taxation Provision) (Amendment)
Decree No 3 of 1993;
A landmark transformation took place in 1993 when the Finance
(Miscellaneous Taxation Provision) Decree No 3 of 1993
established the Federal Inland Revenue Service as the
391
•Finance (Miscellaneous Taxation Provisions) Decree No 31 of
1996
•Finance (Miscellaneous Taxation Provisions) Decree No 32 of
1996;
•Finance (Miscellaneous Taxation Provisions) Decree No 18,
1998.
•Finance (Miscellaneous Taxation Provisions) Decree No 19,
1998.
The Federal Inland Revenue Service (Establishment) Act, 2007
repealed Part 1 (sections 1-8) of CAP 60, likewise the FIRS Act
dissolved the Federal Board of Inland Revenue.
Current CITA -Companies Income Tax Act, (CITA) CAP C 21
LFN 2004
As at today, the current law on companies income tax is the Companies
Income Tax Act, (CITA) CAP C 21 (LFN 2004.) (as amended in 2007).
All the amendments to CAP 60 LFN 1990 were reflected in CAP C 21,
LFN 2004. By virtue of the Law Revision Committee which was
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
mandated to prepare a revised edition of the Laws of the Federation up
to 2000, the various tax laws contained in LFN 1990 accordingly bore
new chapters in the LFN 2004 edition. Thus the Companies Income
Tax Act cap 60 of LFN 1990 (CITA 1990) became Cap C21 of LFN
2004 (CITA 2004); Cap C 21 has itself been amended by the
Companies Income Tax (Amendment) Act, 2007.
Section (14) Taxation of Insurance Business
Companies Income Tax (Amendment) Act, 2007.
Curiously, the Act 2007 did not amend CAP C21, LFN 2004. The Act
amended the Companies Income Tax Act, CAP. 60 LFN, 1990 The Act
is covered by the Federal Republic of Nigeria Official Gazette No 62,
Vol. 94 of 13th June 2007. Although the amendment attempted some
minimal reforms however, the main provisions of the Principal Act are
still intact. The amendments ensured that the old Federal Board of
Inland Revenue (FBIR) is replaced by the Federal Inland Revenue
Service Board (FIRSB).
The provisions of Part X of CITA relating to the Body of Appeal
Commissioners have been deleted in view of the establishment of the
Tax Appeal Tribunal under section 59 of the FIRS Act.
Some of the other amendments included:
Section 9 (1) (5) - Chargeability of Tax on Interest Relating to
Foreign and Agricultural Loan
In view of its redundancy, the provision on the exemption from tax on
interest derived by a foreign company from a loan amount which is not
less than N150, 000 has been repealed.
393
The amendment seeks to simplify the taxation of profits from insurance
business. In order to instil accountability, transparency and full
disclosure in insurance business, the amendments provided in the new
section 14 prescribed the new basis for ascertaining the profit of
insurance companies and thus the tax payable by them and other
provisions relating to the insurance sectors.
Section (19) (5) Profits Exempted
The profit being exempted from tax now include profits of a company
established within an Export Processing Zone or Free Trade Zone,
provided the company does not engage in selling its goods into the
Customs Territory, otherwise ,such income derived from sales to the
local environment will be subject to tax in proportionate measure.
Additionally, the stimulation of economic activity as provided for in
the new Section 19 (s), 20 and 20A wherein exemptions were granted to
companies established within an export processing zone, free trade
zone etc provided 100% production of such companies is for export etc
Section (20) (Bb) (11) Allowable Deductions
The restriction on directors' remuneration with respect to a property
holding company to maximum of N10, 000, subject to three directors is
no longer applicable as such companies can now fully claim amount
paid, provided such expenses are wholly and reasonably incurred for
the purpose of the business and also subject to the staff collective
agreement approved by the Ministry of Employment, Labour and
Productivity.
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Section 20 (c) Bad Debts
Section (41) (1) (6) Penalty for Failure to File Annual Returns on
Due Dates
Removal from allowable expenses the previous provisions relating to
bad debts by deleting section 20 (c)
Section (21) (4) Donations Allowed
Providing a new basis for corporate social responsibility by allowing
deductible donations by companies to university and other tertiary or
research institutions, etc
Section (27) (2) (A) Losses to Be Carried Forward
Removing a period of 4 years for carrying loss forward (deleting
Section 2)
Section (28) (B) (1) Rural Investment Allowance
Adjustment of rural investment allowance by deleting allowance on
telephone;
Section (28) (F) Investment Tax Credit (ITC)
The amendment also provides for reforms to adjust or remove
investment allowance or tax credits by removal of investment tax credit
in respect of expenditure to replace absolute plant and machinery.
Removal of the 25% investment tax credit for companies engaged in
fabrication of spare parts, tools and equipment for local consumption
(deleting Section 28 F);
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There are also reforms in the amendments to CITA to make penalties
imposed for failure to comply with the law more realistic.
Empowerment of National Assembly on Rate of Tax
A new section 79 now empowers the National Assembly on the
proposal of the President to it if he so wishes to impose, increase,
reduces, withdraws or cancels any rate of tax, duty or fees chargeable.
The FIRS Board, whose operational arm is the Federal Inland Revenue
Service (FIRS), is empowered to administer the law. CITA though
amended in 2007, is currently undergoing another review.
In 1977, Dr S.A Akintan, the Legal Adviser to the Federal Board of
Inland Revenue in a paper Recent Developments in the Law of
Taxation in Nigeria, presented to the Federal Board of Inland Revenue
Annual Conference, remarked that “the CITA has been subjected to
numerous amendments to the effect that only the very few people
closely connected with the subject matter are in the privileged position
to be up to date with the position of the law”. The statement is still
relevant till today. Indeed, there is so much confusion in the fiscal
landscape in understanding which of the companies income tax laws
to cite as observed by Prof. Abiola Sanni in PROBLEMS OF
DETERMINING THE APPLICABLE TAX LAWS IN NIGERIA where
he remarked that “the use of LFN 1990 in legal documents, judicial and
legislative proceedings and legal opinions, among others, is most
inappropriate, wrong, ill-advised and illegal, as LFN 1990 has been
repealed by the Revised Edition (Laws of Federation of Nigeria) Act
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
2007 (Revised Edition Act) and supplanted with LFN 2004”. His
article stressed the need for and offered opinion on the development of
a uniform approach for the orderly development of Nigerian tax laws.
He established that LFN 2004 is the extant law; and submitted that “the
continued citation of LFN 1990 is wrong and that, consequently, any
assessment based on the non-existing law runs the risk of being
successfully challenged in a court of law in Nigeria”. Finally, the article
recommended an urgent re-enactment of the Companies Income Tax
Act in particular and offers some thoughts on how the avoidable
confusion could be addressed.
has only two sections, 29 and 30. Part V, on ascertainment of total
profits has sections 31 to 37. Section 38 was repealed by the
Amendment Act of 2007. As for Part VI, it is made up of only one
section 39 on incentives to gas industry. Part V11 is on rate of tax,
deduction of tax from dividends and relief from double taxation
amongst others. Part V111, with section 47 to 54 is on persons
chargeable, agents, company wound up, and liability to file return, self
assessment and currency of assessment. Part ix is made up of sections
55 to 64. Part x is on assessments.
PART B STRUCTURE OF the CITA
The Act is arranged in 14 parts made up of 106 Sections. It has 6
Schedules, and 6 Subsidiary Legislation. Part 1 which used to be
sections 1 to 8 of CAP 60 was repealed by the Companies Income Tax
(Amendment) Act, 2007. Part 11 is made up of sections 9 to 23. It is
about imposition of tax and profits chargeable. It deals with issues such
as charge of tax, insurance companies, treatment of profits of a
company from certain dividends, artificial transactions and profits
exempted.
Based on section 19 of CITA, where a company distributes dividends
but has no taxable profit or the taxable profit is less than the dividend
distributed, the FIRS deems the dividend distributed as the taxable
profit and subjects it to income tax.
Part 111 on Ascertainment of Profits is made up of sections 24 to 28,
whilst section 25A has been repealed. Other issues were deductions,
Donations and waivers. . Part IV, on ascertainment of assessable profits
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Part xi is made up of repealed sections 71to 75 on appeals as appeals are
now to be treated under section 59 of the FIRS Act. However section 76
which deals with assessment to be final and conclusive are retained.
Part xii is on Sections 77 to 91. The sections are about collection of tax,
deduction of taxes at source, generally referred to as withholding tax,
payment of tax deducted, and remission of tax, Power to distrain for
non-payment of tax, relief in respect of error or mistake. Part XIII, is
made up of sections 92 -99, although section 93 was deleted by the
Amendment Act of 2007, is on offences and penalties. The last part of
the Act, xiv is made up of sections 100 to 106 and it deals with
Miscellaneous matters such as Power to alter rate of tax (100), Tax
clearance certificate(101), Power to pay reward (103), Interpretation
(105) and the last section 106, Short title and application.
SCHEDULES TO THE COMPANIES INCOME TAX ACT, CAP.
C21 LFN 2004 (as amended)
There are six schedules to the CITA as follows:
First Schedule—(section 3(4) Powers or duties which the Board may
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
not delegate except to the Joint Tax Board with the consent of the
Minister.
1.
Double Taxation Relief (Between the Federal Republic of
Nigeria and the Government of the Kingdom of Belgium)
Order.
2.
Double Taxation Relief (Between the Federal Republic of
Nigeria and the Government of the French Republic) Order.
3.
Double Taxation Relief (Between the Federal Republic of
Nigeria and the Government of Canada) Order.
Third Schedule (section 11(6) Tax exemption on Certain Interests
Table1 is the Table of Tax Exemption on Interest on Foreign Loans.
4.
Double Taxation Relief (Between the Federal Republic of
Nigeria and the Government of Romania) Order.
Fourth Schedule (section 86), Warrant and Authority to levy by
Distress
5.
Double Taxation Relief (Between the Federal Republic of
Nigeria and the Government of the Kingdom of the Netherlands)
Order.
6.
Companies Income Tax (Rates, etc., of Tax Deducted at Source
(Withholding Tax)) Regulations.
Second Schedule, Capital Allowances;
Table 1 deal with Initial Allowances while Table 11 is about Annual
Allowances. Initial allowances, Annual Allowances¸ Asset to be in use
at end of basis period, Balancing Allowances, Balancing Charges,
Residue. etc
Fifth Schedule (Section 25 (5), Funds, Bodies and Institutions in
Nigeria to which Donations may be made under section 25 of this Act
thirty four of such Funds, Bodies and Institutions in Nigeria are listed in
the Schedule. (Amended by Order (No 1 of 2011) published in the
National Gazette on 14 December 2011).
Sixth Schedule (Section 64(2) {inserted by Decree No. 21 of 1991)
Warrant and Authority to Enter Premises, Offices, etc., under the
Companies Income Tax Act, 1979 The Schedule contains details about
the name of the company, incorporation or tax identification number
and authority to break open any building in the day time. The warrant is
to be signed by the chairman of the FIRS Board on behalf of the Board.
SUBSIDIARY LEGISLATION
Immediately after the Sixth Schedule, six subsidiary legislation are
listed in the Act as follows:
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PART C KEY SECTIONS IN THE ACT
SECTION 9 CHARGE OF TAX
The section provides that companies income tax is payable for each
year of assessment, upon the profits of any company accruing in,
derived from, brought into, or received in, Nigeria in respect of (a) any
trade or business for whatever period of time such trade or business
may have been carried on; (b) rent or any premium, dividends,
interests, royalties, discounts, charges or annuities. The tax is payable
on the incomes or profits of all companies doing businesses in Nigeria,
whether resident or non-resident. This is notwithstanding that some
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
companies are granted exemption from incorporation under section 56
of the Companies and Allied Matters Act LFN, 2004. In effect, all
incomes made in Nigeria by a Nigerian company are chargeable to
income tax as well as incomes earned in other countries. For a foreign
company, companies income tax is charged only on the profits
attributable to its operations in Nigeria.
The major income of an insurance agent is commission, insurance
brokers receives brokerage fee. Withholding tax and VAT are to be
recognized and remittances made to relevant tax authority in respect of
the commission and the fees.
The charge of companies' income tax is not applicable to companies
engaged in petroleum operations as per the definition in the Petroleum
Profits Tax Act, Cap P13, LFN 2004.
SECTION 16 INSURANCE COMPANIES
The new Section 16(1) of CITA which replaced old section 14 of CAP
60 stipulates how insurance business can be taxed. Insurance business
shall be taxed as an insurance company whether proprietary or mutual,
other than a life insurance company; or a Nigerian company whose
profit accrued in part outside Nigeria. Section 16 (5) specifies the
profits on which tax may be imposed. Section 16(6) provides that
where an insurance company carries on a life class and a general class
insurance business, the funds and books of accounts of one class shall
be kept separate from the other as though one class does not relate to the
other class, and the annual tax returns of the classes of the insurance
businesses shall be made separately.
Section 16 (8) (a) and (b) deal with reserves to be allowed as deductions
from the premiums of an insurance company, other than a life insurance
company. A re-insurance company is entitled to certain deductions
from its gross profit to be credited to a general reserve fund. This is
contained in section 16 (10) 0f CITA.
401
Thus section 16 (11) provides that ''an insurance company that
engages the services of an insurance agent, a loss adjuster, and an
insurance broker shall include in its annual tax returns, a schedule
showing the name and address of that agent, loss adjuster and insurance
broker, the date their services were employed and terminated, as
applicable, and payments made to each such agent, loss adjuster and
insurance broker for the period covered by the tax returns.{inserted by
2007 No. 56, section 4 }
SECTIONS 19-21, 43 & 83 DIVIDENDS
Nigeria adopts the classical system of corporate taxation, borrowed
from the UK. This system charges companies to income tax as they
arise and later dividends distributed in the hands of the shareholders
thus taxing the same income twice. In Nigeria, where a company pays
dividends from its reserves and not out of its profits, the company is
deemed to be declaring profits and is taxed accordingly.
Section 19 deals with general circumstances of dividend distribution in
the absence of substantial taxable profits. This section is designed as
an anti-avoidance provision to ensure that company profits do not
escape being taxed. The application of section 19 is limited to
circumstances where dividend is paid by a Nigerian company out of a
profit on which no tax is payable. The section empowers the Board to
raise assessment on amount of dividend paid to shareholders as if such
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
dividend declared is the total profit of the company for the year of
assessment to which the accounts relates. Such a situation may arise
where a company declares dividend to its shareholders when it has no
tax payable reported as a result of no total profits; or total profits which
are less than the amount of dividend distributed. The FIRS deems the
dividend distributed as the taxable profit and subjects it to income tax.
It should be noted that this section does not take some non-taxable
income into recognition. These are exempted pioneer profits, prior
years' retained profits on which income tax has been paid or franked
investment income. Likewise, the capital gains which have suffered tax
under the capital gains tax Act and are to be distributed as dividends are
not taken into cognisance.
to take measures to counter the arbitrariness which is capable of
reducing the tax liability. Thus, any transaction deemed a fictitious
transaction, which is aimed at the avoidance of tax may be disregarded
and taxed accordingly.
Section 80 (3) of the Act is a special provision which also deals with
dividend income. It provides that dividend received after the
deduction of tax shall not be charged to further tax as part of the profits
of the recipient company. However, where such income is redistributed
and tax is to be accounted for on the gross amount of distribution, the
company may off-set the withholding tax which it has itself suffered on
the same income. It should be noted that section 80 (3) provides that
dividend income ought not to be charged to any further tax, whereas the
purport of section 19 is that where that dividend constitutes the only
profit of the company or a substantial part thereof upon any
redistribution, such dividend would again be subject to tax.
SECTION 22 ARTIFICIAL TRANSACTIONS
Under section 22(1)(b) of CITA, internal trading between associated
companies would be regarded as “artificial or fictitious” if not made at
arm's length. The Board is empowered to set aside the transaction and
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Section 22 (1) of CITA provides that 'where the board is of the opinion
that any disposition is not in fact given effect to, or that any transaction
which reduces or would reduce the amount of any tax payable is
artificial or fictitious, it may disregard any such disposition and direct
that such adjustments shall be made as respects to tax as it considers
appropriate so as to counteract the reduction of liability to tax effected,
or reduction which would otherwise be effected by the transaction and
any company concerned shall be assessed accordingly.
For the purpose of this section, the following transactions shall be
deemed to be artificial or fictitious, namely, transactions between
persons one of whom either , in the case of individuals , who are related
to each other or between persons both of whom are controlled by some
other person which, in the opinion of the Board, those transactions
have not been made on the terms which might fairly have been expected
to have been made by persons engaged in the same or similar activities
dealing with one another at arm's length.
A transaction or disposition made between persons one of whom either
has control over the other or is related to the other, or between persons
both of whom are controlled by some other person, or if in the opinion
of the tax authority , the transaction has not been entered into on the
terms which might fairly have been expected of independent persons
engaged in the same or similar activities, dealing with one another at
arms length.
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
SECTION 23 PROFITS EXEMPTED
SECTION 24 DEDUCTIONS ALLOWED
These are profits that are taxable ordinarily, under the provisions of
CITA but are specifically exempted by the Act. By virtue of section 23
(1) (a) to (s) of the CITA, the profits that are exempted from the income
tax include:
1.
profits of any company being a statutory or registered friendly
society, in so far as such profits are not derived from a trade or
business carried on by such society Section 23 (a);
In accounting, all valid businesses expenses are charged to an income
statement. In taxation, not all accounting expenses are tax-deductible.
For tax purposes, for an expense to qualify as allowable deduction in
computing adjusted profits, it has to satisfy one major requirement
which is, it has to be incurred wholly, exclusively, necessarily and
reasonably for the purpose of such trade, or business .
2.
Profits of any company engaged in ecclesiastical, charitable or
educational activities of a public character in so far as such profits
are not derived from a trade or business carried on by such
company. Section 23 ©;
THE BURDEN OF PROOF THAT AN EXPENSE MEETS
THESE CONDITIONS TO BE DEDUCTIBLE RESTS SOLELY
WITH THE TAXPAYER. EXAMPLES OF THE EXPENSES
UNDER THE CITA INCLUDE the expenses incurred by the
company on research and development. OTHERS ARE-
3.
Dividends distributed by Unit Trust. Section 23 (f).
(a)
Dividends derived by a company from a country outside Nigeria and
brought into Nigeria through Government approved channels are
exempt under section 23(1) (k) of the Act.
By virtue of section 23 (2) (a) and (b), the President may ''by Order''
exempt:
(i) “Any company or class of companies from all or any of the
provisions of the Act; or
(ii) From tax all or any profits of any company or class of companies
from any source on any ground which appears to it sufficient.”
Interest on any money borrowed or employed as capital in
acquiring the profits.”
(b) Rent in respect of land or building occupied for the purposes of
acquiring the profits,
(d) “Any outlay or expenses incurred during the year in respect of(e)
Salary, wages or other remuneration paid to the senior staff and
executives; etc
(f)
Repairs of premises, plant, machinery or fixtures employed in
acquiring the profits, or for the renewals, repairs, or alteration
of any implement, utensil or article employed”:
(g) “Bad debts incurred in the course of a trade or business proved to
have become bad during the period for which the profits are being
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
ascertained
and doubtful debts to the extent that they are
respectively estimated to the satisfaction of the Board to have
become bad during the relevant period.
(h) “Any contribution to a pension, provident or other retirement
benefits fund, society or scheme approved by the Joint Tax
Board.
SECTION 25, 26 (2) and 26 (3) DEDUCTIBLE DONATIONS
For donations to be allowable for companies' income tax, certain
conditions must be fulfilled, for example the donations must be made
out of profits and only donations made to organizations and institutions
listed in the Fifth Schedule of the CITA are tax deductible.
While certain donations are specifically exempted from tax if they are
made to approved Funds, Bodies and Institutions in Nigeria listed in
the Fifth Schedule of the of the Act, the unlisted ones are not
allowable deductions for tax purposes and must be added back. To
qualify for inclusion in the Fifth Schedule, such beneficiaries are to be
listed as a public fund, a statutory body or institution or ecclesiastical,
charitable, benevolent, educational and scientific institutions
established in Nigeria and are of public character.
Section 25 (6) prescribes that “the Minister may by order in the Federal
Gazette amend the said Schedule in any manner whatsoever.
For donations made to University/Tertiary/Research Institutions for
any developmental purpose or as an endowment, such donation “shall
be allowed as deductible by the company out of the profits of that
407
period notwithstanding that the donation is of a revenue or capital
nature”.
Section 25 A (3), inserted by the CITA (Amendment) Act 2007
stipulates that for certain category of donor recipients, any donation
allowed a company shall not exceed an amount that is equal to 15% of
the total profits or 25% of the tax payable in the year of the donation;
whichever is higher.
SECTION 27 DEDUCTIONS NOT ALLOWED
The expenses that are non-tax-deductible are specified under section
27 (a) to (i) and they include(a) Capital repaid or withdrawn and any expenditure of a capital
nature;
(b) Any sum recoverable under an insurance or contract of
indemnity;
(c) The depreciation of any asset;
(d) Any expense of any description incurred within or outside
Nigeria for the purpose of earning management fee unless
prior approval of an agreement giving rise to such
management fee has been obtained from the Minister; etc
SECTION 29
PROFITS
BASES FOR COMPUTING ASSESSABLE
Companies are assessed to tax on the preceding year basis. In effect,
income tax is payable in arrears during the calendar year following the
financial year end date.
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
Where a company commences a business, the first three tax years are
subject to the commencement rules as specified in section 29 of the
CITA. The normal basis of assessment can not apply to a new business
since there is no preceding accounting period from which assessments
can be made. The profits assessed to tax are ascertained as follows:
amount of its total assessable profits from all sources for that year
together with any additions thereto to be made in accordance with the
provisions of the second schedule to this Act (balancing charges) less
any deductions to be made or allowed in accordance with the
provisions of this section (losses), section 32 construction/investment
allowances) and of the said schedule (balancing and capital
allowances)”
(i) First assessment year
Profit from date of commencement to the 31st of December of the year
(ii) Second Tax year
The first 12 months from commencement of trade or business.
(iii) Third Tax year
Normal preceding year basis.
The basis of assessment is usually on the preceding year basis, for both
resident and non resident companies. That is, tax is charged on profits
for the accounting year ending in the preceding year of assessment. For
example, if a company makes up its accounts to 31 December each
year, in 2010 tax year, it will be assessed on the profits computed for the
accounting year end 31 December 2009. A taxpayer has the right to
elect for an alternative basis of assessment, on actual basis, for the
second and third years of assessment 'but not for one or other only of
those years.”
Different rules apply during commencement of business, change of
accounting date and when a company ceases business.
SECTION 31 TOTAL PROFITS FROM ALL SOURCES
Section 31(1) of the CITA provides that“The total profit of any company for any year of assessment shall be the
409
Section 31(1) provides that the assessable profits from all sources are to
be aggregated. Where a loss has been incurred from any one source, the
loss cannot be aggregated with the profits from other sources to
determine total profits. The loss is to be carried forward for relief
against future profits from the same source. Additions and deductions
are then made for balancing charge and investment and capital
allowances respectively to arrive at total profits. When the total profits
have been arrived at, the tax rate which is currently 30% is applied on
the total profits to arrive at the tax payable.
If a company is engaged in building houses, road construction,
investment in equity, money lending, consultancy services, technical
services, properties leasing, buying and selling and transportation, nine
activities are clearly identifiable. The profits accruing from these
activities are regarded as accruing from different sources.
With respect to insurance companies, life insurance, fire insurance,
marine insurance, motor vehicle insurance, investment of funds are
different sources of profits. Section 16(6) of CITA which replaced old
section 14(6) of CAP 60 provides that where an insurance company
carries on a life class and a general class insurance business, the funds
and books of accounts of one class shall be kept separate from the other
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
as though one class does not relate to the other class, and the annual tax
returns of the classes of the insurance businesses shall be made
separately.
of assessment the ascertainment of total assessable profits from all
sources of a company results in a loss, or where a company's
ascertained profits results in no tax payable or tax payable which is less
than the minimum tax. The provision targets the capital of any
company which does not return enough taxable profit. Effectively, it
means that such companies would have to pay taxes out of their capital.
This provision is not based on the principle of ability to pay tax.
Generally, tax is imposed on the income of the taxable entity rather than
on its capital.
By virtue of section 33 (3) (a) to (c), the following companies are
exempted from payment of minimum tax:
section 16 (11) provides further that ''an insurance company that
engages the services of an insurance agent, a loss adjuster, and an
insurance broker shall include in its annual tax returns, a schedule
showing the name and address of that agent, loss adjuster and insurance
broker, the date their services were employed and terminated, as
applicable, and payments made to each such agent, loss adjuster and
insurance broker for the period covered by the tax returns.{inserted by
2007 No. 56, section 4 }
(a)
The definition of sources is not given in the Act. However, the
following could be construed to mean different sources: credit
financing, road construction, building construction, road transport,
manufacturing of goods up to disposal of such goods, investment in
stock and shares, equipment leasing etc. To be able to determine
accurately whether there are losses from particular sources which
should not be aggregated with profits from other sources, for the
purpose of arriving at the total profits of a company, each company
should always produce separate profit and loss account/income
statement for each separate activity that can be regarded as un-related
to the others.
SECTION 33 PAYMENT OF MINIMUM TAX
A company carrying on agricultural trade or business as defined
in Section 9(11) of Companies Income Tax Act;
(b) A company with at least 25% imported equity capital; and
(c)
Any company for the first four calendar years of its
commencement of business
(6)
In certain countries, corporations are always liable to a certain
amount of annual tax, regardless of whether they have realized a
profit.
(7) this is one of the sections in CITA that is discriminatory as it does
not apply to entities with significant imported equity. Indeed, it
has been perceived as a tax dis-incentive as it discourages
investment.
By an amendment of 1991, {Decree No. 21 of 1991}, old section 28A
which is now section 33 was included in the CITA Cap 60 LFN 1990 to
make provisions for the payment of a minimum tax where in any year
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SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
SECTION 36 MINING OF SOLID MINERALS
Essentially profits from solid minerals are taxed under the CITA. All
the provisions in respect of tax assessment, payment, objections,
appeals, offences and penalties under the CITA are applicable to the
mining industry. All new companies going into the mining of solid
minerals are to enjoy a tax-free holiday for the first three years of their
operations, with effect from 1st January, 1996. Section 36 specifically
prescribes that a “new company going into the mining of solid minerals
shall be exempt from tax for the first three years of its operation.
SECTION 39 INCENTIVES TO GAS UTILIZATION
(downstream operations)
The Federal Government has done a lot to increase gas utilization in
Nigeria. The term “Gas Utilization” is defined in section 39 (3) of
CITA to mean “the marketing and distribution of natural gas for
commercial purposes and includes power plant, liquefied natural gas,
gas to liquid plant, fertilizer plant, gas transmission and distribution
pipelines.”
The downstream sector deals with the post-production stages of oil and
gas up to the refining and processing stages. Downstream activities
include refining, liquefaction of natural gas, transporting, distribution,
and marketing of refined petroleum products, gas and derivatives. A
company that is engaged in gas utilization (downstream operations) is
granted certain tax incentives under this section. For example, section
39 (1) provides that(1) “A company engaged in gas utilisation (downstream operations)
shall be granted the following incentives, that is—
413
(a) An initial tax-free period of three years which may, subject to
the satisfactory performance of the business, be renewed for
an additional period of two years;
(b) As an alternative to the initial tax free period granted under
paragraph (a) of this subsection, an additional investment
allowance of 35 per cent which shall not reduce the value of
the asset, so however that a company which claims the
incentive provided under this paragraph shall not also claim
the incentive provided under paragraph (c) (ii) of this
subsection;
(c) Accelerated capital allowances after the tax-free period, as
follows, that is—
(i) An annual allowance of 90 per cent with 10 per cent
retention, for investment in plant and machinery;
(ii) An additional investment allowance of 15 per cent
which shall not reduce the value of the asset;
There are other incentives available to downstream operations which
will be treated in details in due course.
SECTION 40 RATES OF COMPANIES INCOME TAX
The section prescribes 30% tax rate on companies' profits. Generally,
in many countries, small traders are subject to a special tax regime in
which exemptions and lower tax burden are granted. In Nigeria, under
the CITA, such companies are charged at a lower rate of tax of 20 per
cent for four years from the commencement of the business. The lower
rate of tax is applicable only to companies engaged in the business of
agricultural production, manufacturing, mining of solid minerals and
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
wholly export trade. Small companies are those companies that earn
total gross sales (annual turnover) of below one million naira (N1,
000,000.00).
representative of the company in Nigeria in like manner and to
like amount as such company would be chargeable or;
(c)
SECTION 45 DOUBLE TAXATION AGREEMENTS
A Double Taxation Agreement (DTA) is an international treaty set up
by the United Nations (UN) for the avoidance of double taxation and to
prevent fiscal evasion of taxes on income and capital goods between
countries. A DTA, also called Double Taxation Convention (DTC) or
Bilateral Tax Treaty (BTT), is a written agreement between two
sovereign states, governed by international law for the primary purpose
of avoiding double taxation on the incomes or transaction flows
between and within the two states. Bilateral tax reliefs are prescribed in
sections 45 (1) and 46 of CITA. By those provisions, the Minister of
Finance is empowered to “issue an order declaring that arrangements
specified in the order have been made with the Government of any
territory outside Nigeria with a view to affording relief from double
taxation.'' The agreement is usually for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes on
income and capital gains. A DTR is part of a DTA and not an Agreement
on its own. Nigeria currently has in-force double tax treaty for taxes on
income and capital gains with Belgium, Canada, China, Czech
Republic, France, Netherlands, Pakistan, Philippines, Romania and
United Kingdom.
SECTION 47 CHARGEABILITY TO TAX
Section 47 of CITA provides that a company shall be chargeable to tax:
(a) In his own name; or
(b) In the name of any principal officer, attorney, factor ,agent or
415
In the name of a receiver or liquidator, or of any attorney, factor,
agent or representative of the company in Nigeria in like manner
as such company would have been chargeable if no receiver or
liquidator has been appointed.
A person in whose name a taxable person is chargeable to tax shall be
answerable for all tax matters within his competence, of the taxable
person and payment of any tax charged thereon.
SECTIONS 52, 55, 57-62 FILING OF RETURNS
A Corporate taxpayer is required to complete an annual tax return and
submit it to the Revenue before a statutory filing deadline. Section 57
stipulates filing of returns by companies operating in the capital
market. Under section 58, the Board may call for further returns. Period
of making returns can be extended under section 59. A separate paper
will be written on filing of returns.
SECTION 53 SELF-ASSESSMENT OF TAX PAYABLE
Self-assessment is a system under which a taxpayer is required to
declare the basis of his assessment (e.g. taxable income), to submit a
calculation of the tax due and, usually, to accompany his calculation
with payment of the amount he regards as due. The role of tax
authorities is to check (perhaps in random cases) that the taxpayer has
correctly disclosed his income.” The system can be described as the
assessment by a taxpayer himself in which he carries out the
computation of the tax liability, usually on a prescribed form IR3C416
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
COY, and accompanies it with the payment of the tax due in part or in
full, to the tax authority latest by the due date as provided in the tax law.
The liability to file a Self assessment return is by virtue of Section 52
(2) of the CITA LFN 2004 which stipulates that ''Every company whose
turnover is one million naira and above shall file self assessment return
within six months of its accounting period provided that a company
whose turnover is bellow one million naira shall file a self assessment
return as from 1998 year of assessment.'' This provision makes it
mandatory for all companies to file Self Assessment Returns from the
1998 year of assessment. However, government assessment will be
raised under audit/investigation, late filers, and non filers and in a few
other cases.
and seizure practices are engaged in by law enforcement officers in
order to gain sufficient evidence to ensure the arrest and conviction of
an offender. In accordance with the CITA the Board is empowered to
'enter the premises, registered office, any other office, or place of
management or residence of the principal officer, factor or agent of
“any defaulting company or taxpayer 'to conduct a search' and cart
away “any records and documents found on such premises, office or
residence of the principal officer, factor or agent of the company
whether or not belonging to the company” which the Board feels will
facilitate the determination of the tax liability of the affected company.
SECTIONS 54 & 84 CURRENCY OF ASSESSMENT &
CURRENCY OF DEDUCTION
Under section 54, an income tax assessment shall be made in the
currency in which the transaction giving rise to the assessment was
effected, while section 84 prescribes that Income tax deducted at
source shall be paid to the Board in the currency in which the deduction
was made.
SECTION 64 POWERS TO ENTER AND SEARCH PREMISES
Search and Seizure Provision in CITA
This provision was introduced into the Nigerian tax law by Decree No.
21 of 1991 which amended CITA 1979, to enable the tax authorities'
deal with recalcitrant taxpayers. The term Search and Seizure refers to
a specific method used by enforcement officers to investigate crimes,
track down evidence, question witnesses, and arrest suspects. Search
417
SECTION 67 ASSESSMENT LIST
(Section 67 (1) of CITA) provides that the Board shall prepare a list of
companies assessed to tax. Such list referred to as “the Assessment
List” shall contain the names and addresses of the companies assessed
to tax, the name and address of any person in whose name the company
is chargeable, the amount of the total profits of each company, the
amount of the tax payable by it, and other particulars as may be
prescribed by the Board.
SECTIONS 65-70 ASSESSMENTS
Section 66 is on additional assessment; under section 76, assessments
can be final and conclusive.
SECTIONS 71-75 APPEALS (The sections relating to appeals were
deleted by the Companies Income Tax (Amendment) Act, 2007
(Appeals now lie to the Tax Appeal Tribunal (TAT) under section 59 of
the Federal Inland Revenue Service (Establishment) Act, 2007.
418
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
SECTION 86 POWER OF DISTRAINT
(i)
This section confers power on the Board for the enforcement of
payment of tax due from a company, where an assessment has become
final and conclusive and a demand note has been served upon the
company then, if payment of the tax is not made within the time limited
by the demand note, the Board may in the prescribed form, for the
purpose of enforcing payment of the tax due distrain the taxpayer by his
goods or other chattels, bonds or other securities, distrain upon any
land, premises, or place in respect of which the taxpayer is the owner
and, recover the amount of tax due by sale of anything so distrained.
SECTIONS 92, 94 & 95 OFFENCES AND PENALTIES
Offences include when a taxpayer knowingly makes any false
statement or false representation; or aids, abets, assists, counsels,
incites or induces any other person—
(i) To make or deliver any false return or statement under the
Act; or
(ii) To keep or prepare any false accounts or particulars
concerning any profits on which tax is payable under this
Act; or
(iii) Unlawfully to refuse or neglect to pay tax,
Where this happens, he shall be guilty of an offence and shall be liable
on conviction to a fine or to imprisonment for five years, or to both such
fine and imprisonment. Under Section 95 (a) (i) to (iv), and (b) any Tax
Officer employed by the FIRS in connection with the assessment and
collection of the tax who-
419
Demands from any company any amount in excess of the
authorized assessment; or
(ii) Withholds for his own use or otherwise any portion of the amount
of tax collected; or
(iii) Renders a false return, whether orally or in writing, of the amount
of tax collected or received by him; or
(iv.) Defrauds any person, embezzles any money, or otherwise uses his
position so as to deal wrongfully with the Board; or not being
authorised under this Act to do so, collects or attempts to collect
the tax under this Act, shall be guilty of an offence and be liable on
conviction to a fine or to imprisonment for three years, or to both
such fine and imprisonment.
See the Federal Inland Revenue Service (Establishment) Act, 2007 for
update on Harmonized 0ffences and Penalties.
SECTION 100 POWERS TO ALTER RATE OF TAX
On the proposal by the President , the National Assembly may by a
resolution of each of the Houses of National Assembly impose,
increase, reduce, withdraw or cancel any rate of tax, specified in
section 29 and the rates of capital allowances in the Second Schedule
to the Act. This will be in accordance with section 59 (2) of the
Constitution of the Federal Republic of Nigeria, 1999.
SECTION 101 TAX CLEARANCE CERTIFICATES (TCC)
A TCC is a document issued by a tax authority to the effect that the
company or the individual stated thereon has paid all taxes assessed up
420
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
to a particular period or that they are not liable to tax. A TCC is issued to
a taxpayer by the tax authorities certifying that the taxpayer has either
paid all taxes due or that he is not liable to any tax. Twenty transactions
are listed in the CITA which may require the presentation of a TCC.
Where a person who has deducted withholding tax fails to remit such
tax to the relevant tax authority TCC may be denied.
detailed arrangements which give effect to the intent and purpose of
primary legislation. Regulations are typically used to address matters
of detail, while matters of substance are left to primary legislation.
Under section 101 (1) of CITA, whenever the Board is of the opinion
that tax assessed on profits or income of a person has been fully paid or
that no tax is due on such profits or income, it shall issue a tax clearance
certificate to the person within two weeks of the demand or give
reasons for the denial. TCC will not be issued where taxes are
outstanding for any of the three (3) years preceding the current Year of
Assessment.
SECTION 105 INTERPRETATIONS
The section interprets terms such as “company”, “foreign company”,
“Nigerian company”, “officers of the Board”, “Year of Assessment”
SECTION 106 Short title and application
(1) This Act may be cited as the Companies Income Tax Act.
(2) This Act shall, except where other provision is made in that behalf
in this Act, apply in respect of tax charged for the year of
assessment commencing on 1 April 1977 and each succeeding
year of assessment
REGULATIONS
This is a form of secondary legislation issued by a government under
the authority of primary legislation. Regulations are used to make the
421
1.
REGULATIONS ON SOURCE DEDUCTIONS:
(Withholding Taxes on Payments for Certain Activities &
Services)-Public Notice 1997.
The regulations were released to the general public on the application
of withholding tax to payments on certain activities and services such
as building, construction, consultancy and professional services,
management and technical services and commissions. The regulations
which related to both the Personal Income Tax and the Companies
Income Tax re-classified some of the activities, modified some of the
rates at which tax was to be deducted and re-emphasized the applicable
principles.
2.
COMPANIES INCOME TAX (RATES ETC OF TAX
DEDUCTED AT SOURCE (WHT) REGULATIONS.
Section 63. S.1 10 of 1997.
The Regulation is about rate of tax to be deducted at source, deduction
not to regard as extra cost, deductions to be receipted, and remittances
of tax, offences, interpretation and citation. The commencement date
was 1st January, 1995.
3.
TAX ADMINISTRATION (SELF ASSESSMENT)
REGULATIONS S.I NO. 41 OF 2011.
The FIRS Board exercised the powers conferred on it by Section 61 of
the FIRS (Establishment) Act 2007 the (FIRS Act), to issue the 2011
Tax Administration (Self Assessment) Regulations 2011 on December
422
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
12, 2011. With the approval of the Minister of Finance, the FIRS Board
gazetted the Regulation dated 19 December 2011 modifying the
processes and procedures for self assessment returns.
6.
Some of the key changes introduced by the Regulations that impact on
the CITA include:
1. Administrative assessment to include penalties and interests
imposed as part of the liability due, effective from the time the
returns became due. Tax authority may issue administrative
assessment where a taxpayer fails to file returns or as a result of
underpayment arising from a tax audit or investigation.
2.
Income tax returns can only be signed by a Director or the
Company Secretary.
3.
For companies income tax (CIT) returns, due date is 6 months
after the financial year end date,
4.
Companies income taxes must be paid as and when due
regardless of any approval for extension of time for filing granted
by the FIRS. Such tax payments may have to be estimated given
that in many cases the actual amounts may not be known.
5.
Due date is defined as the day prescribed by the law for the filing
of returns and making of payments by taxable persons. This
means that whether extension has been granted or not any
payment after the due date is liable to interest. This clearly defeats
the purpose of seeking an extension as envisaged in the relevant
laws.
423
Minimum notice period to conduct an audit is 7 days. No notice
period is stated for an investigation.
(3) Requirements for funds, bodies or institutions (Under the
FIFTH SCHEDULE TO THE CITA) Regulations 2011S.I No. 40
of 2011
On 12 December 2011, the list of bodies eligible for tax deductible
donations has been expanded by the Minister of Finance in
exercise of powers conferred on his Office by section 25(6) of
CITA. This he did by an Order (No 1 of 2011) published in the
National Gazette on 14 December 2011 which amended the Fifth
Schedule to the CITA LFN 2004 (as amended)
In addition to the existing bodies eligible for tax deductible donations
listed in the Act, any donation made to institutions, bodies or funds
engaged in additional broad categories of activities will now be tax
deductible provided such organisations are not established for the
purpose of profits or gains to the individual members of the society,
association or person. The additional categories include Promotion or
defence of human rights, Women empowerment and development,
Youth empowerment and development, Leadership and Resource
Development, Promotion of National Unity and Patriotism, Promotion
of Social and Economic Development, Accident prevention and
control activities and Information system development and awareness.
(4) THE INCOME TAX (TRANSFER PRICING)
REGULATIONS No 1, 2012 S.1 No 42 of 2012
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
PART D CURRENT STATUS of the CITA (from 2011 to 2014)
Apart from the major amendments of 2007, there have been other
changes to the Act.
gazetted the Regulation dated 19 December 2011 modifying the
processes and procedures for self assessment returns.
(I) AMENDMENT TO THE FIFTH SCHEDULE TO THE
COMPANIES INCOME TAX ACT, ORDER NO.I, of 2011 S.I No.
39 of 2011
Order No. 1 of 2011 with a commencement date of 12th day of
December, 2011. In exercise of the powers conferred on the Minister of
Finance by section 25 (6) of the Companies Income Tax Act Cap C 21
LFN 2004 (as amended), Dr Ngozi Okonjo Iweala Coordinating
Minister for the economy and Minister of Finance, Federal Republic of
Nigeria made the Order to amend the Fifth Schedule by inserting
paragraphs 36-42. Thus additional six public institutions were added to
the Fifth Schedule of the bodies in Nigeria to which donations may be
made under section 25 of the Act. The additional categories include
Promotion or defence of human rights, Women empowerment and
development, Youth empowerment and development, Leadership and
Resource Development, Promotion of National Unity and Patriotism,
Promotion of Social and Economic Development, Accident prevention
and control activities and Information system development and
awareness.
(II) TAX ADMINISTRATION (SELF ASSESSMENT)
REGULATIONS IN DECEMBER 2011.
The FIRS Board exercised the powers conferred on it by Section 61 of
the FIRS (Establishment) Act 2007 the (FIRS Act), to issue the 2011
Tax Administration (Self Assessment) Regulations 2011 on December
12, 2011. With the approval of the Minister of Finance, the FIRS Board
425
Some of the key changes introduced by the Regulations that impact on
the CITA include:
1. Administrative assessment to include penalties and interests
imposed as part of the liability due, effective from the time the
returns became due. Tax authority may issue administrative
assessment where a taxpayer fails to file returns or as a result of
underpayment arising from a tax audit or investigation.
2.
Income tax returns can only be signed by a Director or the
Company Secretary.
3.
For companies income tax (CIT) returns, due date is 6 months
after the financial year end date,
4.
Companies income taxes must be paid as and when due
regardless of any approval for extension of time for filing granted
by the FIRS. Such tax payments may have to be estimated given
that in many cases the actual amounts may not be known.
5.
Due date is defined as the day prescribed by the law for the filing
of returns and making of payments by taxable persons. This
means that whether extension has been granted or not any
payment after the due date is liable to interest. This clearly defeats
the purpose of seeking an extension as envisaged in the relevant
laws.
6.
Minimum notice period to conduct an audit is 7 days. No notice
period is stated for an investigation.
426
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
SYNOPSIS OF COMPANIES INCOME TAX ACT (CITA) CAP C 21 LAWS of the FEDERATION OF NIGERIA (LFN),
(III) Companies Income Tax (Exemption of Bonds and Short Term
Government Securities) Order 2011, S.I No. 11 of 2012
Based on the Order, the following are exempt from companies' income
tax for 10 years effective from 2 January 2012:
a. Short term Federal Government securities such as Treasury Bills
and Promissory Notes:
b. Bonds issued by Federal, State and Local governments and their
agencies;
c. Bonds issued by corporate and supra-nationals; and
d. Interest earned by holders of bonds and securities listed above
1997
3.840000 3.622141 1.956409
1998
2.184000 3.600918 2.039652
1999
4.368000 3.670172 2.044030
2000
4.502000 3.826955 2.084791
2001
3.043000 3.838547 2.109950
2002
9.255000 3.891855 2.126391
2003
2.261000 3.996227 2.166667
2004
2.612700 4.057328 2.192205
2005
3.592110 4.164677 2.178689
2006
2.712200 4.268686 2.230960
2007
3.868200 4.315074 2.392169
2008
2.594400 4.385538 2.521661
(VI) Changes to CITA 2018
2009
7.317700 4.73729
APPENDIX I
2010
8.674200 4.799205 2.823513
2011
8.689300 4.855603 2.854573
2012
8.894500 4.903592 2.877199
2013
8.913600 4.949603 2.896747
2014
8.993700 4.973797 2.950121
2015
9.131800 4.952464 2.949663
2016
9.347200 4.598856 2.973608
2017
9.609300 4.749591 2.990388
(IV) COMPANIES INCOME TAX (EXEMPTION OF
PROFITS)ORDER S.I NO. 38 OF 2012
(V) FIRS Circular on the tax implications of IFRS adoption
OBS
SME
1990
1.178000 2.827369 1.755112
1991
1.184000 2.827369 1.772542
1992
1.184000 2.752048 1.749118
1993
3.266000 2.827369 1.827563
1994
4.914000 3.146035 1.842235
1995
3.543000 3.463505 1.880242
1996
2.543000 3.605553 1.951580
VAT
427
CIT
428
2.778585
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
APPENDIX II
CHAPTER EIGHTEEN
Dependent Variable: LOG(SME)
ETHICAL ISSUES IN TAX PLANNING
Method: Least Squares
Date: 08/11/19 Time: 20:40
ADEMOLA Olanrewaju
Partner
Ascension Consulting Services
Sample: 1990 2017
Included observations: 28
Variable
Coefficient
Std. Error
t-Statistic
Prob.
INTRODUCTION
C
-1.378039
0.836407
-1.647570
0.1120
LOG(VAT)
0.704363
1.265883
0.556420
0.5829
LOG(CIT)
2.226481
1.266323
1.758226
0.0909
In an ever-changing world where the dynamics of individual enterprise
and international business operations tend to determine the manner and
methods of tax administration, it is important to draw the line between
legitimacy and morality. Tax planning has been a tool employed by
most individuals and corporate citizens to minimize the level of their
tax obligations especially, during economic crises where organizations
are wary of cash outflow. Whether this practice is morally right or
wrong has been the topic of debate usually between relevant tax
authorities and tax payers.
R-squared
0.655086
Mean dependent var 1.423919
Adjusted R-squared 0.627493
S.D. dependent var
0.678266
S.E. of regression
0.413969
Akaike info criterion 1.174904
Sum squared resid
4.284253
Schwarz criterion
Log likelihood
-13.44866
Hannan-Quinn criter. 1.218540
F-statistic
23.74091
Durbin-Watson stat 1.638294
Prob(F-statistic)
0.000002
1.317641
Thus, the opportunity presented by this discourse is apt in the sense that
it will provide us with an avenue to take a cursory look at tax planning
as a tax avoidance strategy and its morality or otherwise in the tax
environment of national jurisdictions in Nigeria.
Overview of Ethics
Avoiding tax may be legal, but can it ever be ethical?
One of the most under estimated and intriguing issues of modern
business is that of the ethical dimension of taxation and tax planning.
429
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
This is because most businesses regard tax as their biggest headache.
The issue comprises two major pillars of contemporary business:
profitability and morality. Business excellence and business ethics
should go together as a good reputation for fair and honest business is a
prime corporate asset which all employee should nurture with the
greatest care.
Tax planning and management
Ethics is defined as the moral principles that control or influence a
person's behaviour. In other words, ethics are moral values, rules of
conduct, standards, conscience, moral code, and moral philosophy.
The essence of ethics is to ascertain and continuous review how human
beings should behave in order to lead a fulfilling life which include
considering others as well as one. The development of these moral
values is philosophically seen as dependent on the uniqueness of man
makes it possible for him to look for solutions to the problem in his
environment. For the purpose of this discourse ethics refers to the value
system held by individual taxpayers in respect to tax payment.
A person who commits tax fraud through aggressive tax planning (tax
evasion) cannot believe it to be 'sharing of national cake'. His
subjective interpretation of institutional ethics will be over-ridden by
objective interpretation and he will legally be a thief or criminal. He has
committed 'theft against humanity'. It is not only war that constitutes a
crime against humanity. Stealing of tax funds in one way or the other is
also a crime against humanity
Tax Compliance Life Cycle
Tax
Planning
Tax
Provisioning
Tax
Litigation
& Dispute Resolution
Tax
Compliance
Tax
Defense
i.
Tax Planning - Arranging affairs in a lawful manner so as to pay
the minimum tax required by the tax laws. This requires a good
knowledge of relevant tax laws and current tax practice.
ii.
Tax Provisioning - Computing the taxes due based on the laws,
guidelines, understanding, arrangements and decided cases
iii.
Tax Compliance - filing what is correct, at the correct time and
keeping the evidences of taxes paid
iv.
Tax Controversy - It is normal for the revenue officials to hold a
different view where there is no guideline. This leads to
development of the tax policies and laws
v.
Tax Dispute resolution - Clear, friendly dispute resolution is
necessary in a very good tax compliant environment.
Tax planning is the act of arranging one's financial affair so as to take
maximum advantage of tax benefits and minimize, as far as possible,
431
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
tax liability without breaching tax laws. On the other hand, tax
management is the compliance to legal formalities. The objective of
Tax planning is for Taxpayer to minimize his or her tax exposure,
within the ambit of the law and it encompasses tax management. A
good knowledge of the laws, especially tax laws is required in tax
planning.
Morality in tax planning
Morality is viewed as principles concerning the distinction between
right and wrong or good and bad behavior. It could also be understood
to be a particular system of values and principles of conduct, especially
one held by a specified person or society; or the extent to which an
action is perceived to be right or wrong. This is different from legality
which is formal public policy that has consequences for those who
violate it, however, morality with relation to tax planning is further
explained below;
Tax planning is designed to arrange an individual's or an organization's
affairs in order to maximize after tax returns. Needless to say,
businesses are substantially judged on their performance in relation to
their earnings after tax and therefore gain respect within their
environment by minimizing their tax liability. As part of good
governance, companies will seek to minimize their tax liability
through "Tax Planning", making the most of the tools and mechanisms
which the government makes available to them specifically for this
purpose: allowances, deductions, rebates, exemptions, and so on. Tax
planning is tax compliant behaviour but there is a grey area between
this and "tax avoidance".
Advocates of tax planning activities believe that taxpayers can
minimise tax if these are done within the ambits of the law. However,
there is another school of thought that taxpayers must consider the
impact of these schemes on the society (ethical consideration). This
supports the concept of tax morality, the willingness of a taxpayer to
pay taxes and comply with the tax laws. Tax revenue are a means of
giving back to the society, thus improving society, therefore
appropriate tax planning schemes should extol the concept of tax
morality.
433
-
Tax Morality: For taxpayers, this is moral obligation to pay taxes
or a belief in contributing to society by paying taxes and this can
be viewed from the following perspectives:
•Societal benefit
If the revenue collected from tax is used to improve the welfare of
society, the whole community benefits. Government will be able to
provide the services that people need and be able to distribute wealth to
those who are the poorest (Calling for Tax Justice- Christian Aid). Tax
planning should be, therefore, viewed from a societal standpoint as
well as one of self-interest.
When paying tax is considered a moral obligation, companies and
individuals willingly do the right thing at the right time and pay their
fair share of taxes, the resulting benefit being that companies and
individuals are contributing to the benefit of all. Consequently, the
nation as a whole thrives. Arguably, the revenue that government
collects may not necessarily be put to good use and may be used to fund
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
other things that do not serve the interests of the people and this is tax
morality of government.
its reputation and destroying the public's trust. Instances of taxpayers
criticized recently aside from Starbucks are Google, Facebook and
Amazon. These cases have helped shed more light on tax morality
especially as these aggressive schemes will reduce the funds available
for the government to fund the society.
•Public image and general perception of organizations
The image of an organization is negatively affected if the organisation
is perceived to be involved in tax evasion. A good example is the case of
Starbucks, an American coffee company and coffee chain, which was
involved in a scandal in 2012, when it was accused of tax evasion
through effectively shifting taxable income to its subsidiaries located
in jurisdictions where it could be taxed at lower tax rates. It suffered
great harm to its reputation when it was discovered that the company
was not paying corporate tax in the UK.
Tax planning, synonymous with tax avoidance, brings about different
reactions in different individuals, even judges. Three judicial
landmarks for tax planning, reflecting historical development, are as
follows:
(
1) The dictum of Lord Clyde (1929) that the taxpayer is entitled to be
astute to prevent so far as he honestly can the depletion of his
means by the Revenue''.
(
2) The statement of Lord Tomlin (1936) that every man is entitled, if
he can, to order his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would be''.
(
3) The opinion given by Lord Simon of Glaisdale (1974) that
Disagreeable as it may seem that some taxpayers should
escape what might appear to be their fair share of the general
burden of national expenditure, it would be far more
disagreeable to substitute the rule of caprice for that of law''
Protesters marching down Regent Street in London protesting against
Starbucks' corporate tax policies
Aggressive tax planning and minimizing tax liability can make a
taxpayer vulnerable to accusations of greed and selfishness, damaging
435
Fundamentally, taxation is merely the transfer of wealth from the
people's pockets to the public purse. The after-tax income is
determined by both the level of the tax rate and the efficiency of the tax
collection system. It is this income which regulates the standard of
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
living for the individual and generates the opportunities and challenges
for a business. Aggressive tax planning have led to the conclusion that
not paying a fair amount of tax to the government undermines the
integrity of the tax system and is both immoral and unethical. These
schemes go against the “spirit of the law”. Some cases of tax avoidance
are brought on because of the ambiguity in the purpose of the tax
system. Although the government criticizes tax avoidance, tax
incentives and special tax provisions can sometimes promote tax
avoidance as they are aimed at tax planning.
While tax avoidance is a use of legal methods available to lower tax
liability, tax evasion utilizes illegal methods to avoid payment of taxes
or to reduce the amount of tax payable.
Tax Planning Activities: The grey area between tax planning and
tax avoidance
a) Tax payment is a social obligation and should not be avoided.
This is also the socially responsible thing to do.
b)
Where arrangements or financial instruments not anticipated by
the government are used as a tax planning scheme, the tax
advantage from such aggressive schemes are categorised as tax
avoidance activities.
c)
Avoiding tax may be legal, but how ethical are these activities?
d)
Activities including the use of overseas tax havens, countries
with lower tax rates, etc.
e)
Avoiding tax by using such schemes are not illegal like tax
evasion. These operate within the letter, but not the spirit of the
law.
Tax Avoidance and Tax Evasion
Tax evasion and tax avoidance are problems that face every tax system.
437
Tax Avoidance
Tax avoidance is the use of legitimate methods to reduce the amount of
income tax payable to relevant tax authorities. Tax avoidance takes
advantage of the tax laws and the tax loopholes to reduce tax liabilities
in ways that are legal but are not in the spirit of the tax law. Tax
avoidance will utilize all available tax credits as well as tax deductions.
The right of individuals to order their affairs in a tax efficient way has
long been judicially recognised and was recently echoed by Belgore
CJN in Federal Board of Inland Revenue Service v American
International Insurance Company (Nig.) PLC when his Lordship said
“Tax is an obligation not a duty. One is not a bad citizen if one can
organize his business or trade in a legal manner to minimize his tax
liability. He could and he should resist within legal means any unduly
wide interpretation or unconventional implication of legislative intent
of a tax law that might increase that burden. He can do so without being
ashamed of walking in the street as a patriotic citizen. A shrewd
business acumenship and a legitimate protection of sweat of labour are
not a dishonest act or an act having any moral turpitude. It is being
pragmatic and practical. Being capitalistic might leave much to be
desired but among what is left is not illegality”
Tax avoidance, while legitimate, can be seen as aggressive when it
involves using financial instruments and arrangements not intended as,
or anticipated by, governments as a vehicle for tax advantage. For
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
example, the use of overseas tax havens. Avoiding tax and bending the
rules of the tax system is not illegal unlike tax evasion; it is operating
within the letter, but perhaps not the spirit, of the law. Such
arrangement is termed as aggressive tax planning methods and
reduces, defers and prevents the payment of tax. It may also completely
shift tax liability to another taxpayer. While tax planning is both legal
and moral, tax avoidance is legally correct, but it is an immoral act.
attempt to defeat or circumvent the tax laws to illegally reduce one's tax
liability.
Examples of tax avoidance schemes include the following;
i.
Choice of capital/finance - Equity or Loan
ii.
Choice of Loan – Foreign or Local – (WHT)
iii.
Choice of equity – Foreign or Local – (Minimum Tax)
iv.
Choice of Investment – Government or private (WHT)
v.
Mortgage Interest – (Deductible Expense)
vi.
Contribution to Pension – (deductible and future benefit),
vii. Donations to approved charitable organizations, etc
Tax avoidance goes against the principle of fairness, one of the canons
of taxation because it shifts the burden of taxation to the taxpayers who
do not have the necessary knowledge to adopt the same tax avoidance
schemes. Where the government should increase taxes to make up for
the lost revenue, this will lead to redistribution of wealth to the tax
avoiders. This also makes it difficult for the Government to provide
social services and fund the development of infrastructures
Tax Evasion
Tax evasion is the illegal act of concealing or misrepresenting income
to avoid taxation, and it's not only dishonest, but also punishable by
law. The Black's Law Dictionary defines tax evasion as the willful
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Some common actions that are regarded as tax evasion include:
1. Outright refusal or neglect to pay tax;
2. Making an incorrect return by omitting or understating any
income
3. Omission to state income received in or brought into Nigeria from
sources outside Nigeria;
4. Reduction of tax liabilities through fraudulent tax returns.
5. Under declaration or dishonest declaration of income, earnings or
assets.
6. Evading custom duties either by under invoicing or changing
product description to one with a lower rate or smuggling.
7. Inflating input VAT used to deduct VAT payable.
8. Failure of an employer to remit employment taxes deducted to the
government, filing false payroll tax returns or failing to file
payroll tax returns.
9. Underreporting income.
10. Fabricating income records.
11. Intentionally underpaying taxes.
12. Claiming illegitimate business expenses or dependents on your
tax return.
Some reasons for tax evasion by taxpayers include:
a) High tax rate
b) Bribery and corruption in the tax system administration
c) Ridiculously low penalty set by the law for the late payment of
due taxes
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
d)
e)
f)
g)
an arrangement that they have entered for a prohibited tax-related
purpose. The below are some of the GAARs in our laws:
Taxpayer inaccessibility to government services
Poor management and misuse of collected taxes
Lack of essence of civic responsibility
Unfair distribution of amenities
The Nigerian Tax System (comprising of the Tax administration, the
Tax Policy and the Tax Laws) seems to be weak and inefficient, and this
has resulted in the loss of government revenue caused by widespread
tax evasion and tax avoidance. Other factors and that encourage tax
evasion and avoidance are default from the tax laws, tax administration
and the government.
Anti-Tax Avoidance Provisions in Nigeria
Anti-avoidance legislations are statutory provisions which seek to
prevent an escape from liability to tax payer using artificial or fictitious
transactions to dodge tax. The escape of liability usually involves no
criminality.
Taxes and the tax system are critical to the revenue generating capacity
of the government. However, the tax system in Nigeria is characterized
by evasion and corruption. The tax laws do not specifically define the
term tax planning and tax avoidance; it also does not delineate
acceptable tax planning from unacceptable tax avoidance. The laws
only specify when a transaction should be challenged based on tax
avoidance.
Provisions of the law known as General Anti-Avoidance Rule (GAAR)
statutes exist in our tax laws, just like other tax jurisdictions, which
prohibits aggressive tax avoidance schemes. A GAAR is a statutory
rule that empowers a revenue authority to deny taxpayers the benefit of
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(a)
Section 22 of the Companies Income Tax Act (CITA)
“Where the Board is of opinion that any disposition is not in fact given
effect to or that any transaction which reduces or would reduce the
amount of any tax payable is artificial or fictitious, it may disregard
any such disposition or direct that such adjustments shall be made as
respects liability to tax as it considers appropriate so as to counteract
the reduction of liability to tax affected, or reduction which would
otherwise be affected, by the transaction and any company concerned
shall be assessable accordingly.”
(b) Section 17 of the Personal Income Tax Act, CAP P58, LFN, 2004
as amended (PITA)
“Where a tax authority is of opinion that any disposition is not in fact
given effect to, or that any transaction which reduces or would reduce
the amount of any tax payable is artificial or fictitious, the tax authority
may disregard the disposition or direct that such adjustments shall be
made as respects the income of an individual, an executor or a trustee,
as the tax authority considers appropriate so as to counteract the
reduction of liability to tax effected, or reduction which would
otherwise be affected by the transaction”
(c) Section 20 of the Capital Gains Tax Act (CGTA)
“Subject to the provisions of this Act, where the Board is of the
opinion that any disposition is an artificial or fictitious transaction or
where any transaction which reduces or would reduce the amount of
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
any capital gains tax is artificial or fictitious the Board shall disregard
such disposition and may direct that such adjustments shall be made
with respect to the liability of any person for the payment of capital
gains tax as it considers appropriate so as to counteract the reduction
of liability to capital gains tax effected or reduction which would
otherwise be effected, by the transaction and any person
concerned with such transaction shall be assessable accordingly”
(i)
(d) Section 15 of the Petroleum Profits Tax Act, CAP 13, LFN, 2004
(PPTA).
“Where the Board is of opinion that any disposition is not in fact given
effect to or that any transaction which reduces or would reduce the
amount of any tax payable is artificial or fictitious, the Board may
disregard any such disposition or direct that such adjustments shall be
made as respects liability to tax as the Board considers appropriate so
as to counteract the reduction of liability to tax effected, or reduction
which would otherwise be effected, by the transaction and the
companies concerned shall be assessable accordingly. In this
subsection, the expression “disposition” includes any trust, grant,
covenant, agreement or arrangement”
(e) Transfer Pricing Regulations. To give effect to the above GAARs,
the Service has published the Income Tax (Transfer Pricing)
Regulations, 2018 which empowers the Federal Inland Revenue
Service (FIRS) to disregard any disposition or make necessary
adjustments if transactions between connected persons appear to
be artificial or fictitious. The Service has adopted some of
Organization for Economic Co-operation and Development
(OECD) guidelines and pronouncements:
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The Arm's Length Principles in Article 9 of the UN and OECD
Model Tax Conventions on Income and Capital for the time being
in force; and
(ii) The OECD Transfer Pricing Guidelines for Multi-national
Enterprises and Tax Administration, 2017 and the UN Practical
Manual on Transfer Pricing for Developing Countries, 2017 as
may be supplemented and updated from time to time.
Tax Compliance
In simple definition, Tax compliance means making tax payments and
producing and submitting information to the tax authorities on time
and in the required formats as prescribed by the applicable tax laws
without being forced
Efforts have been made to increase the level of compliance to tax
collections by the tax authorities. This is aimed at increasing revenue
generation from taxation. These efforts include tax amnesty programs,
encouraging non-compliant taxpayers to come forward to declare taxes
(thus including them in the tax net). Despite these actions, there is still a
low level of tax registration; this implies that the ability of the
government to generate revenue through taxes is still impaired.
In Nigeria, the gap between taxes collected by government and taxes
collectible is high. Increasing tax compliance can be achieved through
the following:
i.
Government's willingness to lead by example through being
accountable and transparent in the handling of public finances
ii.
Sincerity on the part of government on compliance scheme. A
case is VAIDS.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING
iii.
CONCLUSION AND CASE STUDY.
Taxpayers' education, with emphasis on partnering with the
government on key and verifiable projects
iv.
Provision of special incentives/supports to small businesses to
help them manage and grow their business in exchange for tax
compliance
v.
Monitoring and enforcement action must be straightened to drive
compliance.
vi.
Public enlightenment and sensitization campaigns
vii. Review of the tax policy and laws with a view to bringing them up
to current realities
viii. The use of incentives to improve voluntary tax compliance, such
as access to revolving loans for Small and Medium Enterprises
(SME)
ix.
Bringing more taxpayers into the tax net, thus widening the tax
base.
Application of force will achieve very little results, therefore driving
compliance through incentives seem to be the most likely way to
increase tax compliance. However, this will come with challenges as
there is need for proper re-orientation geared towards attitudinal
change of taxpayers. Strong political will is required to ensure that the
system treats every taxpayer equally and fairly. The government and its
revenue collection agencies must continue to display transparency in
the collection and utilization of taxes.
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Tax authorities are now taking a discernably more aggressive stance
against tax evasion. This will result in a shift to the legal option of tax
avoidance as a means to maximise profits. This shift will be a concern
because although it is a legal option, it undermines equality, and it is
ultimately subversive of free and fair competition, which is contrary to
the capitalist system Nigeria has chosen to embrace.
The GAAR should adequately define a distinction between acceptable
and unacceptable tax avoidance in a fair and efficient way. However,
domestic intervention is not going to be sufficient. Tackling this
problem will require greater international co-ordination across
national tax systems and policies. A proposed solution is Unitary
Taxation of multinationals, underpinned by country by country
reporting. The idea here is that parent companies and their subsidiaries
should be viewed as a single entity for tax purposes such that the tax
liability of a multinational in any country would be proportionate to its
economic activity in that country, as determined by commonly agreed
criteria. The proposal has not been accepted by the developed nations,
but for developing such as Nigeria, where profit-shifting is causing
damage in the vital area of development, it is arguably appropriate.
Hopefully, this proposed solution will eventually be accepted as a
GAAR option to discourage aggressive tax planning schemes.
Case Study – CIT Related
XYZ Limited is a tax resident Company in Nigeria and requires
funding for expansion of its Diving Services. The Company has two
(2) related parties that are resident in United Kingdom and Malaysia
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
who are willing to assist XYZ Limited with loan facilities. The
Company seeks for your advice as its Tax Manager on:
1. the potential Withholding Tax (WHT) rate on the interest payment
if separate short-term loan with repayment period including
moratorium is below two years was provided by each related
party;
2.
3.
What is the duration of loan repayment period including
moratorium that can
lift the WHT burden on the interest
payable on the loan?
What are the other tax considerations to be considered on this loan
request and resultant transactions that the loan is applied?
ETHICAL ISSUES IN TAX PLANNING
REFERENCES
Abdulrazaq, M.T., Principles and Practice of Nigerian Tax Planning
and Management
Prebble Z & Prebble J., The Morality of Tax avoidance
Professor Judith Freedman., Fair tax: Towards a modern system
Hans J.L.M, & Jallai A., Good Tax Governance: A matter of moral
responsibility and transparency
Obayemi O.K., Implementing General Anti Avoidance rules in Nigeria
Ademola Olanrewaju Partner Ascension Consulting Service: The
Dynamics of modern day tax practice management
Obadina D.A., Fighting Aggressive Tax Avoidance in Nigeria
447
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VOLUNTARY ASSET AND INCOME DECLARATION SCHEME (VAIDS): AN APPRAISAL OF THE INTENT AND OBJECTIVE
CHAPTER NINETEEN
VOLUNTARY ASSET AND INCOME DECLARATION
SCHEME (VAIDS): AN APPRAISAL OF THE INTENT
AND OBJECTIVE
FOWOKANTitilayo Eni-Itan
Head, Group Strategic Tax Compliance
Dangote Industries Ltd, Lagos, Nigeria
tfowokan@gmail.com
ABSTRACT
The level of tax compliance in Nigeria compared to the wealth and
affluence displayed by high-end citizens, both within and outside the
country, has been considered as having negative correlation. The need
to fund the government budget which is on the rising side, the low tax to
GDP ratio of 6% and the reduction in reliance on oil revenue, arising
from the 21st century fall in the price of crude oil in the international
market, shifted government focus to taxation as a sustainable means of
generating revenue. Hence, the initiation of Voluntary Assets and
Income Declaration Scheme (VAIDS) programme, which is aimed at
increasing Nigeria's tax revenue generation. Although VAIDS have
been extended to all citizens, it is clear that not all citizens will
understand the programme and take advantage of the benefits. An
appraisal of the implementation of the scheme reveals that there has
been an increase in the number of taxpayers in Nigeria's tax net and an
appreciable increase in the tax revenue generated during the one-year
VAIDS window. However, there are still more to achieve with
449
appropriate tax education and good governance, the desired goal of
voluntary tax compliance can be achieved.
INTRODUCTION
Nigeria's 2018 budget of N8.6 trillion is to be funded by expected
revenue of N6.6 trillion of which tax and customs portion is N1.4
trillion. Thus, a budget deficit of N2 trillion is to be funded through
debts. Of the N1.4 trillion from tax and customs revenue, N88 billion is
expected from tax amnesty programmes, which includes through the
Voluntary assets and income declaration scheme (VAIDS). The focus
of the Nigerian government in setting up this scheme is to fund the
bigger budget by generating more revenue, plugging the leakages,
improve in tax collection and rely less on oil and gas thereby avoiding
borrowing (Osinbajo, 2017)
Voluntary Assets and Income Declaration Scheme (VAIDS)
VAIDS is a time-limited opportunity for non-compliant taxpayers to
regularize their tax status relating to previous tax periods. The
programme was formally launched in Nigeria via the signing of an
'Executive Order' on June 29th, 2017, during the tenor of Prof. Yemi
Osinbajo as the Acting President.
VAIDS is a voluntary disclosure programme that gives opportunity to
taxpayers to fully and honestly declare all their assets and incomes
from all sources which had previously not been exposed to the
authorities and to pay tax due on those assets and incomes. According
to the organisation for Economic Cooperation and Development
(OECD), Voluntary Disclosure Programme (VDP) is “opportunities
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
VOLUNTARY ASSET AND INCOME DECLARATION SCHEME (VAIDS): AN APPRAISAL OF THE INTENT AND OBJECTIVE
offered by tax administrations to allow previously non-compliant
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.” VAIDS is aimed at improving revenue collection rate
and generally improving domestic revenue mobilisation so that the
budget can be funded sustainably. (Premium Times News, July 11,
2017)
and encourage voluntary compliance with the tax laws and regulations.
Furthermore, the country is taking a cue from the OECD's drive for
voluntary compliance through the 2010 Voluntary Disclosure
Programme Guideline for adoption by member countries. Although
Nigeria is not a member of OECD, the country is joining members of
G20 nations to prevent flow of tax revenue out of their jurisdictions
through, for example the signing of multilateral agreements. The
VAIDS programme is also “giving taxpayers, both corporate and
individuals, an opportunity to regularise, to come clean so to speak, to
declare fully and to declare honestly.” (Premium Times News, July 11,
2017)
Objective of VAIDS
The VAIDS programme is aimed at achieving the following objectives:
(a) To extend the tax net to capture self-employed persons,
professionals and some companies that have been able to evade
full tax payment due to the inability of the tax authorities to assess
their true income and thereby tax them accurately.
(b) To reduce the gap of Nigeria's tax to GDP ratio which is at 6% and
the lowest in the world when compared to other countries such as
India (16%), Ghana (15.9%), and South Africa (27%).
Statutory Basis for VAIDS
The legal basis of the Voluntary Assets and Income Declaration
Scheme (VAIDS) is the provisions of the 1999 Constitution of the
Federal Republic of Nigeria as well as the income tax laws –
Companies Income Tax Act (CITA) Cap C21 LFN 2004 (as amended)
and Personal Income Tax Act (PITA) Cap P8 LFN 2004 (as amended).
Section 5(1)(a) & (b) of the Constitution provides that:
(c) To increase the number of compliant taxpayers in Nigeria, which
is just 14 million as at May 2017, out of the estimated 81 million
economically active taxpayers, as reported by the Joint Tax Board
(JTB).
Implications of VAIDS
With the adoption of VAIDS scheme, Nigeria is following the global
order of voluntary tax compliance schemes and joining forces with the
rest of the world to tackle illicit financial flows, track offshore evasion
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“5. (1) Subject to the provisions of this Constitution, the executive
powers of the Federation:
(a) shall be vested in the President and may subject as aforesaid and
to the provisions of any law made by the National Assembly, be
exercised by him either directly or through the Vice-President and
Ministers of the Government of the Federation or officers in the
public service of the Federation; and
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
VOLUNTARY ASSET AND INCOME DECLARATION SCHEME (VAIDS): AN APPRAISAL OF THE INTENT AND OBJECTIVE
(b) Shall extend to the execution and maintenance of this
Constitution, all laws made by the National Assembly and to all
matters with respect to which the National Assembly has, for the
time being, power to make laws.”
A person who –
(a) Being a person appointed for the due administration of this Act or
employed in connection with the assessment or collection of the
tax(i) Demands from a person an amount in excess of the
authorised assessment of the tax, or
Section 23(2) (a) & (b) of CITA also provides that:
(2) The President may exempt or order -
(ii) Withholds for his own use or otherwise, a portion of the
amount of tax collected, or
(a) Any company or class of companies from all or any of the
provisions of this Act; or
(iii) Renders a false return, whether orally or in writing, of the
amount of tax collected or received by him, or
(b) From tax all or any profits of any company or class of companies
from any source, on any ground which appears to it sufficient.
Furthermore, Sections 79 on remission of penalty and 80 on remission
of tax, 97 on penalty for offences and 106A of PITA on power to make
regulations, provides that:
“The relevant tax authority may, for any good cause shown, remit
either before or after judgement the whole or any part of the penalty
due under section 76 of this Act. (s. 79, PITA)
The Governor of the State may, on the recommendation of the
Commissioner responsible for Finance acting on the advice of the
relevant tax authority remit wholly or in part, any tax payable under
this Act if satisfied that it is just and equitable so to do. (s. 80, PITA)
(iv) Defrauds a person, embezzles any money, or otherwise uses
his position to deal wrongly with the relevant tax authority; or
(b) Not being authorised under this Act to do so, collects or attempts
to collect the tax under this Act,
is guilty of an offence and liable on conviction to a fine of N1,000 or to
imprisonment for three years oir both fine and imprisonment.
In order to support the exercise of government's power to make the
VAIDS regulations, section 106A of PITA Cap P8, LFN 2004 provides
that:
(1)
The Minister may, on the recommendation of the Joint Tax Board,
make regulations generally for giving full effect to the provisions
of this Act.
(2)
The National Assembly may, upon proposal by the President,
impose, increase, reduce, withdraw or cancel any rate of tax, duty
Section 97 on penalty for offences by authorised and unauthorized
persons' states that:
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
VOLUNTARY ASSET AND INCOME DECLARATION SCHEME (VAIDS): AN APPRAISAL OF THE INTENT AND OBJECTIVE
or fee chargeable as specified in section 40 and Second Schedule
of this Act and in accordance with Section 59(2) of the 1999
Constitution.
Participants and eligibility criteria for VAIDS Programme
Major participants in the VAIDS programme are the State and Federal
Governments represented by the State Internal Revenue Services and
Federal Inland Revenue Service. Other participants include
Community Tax Liaison Officers (CTLOs) and the Federal Ministry of
Finance, being the programme coordinator. Eligible applicants for the
VAIDS programme are all persons (companies, individuals and other
taxable entities) who are non-compliant with the provisions of the
various tax laws. These applicants are referred to as 'Voluntary
Declarants'.
The criteria for eligibility of declarants specifically covers persons
with cases of: default on their tax liabilities, none payment of any taxes
at all, under-payment or under-remittance of their taxes, nonregistration with the tax authorities and thereby not yet in the records of
the authorities for tax purposes, partial compliance in relation to full
declaration of their assets and incomes from all sources, new
disclosures by compliant persons, on-going tax audits or investigations
of compliant persons by the tax authorities, tax disputes between
compliant persons and the tax authorities for which out of court
settlement has been agreed and finally, under-declared income of nonresidents derived from or accruing within Nigeria.
Taxes covered for the VAIDS programme include all Federal and State
taxes, most especially: company income tax, withholding tax and value
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added tax, petroleum profits tax, education tax, capital gains tax on
assets disposed, stamp duties, national information technology
development levy, personal income tax (covering employees' PAYE
and direct assessment for high net worth individuals) and property tax,
where applicable (for instance Land Use Charge).
Procedure and Target for VAIDS Programme
The VAIDS programme was in two phases with the first phase focused
on granting complete immunity from prosecution and audit, full waiver
of interest (usually 21% per annum) and penalty (at a flat rate of 10%)
on the under-remitted or under-declared taxes as well as tax due on
undisclosed income. This phase was from 1st July 2017 to 31st
December 2017. The second phase was between 1st January 2018 to
31st March 2018 with “less forgiveness for those who delay” in making
voluntary declaration because the benefit of interest forgiveness on
overdue tax balances was no longer available.
Valid declaration under the VAIDS programme requires that the
declarant provide proper identity, as declaration cannot be anonymous.
The declaration must be made in the prescribed form designed for the
voluntary and full disclosures of the undisclosed income and taxes,
with complete and verifiable facts. Subject to the details of declarations
made in the VAIDS form, the tax authorities shall raise tax assessments
for the declaration period and agreed assessments is payable by the
declarant based on the proposed payment plan. As an evidence of
voluntary declaration, the tax authorities shall issue 'VAIDS
Declaration Certificate' and a final VAIDS clearance letter subject to
the agreed installmental payment plan or full liquidation of the agreed
VAIDS liabilities by the declarant.
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The expectation of government is that the VAIDS programme will
facilitate the expansion of the country's tax base by enrolling estimated
additional 4 million taxpayers, increase tax-to-GDP ratio from 6% to
18% by 2020, improve compliance with existing tax laws, curb the use
of tax havens, discourage tax evasion, tackle illicit financial flows and
generate estimated tax revenue of $1 billion. There is therefore need to
appraise whether this expectation was achieved or more efforts has to
be put in to realize the target.
not open to the Nigerian tax authorities, despite the existence of data
protection and information management laws in those jurisdictions.
Considering that there may still be some persons who fail to embrace
the 'open arms' of the government towards voluntary declaration and
tax compliance through the VAIDS programme, there are provisions
for non-participation in the programme. This includes: applying the
full force of the law on wilful defaulters, the use of additional
information at the disposal of the tax authorities based on the recent
reforms in Nigeria, and exploring the opportunity provided by the
increased inter-agency co-operation resulting in access to information
from Bank Verification Number (BVN), Nigerian Customs Service
(NCS), Nigerian Immigration Service (NIS), State Land Registries,
Corporate Affairs Commission (CAC). The government has further
employed the use of international asset tracing professionals through
the Asset Tracing Team (ATT) of the Ministry of Finance to gather
information on individuals and companies. From the international
relations angle, contacts have been made with and cooperation assured
from relevant authorities in foreign countries such as: USA, Canada,
UAE, UK, Switzerland, etc. Above all, the signing of multilateral
agreements for exchange of information opens up the channel for
Nigeria's access to information in the international domain which are
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Appraisal of the VAIDS Programme
It has been empirically proven that tax compliance level in Nigeria is
low. The efforts of government towards increasing the tax-to-GDP
from 6% as well as generate more revenue from tax through VAIDS
programme cannot be realistically achieved in a 12-month period
given the population of over 180 million Nigerians, of which only 19
million has been confirmed as active taxpayers. With the introduction
of VAIDS in 2017, the number of active taxpayers moved from about
N14 million as at May 2017 to an excess of 19 million by May 2018
(Osinbajo, 2018). The increase in number of active taxpayers by 36%
over a one-year period is an indication that VAIDS has made an impact
on bringing more people into the tax net. It can be further deduced that a
further extension of tax amnesty may move the indices up but with a
government's demonstration of accountability on the judicial use of
taxes collected for the improvement of the well-being of citizens.
Although VAIDS delivered N23 billion into government coffers in the
first six months of the programme (Ogunsusi, 2018), there is still a lot
to be done by tax authorities in relation to tax education and
encouraging voluntary tax compliance. Tax administration should not
be about just collection but also creating an enabling environment for
voluntary tax compliance. Research findings indicate that, “the
citizens' perception of government accountability is an instrumental
factor that shapes the emergence and maintenance of tax morale
resulting in voluntary tax compliance.” (Modugu, Eragbhe &
Izedonmi, 2012) Good governance has also been linked to positive
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
VOLUNTARY ASSET AND INCOME DECLARATION SCHEME (VAIDS): AN APPRAISAL OF THE INTENT AND OBJECTIVE
attitude of citizens towards personal income tax compliance in Nigeria
(Okoye, Isemila & Oseni, 2018).
The expectation of the taxpayers on the other hand is that government
should demonstrate accountability, being promoters of the VAIDS
programme without adopting a 'carrot and stick' approach. This is
further buttressed by the recommendations of Okoye et al (2018), that
the “tax authorities should shape the attitude and perceptions of
taxpayers positively by the effective utilization of taxpayers' fund in a
transparent and accountable manner”.
On closure of VAIDS, the FIRS embarked on enforcement drive, which
resulted into the freezing of over 6,722 accounts of defaulting
taxpayers. This has economic implications for both the taxpayers and
the nation. Though this action has brought more taxpayers into the tax
net, the legality of the mode adopted for the enforcement drive can be
challenged and thus, may not really achieve the expected tax revenue
target. Freezing of bank accounts is based on the power of appointment
of collection agent under the FIRS Establishment Act 2007 which
states:
31.- (1) The Service may by notice in writing appoint any person to
be the agent of a taxable person if the circumstances provide
in sub-section (2) of this section makes it expedient to do so.
(2) The agent appointed under sub-section (1) of this section
may be required to pay any tax payable by the taxable person
from any money which may be held by the agent of the
taxable person.
Although VAIDS have come and gone, continuity of tax compliance
culture by citizens will give good grounds to hold government
accountable on the judicial use of the tax collected. The continuous
reforms in the international tax space may make it more difficult for
non-compliant and erring taxpayers to hide.
Finally, there may be need for the tax authorities to assess the current
mechanism of enforcing tax compliance following the closure of
VAIDS, such that taxpayers are not economically grinded. This is to
encourage voluntary tax compliance and for citizens to imbibe the
culture.
Although the power of appointment as collection agent is in the Act,
collection of unpaid taxes can only be enforced when assessment has
been raised and become final and conclusive.
CONCLUSION AND RECOMMENDATION
The intent and objective of the VAIDS programme clearly indicates a
move towards inculcating tax compliance culture in citizens and the
boost government revenue from tax. It is not an end in itself but a big
opportunity for all persons liable to tax in Nigeria to start doing it right.
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CHAPTER TWENTY
REFERENCES
Okoye, A. E., Isenmila, P. A. & Oseni, A. I. (2018). Good Governance
and Personal Income Tax Compliance in Nigeria. International
Accounting and Taxation Research Group, Faculty of
Management Sciences, ISSN: 2635-2958 (Online). Accounting
& Taxation Review, 2(1).
Modugu, K., Eragbhe, E., & Izedonmi, F. (2012). Government
accountability and voluntary tax compliance in Nigeria.
Research Journal of Finance and Accounting. 3(5)
Osinbajo, O. O. (2018). Number of Tax Payers rises by 5m in I year.
Vanguard May 5, 2018 <
https://www.vanguardngr.com/2018/05/number-tax-payers-rises-5m1-year-osinbajo/>
UTILIZING APPROVED TAXES AND LEVIES
COLLECTION ACT 2004 FOR EFFECTIVE REVENUE
GENERATION AT STATES LEVEL: THE ROLES
OF CHARTERED ACCOUNTANTS
DANDAGO Kabiru Isa
Professor of Accounting, Bayero Univeristy, Kano, Nigeria
Professor of Taxation, Kaduna State University, Kaduna, Nigeria
kidandago@gmail.com +2348023360386
The chapter is written in honour of our mentor, Professor Richard
Abhulimen Anao, for his unquantifiable contributions to the
development of Taxation as a discipline of study in the Nigerian
University system and to the development of Taxation profession in
Nigeria and beyond.
INTRODUCTION
Taxes and levies are important sources of revenue generation all over
the world, accounting for the greater part of the revenue that is annually
generated in most of the advanced economies of the world (Dandago,
2011). In an economy with more than one tier of government, efforts
must be made to ensure that each tier of government is in control of
some taxes and levies so that revenue assurance could be equitably
established at each tier of government. Before the 1997 budget
pronouncement, Nigerian taxpayers had been complaining of multiple
taxes to the extent that businesses were suffering from heavy cost of
production, which ultimately had been bringing about high prices of
goods and services.
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With effect from 1st April, 1997, the Federal Military Government, in
furtherance of its philosophy of investor-friendly tax regime,
announced that it would tackle the multiple dimensional problems
consequent on the multiplicity of taxes at federal, state and local
government levels. It further directed the joint tax board (JTB) to
publish the list of all approved taxes and levies collectible by each tier
of government. After an exhaustive study of the issue nationwide, JTB
prescribed a list of all taxes and levies that every tier of government in
Nigeria can legitimately collect. The taxes and levies are based on the
provisions of the Constitution of the Federal Republic of Nigeria and
the various tax statutes in the country. In fact, the 1998 Act on those
taxes and levies collectible by the three tiers of government in the
country was amended in 2004, through Cap T2 Law of the Federation
of Nigeria.
made by capable individuals and organizations in an economy for the
financing of a particular developmental project.
With this development, it is hoped that complaint on multiplicity of
taxes in Nigeria would be a thing of the past; all that is required of each
of the three tiers of government is an aggressive utilization of the taxes
and levies approved for it to massively generate revenue that could be
used in executing developmental projects. The relevant tax authorities
at each tier of government are to make good use of those approved taxes
and levies on behalf of their governments.
Webster's Dictionary describes 'tax' as a charge imposed by
governmental authority upon property, individuals or transactions to
raise money for Public (expenditure) Purposes. Again, Dandago &
Alabade (2002) define tax as “a compulsory contribution made by
individuals and organizations towards defraying the expenditure of the
government”. Levies, on the other hand, are the compulsory payment
463
The subjects to a government for taxes and levies are individuals
(natural persons) and organizations (artificial persons). The income
they earn; the profit they realize; the capital gains they make; and their
consumption of goods and services are all subject to assessment for
taxing, levying, or charging purposes, as per the provisions of relevant
tax laws in the country. Tax assessment and collection are done by a
government agent, called tax authority, with a view to avoiding cases of
multiplicity of taxes and levies. The tax agent needs the support of tax
experts that are widely recognized as chartered accountants.
A chartered accountant is a professionally trained member of the
Institute of Chartered Accountants of Nigeria (ICAN) or any other
internationally recognized accountancy professional body. This person
is expected to be thoroughly trained in the principles and practices of
taxation, and to have deeper understanding and intimate knowledge of
the problems and solutions to the imposition of taxes and levies at
different tiers of government in a federal set up, like Nigeria. He/she is
expected to play some roles in ensuring effective revenue generation,
using taxes and levies approved for each tier of government in the
country.
Taxes and levies, therefore, represent an important source of revenue
to government of any nation. As every government engages in a
number of economic and political activities, which require spending of
money, the fund generated through the natural resources available to
the government is always grossly inadequate for achieving set goals
and, so, more funds must be raised through taxes and levies. In fact,
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taxation is the most durable source of revenue to any serious society,
from time immemorial to date (Abdulrazaq, 2002).
of those taxes and levies for massive revenue generation, and section 5
summarizes and concludes the paper.
Revenue generation, however, is not the only purpose of taxation in
modern economic system. It is now apparent that taxation, as a strong
instrument of fiscal policy, is used for economic stabilization; for
regulation and control of the activities of businesses; and for
redistribution of income with a view to narrowing down the gap
between the rich and the poor. With this development in the scheme of
things, in the modern world economy, it has become imperative for
every tier of government in a federal set up, like Nigeria, to effectively
utilize the taxes and levies available to it to attain the purposes
mentioned above, one of which is revenue generation to execute
developmental projects.
PURPOSES OF TAXATION
A good tax system should be able to meet up with the modern principles
of taxation for it to serve all the modern purposes of taxation. These
principles or 'canons' are: equity (it should be fair and equitable);
convenient (it should be administratively simple to implement);
certainty (it should be clear and unambiguous); economical (it should
be revenue productive, that is, its cost of collection should not be higher
than or equal to the amount collected as income/revenue); and
neutrality (it should be neutral, that is, it should not change the
consumption pattern of individual tax payers or influence the
production decision of businesses, after it has been levied).
This paper, which is dedicated to the honour of Professor Richard
Abhulimen Anao for his unquantifiable contributions to the
Accounting and Taxation Profession, aims at discussing the roles
chartered accountants could play in ensuring that taxes and levies
approved for states governments to collect are effectively utilized for
massive revenue generation necessary for execution of developmental
projects at the state level. This would go a long way in making the
“love” of taxation to be inculcated in the minds of the present and
prospective taxpayers, as they see the positive impact payment of taxes
and levies could make in their lives.
Revenue to Cover Expenditure: Taxation is the most important
source of revenue for governments, all over the world. Tax payers
(individuals and firms) enjoy government services, in one way or the
other hand, so, they pay tax to cover part of the cost of these services.
Government provides infrastructural facilities and welfare packages,
for all to enjoy, using funds generated mainly through taxation
(Adesola, 1998).
The rest of the presentation is in four sections. Section 2 discusses the
general purposes of taxation. Section 3 presents the approved taxes and
levies collectible at the state level, as per Act 2004. Section 4 highlights
the roles chartered accountants could play in ensuring the effectiveness
Economic Stabilization: Taxation is one of the two main instruments
of fiscal policy; the other being government spending/expenditure
(Buhari, 1993). Fiscal policy is about the way government generates
and expends revenue, in such a way that the economy would be moving
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A good tax system should amount to the achievement of the
following purposes:
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in a stabilized direction. Direct taxes could be used to stimulate
economic growth and direct the economy towards sustainable
development. They could be used to reduce level of inflation in an
economy from a high level to a desired level. For example, companies
income tax rate could be reduced from 30% to 25% to enable
companies retain more earnings to be used in financing more viable
projects. This would amount to employing more people, producing
more goods and services, reducing prices of goods and services and
increasing the national income level and reducing crime rate and other
anti-social activities. All other direct taxes could be used to enhance
the robustness and bubbling of the economy.
facilities and welfare packages for all to enjoy, especially the
incapacitated among the citizens in the economy. With this
arrangement, the disparity in standard of living between the rich and
the poor would be narrowed down to a bearable level. Without
taxation, especially the progressive taxes, the disparity between the
“haves” and the “have-nots” may aggravate (Oremade, 1986).
Taxation, therefore, is serving the purpose of closing or narrowing
down the gap between the rich and the poor, by collecting income tax
from the rich and redistributing it to the poor, in a systematic way
(through execution of public goods projects).
Regulation and Control: Taxation is used to regulate the production
patterns of firms on goods and services and to control the consumption
behavior of the citizens. Indirect taxes, like import duties, are used to
control the importation behavior of importers of durable and consumer
goods and services. Excise duties are used to regulate the production
patterns of producers of some goods and services. Export duties are
used to regulate the production patterns of producers of some
exportable goods and services. Value Added Tax (VAT) is used to
control the consumption behavior of consumers of VAT able goods and
services (Naiyeju, 1996). These indirect taxes bear different rates
which are subject to changes by government, depending on the
economic regulation or control purpose to be achieved.
Income Re-Distribution: Taxation is an instrument for narrowing
down the gap between the rich and the poor. It is the income earners
(individuals or firms) that are to pay tax, based on the amount earned,
and the income tax realized is to be used in providing infrastructural
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From a humble beginning of charges, levies and fines on agricultural
products, solid mineral extracting activities to delivery services
provisions, development has led many countries to put in place laws
empowering those in positions of authority to tax income of
individuals and corporate bodies; tax their profits; tax their capital
gains; tax their consumption and tax their transactions related to import
or export. This taxing/levying is done with a view to achieving the
purposes mentioned above.
Above are issues that Prof. Anao has been researching and teaching at
various levels and in various Universities and research institutes most
of his life. As a professor of Accounting, he had paid a lot of attention to
Taxation in his research and teaching.
TAXES AND LEVIES COLLECTIBLE BY STATE
GOVERNMENTS
Internally generated revenue (IGR) sources at the States level in
Nigeria are many. Decree No. 21 of 1998, as amended by Cap T2 Law
of the Federation of Nigeria, 2004, gives a list of taxes and levies
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approved for collection by the three tiers of government in Nigeria.
Those related to the State Governments are as follows:
Interest Payment and Repayment of Loan: These are interest
payments by state government employees and government companies,
on loans granted by the state government.
Taxes and Levies: The following are the taxes and levies that are
approved for collection by the State Governments in Nigeria:
(i) Personal income tax (applies to residents of the state);
(ii) Withholding tax (individuals only);
(iii) Capital gains tax (individuals only);
(iv) Stamp duties (applies to instruments executed by individuals
only);
(v) Road taxes (e.g. vehicle licenses);
(vi) Taxes on pool bets, lottery and casino wins;
(vii) Business premises and registration fees;
(viii) Development levy (applies to taxable individuals only);
(ix) Streets name registration fees (state capital only);
(x) Fees for right of occupancy on urban land owned by the state
government;
(xi) Market taxes and levies where state finance is involved; and
(xii) Miscellaneous revenue (e.g. rent on government property, income
from investment, etc).
Fines, Fees and Rates: School fees, water rate, etc.
Licenses: These cover amount received for issuance of licenses of
various types.
Earnings from Sales: Sale of government properties e.g. vehicles,
houses, etc.
Rent from Government Properties: Include rent of government
houses, land etc.
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Re-imbursements: These are refunds for services rendered to the
Federal and Local Government(s), public corporations and other
statutory bodies owned by the State Government.
Miscellaneous: Other sources than those mentioned above, e.g.
dividend from investment in quoted or unquoted companies, etc.
These sources of revenue are available to each of the 36 states
governments in Nigeria, but they appear to be poorly utilized for
revenue generation by most of the states' governments. By their
training and inclination, chartered accountants are expected to show
the states governments the way of putting these sources of revenue to
good use for massive revenue generation that would give way to
execution of developmental projects. The paper believes that Prof.
Anao has done a lot along this line in the course of his involvement as a
public administrator in the University and beyond.
THE ROLES OF CHARTERED ACCOUNTANTS
Chartered Accountants are expected to guide the states governments as
to how to effectively utilize the taxes, levies and other sources of IGR
available to them to massively generate revenue in a number of ways.
They should play the role of guiding the states governments in the area
of: (i) articulating solutions to problems of revenue generation through
the taxes and levies; (ii) finding solutions to the problem of revenue
accounting, accountability and transparency; (iii) conducting SWOT
analysis on sources of revenue at the states level; and (iv) creating
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awareness on the need to make each of the 36 states as a tax-based
economy.
out as follows:
a) A revenue cashbook is maintained
Problems of Revenue Generation at States Level
b)
Receipt (in triplicate) is issued for any money received
From the works of Mukhtar (1996), Isyaku (1997), Abdulkadir (1998),
Ibrahim (2002), Ishaq (2002) and Williams (2002) the problems of
internal revenue generation at States Government level are: [i] tax
evasion; [ii] tax avoidance; [iii] lack of trained, effective and
motivated revenue staff; [iv] nonchalant attitude of some tax officials;
[v] problem of assessment;[vi] lack of effective tax administration;
[vii] slow legal proceedings; [viii] lack of up-to-date statistics on tax
payers; [ix] lack of commitment to pursue IGR available to the states
governments; [xiii] non collection of development level from taxable
persons.
c)
All receipts issued shall be entered into the cashbook serially
d)
(iv)Revenue collector's pay-in-form is prepared at the end of
every day, to be used in making payment to the sub-accountant,
quoting relevant heads and sub-heads (or codes).
e)
Revenue cashbook shall be examined by the sub-accountant to
ensure that no other revenue is kept by the revenue collector.
f)
The duplicate of the receipts should accompany the revenue
collector's pay- in-form submitted to the sub-accountant (after
the original must have been
given to the payer) and the
triplicate should be retained on an audit trail.
g)
If the revenue collector paid the money collected to the subaccountant in cash, treasury receipt is issued immediately, but
where a teller is attached in lieu of cash, the main cashier should
ensure that the deposit reflect in the bank statement before the
issuance of the treasury receipt. The treasury receipt is an
indication that the revenue collector has accounted for all the
revenue collected.
h)
After all the revenue collectors have made return to the main
cashier, who had issued treasury receipt, the head of account will
transfer, on monthly basis, all the revenue collected to the subtreasurer using the appropriate special cash transfer account
numbers.
Chartered Accountants are to assist states governments with solutions
to all the identified problems, through training and retraining of the
staff of the State Internal Revenue Service (SIRS) on effective taxnetting, tax assessment and tax collection strategies. They should
partner with the SIRS in solving the perennial problem of poor taxnetting of businessmen and women. They also have a role to play in
educating accounting staff/salary officers of organizations in both the
public and private sectors on the implementation of PAYE system for
optimum collection of personal income tax revenue from salaried
workers.
Revenue Accounting at States Level
To ensure accountability and transparency, accounting and control of
government revenue at States level in Nigeria is required to be carried
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Some of the reasons why the states governments should maintain
proper accounting books and records include the following: to provide
financial information to all users (internal and external); to ensure
effective internal control; to prevent and/or detect fraud; to ensure
proper accountability, transparency and probity; and to confer
credibility and confidence on the officials of the government.
i.
Greater capital gains and rent accruing to individuals through
disposal of land and renting of houses, which if properly tapped,
can help to improve
internally generated revenue.
ii.
Increase in internally generated revenue through the imposition
of development levy on all taxable individuals and other
miscellaneous taxes.
The question is: where are the chartered accountants as states
governments face the problem of revenue accounting, accountability
and transparency? With their presence in the economy of the states,
adherence to the procedures of revenue accounting prescribed above,
and the demonstration of accountability and transparency in revenue
generation, should not be a big deal to the states government!
Conduct of SWOT Analysis
SWOT Analysis entails an analysis of the Strengths, Weaknesses,
Opportunities and Threats (SWOT) of the States Governments sources
of IGR in order to generate strategic options. Chartered Accountants
could, through regular conduct of this analysis for the states, help in
formulating revenue objectives that are SMART (Specific,
Measurable, Achievable/Attainable, Realistic and Time-bound) and
SIMPLE (Suitable, Implementable, Measurable, Practical, Logical
and Evaluable). If chartered accountants are to work on the SWOT of
states governments on IGR, they could come up with findings, like the
following, which would aid in setting realistic revenue objectives that
are SMART and SIMPLE:
Strengths: The following are the major Strengths of States
Governments' sources of IGR.
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Weaknesses: In order to enhance internally generated revenue
accruing to the State Governments, there is the need to improve on the
following weaknesses:
a) Lack of commitment to educate and enlighten Nigerian taxpayers
of their civic responsibility of paying taxes to the government.
b)
Lack of commitment to collect all relevant taxes that are under the
jurisdiction of the state governments e.g. withholding tax from
rent, interest and dividend as well as collection of capital gains tax
from individuals.
c)
Poor tax statistics, lack of effective research unit to gather and
collect tax statistics and lack of tax intelligence service that can
identify tax evaders for appropriate sanction.
Opportunities: Amongst the opportunities that abound for the States
Governments in IGR are the following:
a)
Potentials for increase in internally generated revenue through
adequate tapping of all available sources of revenue.
b)
Potentials for higher productivity in revenue generation
through training and better motivation to revenue staff.
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Threats: The following are the threats facing internal revenue
generation at the States Governments level:
a) Lack of requisite training and tax education for tax officials
makes it difficult for them to perform their duties effectively.
Excise Duties, Import Duties, Export Duties, etc), in the case of
Nigeria. Taxation is the surest and everlasting source of revenue from
the beginning of society to the end of the world. It is taxation; therefore,
that assures revenue for economic development at all levels.
b)
High tax evasion due to increase in cost of living and poor tax
statistics.
c)
Poor records keeping by businessmen and women to serve as the
basis for realistic tax assessment.
An economy that relies heavily on natural resources in generating
revenue for development is termed resource-based, while the one that
relies mainly on taxation for development is termed tax-based or
knowledge-based. It is apparently clear, in the modern world, that
resource-based economies are regarded as developing economies or
backward economies of the world, due to the fact that the resources
available to them make the government functionaries in those
economies to become lazy, corrupt and greedy, while their citizens
develop apathy on the way the resources are managed since they are
natural endowments.
Chartered Accountants have to make themselves available for regular
SWOT analysis of revenue sources, generation and utilization at the
states government level. As they distance themselves away from the
SIRS, it means that they are not playing the role expected of them in the
area of revenue generation and utilization at the states governments'
level.
Awareness Creation on Tax-Based Economy
Chartered Accountants are to play the role of educating the people on
the two main types of revenue available to governments for the
execution of capital and recurrent projects: Tax revenue and Non-tax
revenue. The non-tax revenue sources are mainly natural resources like
crude oil, solid minerals, precious minerals, groundnut, cocoa, etc.
These sources could not last forever; they are bound to become extinct
or dried up in a matter of time. They, therefore, could not assure any
economy of revenue that would ensure economic development.
Tax-based revenue sources are all the forms of taxes in an economy:
direct taxes (PPT, PIT, CIT, CGT, Edu T, etc) and indirect taxes (VAT,
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With the greed and laziness in the government functionaries, they are
bound to fail in the implementation of all the excellent Development
Plans, Rolling Plans, Visions, NEEDS/SEEDS and other economic
development blue prints that could be thought out and, therefore,
leaving the economy to remain perpetually backward or
underdeveloped. With the apathy in the majority of the citizens, they
are bound to remain in absolute and chronic poverty, ignorance,
diseases and perpetual hopelessness.
Tax-based economies are, not surprisingly, the developed economies
of the world, due mainly to the fact that the governments of those
economies are finding it necessary to be prudent, transparent,
accountable, just and fair in spending tax payers' money, thereby
achieving the objective of sustainable development. It is sustainable
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revenue that would ensure the development of all the four interwoven
sectors of an economy: Manufacturing Sector; Services Sector;
Extractive Sector; and Agricultural Sector. For sustainable economic
development, at states governments' level, the four sectors are to be
emphasized, using the revenue generated on sustainable basis.
states governments for massive revenue generation. Discharging those
roles suggests that Chartered Accountants are to take it as a
responsibility to show the states governments the way of refocusing
their economies to be tax-based or knowledge-based as against the
present circumstance of the states economies being absolutely
resource-based!
Chartered accountants are to be apportioned with a substantial part of
the blame for the states governments' inability to make their economies
tax-based or knowledge-based and for their inability to use whatever
revenue available to them in ensuring sustainable economic
development in their states. They are expected to demonstrate
professionalism in playing their roles of serving as professional
advisers to the states governments. This is a role Prof. Anao has been
playing ever since!
This conclusion is in tune with the academic and professional efforts
Prof. Anao has been making over his many years of research, teaching
and professional productivity in Nigeria and beyond. This paper is a
mark of sincere respect for Prof. Anao’s contribution to humanity
generally!
CONCLUSION
The paper argues for the important roles that are to be played by
chartered accountants in ensuring effective utilization of all sources of
internally generated revenue available to states governments for
executing developmental projects at states level. It reviews the four
major purposes of modern taxation; and the need to ensure sustainable
revenue generation, through taxes, levies, and other sources of revenue
available to states government, for sustainable economic development.
These sources of revenue are as provided for in the amended provisions
of Act 2004 on Approved Taxes and Levies to the three tiers of
government in Nigeria.
The paper highlights four major roles Chartered Accountants are to
play in ensuring effective utilization of sources of IGR available to
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Dandago, K.I. & Alabede, J.O. (2000). Taxation and Tax
Administration in Nigeria, Kano: Triumph Publishing Company
Limited.
Dandago, K.I. (2011). Integrating the Discipline of Taxation into
National Psyche. A Paper presented at the 1st International Tax
Conference, organized by the Nigerian Joint Tax Board(JTB),
Abuja-Nigeria.
Ishaq, I. (2002). The Role of Taxation in the Economic Development of
Kano State, B.Sc. Economics Project submitted to the
Department of Economics, BUK (Unpublished).
Muktar, A.M. (1996). Problems and Prospects of Tax Administration
(A Case Study of Kano State Board of internal Revenue).
PGDBF Project Submitted to the Department of Economics,
BUK (Unpublished).
Naiyeju, J.K. (1996). Value Added Tax: The Facts of a Positive Tax in
Nigeria, Lagos: Wordsmiths Limited.
Oremade, J. (1986). Petroleum Profits Tax in Nigeria, Ibadan: Evans
Brothers (Nigerian Publishers) Limited.
Webster's Dictionary of the English Language, College Edition,
Surject Publications, India, P 1574.
Williams, A. (2002). Taxation and Nigerian Economy, A paper
delivered at a seminar by the Nigerian Institute of Taxation.
Ibrahim, A.U. (2002). Tax Administration in Nigeria (A Case Study of
Kano State Board of Internal Revenue). B.Sc. Economics Project
submitted to the Department of Economics, BUK
(Unpublished).
479
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
UTILIZING APPROVED TAXES AND LEVIES COLLECTION ACT 2004 FOR EFFECTIVE REVENUE GENERATION AT STATES LEVEL:
Bio-data of the contributor
65 articles in national and international journals and books of readings.
He has supervised 21 PhD holders as first or second supervisor and 20
M Sc. holders as first supervisor. He has conducted Viva Voce on 10
PhD Holders and 49 M Sc holders from different Universities in
Nigeria; and he has served as External Examiner to 10 Universities and
6 polytechnics across the country. He has participated in 14
accreditation exercises of Nigerian Universities and Polytechnics
organized by National Universities Commission (NUC), National
Board for Technical Education (NBTE) or the Institute of Chartered
Accountants of Nigeria (ICAN), as team leader or team member.
Kabiru Isa Dandago holds B. Sc, M. Sc (Accounting), MBA, PhD
(Economics) degrees. He is a Fellow of the Institute of Chartered
Accountants of Nigeria (ICAN), Fellow of the Chartered Institute of
Taxation of Nigeria (CITN), Fellow of the Nigerian Institute of
Management (NIM), Fellow of the Forensic Accounting Researchers
(FFAR), Fellow of Nigerian Accounting Association (FNAA), Life
Member of the Nigerian Economic Society (NES), Full Member of the
Institute of Management Consultants (IMC), Member of the Business
Ethics Network of Africa (BEN-Africa) and holder of Associate Award
in Islamic Finance (AAIF) from IBFIM, Malaysia. He is an alumnus of
the prestigious Galilee International Management Institute, Israel.
Professor Dandago joined the services of Bayero University in
September 1990 and rose to the rank of Professor of Accounting in
2007. He also occupies the professorial chair on Taxation endowed by
the Federal Inland Revenue Service (FIRS), in 2012, at the Kogi State
University, Anyigba, Kogi State, Nigeria.
Professor Dandago has been a consultant to the British Council/World
Bank for Capacity Universal Basic Education (CUBE) on States
Educational Public Expenditure Review (SEPER); DFID/British
Council on the adoption of Budget Classification and Charts of
Accounts (BC&COA) in line with the United Nations' Millennium
Development Goals (MDGs); Nigeria Governors' Forum (NGF) for
Peer Review Mechanism (PRM) on the performance of the 36 states
governors; United Nations Development Programme (UNDP) on the
Nigeria's Human Development Report (NHDR); the European Union
Support to Reforming Institutions Programme (EU-SRIP) on needs
assessment and establishment of public procurement (Due Process)
directorates under the auspices of Kano, Jigawa and Yobe states
Coordinating Units; Universal Basic Education Commission (UBEC);
and some states' Universal Basic Education Boards (SUBEBs).
In the course of his 25-year academic life in the University system, he
has authored, co-authored and edited 26 books in the areas of
Accounting, Finance, Management and Economics. He has published
In the University system, He has been a Senate member of Bayero
University from 2002 to date; and he sat on the Governing Council of
the University, representing the Senate. He also served on 26
Professor Dandago was a Visiting Professor at the Universiti Utara
Malaysia (UUM), from July 2012 to August 2014. He served as the
Chair, Bayero University Consultancy Services Unit (July 2008 to July
2012); as the Dean, Faculty of Social and Management Sciences (June
2004-June 2008) and as the Head, Department of Accounting of the
same University (April 2002- April 2006).
481
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
UTILIZING APPROVED TAXES AND LEVIES COLLECTION ACT 2004 FOR EFFECTIVE REVENUE GENERATION AT STATES LEVEL:
Committees of the University at different times, either as Chair or
Member. Professionally, he sat on the Governing Councils of the
Chartered Institute of Taxation of Nigeria (CITN), Chartered Institute
of Stockbrokers of Nigeria (CISN), and the Institute of Chartered
Accountants of Nigeria (ICAN). He also served as a Member of some
Council Committees of these professional bodies, as well as the
Nigerian Institute of Management (NIM).
Services for Microenterprises, held in Khartoum, Sudan, October 0912, 2011, the Checkmate 2013 4th Annual International Conference
held on 15-16 February, 2013 at, Pune, India, the 2nd Critical Studies in
Accounting and Finance (CSAF) Conference, held at Abu Dhabi,
United Arab Emirates, 15-17 December, 2013, the 1st Global
Conference on Enterprise Risk Management, held in Kuala Lumpur,
Malaysia, June 4-5, 2014, the 2rd Global Conference on Business,
Economics, Management and Tourism, held in, Prague, Czech
Republic, October 30-31, 2014, and the 10th Euro Money Saudi Arabia
Conference, Riyadh, May 5-6, 2015.
Prof. Dandago has visited 25 countries of the world, mainly for
academic and professional conferences and interactions; visiting their
Universities and appreciating their strategic thinking for having in
place a global University.
Prof. Dandago has attended 63 conferences, nationally and
internationally, including the 17th World Congress of Accountants
(WCOA) held in Istanbul, Turkey in November 2006, the CODESRIA
Conference of Deans of Faculties of Social Sciences and Humanities
held in Dakar, Senegal in November 2007, the 12th World Congress of
Accounting Historians (WCAH) held in Istanbul, Turkey in July 2008,
the 1st International Conference on Public Private Partnership (PPP) in
Development held in Kuala Lumpur, Malaysia in January, 2009, the
7th NTU International Conference on Economics, Finance and
Accounting, held in Taipei, Taiwan in May, 2009, the 1st International
Conference on Islamic Finance held in Labuan, Malaysia in March,
2010, the 18th World Congress of Accountants (WCOA) held in Kuala
Lumpur, Malaysia in November, 2010, the 1st International
Conference on Islamic Trade and Economic Integration held in Tehran,
Iran in December, 2010, the 2nd International Conference on Inclusive
Islamic Financial Sector Development: Enhancing Islamic Financial
483
Prof Dandago is married and blessed with children.
Ogunsusi, A. (2018). VAIDS and Nigeria's Viability. Vanguard January
21, 2018
<https://www.vanguardngr.com/2018/01/vaids-nigerias-viability/>
484
LIVING TRUST AS AN INSTRUMENT OF WEALTH PLANNING
CHAPTER TWENTY-ONE
LIVING TRUST AS AN INSTRUMENT
OF WEALTH PLANNING
Uwanna Ikechukwu LLB, BL, LLM ACTI
Tsedaqah Attorneys, Lagos
i.uwanna@ta-ng.com; +2348036764906
They often teach this information to their children and pass on the
family fortune to the generations that follow in form of corporations,
trust and partnerships. They personally own little. Nothing is found in
their names for tax purposes…They control the legal entities that own
their assets. They spend a small fortune on solid professional advice
not only to increase their wealth but also to protect their wealth from
family, friends, law suits and the government. Even after they have
departed this life, they are still controlling their wealth. These people
are often called “Stewards of Money”. Even after death, they continue
to direct the fate of the money they created. (Emphasis mine)123
INTRODUCTION
The trust device has been described as “the greatest and most
distinctive achievement performed by the Englishman in the field of
jurisprudence”124 This description was cited with approval by the
Nigerian Court of Appeal in the case of National Bank of Nigeria vs.
125
Savol West Africa Limited . Trust was however held to be “foreign
and unknown to native law and custom”126 by the Federal Supreme
Court of Nigeria.
The trust is a legal relationship whereby a person (the Settlor) gives
property (the trust fund) to professional administrators (the Trustee(s))
to hold for the benefit of certain persons (the Beneficiaries) who may
be individuals, companies, groups, charities, etc. Trust relationships
may include another person, known as the Protector, usually a trusted
friend or adviser of the Settlor, (but may be a committee or company)
who is sometimes appointed to ensure that the Settlor's wishes are
honoured by the Trustees.
A trust fund, the property, subject matter of the trust will no longer be
under the control of the Settlor and he may be unable to reclaim the said
property. The Trust arrangement in Nigeria may be encapsulated in a
written instrument known as the Trust Deed.
The Settlor is not excluded from being a beneficiary and a co- trustee of
a Trust, but cannot be a sole beneficiary. A settler may indicate to the
Trustees how the assets would have been handled had he/she
maintained control of them, and a letter to this effect is known as the
Letter of Wishes. The wishes in this letter, though not legally binding
on the Trustees, are usually followed, except where a change of
circumstances makes it clear that to do so would not be in the
beneficiaries'' best interest. The Trust Fund may be any property (cash,
personal effects, real estate, securities, and other tangible and
intangible assets)
123
Rich Dad's CASHFLOW Quadrant, Robert T. Kiyosaki with Sharon L. Lechter, CPA Warner Book Edition in
association with CASHFLOW technologies, 2003 page 137
124
Maitland “Selected Essays” (1963) at page 129
125
(1994) 3 Nigerian Weekly Law Report (part 333) 435 at 467
126
Per Ademola, C.J.N. in Anyike & Anor V. Ibidunmi 1 N.S.C.C. (Vol. 1) 223 at 225
485
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
LIVING TRUST AS AN INSTRUMENT OF WEALTH PLANNING
Legally, Trustees have stringent duties imposed and are obliged to
administer the Trust in such a way as to safeguard the best interests of
the beneficiaries.
HM Revenue & Customs (HMRC) which report establishes that
avoidance of tax is only a secondary consideration for most people
when setting up trusts. The primary motivation, the research revealed is
the protection of assets.
Historically, the Common Law ignored the rights of the beneficiary as
legal title passed from the Settlor to the Trustee. Property, under the
auspices of the Common Law, could not be spilt: you either owned
something, or you did not. But Equity championed Trusts and
recognised the proprietary rights of both Trustees and Beneficiaries.
Today, the Law of Trusts is a myriad of subcategories and divisions,
each with their own distinct rules and exceptions.
LIVING TRUST
A living trust (inter vivos trust) sets out instructions on how your
wealth should be managed in your lifetime and distributed after your
death. The instructions are contained in a document called a “Trust
Deed.” Your wealth is transferred to a person called the “Trustee”
during your lifetime and is managed for the benefit of persons called
127
“the Beneficiaries”. In the book, Leo on Living Trust, Living Trust
was defined as one of the most flexible estate planning tools available
and can be the foundation on which an individual's financial and estate
planning tools can be built. It is an efficient assurance of the future; a
protection against the oppression of loved ones in the event of demise
of the breadwinner, and a secure assurance at old age irrespective of
any pension in place.
PURPOSE FOR THE CREATION OF A LIVING TRUST
A living trust may be used for a variety of personal, estate, financial, tax
and business planning objectives. The British Broadcasting
Corporation (BBC) on the 10th of January 2007 published a report of
487
The following are other considerations in creating trusts:
1.
Privacy
2.
Avoidance of forced heirship
3.
Preservation of family wealth
4.
Continuity of family business
5.
Ownership of assets and investments
6.
Establishment of pensions or employees stock option plans
7.
Protection of lender in corporate financing transactions
8.
Creating/ making provision for Charities
9.
Efficient and timely distribution of assets upon death
10.
Tax planning
BENEFITS OF A LIVING TRUST
The trust property can be entrusted to investment Experts for optimal
management. The investments experts would however, manage and
invest assets in line with the stipulations in the Trust Deed for the
benefit of named beneficiaries. Trust assets are invested to earn income
(dividends, interest income, etc) and ensure capital appreciation.
Taxation
Taxation is a compulsory payment imposed on the income or wealth of
individuals or corporations by government for the purpose of financing
some governmentally established functions.
127
Leo on Living Trust published by Prestige Book, 2009 at page 35
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When it comes to taxation of a trust, it may help to think of the trust as
an individual person in its own right. If you have invested in properties
abroad, it is pertinent to note that upon your demise, an inheritance tax
may be levied against your Estate, before it devolves to your heirs.
However, placing assets and property from an Estate into a Trust to
avoid death or inheritance taxes call allow the Settlor's beneficiaries to
benefit more fully from the assets' worth without excessive taxation
being levied against their gains.
Again, a trust affords the opportunity of avoiding public disclosure of
value, amount and the disposition of the trust fund.
Probate
The trustee owns the assets of the trust. On the death of the Settlor, the
trustee can distribute the assets to the trust beneficiary according to the
instructions in the Trust Deed. There is no need to go to the Probate
Registry/ Court to obtain Probate or Letters of Administration and no
probate fees have to be paid. In Nigeria, this is a tedious and circuitous
process. In most cases, bureaucratic bottle-necks keep beneficiaries of
a will waiting for months or even years to receive the assets bequeathed
to them by their loved ones. This problem is even more painful when
you consider the fees you have to pay in order to obtain Probate or
Letters of Administration. However, a trust affords one the opportunity
of saving his beneficiaries emotional and financial distress.
CONCLUSION
The trust instrument is very effective, with far reaching implications.
For instance, Michael Jackson, who passed on a year ago, employed
this instrument. At the reading of his will, scavengers and meddlesome
interlopers gathered, only to hear this:
“I give my entire Estate to the trustee or trustees then acting under
that trustee or trustee which is called the Michael Jackson Trust,
giving effect to my amendments thereto made prior to my death. All
such assets shall be held, managed, and distributed as a part of said
Trust according to its terms and not as a separate testamentary trust”.
The absence of the much-anticipated details helped to dampen the
tension that was already building up, and left the press to speculate
about its contents and the value of his Estate.
The true mark of wealth is ensuring that your wealth endures beyond
you, to your next generation. This is a task before every great man,
needless to say, women inclusive.
Privacy
Nigerian Family Law does not apply to trusts and it is not an instrument
lodged in the Probate Registry, so the contents are strictly confidential.
This can be an important consideration in wealth planning as a spouse;
child or dependant will not have any locus to commence an action in
court to claim rights over the said property.
489
490
TAXATION CASE REVIEW
CHAPTER TWENTY-TWO
The facts of the case are not complex and the issues are fairly
simple.
TAXATION CASE REVIEW
ABDULRAZAQ M. Taofeeq
Professor of Taxation
The Federal Inland Revenue Service Endowed Chair in Tax Law
Faculty of Law, Lagos State University, Lagos, Nigeria
Former Registrar/Chief Executive of Chartered
Institute of Taxation of Nigeria
mtabdulrazaq@gmail.com; +2348023631400
INTRODUCTION
This paper presents the reviews of the Supreme Court judgment on
Hotel Regulations and Federal Taxation and also the judgment on the
Nigerian Bank Holding Companies with respect to the payment of tax
on Dividends
The Supreme Court, Hotel Regulations and Feral Taxation
The Supreme Court on the 19th of July 2013 by a full panel of 7 Justices
in the case of the Hon. Minister for Justice and Attorney-General of
the Federation v Honourable Attorney-General of Lagos State
declared that it is only a State House of Assembly that can make laws on
tourism or licensing and grading of hotels, restaurants, fast food outlets
and other hospitality establishments in the Country and it dismissed the
case filed by the Attorney-General of the Federation.
491
By an originating summons taken by the Federal Government as
Plaintiff against Lagos State, as the Defendant, the Plaintiff challenged
the validity of enactment of the following laws: The Hotel Licensing
Law Cap H.6, Laws of Lagos State of Nigeria 2003; The Hotel
Occupancy and Restaurant Consumption Law No. 30, Vol. 42, Lagos
State of Nigeria official Gazette 2009 and The Hotel Licensing
(Amendment) Law No. 23, Vol. 43, Lagos State of Nigeria official
Gazette, July 2010.
The Supreme Court, after quoting Professor Ben Nwabueze SAN's
book titled Federalism in Nigeria under the Presidential Constitution
(page 7) decided that the quotation sums up what a Federation is and
stated that “It expresses the independence of the governments under a
Federation. Powers within a country should be allowed to be shared
among the two tiers of government. This will include the powers of such
federating units to make laws for the benefit or good governance and
well-being of the people. If so, the Lagos State laws (supra) which are
in controversy herein are valid and not unconstitutional”.
The Court consequently refused to grant the declarations sought by the
plaintiff and also refused the order of perpetual injunction sought in the
originating summons. “In the whole, the case of the plaintiff fails in its
entirety and it is dismissed “. No order is made as to costs.
The case has been hailed as victory for Federalism and that is exactly
where the danger lies.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAXATION CASE REVIEW
It is difficult to understand the motivation for this case by the plaintiffs
but to most citizens affected by the judgment the complaint at that time
was specifically on the Hotel Occupancy And Restaurant
Consumption Law No 30 Volume 42 of the Lagos State which
imposes tax on goods and services consumed in Hotels, Facility or
Event Centres within the territory of Lagos State, the law imposes the
tax on any person, corporate or otherwise who pays for the use or
possession of any hotel, facility or event centre or purchases
consumable goods or services in any restaurant whether or not located
within a hotel in Lagos State.
basis of corporate personality and the Shell case which veered into the
general area of equity in a contractual relationship.
The rate of tax imposed by the law is 5% of the total bill issued to the
customer excluding Value Added Tax and Service Charge.
The issue for most citizens was the tax issue and not who regulated
hotels and tourism. Therefore, lumping all issues for decision under the
concept of Federalism was a mistaken approach by the plaintiffs and
the decision has created wider fiscal implications forcitizens.
This manner of lumping tax issues with other general issues before the
Supreme Court by counsels in many cases is not new but it should stop.
The examples of the cases starting with Nasr v Federal Board of
Inland Revenue (1964) NCLR 93, then Marina Nominees Ltd v.
Federal Board of Inland Revenue (1986) 2 NWLR 48 and Shell
Petroleum Development Company Ltd v. Federal Board of Inland
Revenue (1996) NWLR 8 (Pt 446) 256 are instructive.
The Nasr case which involved a tax avoidance scheme of a Deed of Gift
of Property was decided on the basis of onus of proof. Marina
Nominees which was also a tax planning scheme was decided on the
493
What this “tourism case” introduces is what may be called “feral
taxation”. A kind of viral and wild taxation with no end. Feral like its
human counterpart meaning a human being who has lived isolated
from human contact possibly amongst wild animals like the “Russian
Bird Boy”, the “Nigerian Chimp Boy”, the “Indian Wolf Boy” and the
famous “Ugandan Monkey Boy”.
What is feral about this case is that it legitimizes the tax inherent in the
regulation of hotels as constitutional and produces the wild and viral
effect that to enact tax statutes to no end is simply to seek to regulate
any industry with inherent taxing powers embedded in the regulations.
This manner of approach to the drafting of tax legislations is inherently
wrong and should be discouraged.
It is commendable and amusing that Lagos State allowed the plaintiff
to play the game of federalism and constitutionalism rather than the
core issue of taxation and fiscal federalism. It was a brilliant chess
game strategy.
However, more questions on the validity of the Taxes and Levies
(Approved List for Collection) Act 21 of 1988 and the effect of the
cases of UAC Plc v FBIR & Ors (Suit No FHC/L/CS 350 LOS), LSBIR
v. NBC (Suit No ID/45/2002) and Attorney-General of Lagos v. Eko
Hotels Limited [2008] All FWLR (Pt 398) 235 where the Court held
that sales tax and VAT are the same and that the imposition of both taxes
amounted to double taxation must now arise.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAXATION CASE REVIEW
The proper question that should have been put to the Supreme Court
should have been limited to whether Hotel Consumption Tax and Value
Added Tax are the same and whether the imposition of both taxes
amounted to double taxation? The relief that should have been asked
for, where the answer is in the positive, should have been that the Hotel
Occupancy and Restaurant Law be declared null and void on the
grounds that the power to impose taxation of this nature is within the
exclusive legislative list and outside the legislative competence of
Lagos State to regulate hotels and tourism.
The circular explained that the Central Bank of Nigeria (CBN) recently
issued its Regulations on Scope of Banking Activities & Ancillary
Matters, No 3, 2010 (Regulation 3 of 2010), repealing the erstwhile
Universal Banking Licence regime and modifying the scope and
framework for banking business in Nigeria. In line with requirements
of the CBN Regulations aforesaid, some banking groups in Nigeria
restructured their business operations by incorporating one or more
Holding Companies to aggregate shareholder capital and hold
ownership interest in operating companies conducting Banking and
other permitted businesses separately.
In the mean-time and the fact that the same issues cannot be litigated
twice since there must be an end to litigation Lagos State must now
smile to the Bank.
Nigerian Bank Holding Companies are Taxable on Dividends
Nigerian Banks have been declaring huge profits and it is expected that
huge sums would be paid out as dividends. The question that needs to
bother the bank holding companies is how the dividends received by
them would be treated for tax purposes.
In an explanatory note on the critical tax issues for the operation of
bank holding company structure in Nigeria, the Federal Inland
Revenue Service under the authority of its Board issued an information
circular PC – T12. 2.3. 027 dated April 2012.
The circular addresses issues arising in connection with the taxation of
Bank Holding Companies and their Subsidiaries pursuant to Section 61
of the Federal Inland Revenue Service (Establishment) Act, 2007, Cap
F36, Laws of the Federation of Nigeria, 2004. The circular applies to all
Bank Holding Companies and their Subsidiaries in Nigeria
495
The main thrust of the information circular is the clarification on
relevant tax issues and avoidance of double taxation on dividends paid.
The FIRS clarified that any dividend paid by subsidiary companies
within each Group to their parent Holding Company (HoldCo) is
Franked Investment Income which would not form part of the said
Holding Company's total profits for tax purposes including
consideration of total profits chargeable to tax in the contemplation of
the anti-tax avoidance provisions in the Companies Income Tax Act
(CITA), Cap C21, LFN, 2004 (as amended) particularly Section 19
thereof.
For purposes of clarity, it is further stated that Section 19 of CITA, CAP
C21, LFN, 2004 states that:
“Where a dividend is paid out as profit on which no tax is payable due
to(a) no total profits; or
496
TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAXATION CASE REVIEW
(b) total profits which are less than the amount of dividend which is
paid, whether or not the recipient of the dividend is a Nigerian
company, the company paying the dividend shall be charged to
tax at the rate prescribed in subsection (1) of section 40 of this Act
as if the dividend is the total profits of the company for the year of
assessment to which the accounts, out of which the dividend is
declared, relates”.
It is instructive to note that the FIRS said that the circular is made
pursuant to section 61 of the Federal Inland Revenue Service
(Establishment) Act 2007, Cap F36, Law of the Federation of Nigeria
2004.
The FIRS stated that Section 80 (3) of CITA, CAP C21, LFN, 2004
provides that:
“Dividend received after deduction of tax prescribed in this section
shall be regarded as franked investment income of the company
receiving the dividend and shall not be charged to further tax as part of
the profits of the recipient company...”
The section 61 of the FIRS (Establishment) Act 2007 provides that
“The Board may, with the approval of the Minister, make rules and
regulations as in its opinion are necessary or expedient for giving full
effect to the provisions of this Act and for the due administration of its
provisions and may in particular, make regulations prescribing the—
(a)
forms for returns and other information required under this Act
or any other enactment or law; and
(b)
procedure for obtaining any information required under this
Act or any other enactment or law.”
The FIRS then further states that Section 80(3) regards dividend
received by a company after deduction of withholding tax as Franked
Investment Income (FII), which should not be subjected to further tax
(income tax) and by extension WHT. Therefore, FII received by a
HoldCo (including Intermediate Holdco), as the case may be, from its
operating subsidiaries should not be subjected to further companies
income tax. Accordingly, in the opinion of the FIRS the provisions of
Section 19 of CITA will not apply to such FII upon redistribution of
dividends to such Holdco's ultimate shareholders.
What do we have? We have an Information Circular issued under the
authority of the Federal Inland Revenue Service Board. It is humbly
submitted that this is not what is envisaged by section 61 of the FIRS
(Establishment) Act of 2007.
In the light of the above, the FIRS states that any Holdco's income
profile which may consist of dividend received from its subsidiaries,
will not be subjected to any further tax.
Information Circular issued under the authority of the FIRS Board does
not meet the demands of section 61 and therefore cannot be the exercise
of the authority contained therein.
497
The requirements of section 61 are clear. It must be with the (1)
approval of the Minister of Finance it must be by way of (2) rules and
regulation and it must, like paragraph 1 (2) of the fifth Schedule of the
FIRS (Establishment) Act be by (3) Notice in the Federal Gazette.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
TAXATION CASE REVIEW
If it is not an exercise of the purported authority, it then simply means
that the power has not been exercised and therefore the dividend
received by the bank holdings companies in Nigeria remains taxable
under section 19 of the Companies Income Tax Act Cap C21,
LFN,2004.
direction, order or instruction given by him after consultation with the
Executive Chairman shall be carried out by the Board:
If this is the correct position and it is the correct position, then what is
the legal status of information circular?
The meaning and legal status of Information Circulars was explained in
the case of Halliburton v Federal Board of Inland Revenue N.R.L.R. 2
(2013) p11 where it was stated that “Information Circulars issued by
the Respondent are neither laws nor regulations but merely for
information of general public and in particular all taxpayers'
representatives or advisers and staff of Revenue Services. They contain
what the makers consider to be their interpretation of the various
Nigerian Tax Acts and thus constitute their opinion on a point of law
with no legally binding effect”.
Two further issues. The first issue is, assuming that the powers under
section 61 of the FIRS (Establishment) Act was properly exercised, the
dividend received by the bank holding companies would still be
taxable as no rule or regulation can alter or be in conflict with a
substantive law as determined in the cases of Ewete v. Gyang (1997)
738 and Kuusu v. Udom (1990) 1 NWLR (pt 127) 421.
We can also not run away from the provisions of section 51(1) of the
FIRS (Establishment) Act which states that “In the exercise of the
powers and duties conferred upon the Board by this Act, the Board
shall be subject to the general direction of the Minister and any written
499
Provided that the Minister shall not give any directive, order or
instruction in respect of any particular person which would have the
effect of requiring the Board to increase or decrease any assessment of
tax made or to be made or any relief given or to be given or to defer the
collection of any tax or judgment debt due, or which would have the
effect of initiating, forbidding the initiation of, withdrawing or altering
the normal course of any proceeding whether civil or criminal, relating
either to the recovery of any tax or to any offence under any of the laws
listed in the First Schedule.”
This simply means that even on a proper application, section 61 of the
FIRS (Establishment) Act would have no effect by virtue of section 51
(1) if it does as it seeks to “decrease any assessment of tax … or to defer
the collection of any tax” made under section 19 of CITA 2004.
Under sections 2, 25, 68 and the First Schedule to the FIRS
(Establishment) Act 2007, Information Circulars are not part of the
legislation to be administered by the Federal Inland Revenue Service.
To achieve the intention of the Federal Inland Revenue Service to
exempt banks holding companies from section 19 of CITA the Tax Act
would need to be amended as stated in Northern Nigeria Investments
Ltd v. Federal Board of Inland Revenue (1981) 2 P.L. & 517 at 525.
The second issue is, what is next in the present circumstances? This
would be an enforcement of the recovery of any outstanding tax debts
of bank holding companies as properly stated by the FIRS in its Public
Notice on Recovery of Tax Debts issued on 14th August 2013.
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All the issues enumerated above is a happy reminder of our childhood
years as we strutted about in the Epetedo area of Lagos Island listening
to the melodious and evergreen Sakara music of Yusuf Olatunji in
B'olowo Bate and his wise counsel to the moneyed class as presently
represented by the bank holding companies.
The wise counsel on the implications of various actions in B'olowo
Bate is a lesson to be imbibed by all that are concerned in this matter of
the taxation of the dividends of Bank Holding Companies in Nigeria.
CHAPTER TWENTY-THREE
BRIDGING TAX GAPS IN NIGERIA THROUGH PLANNING
AKINTOYE Ishola Rufus
Professor of Accounting and Finance
Accounting Department
Babcock University, Ilishan-Remo, Nigeria
INTRODUCTION
From the global perspective, many nations of the world had resulted on
optimizing revenue from taxation, since this is their major source of
income. It became necessary because multinational corporations
continue to devise means and ways of optimizing and managing their
liabilities as some even engage in tax evasion practices (Okwara &
Amori, 2017). Also the study of Ojong, Ogar and Arikpo (2016) opined
that there is a paradigm shift to taxation revenue as an alternative
source of revenue as a strategic planning towards optimizing revenue
from taxation. For example the United State corporations' income tax
has been based on the benefit theory of taxation, which translates that
corporation, should be made to pay tax because they are taking
advantage of the benefits that the state provides (VanDenburgh, 2012).
Incidentally, the case of Nigeria tax issues is rather multifaceted. Not
only that the country has not huge tax revenue gaps, the ones collected
are not properly remitted. Going through the memory lane, the study of
Eme, Chukwura and Iheanacho (2015) revealed that the Ministry of
Finance had in 2014 secured the services of McKinsey & Co. to help it
plug tax leakages in the country, at least to shore up the country's tax
501
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revenue to Gross Domestic Product (GDP) ratio of seven per cent,
which is considered low when compared with other middle-income
African countries like South Africa and Angola, estimated at about
22%. Mrs Okonjo-Iweala also disclosed that over 75% of small scale
business operators have consistently been evading tax, in spite of the
laudable efforts of the FIRS. More worrisome was a further revelation
that there is widespread allegations that, El-Rufai in 2014 said that
“Pioneer status (tax holidays) was granted to companies whose
products do not meet the requirements of the list of industries or
products specified in the schedule to the Act” resulting to a loss in the
region of $20 billion. Eme et al. (2015) further said that Okonjo in a
letter that tax holidayswere granted for a straight five year- period,
contrary to the provision of Section 10 of the Act which states that the
tax relief period for a pioneer company shall commence from the
production date of the company and shall continue for a period of three
years in the first instance, and may be extended for a period of one year
and thereafter for another one year, or for a period of two years subject
to the satisfaction of Mr. President that certain requirements such as
rate of expansion, standard of efficiency, level of development of
company, among others, are met.
a matter of extreme urgency and importance. The desire of any
government to maximize revenue from taxes collected from tax payers
cannot be over- emphasized. This is because, as it is well-known, the
importance of tax lies in its ability to generate revenue for the
government, influence the consumption trends and grow and regulate
economy through its influence on vital aggregate economic variables
(Leyira, Chukwuma & Asian 2012).
Nigeria is not an exception. The machinery and procedures for
implementing a good tax system in Nigeria are inadequate; hence tax
evasion and avoidance of the self-employed individuals and
organizations whose data base is not captured in the relevant tax
authority's data system poses a great challenge and impediment to
national economic growth as submitted by (Angahar & Alfred, 2012).
In the findings of (Edemode 2009), the need for the government to
generate adequate revenue from internal sources has therefore become
503
Obara and Nangih (2017) stated that taxation is seen globally as the
best means of generating revenue internally. Nangih, Akpeekon and
Igbara (2017) asserted that taxation has a significant contribution to
revenue generation. It is therefore very essential for government's tax
policies and administration to be properly designed and tailored to
achieve efficiency in revenue generation. A number of studies have
been carried out on problems of revenue generation in Nigeria. Park
(2005) summarized as follows: Sweden: 50.7%, Denmark: 49.6%,
United States: 25.4%, Korea: 24.6%, Mexico: 18.5%, Tanzania: 11%
in 1997 and Uganda:10% in 1997, with whopping population of
Nigeria of about 182 million and a Gross Domestic Product of $568.5
billion, Nigeria' tax to GDP was estimated as 5.23% to GDP in 2014
(Abata, 2014).
The highway of economic growth of most developed nations of the
world is paved with revenues derived from efficient taxation system as
implied by Enahoro and Olabisi, (2012). The provision of public
services such as power, roads, efficient transportation system,
healthcare facilities, schools, security of lives and properties and
defense against internal and external aggression, are the exclusive
responsibility of governments all over the world. According to Worlu
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and Emeka (2012), to meet these responsibilities, governments need to
harness all sources of revenue available to it nationally and
internationally. Reliance on external sources of revenue for
developmental purposes has proved unproductive for many countries
over the years, and those countries which experienced rapid social and
infrastructural development around the world were found to have
leveraged on revenue from efficient tax system.
developing nations are rather suffering from problems ranging from
revenue leakages, daily widening the tax revenue gaps, as many
potential tax payers are not paying tax, resulting to the government
loosing huge and un-presented tax revenue. Tax payer in these
advanced economies overburden with tax are happy in tax compliance
because they see the transparency and accountability in tax utilization,
in these case, the tax gaps being narrowed to nothing.
The Issue
Park (2016) enumerated that there are problems of optimizing revenue
from taxation through tax gaps in Nigeria, that some of these problems
are associated with tax gaps created and widening due to various
reasons which include: Complicated tax system, too much
discretionary power of tax officials, non-transparency leads to
corruption and revenue leakage, inefficient and corrupt tax
administration, lack of infrastructure, scarcity of qualified tax officers,
low incentives for tax officers, low tax morale due to culture of
corruption (Park, 2016). In addition, there are some critical problems
of weak legal sanctions for tax defaulters, the government have not
captured the informal sector into the tax net, thereby losing huge tax
revenue accruable from that sector, there are the issue of unnecessary
waivers and exemptions and most importantly, illicit financial outflow
as most funds are illegally transferred to other countries.
Prior studies had written on tax revenue, optimizing revenue from tax,
as well as tax gaps in Nigeria (Eme, Chukwurah & Iheanacho, 2015;
Erhun, 2015; Edema & Oki, 2014; Dickson & Osemwengie, 2015).
The study of Eme, Chukwura and Iheanacho wrote on addressing
revenue leakages in Nigeria, while Akinwumi (2015) investigated
revenue leakages as stockholders demand tax justices and fiscal
discipline.In addition, most of the empirical studies written on closing
tax gaps were from the advanced economies, which had been predicted
on data from developed countries, notably USA, China, Japan, New
Zealand, South African and Thailand as opined in the study of
(Nwaiwu, 2017).
From the developing economies, studies espousing on optimizing tax
revenue from developing economies have been rather sparse. Notable
exceptions include Bello (2001), Beren (2002), Ajzen (2002), Frey
(2003), Alabede, Zainal-Affirm & Idris (2011), Bradford (2013),
Bitras (2014), Okonkwo (2014), Oyedokun (2015), Onoja & Iwarere
(2015). Ironkwe & Nwaiwu (2014), Nwaiwu (2017). Specifically, the
study of Eme, et al. (2015) posited that while advanced economies are
overburdened of tax, since it is their major source of revenue, the
505
Consequently, the objective of this paper is to investigate the strategic
and pragmatic possibilities of optimizing revenue from taxation
through tax gaps in Nigeria. In doing so, the paper was is considered in
this manner: Various tax leakages creating tax gaps in Nigeria were
reviewed in section two in the literature review, using conceptual,
stating possible ways the government could mitigate against these
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problem towards closing these gaps were enumerated, theoretical
stating the underpinning theory of the study and empirical reviews of
prior empirical studies, section three considered the methodology and
finally, the study ended with conclusion and recommendations in the
last section.
inequalities in income distribution; to provide economic stabilization;
to correct market failures or imperfections.
A Review of Extant Literature
Tax Revenue: Apart from the revenue derived from the oil and gas in
Nigeria, the next major source of revenue is through tax. The revenue
has been defined by authors from different angles. Somorin (2012)
defined tax revenue as all revenue income derived from direct and
indirect taxes. Direct taxes include corporate taxes, personal income
taxes, these include pay as you earn (PAYE) of the Armed Forces and
Police personnel, foreign service officers and residents of the Federal
Capital Territory-Abuja , capital gain taxes and wealth taxes, while
indirect taxes are the taxes from customs duty, central excise duty,
value added tax, services taxes. Public revenue consists of taxes,
revenue from administrative activities like fines, fees, gifts and grants.
Public revenue can be classified into two types including: tax and nontax revenue (Illyas and Siddiqi, 2010).
Taxes are the first and foremost sources of public revenue. Taxes are
compulsory payments to government without expecting direct benefit
or return by the tax payer. Dike (2014) opined that tax revenue is
essential in any government since it is meant to do the following: To
promote fiscal responsibility and accountability, to facilitate economic
growth and development; to provide the government with stable
resources for the provision of public goods and services; to address
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Tax Gap Defined: Basically, tax gap is the difference between the
amount of tax legally owed and the amount actually collected by the
government. A tax gap can be closed through recoveries of voluntary
late payments and enforcement activities. Some view a tax gap as a
major revenue source that can be used to close the federal budget
deficit. From the Nigerian perspective, the issue of utilization and tax
justice is a big problem and this has drastically affected tax evasion and
noncompliance by the tax payers.
Optimizing Tax Revenue: In response to these challenges,
government must develop smart solutions unique to this sector and the
Lagos State Internal Revenue Service (“LIRS”) now offers a good
reference point because of its approach. The State made effort to
expand its tax net by specifically including the informal sector and
encourage them to embrace tax payment. They had recognizing the
huge revenue stream in the informal sector, the LIRS had earlier in the
year classified the tax payers in the informal sector to be: market
men/women and artisans; micro, small and medium scale enterprises
(including professionals); and household domestic staff. The LIRS
stated that it has begun the process of overhauling its informal sector
operations to ease voluntary compliance by tax payers.
Prior to this, Section 6 of the Personal Income Tax Act (Amendment)
2011 (hereinafter referred to as “PITA”) provides for a new sub-section
(6) to Section 36 of the Principal Act which states: “(6) notwithstanding
any of the provisions of this Act, where for all practically purposes the
income of the taxpayer cannot be ascertained or records are not kept in
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such a manner as would enable proper assessment or income, then such
a tax payer shall be assessed on such terms and conditions as would be
prescribed by the Minister in regulations by order of gazette under it
prescriptive tax regime”. In essence, the above provision mandates that
the income of a taxpayer from the informal sector shall be taxed in
accordance with the prescriptive tax regime.
While PITA relies on the Prescriptive tax regime as means of taxing on
the informal sector, the national tax policy (NTP) on the hand relies on
the Presumptive Income Tax Assessment and it is apparent that these
tax regimes have the same intent. According to the NTP, “the
Presumptive Income Tax Assessment will require less documentation
from the tax payer and also result in a quick and effective method of
providing an assessment”. It would appear that the intent of both tax
regimes is to develop a flexible plan to enhance voluntary compliance
and minimize tax evasion. It is based on a taxpayer's supposed income
given the fact that most participants in the sector do not keep proper
records of account. Unlike the self-assessment system of tax wherein a
taxpayer prepares and submits its audited account and tax
computations which is subject to acceptance or rejection by the
relevant tax authorities upon review, the presumptive tax regime
assesses a tax payer on perceived income in view of its lack of
documentation.
It would appear that this assessment can be determined based on best
judgement. While voluntary compliance is a benefit of this tax regime,
the “imprecise” nature of the tax assessment could pose hardship to the
business owner. Income under this tax regime may be estimated by:
I. A standard assessment i.e. apportioning an aggregate sum to tax
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payers doing the same kind of business (this is general and may
not take into consideration the tax payers specific condition);
ii.
An estimated assessment of the tax payers' income based on
indicators specific to a given business;
iii. Net worth and assets of the tax payer (this does not take into
consideration intangible assets)
It is however advisable that a massive tax enlightenment for
participants of the informal sector be embarked upon to reiterate that
tax payment is part of their civic duties. The enlightenment must also
seek to demystify the process leading up to taxation which is needlessly
shrouded in complex financial jargons.
Given the fact that to access government support, business owners are
required to undertake some form of registration with it, inter-agency
collaboration would even helpful to at least identify these potential
taxpayers. It remains incontestable that the law mandates tax payers to
pay their taxes regardless of whether or not government provides
infrastructure to support economic activities, it would however be a
moral victory for government to fulfill its duty to its citizens, in order to
motivate/demand the citizens to fulfill their civic duties. The need for
government to capture the informal sector into the tax net has never
been more urgent. Commodity prices have remained volatile globally,
diversification into other better paying natural resources require
massive investment income which government does not have readily.
Taxation is a viable and long-lasting solution to government revenue
shortfalls. Therefore, the effort of all players should be to evolve a tax
system that works well for all parties and the economy.
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The study of Folayan and Adeniyi (2018) examined the effect of tax
evasion on government revenue generation in Nigeria, using Oyo State
a case study. The study employed a survey research design of 165
structured questionnaires of 165 respondents. The study obtained data
from the National Bureau of Statistics, Office of the Budget and
Economic planning and Inland Revenue office from the period 20112016. Descriptive and inferential statistics were employed for the dada
analyzes. The study found that tax evasion had an adverse effect on
government revenue generation in the Oyo State government for the
[period under consideration. Similarly, though from an advanced
economy, Engen and Skinner (2006) examined the impact the level of
compliance of taxation on economic growth of United State of
American using large sample of survey collected from the citizens. The
study adopted some evidence from the micro level of labour supply,
investment demand and productivity growth. The study found that
there was a modest effect on the economic growth of 0.2 to 0.3
percentage points' differences in growth rates in response to major
reforms. The study stated that such small effect can have a huge
cumulative impact on the living standard of the citizens.
economies of sampled states. In addition, Ibadin and Eiya (2013)
studied tax evasion and tax avoidance behavior of the self – employed,
using some selected states in Nigerian geo-political zone. The study
found that respondents belief that tax evasion is ethical sometimes,
hence the study found a positive significant association between the
ethical views, mode of tax administration and cultural practices of the
self-employed and tax evasion and avoidance. Following Ibadin and
Eiya (2013) findings, Obafemi (2014) conducted a related study on the
effects of tax avoidance and tax evasion on Nigeria economic growth.
He adopted survey research design and responses were obtained
through questionnaire administered to 150 Nigerians, out of which are
tax payer and tax evader. He found that, tax evasion and avoidance
have adversely affected economic growth and development in Nigeria.
Ihendinihu, Ebieri, Amaps and Ibanichuka (2014) study investigated
the influence of tax revenue instability on government budget
implementation in Nigeria, using Southwest Nigeria as a case study, for
the period of 1999-2014. The study found that 61% of the expected
revenue of the states was hampered by tax shift and tax avoidance
through on-compliance with non-remittances and the level of tax
avoidance through implementation of tax laws and policies in
Southwest Nigeria revealed negative performance of government
budget implementation and as such affected the development of the
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Theoretical Consideration
Theory of Planned Behavior: This study is underpinned on the theory
of planned behavior. The theory of planned behavior postulated by
Ajzen in 1985 as an improvement after the theory of reasoned Action
Fishbein and Ajzen (1975) that people's behavior within the
environment they live has much influence of certain factors, originate
from certain reasons and emerge in a planned way. Therefore, the
factors that determine the purpose towards that behavior are attitude
towards behavior, subjective norms and perceived behavioral control.
Ajzen (2002) says that these factors are under the influence of
behavioral beliefs, normative beliefs and control beliefs. Wenzel
(2004) and Braithwaite (2003) highlighted that sociological and
psychological factors have proved to be important in understanding the
high levels of tax compliance. Priori studies, highlights on this theory,
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and related concepts such as trust in authorities (Murphy, 2004);
perceived fairness of the system (Wenzel, 2004); moral considerations
and norms (Frey, 2003; Wenzel, 2004) are used to promote better
understanding of tax compliance.
register for tax, refusal to pay assessed taxes, over and/or under
invoicing, fictitious loans, understatement of activities, claim of
fictitious expenses and assets, under-declaration of income, nonremittance of withholding tax (WHT) and value added tax (VAT).
The theory of planned behavior is considered relevant and appropriate
for this study since the payment behavior has perception and attitudinal
characteristics that has to do with taxpayer's attitude and their reaction
towards the need to oblige to their civic responsibility as required by
law and comply accordingly. Actions and reactions have to do with
perception and conviction, besides; it becomes difficult to see reason to
pay tax especially within the peculiarity context of the Nigerian society
where people do not see any reason to pay tax.
Others include, late remittances of withholding tax (WHT) and value
added tax (VAT), deliberate claiming of tax credits to which claimant
knows they were not entitled, suppression of turnover, inflation of
expenses higher than normal, concealment of offshore businesses and
income, reporting non-existent assets to claim capital allowances,
intentional failure to deduct or withhold tax from payments to
contractors/suppliers failure to remit the value added tax (VAT) and
withholding tax (WHT) deducted at source on behalf of Federal Inland
Revenue Services (FIRS), deliberate refusal of banks to remit tax funds
to central bank on one flimsy excuse or the other, falsification of
security documents as tax clearance certificate, tax receipt,
withholding tax credit notes, official stamps, value added tax
certificates, forgeries of signature of tax officials, claim of fictitious
expenses, connivance of tax officials in reduction of tax taxable in
consideration of bribe received or to be received, tax alteration ,
removal of documents or outright destruction of tax payers file or
returns to suppress the real compliance status of the taxpayer and the
use of non-existing companies or existing companies within a group
structure to make frivolous claims using transfers pricing or over
invoicing mechanism.
Tax gaps in Nigeria: Causes and Suggested Solutions
Tax Injustice: Justice delayed people say is justice denied. The slow
pace of tax justice due to insufficient knowledge and inadequate
attention being given to tax matters by the judiciary will continue. Also,
the trend whereby the court focuses extensive on the letters rather than
the spirit of the law is not likely to change.
Tax Advocacy: Oyedele (2015) opined that the level of ignorance
regarding tax matters in Nigeria is alarming and that this cuts across the
spectrum from taxpayers to tax administrators, policy makers,
legislators and tax professionals.
Causes of Tax Gaps: The likely causes of tax gap among others
include: non filling of tax at all, under reporting on timely filed returns
and under-payment of reported taxes. Also, tax gaps could arise as a
result of non-registration for tax, refusal to file returns, refusal to
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Possible Strategic Solutions: Optimizing Revenue from Taxation
There is need for tax awareness through public enlightenment
campaign and tax payers' education. As a matter of fact, taxpayers must
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resolve to comply fully with their tax obligations, pay the right amount
of tax and on time, while the government o its part must resolve to
simplify the tax system, put tax money to work and be more transparent
and accountable to the people, even as the public offers must be tax
compliant and lead by example if the government want to optimize tax
revenue.
building mansions in some selected choice areas like Federal capital
territory (FCT) with a value of more than N300 million, a special
surcharge for first-class tickets on airlines, and selected exotic hotels
booking in Nigeria. Unfortunately, getting the rich to pay in Nigeria is a
bit more difficult and if they are made to pay, it would make the tax
system fairer.
If a country like South Africa which is a smaller economy generates far
more revenue from tax alone than what Nigeria generates from all
sources including oil. According to the 2013 tax statistics, a joint
publication between national treasury and the South African revenue
services, their government generated R813.8billion (about USA 74
billion). Whereas Nigeria even based on 2014 budget, the total
projected revenue for the 3 tiers of government was N10.88 trillion
which is about USA 65 billion.
According to Eme et al. (2015), the following holistically can help in
closing the tax gaps and consequently, help in optimizing revenue from
taxation through tax gaps in Nigeria.
1. Broadening tax base & flattening the tax rates
2. Introduction of value-added tax
3. Lower personal and corporate income taxes
4. Simplification of tax bands and broadening of the bases for
personal and corporate income taxes
5. Reduction of import duties and simplification of the rate structure
6. Abolition of export taxes
In addition, the study of Ayuba (214) postulated the following:
7. Simplification of tax structure
8. Remove discretionary tax exemption
9. Improve tax administration
10. Harmonize central and local
Optimization through Luxury Tax: The study of Oforegbu, Akwu
and Olive (2016)posited that Nigeria is the largest importer of French
wines in the world, has the most number of private jets in Africa, and
buys exotic cars and so on. Therefore, the idea of luxury tax makes
sense but it will not be easy to impose and more difficult to collect
because of the level of compromise, corruption and impunity in the
country. Beyond the intension, there must be a legal framework to
support it and the administrative capacity on the part of tax authorities
who must be patriotically motivated to collect the tax. According to
Obara and Nangih (2017), the attempt to impose a luxury levy on
private jets in 2013 was quickly aborted by the power brokers that be.
Luxury taxes on list items like yachts, alcoholic beverages, tobacco,
imported champagnes, wines and spirits should be subjected to tax,
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CONCLUSION
This paper examined the optimizing revenue from taxation through tax
gaps in Nigeria. The paper reviewed some related literature,
enumerated tax leakages, some untapped areas and possible solutions.
In addition, the paper found that huge uncollected tax revenue could be
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collected if the right legal framework is put in place, for instance for
taxing luxury items like private jets, yachts, exotic cars and mansions
value from N300 million and above, strategic planning towards
capturing the informal sector operators into the tax net and winning the
taxpayers confidence by ensuring transparency and accountability of
tax revenue, thereby increase the tax base and closing the tax gaps as a
panacea to optimizing revenue from taxation through tax gaps in
Nigeria.
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CHAPTER TWENTY-FOUR
ADOPTION OF POPULATION CENSUS AND STRUCTURE:
A FRAMEWORK OF TAX PLANNING AND COMPLIANCE
IN NIGERIA
IKOTUN Sabic Idowu, KAYODE George
and AJAYI Olorunshola
1
Department of Business Administration,
McPherson University Seriki Sotayo, Nigeria
2&3
Caleb Business School, Caleb University, Imota, Lagos, Nigeria
INTRODUCTION
Fundamentals of human population census are attempt at a coherent
presentation of some aspects of humanity's developmental agenda,
which is of interest to social scientists and planners. Besides, study of
human population cuts across diverse fields in different
perspectives.(Aigbe, 2000), particularly, as human population census
is central to all disciplines or such as medicine, biology, statistics,
geography, sociology, political-science, economics and management
sciences. However, a review of the literature dealing with human
population matters indicate that demography is the core value of
understanding human population, because demography provides
answer to three basic questions of: (i) how many people live in an area
(population size); (ii) what are the characteristics of these people
(population composition structure); and (iii) where are these people
located within the area (population distribution).
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In this regard, a further reflection suggests that the objectives of
demography are to make any worthwhile contribution to a planning
team in any area. Therefore, this paper seeks to expose importance of
human population census and its structure in the development of tax
planning and compliance in Nigeria. Successive government regimes
in Nigeria had carried out various reforms without much interest in the
taxation planning based on human population census. Although,
various human population census exercises were contentious,
controversy and full of acrimony over their conduct, organization and
data collections, still government institutions were making use of the
results for planning, as well as necessary for the economic and political
advancement of the federating units of the country.
enumeration (de-facto) (Aigbe, 2000). A population census is the total
process of collecting, compiling, evaluating, analyzing and publicizing
demographic, economic and social data pertaining at a specified time,
to all persons in a country or in a well delimited part of a country
(Onokerhoraye, 1985). Population census involves the complete
enumeration of population in a country, territory or area and should be
conducted at least once every ten years (United Nations, 2019).
Therefore, it is desirable to make use of estimates of last human
population census exercise in Nigeria, as basis of planning taxation
within the context of policies emphasized in the fiscal and monetary
framework. Our methodology adopts historical approach that relied on
secondary data sources consisting of relevant textbooks, journals,
internet sources and official government documentaries. The rest of
paper is divided into following sections.
Conceptual Issues
(a) Population Census
A population is the number of living people in a particular defined area
or country such that the whole number of people or inhabitant in a
country or region, whereas, census is an official count or survey in
respect of a population (Ikotun, 2005). Population census is a
systematic recording of information on all members of a population
located or residing in a country (de jure) or present at the time of
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(b) Demography
According to Hauser and Duncan (1959), defined demography as the
study of the size, territorial distribution and composition of population
changes therein and the components of such changes which may be
identified as natality, mortality, territorial movement (migration) and
social mobility (change of status). In another dimension, Bogue (1969)
defined demography as the statistical and mathematical study of the
size, composition and spatial distribution of human population and
changes over time in these aspects through operation of the five
processes of fertility, mortality, marriage, migration and social
mobility. These distribution largely captured variety of definitions
which have been given to demography (Onokerhoraye, 1985).
(c) Population Structure
This is defined in terms of compositions of people which have many
characteristics that have demographic dimensions such as age, sex,
marital status, race, ethnicity, education, occupation, and composition
of families and households, economic activities, nationality language
and religion. The population of any defined area is varied in terms of all
these compositions, which have become increasingly interested in the
analysis of the pattern of population structure and characteristics
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because it contributes remarkably to explaining area variation in the
culture landscape as well as the pattern of development
(Onokerhoraye, 1985).
theories and taxation theories in order to appreciate the inevitable
relationship that exists between the population census and the tax
planning in the society. Therefore, it is important to examine some of
the most notable theories of how population processes are related to the
socio-economic system like tax planning. Although, the relationship
between population and society has for a long time attracted the
attention of a large number of the scholars and most influential
planners in the world. However, this attention has not been much
placed on tax planning. The population theories include Malthusian
theory, Neo-Malthusian theory, Marxist theory, theory of the
demographic transition, theory of demographic change and response,
and finally theory of relative income. While tax theories include
following equality of sacrifice theory, ability to pay theory, benefit
them and diffusion theory.
(d) Tax Planning and Compliance
The concept of tax and taxation have been defined and used
interchangeably over the years, particularly, to mean compulsory levy
paid by individuals or organizations into government treasury based on
certain parameters of its determination, while act of doing the tax
processes is regarded as taxation. Bhartia (2009) defined tax as an
enforced payment or fee from persons and property levied by the state
according to virtue of its sovereignty for the support of government. In
this regard, tax can be described as a monetary charge imposed by the
government on individuals, entities, transactions or property to yield
public revenue.
Planning is defined on basis of management approach as whole process
of determining what purpose to pursue and the means of attaining
predetermined activities as well as the mechanism of monitoring and
achievement of the desired results (Osaze, 1991). By implication, tax
planning connotes effective and efficient methods put in place to
achieve maximum tax collection from eligible tax payers. In essence,
tax planning is a predetermined arrangement to willingly capture all
eligible tax payers for their obligatory and voluntary remittances.
Compliance can be referred to as process or act of willingness,
responsibility, voluntarily and statutorily obey rules and regulations of
taxation by the tax payers.
Theoretical Review
The theories underpinning this discussion are hinged on the population
527
Nevertheless, Malthusian theory of population is only used among
population theories because it has a number of propositions which cut
across other population theories. Beside, being the first major
population theory that was put forward in the 18th century. While tax
theories are silent here because other chapters of the book have
discussed on them, particular chapter with title “Taxation Planning and
Compliance: A Normative Approach of Education and National
Development in Nigeria”.
Malthusian Theory of Population of Theory
The theory was postulated by Thomas Robert Mathus in 1798, through
his essay on the principle of population and subsequently revised in
1803. The theory was premised on principle that population growth can
be broken down into three major parts on the basis of the orientation of
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his propositions: (i) causes of population growth, (ii) consequences of
population growth, and (iii) avoiding the consequences of population
growth. The crux of Malthus's argument is that populations tend to
grow more rapidly than required resources by the populations.
Particularly, if human being will continue to increase their numbers
indefinitely thereby covering the whole world with their species.
census and structure as independent variable and tax planning and
compliance as dependent variable, while platform of application is
Nigeria as nation. Furthermore, other dynamics of interactions
between two variables can be presented. It is essential that some of
these issues should be outlined because it will be helpful in evaluating
the validity and usefulness of the available population data in planning
at all levels.
Therefore, Malthus focused attention on the factors which tend to
balance the population growth and resources required by the
population. In this regard, Malthusian theory provides a simple and in
many respects an attractive theory of the relationship between
population growth and available resources to sustain human existence.
Onokerhoraye (1985) asserted that the theory is unfortunately based on
a number of simplistic assumptions and hypotheses that do not stand up
to the test of empirical verification. However, since the theory
established provision for knowing population growth, that is numbers
of population in order to cater for required resources by the population.
It can be implied that population census can also be used to carry out tax
planning.
The Main Elements of Discussion
Basically, the population census refers to the most important source of
information about the population of a country or any locality within it.
The precise definition of the area covered by a census is essential while
the principle of universal applies that is, the need to include every
individual in the defined area of census exercise. Also, tax planning
simply connotes predetermined arrangements of facilitating tax
collection from the tax payers. It is obvious from previous sections'
discussion that conceptual framework of the discussion is population
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Nexus between Population Census and Tax Planning
According to Onkerhoraye (1985), population census has a long
history going back to the ancient times, particularly, as the earliest
census counts were generally related to taxation. This is reflected in the
word “census” being derived from the Latin 'censere' which implies to
value or tax (Lucas, 1980). Therefore, population census provides
basic data for many aspects of economic and social research as well as
for planning and administration. In view of the fact that a population
census cover the total population in a country at a particular time, the
information derived from it is useful for analyzing the present and
future population sizes and distribution which is fundamental to long
term planning of many public programmes such as education, health,
housing, industrial sector, servicing sector and all other economic
sectors. No doubt, tax plays an important part on these sectors' planning
side. More importantly, this would facilitate planning for the number of
economic sectorial developments.
Another major area where population census is quite essential in the tax
planning is the analysis of the relationship between population change
and economic activities, because for planning purposes therefore the
trend in occupational change measured in terms of proportion of the
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total population engaged in a specific economic activities is essential.
A further relationship of population census information with tax
planning can be gleamed from manpower development that is
employment opportunities which is one of the most important social
and economic problems facing Nigeria. Besides that, it is most reliable
source of tax generation in the country. In order to adequately plan for
employment opportunities as well as adequate tax generation from
labour force, there is need to have reliable data relating to the labour
force particularly the rate at which new people enter it and old people
leave it as well as the characteristics of the labour force itself.
alone and in combination in the hope of finding the best way to achieve
taxation implementation.
Tax Planning: Dimension of Segmentation, Targeting and Positioning
from Population Census
Furthermore, following criteria or conditions are usually crafted to
justify the concept of segmentation in the entire population census:
(i)
Measurability: It determines the extent to which the information
or data required for classifying peoples into segments are
obtainable and quantifiable in terms of physical parameters for
the justification or assessment.
(ii) Size: This means that the identified segments must be sizeable
and large enough to justify consideration for tax planning.
(iii) Homogeneity: The identified segments must have similar socioeconomic behavior and hence constitute a unit to be considered
for a tax planning so that appropriate recommendation will be
acceptable to the segments.
The population census of any defined area or country is varied in terms
of age, sex, marital status, the size and composition of families and
households, economic activities, nationality and religion. It is in this
respect that appropriate tax planning can focus and pay attention to the
demographic characteristic from dimension of segmentation, targeting
and positioning (STP). Although, the concept of STP is fundamentally
traced to the marketing discipline, however, the concept can be applied
with modification in tax planning presentation.
(v)
Segmentation is a process of dividing a total population census into
groups of people with relatively similar characteristic for the purpose
of designing appropriate tax planning that more precisely matches their
worth or value. There is no doubt that way of segmenting the
population census is purported done in the population structure
analysis. A tax planner might use different segmentation variables
Targeting is the process of focusing or aligning different activities of
specific groups or segments within the total population with tax
planning agenda so that there can be mutual relationship for the
achievement of congruent goals. Such that you decide on what groups
531
(iv) Uniqueness: This means that the identified segments must be
very much distinct from other segments of the population to
facilitate easy rate of tax application and its adjustments.
Sustainability: This means that the identified segments must
have a long time existence in the location to patronize tax
planning implementation.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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of the population should be given preference or priority and on what
basis. More importantly, targeting is described as strategy of
concentration on segments based on their uniqueness for proper
attention.
(ii) Age Structure
Age influences socio-economic organization of human society,
because we assign different functions and roles to people on the basis of
their age. More so that important aspects of individual or communal
life are affected by age. In any collection of human population, three
major age groups may be identified for purposes of overall appraisal
and planning for development and welfare of the people concerned.
The first age group comprises people of between 0 – 17 years or what
can be called infants. The second group comprises people of between
18 – 64 years or people called adult category that are most reproductive
and productive and also cater for two other groups. The third group
comprises of people over 65 years. By implication, tax planners must
focus on age group with productive capacity to pay tax rather than
depending age groups that are not productive.
Positioning is the process of creating awareness and communication
between the specific groups or segments of population and the tax
planners in order to have standard operating procedures and serve to
increase mutual relationship and its effectiveness by standardizing
many routine decisions to limit the discretion of tax management.
7.0 COMPONENTS OF POPULATION STRUCTURE: A
CONSIDERATION OF TAX PLANNING
In recent years, tax planners must be interested in population structure
and characteristic because it contributes remarkably to explaining
fundamental variations and parameters in the tax assessment as well as
the patterns of development.
(i) Sex Structure
The sex composition of population in any area may be defined as
relative proportion of males and females within the population. The sex
ratio is defined as the number of males per 100 females in a population,
and it is vice versa for both females and males in the total population. It
can be determined by finding the proportion of males or females as a
decimal of unity. Therefore, tax planners can use the data to arrive at
whom to pay more or less tax based on adequate informed decision
from the census.
533
(iii) Race and Ethnicity Structure
These are important biological characteristics of the population of any
area. However, is becoming irrelevant in the developing country like
Nigeria, but it can be used to mark differences in terms of the level of
education, level of income, nature of occupation and lifestyle in
general. Although, these differences can be used by tax planners as
indicators of the social and economic organization in the society
(iv) Marital Status Structure
Marital status of a population may be broadly defined as the proportion
of single, married, widowed and divorced persons within the
population. Tax planning needs to consider various components of the
marital status structure before effective taxation implementation can
take place.
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(v) Families and Households Structure
The two terms are however different from each other. The family is a
smallest unit of social organization in most societies and also a social
group based on marriage whereas households are generally collection
of families living together in a compound with a common culture. The
nature of family and household in any area is of direct importance to
planners for the fact that they often have some of the socio-economic
and physical needs of the population in any area have to be done in
relation to the groupings in which people choose to live. This is another
special considerable task for the tax planning.
an economy so that tax planners must have the information for
necessary consideration.
(vi) Religion Structure
Religion is defined as a certain procedure of faith believes system with
worship and these entail scared observations as well as codes of
behavior. Thus religion imposes certain controls on human activities
such as style of life, nature of diet, farming methods, nature of trading,
marriage and economic orientation and prosperity virtue. All these
factors are essential and critical to the tax planning consideration.
(vii) Economically Active Population Structure
This is a segment of human population that constitutes people
contributing or capable of contributing to the generation of income.
However, there are often three terms normally used interchangeably in
reference to economically active population structure, these are gainful
workers, labour force or occupational person and manpower. Whereas,
inactive population therefore comprises children who are not working,
retired persons, students, full-housewives, inmates and unproductive
physically challenged persons. The population census are the major
source of information on economically active or inactive population in
535
CONCLUSION AND RECOMMENDATION
The population censuses are vital and comprehensive major source of
information collected, compiled, and published by government, and as
such it has principle of universality. Consequently, population census's
information has acceptable and a proper analysis of population
structure and distribution which can be used as assessment of the
quality of data for planning purposes. No doubt, tax planning requires
robust facts and figures in terms of operation, which can be primarily
accessed from human population census in the country. Particularly, as
population census provide basic data for many aspects of economic,
social, physical and cultural for planning and administration.
Therefore, need to instill consciousness of population census
significance in the mindset of tax planners are quite desirable,
particularly, as veritable means of understanding demographic
characteristics of Nigerian citizens or residents for effective and
efficient tax collection from tax payers.
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
CHAPTER TWENTY-FIVE
REFERENCES
Aigbe, G. O. (2000). Fundamentals of population studies. Ojo, Lagos:
Jehovah Shammah Publishers.
ETHICAL ISSUES IN TAX PLANNING:
SETTING UP OF A SUCCESSFUL TAX PRACTICE
Bharita, A. L. (2009). Public finance (14th edition). New Delhi: Vilkas
Publishing House Ltd.
Omonayajo B. Akanji, MBA, FCTI, FCA, MNIM
Bogue, O. J. (1969). Principles of demography. New York: Wiley.
INTRODUCTION
Hauser, P. M. and Duncan, O. O. (1959). The study of population.
Chicago: University of Chicago.
Ikotun, S. I. (2007). The effect of population growth on rural
development and poverty alleviation in Nigeria, in Onah, A. O.
(Ed.). Religion ethics and population development. A
publication of Nigerian Association for the Study of Religion
(NASR).
Lucas, D. (1980). World population growth and theories: Beginning of
population studies. Canberra: A. N. U. Press.
Malthus, T. R. (1970). An essay on the principle of population.
Harmondworth Penguin.
Onokerhoraye, A. G. (1985). Population studies: The geography and
planning series of study notes. Publication of Department of
Geography and Regional Planning, University of Beavn.
Osaze, E. R. (1991). Nigerian corporate policy and strategic
management: Tex and case. Second Edition. Ikeja: Centre for
Management.
Taxation has become very relevant in the country as a result of the fall
in oil prices and as a result, the federal government has taken much
interest in the generation of revenue from non-oil sources. Because of
this, tax practice has become very important and setting up a successful
tax practice requires professional competency.
OVERVIEW OF ETHICS
WHAT IS ETHICS?
The oxford Advanced Learners Dictionary defines ethics as “the moral
principles that control or influence a person's behavior. This goes to
confirm that ethics is a branch of philosophy that deals with moral
principles.
Other words which have been use3d in describing ethics are: MORAL
VALUES, RULES OF CONDUCT, MORAL CODE, CONSCIENCE,
STANDARD and so on.
There are two principal types of ethics; Business and Professional
ethics.
United Nations (2019). Determinants of consequence of population
trend. New York: Department of Economic and Social Affairs,
UNO.
537
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ETHICAL ISSUES IN TAX PLANNING: SETTING UP OF A SUCCESSFUL TAX PRACTICE
BUSINESS ETHICS
Thus, when persons come together under the umbrella of a profession,
they draw up rules and regulations to guide members in their general
conduct. They also agree to be bound by such rules and regulations in
the general interest of members and the profession. These rules and
guidelines then become the code of conduct or ethics of the profession.
Ethics that are related to business is essentially concerned with how an
enterprise carries out its operation in a morally acceptable manner,
ensuring that the decisions taken at all times are fair to all the parties
involved. These parties usually referred to as stakeholders include
shareholders, customers, suppliers, employees, creditors, government,
local community and the society at large.
This can also be likened to the four-way test of Rotary
Ø
Is it the truth?
Ø
Is it fair to all concerned?
Ø
Will it build goodwill and better friendship?
Ø
Will it be beneficial to all concerned?
PROFESSIONAL ETHICS
Tax practice thrives on high level professionalism. Tax practitioners
are usually exposed to very high level and confidential documents of
clients, which requires to be treated meticulously. Also practitioners
are often required to deal with figures and calculation of taxes, which
requires precision, in order to avoid tax gaps. We must note that a
Chartered Tax Practitioner is one who is a registered member of the
Chartered Institute of Taxation of Nigeria (CITN) and who is also
licensed to practice taxation in Nigeria.
Generally membership of a profession imposes certain duties on its
members. Such duties may be to the public at large, employers, clients,
including those who engage him as an employee, to the profession
itself and to all other members of that profession, even though such
duties may, at times, be at variance with his own personal interest.
539
To check unprofessional conducts within the profession, the CITN has
set up machineries to deal with cases of professional misconduct by
any member of the Institute. Like every other profession, tax practice is
regulated by Laws and codes of professional ethics that guides its
members in their practice of the profession. These include Chartered
Institute of Taxation Act Cap C10, LFN 2004, Statement of Taxation
Standard, Membership rules, Practice rules and practice guidelines etc.
The CITN Act provides for the Investigation panel and the Disciplinary
Tribunal.
TAX PLANNING AND MANAGEMENT
WHAT IS TAX PLANNING?
This is the art of arranging the affairs of a tax payer in such a manner so
as to minimize his tax liability within the limits of law. Tax planning is
legal. It can also be referred to as the act of studying the provisions of
the tax laws to identify areas where a business could take economic
action which allows for little or no tax payment. The tax payer seeks to
take full advantage of all exemptions, deductions, concessions,
rebates, allowances and other tax reliefs or benefits permitted by law.
Another one that is more contentious is that by which the taxpayer
actually dodges liability. That is not to say that he omits either by
negligence or refusal to discharge his established tax liabilities. Rather
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
ETHICAL ISSUES IN TAX PLANNING: SETTING UP OF A SUCCESSFUL TAX PRACTICE
the taxpayer takes a proactive look at his business activities, relevant
legislations and possible tax liabilities. He then arranges his affairs in
such a way that his earnings attract minimal or no tax liability. Looking
ahead on how to minimize the resultant tax effect before the income is
earned (i.e. from inception).
assessment. It is therefore essential to choose most carefully the date
of cessation of the business so as to maximize the untaxed profit or to
minimize the tax payable by the business.
The following are some legally available tax planning or tax avoidance
options that may be adopted by a company to reduce its tax burden:
CHOICE OF ACCOUNTING DATE
Choice of commencement or cessation dates require preparation of
pilot computation based on the projected results of the company for the
first three or last two accounting periods respectively with options of
accounting date or cessation date.
FINANCING A BUSINESS
Financing a business a business requires capital outflow and also has its
tax implication because the form of financing available to a company is
more than one. It could be through debt financing or through equity
financing. The use of debt financing has a clear tax advantage over
equity in terms of interest for debt, which is tax deductible as against
dividend for equity which is not tax deductible. Examples of debts:
Term loans and debentures. Example of equity: Ordinary shares and
preference shares.
ROLL-OVER RELIEF
ESTABLISHING A BUSINESS
The provisions of commencement cases will often result in the
assessment of the accounts for the first two years of operation. The
interest of taxpayers is to try and keep the profit for the accounting
period as low as possible and to take the greatest care in selecting the
closing date for the first accounting period.
As the period does not necessarily have to cover 12 months, it will often
be possible to reduce the tax payable by contracting or extending that
accounting period so as to take in months with low profits or leave out
months of high profits.
TERMINATING OR CEASING A BUSINESS
On the cessation of a trade or business, the profit of a period will escape
541
A company should plan its disposal and acquisition of assets to take
place in such a way that it can take advantage of the relief available for
replacement of business assets (roll-over relief). Where a company
disposes of an assets used for the purpose of its trade or business and
applies the sale proceeds in acquiring another asset of the same class
for the same purpose within 12 months before and 12 months after the
disposal of the old asset, it can claim roll-over relief so that capital gain
tax is not payable on the capital gain arising from the disposal of the
asset.
SALE AND LEASE BACK
A company can sell its assets (e.g. building) to another person and at the
same time leases (rents) it back from the new owner. The tax
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ETHICAL ISSUES IN TAX PLANNING: SETTING UP OF A SUCCESSFUL TAX PRACTICE
advantages are as follows:
a) The company can claim balancing allowance if the written down
value of the asset at the date of disposal is higher than the sale
proceeds;
will be able to claim the lease rentals paid to the lessor as deductible
expenses for income tax purposes. Where the capital allowances
already exceeded 662/3% a company's profit, the option of a finance
lease by a bank or finance company will be attractive. Operating leases
always has a tax advantage over owning, for lease payments are
deductible as soon as they are made.
b)
c)
If the lease qualifies as a finance lease, the company (i.e. the
lessee) can claim capital allowances on the qualifying
expenditure;
The hire charge (rental) is an allowable deduction in computing
the company's profits.
RUNNING A BUSINESS
There is need to do tax planning while running the business. This will
include maximizing non-taxable receipts, minimizing non-deductible
expenses, avoiding outright default of tax provisions to eliminate
payment of penalties and interests. This also includes timing of
payments of tax in such a way that it can be delayed to take advantage
of time value of money.
A company which cannot purchase an asset out rightly or acquire under
a finance lease will find it more advantageous to enter into a hire
purchase agreement. Capital allowance is claimable on the capital
portion of the hire payments and the interest element of these payments
is deductible as expenses.
LOANS FOR AGRICULTURAL TRADE/BUSINESS AND
MANUFACTURING GOODS FOR EXPORT
A bank could grant more loans to companies engaged in manufacturing
goods for export or agricultural business or fabrication or any local
plant and machinery since the interest on such loans are granted tax
exemption to some extent.
ACQUIRING FIXED ASSETS
OTHER TAX PLANNING CONSIDERATIONS
The effect of capital allowances has to be taken into account in
comparing different investment alternatives which demand the
acquisition of fixed assets. Consideration has to be made of the tax
effect the acquisition of assets will have on the company. The company
should decide whether to lease, hire or buy. Leasing of an asset can be
in two forms; operating lease or finance lease. Under an operating lease
agreement, the Lessor will be able to claim capital allowances on the
investment made in the assets leased to the company while the Lessee
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Other tax planning opportunities that may be explored when
considering setting up a business in Nigeria include the following:
Ø
Operating in the Export Processing Zones (EPZ)
Ø
Operating in the Free Trade Zones (FTZ)
Ø
Investing in preferred sectors;
Ø
Proper classification of fixed assets – Furniture & Equipment Vs
Plant & Equipment;
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Ø
Transfer of assets to profit leaders for claiming of capital
avoidance and tax evasion. Both tax avoidance and tax evasion have
only one objective which is to reduce the tax liability of the taxpayer.
The difference lies in the legality of one over the other. Tax is an
obligation and not a duty. A taxpayer therefore can organize his
business or trade in a legal manner to minimize his tax liability.
allowances;
Ø
Operation of domiciliary accounts – Tax free interest;
Ø
Operation of asset-based compensation plans - Lower tax rates;
Ø
Investment in government bonds – Interest on the bonds are tax
free etc
TAX AVOIDANCE
MORALITY IN TAX PLANNING
It should be stressed that arrangement of tax affairs in law is not in any
way immoral as it is merely a reduction of tax payable from a higher
revenue assessed figure to a lesser one. Tax planning should be done in
such a way that it will not become illegal. While tax planning is legally
allowed, companies must note that:
i.
Tax payment is imperative to both the company and employee;
ii.
The company is responsible to ensure that proper taxes based on
its profits are paid and adequate deduction is made from
employees' salary;
iii. Tax authority is a watchdog between the company/employee
activities in one hand and the government (Federal & State)/Tax
laws on the other hand.
iv.
A balance must be strike between the company/employees'
expectation and the expectation of the tax authority so that the
parties involved would not be offended.
TAX AVOIDANCE AND TAX EVASION
Tax planning could not be discussed without making reference to tax
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It could be described as those various devices which have been adopted
with the aim of saving tax and thus sheltering the taxpayers' income
from greater liability which would have been incurred but for such
device.
It may also be described as the “art of dodging tax without actually
breaking the law and the lawfully carrying out of a transaction which
was either entered into or which took a particular form, for the purpose
of minimizing taxation.
Another definition of tax avoidance is the shrewdness, cleverness or
meticulous ability in taking advantages of loopholes in the tax statutes
in order to reduce tax assessed to the minimum.
A taxpayer can arrange his affairs in such a manner that he reduces his
tax liability without contravening the law. This is referred to as tax
avoidance. In tax avoidance, the taxpayer exploits certain provisions or
lack of provisions in the tax law to legally reduce his tax liability.
Whereas the tax authority will like to take every advantage available to
it under the tax laws to empty the taxpayer's pocket, the taxpayer is in
like manner entitled to be wise to adopt lawful means to prevent the
depletion of his pocket by the tax authority. Examples of tax avoidance
include:
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i.
Avoiding the purchase of articles on which indirect taxes
(VAT, import duties, etc) are imposed,
ETHICAL ISSUES IN TAX PLANNING: SETTING UP OF A SUCCESSFUL TAX PRACTICE
ii.
ii. Taking advantage of the loopholes existing in the tax laws,
iii. Claiming appropriate reliefs and where options are given in
the tax laws, the tax payer can choose the ones that will
minimize his tax liability. On commencement of a business,
the taxpayer can choose to have his assessment for the
second and third years of assessment to be based on the actual
income of the respective years and not on the preceding year
basis.
TAX EVASION
Tax evasion is an illegal means adopted by a taxpayer to escape
payment of tax or to reduce his tax liability. According to Pritchard and
Murphy (1988, P.286) “Evasion consist of illegal activities which are
deliberately undertaken by a taxpayer so that he or she does not have to
pay any or all of the taxes the law would otherwise charge on the
income and gains”.
The following are examples of tax evasion:
i.
Omitting or understating income liable to tax or overstating
expenses, for example, an employee may fail to declare all the
benefits-in-kind provided to him by his employer or a company
may suppress its turnover. A self-employed individual may also
understate his income from trade, business, profession and
vocation or he may inflate his business expenses. Others may fail
to declare their investment income like rent.
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Claiming reliefs and deductions for which the taxpayer is not
entitled to. For example, a company can “doctor” its accounts to
show losses with a view to claiming loss relief or they can make
false claim in respect of fixed assets acquisitions with the aim of
getting capital allowances.
iii. Failure to pay tax due or failure to remit withholding tax, PAYE
tax deducted and VAT to the relevant tax authority.
iv.
Hiding away from the tax authority, for example, not registering
oneself or your business with the tax office or giving the tax office
wrong address in order to escape payment of tax.
v.
Failure to file tax returns with the relevant tax authority or
submission of false or incorrect returns, statements or accounts to
the tax authority.
Generally, tax evasion results in a loss of tax revenue that the
government could have collected. Tax evasion is an offence which is
punishable under the law.
ANTI-TAX AVOIDANCE PROVISIONS
There are certain provisions in tax laws to combat tax avoidance. These
are referred to as anti-avoidance provisions. Maples and Temples
Associates (2000b, p. 1) define anti-avoidance legislations as:
Ø
Statutory provisions which seek to prevent an escape from
liability to tax by a taxpayer using artificial or fictitious
transactions to dodge tax.
Section 18 of Companies Income Tax Act, LFN 2004 (as
amended) states:
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Ø
“Where the Board is of the opinion that any disposition is not in
fact given effect to, or that any transaction which reduces or
would reduce the amount of any tax payable is artificial or
fictitious, it may disregard the disposition or direct that such
adjustments shall be made as respects the liability to tax, as it
considers appropriate so as to conteract the reduction of liability
to tax effected, or reduction which would otherwise be affected,
by the transaction and any company concerned shall be
assessable accordingly”.
The following are found in the Personal Income Tax Act 2004:
a) Section 17(1) which gives the tax authority the power to disregard
any transactions considers to be artificial or fictitious and to make
appropriate adjustments to the income of the taxpayer to
counteract the reduction of liability to tax effected, or reduction
which would otherwise be effected by the transaction.
b)
c)
Paragraph 1 of the second schedule which provides that the
income of a settlement or trust shall be deemed to be the income of
the settler or person creating the trust if the settler or person retains
or acquires an immediately exercisable general power of
appointment or makes use either directly or indirectly any part of
the income arising under the settlement or trust or the settlement
or trust is revocable in circumstances whereby that settler or
person, or the spouse thereof, resumes control over any part of the
income or assets comprised therein.
Paragraph 4(1) of the second schedule which provides that where
in consequence of a settlement and during the life time of the
settler, an income is paid to or for the benefit of the settlor's child
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in any year of assessment, such income shall be treated as the
settlor's income for that year and not as income of any other
person provided the child was an infant and unmarried at the time
of payment.
d)
Paragraph 7(2) of the fifth schedule which stipulates that where
capital expenditure is incurred on the purchase of an asset and
either the seller has control over the purchaser or both of them are
controlled by a third person, the amount of an initial allowance to
be granted in respect of the expenditure shall be such an amount as
the relevant tax authority may determine to be just and reasonable
having regard to all circumstances relating to the asset and control
but shall not exceed the amount of the initial allowance which
would have been allowable under normal circumstances.
SETTING UP A SUCCESSFUL TAX PRACTICE
Tax practice has become very relevant in Nigeria due to the fall in
global oil prices and other economic variables which point to the fact
that the Nigeria economy can no longer solely rely on income from oil
but from other non oil sources.
WHAT IS TAX PRACTICE?
Tax practice is not just an occupation or vocation but a profession. This
was even asserted by Hon. Justice Lateefat Abisola Okunnu in one of
her rulings (in the case of ICAN vs CITN) when she declared that
“taxation is legally recognized in Nigeria as a profession separate and
distinct from other professions”.
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WHO IS QUALIFIED TO SET UP A TAX PRACTICE?
Policies and procedures that guide the actions of individuals in acting
consistently with the firm's values (its management and control)
For anybody to qualify to practice tax or set up tax practice, such person
must belong to the body charged and vested with the power to regulate
and control the practice of taxation in Nigeria i.e. The Chartered
Institute of Taxation of Nigeria. Apart from being inducted as a
member of the Institute, such member must undergo articleship under a
registered tax practitioner for a period of not less than 18 months before
the Institute practicing license is issued to such a person. This means
that for you to qualify to set up a tax practice, you must firm be inducted
as a member of CITN and then obtain the Institute's practicing license.
b)
Building risk management into your practice
Carefully vet any new client before agreeing to do business with it
Ensure you have quality recruitment
Ensure your employees are properly trained
Do not delegate tasks beyond capacity level
Have an adequate insurance policy
Back up your technology and records
Be fully aware of privacy and client confidentiality guidelines
STEPS TO TAKE TO HAVE A SUCCESSFUL PRACTICE
i. Develop plans for your firm
ii. Build risk management into your practice
iii. Establish a practice manual and systems
iv. Building and growing your firm
v. Think of technology and e-business
vi. Build a strong client relationship management
a) Developing plans for your firm
You should determine whether your firm is going to be a highly
specialized one or a general one.
Have a procedure to identify weaknesses or problems
Maintain adequate spread in your fee base
Employ proper review processes.
c)
Establish a practice manual and process
A well run firm should document its policies and procedures. A
current practice manual is also required under quality assurance
guidelines.
The manual should cover among other things the following:
Mission statement and objectives
List of services provided
Whether you intend to be a sole practitioner or develop into partnership
in future
Develop a human capital policy i.e. the people and skills required
Services that the firm intend to render
Employment conditions
Approval processes for purchases
Use of the firm's equipment
Detailed business plan including organogram
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d)
Building and growing your firm
This means developing a growth strategy, coping with increased
regulation and competition, marketing and enhancing the culture of
your firm. There are three key elements in the philosophy behind the
development of a business plan:
Ø
Get your pricing right i.e. your fees should be reasonable;
Where is the firm now? Where is the firm going? and How will it get
there?
The second question above identifies the key objective of the firm and
unless you know where you are going to, you wouldn't know if you are
on the right track.
e) Technology and e-business
In this 21st century, small and medium sized firms rely heavily on
technology to provide efficient, cost-effective, high quality and
profitable services for their clients. Effective selection,
implementation and management of technologies, as well as training
employees to use these tools, are fundamental to the success of every
firm.
f) Build a strong client relationship management
You are in business because of your clients. A leader who has no
follower is only taking a walk, same thing applies to a practicing firm
without clients.
The solid relationship tax practicing firms build with their clients is
fundamental to the existence of their firms. You should therefore:
Ø
Know your clients;
Ø
Reviewing your client base from time to time;
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Ø
Measuring and exceeding your clients' expectations.
QUALITIES A TAX PRACTITIONER SHOULD POSSESS
For any member to practice tax successfully, such person must possess
the following qualities:
i.
Integrity
Webster third new international dictionary defines integrity as “an
unimpaired or unmarred condition; soundness and uncompromising
adherence to a code of moral, artistic or other value; utter sincerity,
honesty and candor; avoidance of deception, expediency, artificiality
or shallowness of any kind”.
From the above definition, it is clear that integrity cannot be qualified.
You either have integrity or you do not have it. There is no midway or
shortcut to it.
Integrity, therefore, implies not merely honesty, but fair dealing,
truthfulness and sincerity. Thus before accepting any professional
assignment, a member should critically examine its peculiarities and
assure him/herself that the performance of the assignment will not have
adverse consequences on his integrity and objectivity which will
demean the image of the profession as well as the goodwill of the
Institute.
ii. Independence and objectivity
This is an attitude of mind based on integrity and an objective approach
to work. A member must perform his work objectively and impartially
and free from influence by any consideration which might appear to be
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in conflict with this requirement. The principle of objectivity imposes
on the professional tax practitioner the obligation to be fair,
intellectually honest and free of conflicts of interest. They should
maintain objectivity in their judgments in all circumstances.
To facilitate this and as part of its responsibility to its members, the
Institute established the Mandatory Professional Training Program
(MPTP) which every member is compulsorily required to attend
annually in order to retain his/her membership of the Institute.
iii. Confidentiality
A tax practitioner should respect the confidentiality of information
entrusted to him by his employer or client and should not disclose any
such information to a third party without the specific authority of his
client or employer unless in special circumstances as indicated by the
exigencies of the law. The duty of confidentiality continues even after
the end of the relationship between tax practitioner and his client or
employer.
v. Conformity with technical standards
Every tax practitioner must conform to the practice standards as issued
by the Institute. It is worth mentioning that the Institute has joined other
leading professional bodies in Nigeria with the presentation of eight
statements of Taxation standards for use as practice guide by all tax
practitioners in the country.
iv. Maintenance of technical competence
The role of tax practitioners nowadays has gone beyond just computing
tax and submitting returns. There is need for adequate tax planning
which should be to the advantage of the client and at the same time not
running foul of the law.
The maintenance of professional competence requires a continuing
awareness of developments in the taxation practice including relevant
national and international pronouncements on taxation and other
relevant regulations and statutory requirements.
A tax practitioner should, therefore, adopt a program designed to
ensure quality control in the performance of professional services
consistent with appropriate national and international
pronouncements.
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The first three were issued in January 2007 while another two were
issued in September 2008. The STS are:
STS ONE – Know your client
The STS 1 stated interlaid that “when acting for a client, a member of
the Institute places his professional expertise at the disposal of the
client, and in so doing, the member assures a duty of care towards the
client.
A member must, therefore, exercise reasonable skill and care when
acting for a client. Failure to exercise such reasonable skill and care
may cause a member to be sued for negligence on the discharge of his
professional duties.
All members of the Institute must understand the duties and
responsibilities in respect of the client and the risks associated with
failure to adequately discharge those duties and responsibilities.
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The duty of care in contrasts will exist whether or not an engagement
letter is issued. A member should insist on or instigate a letter of
engagement to clearly delineate the scope of his responsibilities. As a
professional, there would be an expectation that you take the initiative
to do this.
Income Tax Act (CITA), the upstream income are taxed under the
Petroleum Profits Tax Act (PPTA) and other side agreements lime
Memorandum of Understanding (MOU) and Production Sharing
Contract (PSC).
STS TWO – Tax return positions
This set forth the applicable standard for members when
recommending tax returns positions and preparing or signing tax
returns (including amended returns, claims for refund and information
returns) filed with the tax authority.
A member should, therefore not recommend to a client acceptance of a
tax return position with respect to any item unless the member is
convinced that the position enjoys the backing of the relevant tax laws
and can be effectively defended if challenged by the relevant tax
authority.
STS THREE – Procedural aspect of filing returns
It deals with preparation and filing of tax returns forms for company
income tax and personal income tax and their legal requirements,
taking due cognizance of the payers' nature of business and other
relevant particulars.
STS FOUR – Preparation & Filing of tax returns: Petroleum
profits tax
The petroleum industry is strategically positioned in Nigeria economy
as the nation's major foreign exchange earner. The activities of the
petroleum industry are divided into two broad categories, upstream and
downstream. While the downstream income are taxed under Company
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The statement covers only the upstream operations. It does not cover
the downstream operations which deal with the refining and marketing
of petroleum products.
STS FIVE – Preparation & Filing of Tax returns: Value Added Tax
Value Added Tax (VAT) is a consumption tax introduced into the
Nigerian tax environment by the VAT Act of 1993 now Value Added
Tax Act (Cap. VI, LFN 2004) It replaced the sales tax operated by the
various states of the federation and is imposed on the supply of goods
and services.
This statement deals with the preparation and filing of VAT returns
which are made on monthly basis. The statement captures all
information about cash sales and services, goods/services given out
free and goods and services exported or zero rated. It also covered legal
requirements.
STS SIX – Knowledge of error: Administrative procedures
If a member is representing a taxpayer in an administrative proceeding
with respect to a return that contains an error of which the member is
aware, the member should inform the taxpayer promptly upon
becoming aware of the error. The member should recommend the
corrective measures to be taken. The member is not obliged to inform
the tax authority, nor allowed to do so without the taxpayer's
permission, except when required by law.
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A member should request the taxpayer's agreement to disclose the error
to the relevant tax authority. Lacking such agreement, the member
should consider whether to withdraw from representing the taxpayer in
the administrative proceeding and whether to continue a professional
or employment relationship with the taxpayer.
The disclosure of the use of estimates should be consistent with the
relevant tax authorities' self-assessment procedures.
STS SEVEN – Knowledge of errors return preparation
A member should inform the taxpayer promptly upon becoming aware
of an error in a previously submitted return or upon becoming aware of
a taxpayer's failure to submit a required return. A member should
recommend the corrective measures to be taken. The member is not
obliged to inform the tax authorities, nor allowed to do so without the
taxpayer's permission, except when required by law.
If a member is requested to prepare the current year's return and the
taxpayer has not taken appropriate action to correct an error in a prior
year's return, the member should consider whether to withdraw from
preparing the return and whether to continue a professional or
employment relationship with the taxpayer. If the member does
prepare such current year's return, the member should take reasonable
steps to ensure that the error is not repeated.
STS EIGHT – Use of estimates
Unless prohibited by statue or by rule, a member may use the taxpayer's
estimates in the preparation of a self-assessment return if it is not
practical to obtain exact data and if the member determines that the
estimates are reasonable based on the facts and circumstances known
to the member. If the taxpayer's estimates are used, they should be
presented in a manner that does not imply greater accuracy than exists.
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SANCTIONS
The procedure is that any form of misconduct by a member, which is
likely to damage the reputation of the Institute or the profession shall be
referred to the investigation panel, which investigates the allegation
and if deemed necessary, refer such case to the disciplinary tribunal.
By section 13 of CITN Act, a member of the Institute may be liable to
be removed or suspended from membership by Council of the Institute
if he:
a) Violates fundamental rules of the Institute applicable to him;
b) Fails to satisfy a judgment debt;
c) Fails to pay any subscription or other sums payable by him to the
Institute;
d) Fails to participate in the Mandatory Professional Training
program of the Institute;
e) Is convicted of felony or misdemeanor;
f) Willfully commits any breach of the regulations of the Institute
ISSUES AND CHALLENGES OF MANAGING A TAX
PRACTICE FIRMS
Despite the lucrativeness of managing tax practice, it is not without its
own challenges. In today's business environment, tax firms face
numerous challenges. Some of these challenges are internal while
others are external. Al of these problems will have a direct effect on
how firms deliver services to clients.
For the purpose of this presentation, I will mention some of the
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challenges that is common to professional services firm going by
experience:
poorly, or employees that were formerly under-utilized and let go may
suddenly become needed.
a) Economic pressure on tax practice
The economic downturn and other factors have forced the tax
practitioner to view tax practice less as a profession and more as a
business.
c)
Knowledgeable clients
As clients evolve in their sophistication and their own internal ability to
execute and deliver projects, it becomes more challenging to
professional service organizations to show their value. As information
becomes more and more available, and as technology allows
individual or small group of tax firms to expand their practice, it is
likely companies will create or expand in-house tax departments.
In a buyer's market, the client determines what services are needed and
at what cost. To survive, tax firms are looking for competitive
advantages. To remain competitive, many tax firms are forced to
consider price reductions. This simply involve doing the same work for
less than in the past.
To remain competitive, tax firms must also consider Alternative fee
arrangements (AFA). This may include fixed, contingent, results
based, hourly, graduated, or any such combination. In the past, in a
seller's market, tax firms determined how to charge for their services,
and clients would simply purchase those services. Today, we have a
buyer's market, and clients want an AFA to fit their needs. If a tax firm
cannot fit the need, the client is likely to go elsewhere.
b) Human capital
In a tax firm, as it is with all professional services firms, skilled
employees are more important than in any other industry. Skilled and
experienced workforce helps to reduce the derivative time on
engagements without compromising quality.
Not knowing when new business will come makes it difficult to staff
skilled resources effectively. Highly paid employees may be utilized
561
They will do so for the efficiency of the service, and to save costs. This
will most certainly create competition concerns for the tax firms
representing those companies.
d) Attracting potential clients
One of the major challenges facing tax practitioners is inadequate
clients and how to attract clients to your firm considering the fact that
there is limit to the advert you can place as a professional firm.
The problem is that things are based much on who you know than what
you know. It is better to keep the clients you have than to lose any one of
them.
e) Lack of basic infrastructures
Although this is not common with big firms but it is a problem with
small tax practicing firms. These may include power supply, office
space, technology development etc.
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CONCLUSION
In order to have a good and successful tax practice, tax practitioners
should do the following:
f) Absolute trust in God;
g) Develop strategic direction for the tax practice firm;
h) Professional rules and practice guidelines and the statements of
taxation standards should be applied to tax practice in a bid to
ensuring that the minimum professional ethics required is
achieved;
i) Have passion for the practice;
j) Develop alliances/networks;
k) Think outside the box
l) Get a good succession plan;
m) For an ordinary man to become hero, he must do extra-ordinary
things. Are you prepared to do extra-ordinary things?
Motor vehicle expenses – N250m: Provide a schedule of the make-up
of this item together with third party invoices; and
CASE STUDY ON ETHICAL DILEMMA
You are Daniel Agboola, the Managing Consultant of Agboola and
Associates, a firm that specialises in accounting and tax services.
Danob Nigeria Limited is one of your clients. Your firm acts as the tax
consultant to the company.
You have just submitted Danob Nigeria Limited's tax returns to the tax
authority, Federal Inland Revenue Service (FIRS). The desk officer at
FIRS has carried out a desk review of the company's tax returns and has
raised the following queries:
Reserves for inventory – N55m: You are to provide details of the
balance on this account and justify the reason why this balance should
not be written back into the year's account;
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Distribution expenses – samples – N25m: Provide details of this item
and explain how the samples are distributed and to who.
Your staff has visited the company to collect information with which
you will reply this query from the tax authority. Your staff has reported
to you that the company's management has requested for you to come
personally, as the company is not comfortable discussing with your
staff.
During your visit to the company, you gathered the following
information:
1. Reserves for inventory were in respect of increase in imported
costs of the company's raw materials as a result of the increase in
exchange rate. This made the company to increase its standard
costs of production, with which the finished inventory is valued.
The goods produced with the materials have not been sold, so the
difference between the costs at which the materials were bought
and the current costs were transferred into the inventory reserve
account, pending the time the products produced with the
materials will be sold and the profit, as a result of the increase in
costs is realized. However, as at the year end, the goods have been
sold, but the company's management decided to retain the
inventory reserve to moderate the company's profit so as to
reduce tax payable.
2.
An item in the schedule of motor vehicle expenses, N5m is in
respect of a second hand Highlander, imported as spare parts, for
the managing director of the company.
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3.
The sample is in respect of finished goods sold via the internet but
reported as samples, this was not disclosed as sales revenue.
Proceed was transferred into an offshore account maintained by
the company. This account is normally at the disposal of the
directors of the company anytime they traveled outside the
country.
The company has, therefore, implored you to find a way of covering up
these with the tax authority, since each of the figures are not materials in
their respective category.
Required:
How would you handle the situation?
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CHAPTER TWENTY-SIX
TAXATION IN A DIGITALIZED ECONOMY:
HOW PREPARED IS NIGERIA?
1
OYETUNJI Oluwayomi Taiwo and LAWAL Busayo Olawumi
1
Lecturer, McPherson University, Seriki – Sotayo, Nigeria.
Oyetunjioluwayomi2014@gmail.com
2
Accountant, Extension Publications Limited,
Ososami, Ibadan, Nigeria
2
ABSTRACT
Taxation has been the major source of revenue generation to the nation
from time immemorial since the beginning of the recent economic
recession that has led to the dwindling revenue derived from the oil
sector, the means of generating fund for the smooth running of
governance has been tax revenue but this area has not been fully
explored due to high volume of tax evaders and several leakages in the
tax system and administration in Nigeria. This study is a desktop
research as well as exploratory because it examined the tax
administration process in Nigeria and the factors for a successful
implementation of integrated tax administration system in a digitalized
economy such as Nigeria. There exist a lacuna between the number of
taxable persons and the tax payers due to lack of relevant information
to capture them into the tax net. Information technology is perceived to
enhance revenue generation through automated processes, widening
of the tax net and improved compliance among citizens. The study
concluded that advances in technology will clearly change the tax
environment in developing countries like Nigeria by changing the
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underlying economy. The study recommended that transparency is very
critical whereby the Government should make full information about
revenue and expenses with detailed breakdown to Nigerians and
implementation of the 2017 National Tax Policy will go a long way in
readdressing the challenges facing tax administration system.
report of the Joint Tax Board (JTB) and National Bureau of Statistics
(NBS), it was seen that only 13% of the taxable persons in Nigeria are
captured in the tax net. Lack of sophisticated information technology
and resources in accordance with global standards has been the major
limitation making integrated tax administration system a myth instead
of a reality.
Keywords: Economic Recession, Information Technology
Transparency, National Tax Policy, Taxation.
INTRODUCTION
Globalization, Information Communication and Technology (ICT)
have transformed everyday activities of life including the tax system
and administration process; economic transactions have gone beyond
face to face buying and selling to the era of e-commerce, e-business,
and networking. This has made day to day business dealings more
complex though less cumbersome and lessened paperwork (Oyedele,
2016).
There has been over reliance on oil revenue over the last decades which
however has led to the neglect of all other sectors from which the
government can generate finance and revenue for the smooth running
of the country. The present state of the oil sector has shown that relying
on the oil revenue is not sustainable. Therefore, taxation has been seen
as a very useful tool which is a reliable and conceivable means of
revenue generation but there are lots of challenges in its administration
process (Oyedele, 2016).
Nigeria lacks an effective database, no adequate records for majority of
the citizens, thus a wide gap between the number of taxable persons and
the actual tax payers since most of the citizens cannot be traced. In the
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Majority of the states in Nigeria relied heavily on the bailout fund
policies and owe their workers' salaries; a future oriented government
will ensure expansion of taxation revenue so as to break from
restrictive aid and loan conditionality. The focus on taxation is of
paramount importance because ability to collect tax revenue is
germane for state building and long term sustainability (Oyedele,
2016).
Technological advancements offer an economical means of gathering
and analyzing huge volume of tax payers' data efficiently and
effectively. This has drawn the attention of the tax authorities as a
means of improving fiscal resources. In developing countries like
Nigeria, lots of transformations were conducted on the tax system for
the implementation of information technology-based tax system but
despite this there has been little if any logical and realistic evidence on
the impact of those reforms especially in Nigeria. Nigeria is the least in
tax revenue generation compared to other countries like South Africa,
Burundi and Peru over the years despite the implementation of e-tax
system with the aim of broadening the tax net, enhanced tax
compliance and effective administration system (Bird & Zolt, 2008).
This study examines the tax administration system in Nigeria, how
technology can be of great importance in the tax system in a digitalized
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economy such as Nigeria, the challenges hindering integrated tax
administration system and the way forward.
nations, “A study by the European Commission found that the average
effective tax rate for tech businesses was only 9.5%—less than half of
the 23.2% for traditional businesses”. This study is aimed at
determining how companies in the digital economy can be properly
taxed in order to boost tax revenues of nations.
Statement of the problem
The swift development brought about by the digital economy also
raised some new problems for tax authorities. The introduction of the
digital economy has resulted in lower taxed paid by corporate firms
that has adopted the digital economy because the business and financial
function of digital firms are operated manually, thereby allowing them
to grow without having to building permanent establishment in various
countries where they operate. Many of these digitalized firms ensure
that they carry-on businesses in countries where they can enjoy low tax
rates or no tax laws since many of this country have not established law
that deals with taxation of digitalized business as well as tax evasion of
digital firms. Some countries like France and Italy have put on some tax
law on internet access and use (OECD, 2015). Another issue is with
charging sales taxes and value added tax on digital activities, the issue
ascends when trying to determine how much value added tax should be
placed on transactions among individuals especially where the
transaction is among individuals in different location; the actual tax
rate to be applied becomes an issue. Nigeria as a country in a bit to
widen its tax net has decided to incorporate the issue of digital
transaction in its tax legislation; the federal inland revenue service
(FIRS) in Nigeria has argued that the provision of section 9(1) of CITA
should apply to digital transactions since profit from the digital
transaction are earned from Nigeria. (Business day, 2018).
According to Shigeki (2018) evasion of tax in the digital economy is
another major problem and it is depriving nations of the tax revenue
needed to drive development and growth need in by the populace of the
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Objective of the Study
The objective of this study is to examine how tax authorities can
conveniently tax companies operating digitally and the likely
challenges been faced by the tax authorities.
DATA AND METHODOLOGY
This is a qualitative and analytical research, desktop review research
approach was adopted; through review of extant literature related to the
taxation administration system in Nigeria was carried out. Also, the
study explored the influence of technology on the tax administrative
system in Nigeria from the extant literature reviewed and the findings
served as the basis which we drew the conclusion and
recommendations from for policy formulation and implementation on
the effect of technology on tax administration.
Literature Review
The underpinning principles of taxation and the conceptual review of
the variables were discussed in this section.
Underpinning Principles
Tax system in Nigeria is governed by different principles such as equity
and fairness, flexibility, sustainability, certainty, clarity and simplicity
as well as cost benefit analysis. Tax system must be indiscriminative,
objective, reasonable and just. It must be designed in line with tax
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payers capacity to pay; tax laws should be written in a simple, easy
language to understand, it must be unambiguous, all encompassing and
conclusive; effective tax laws should be designed in such a way to
entice the tax payers compliance, the timing, process and economic
cost of its compliance should be at the barest minimum. The cost of
administration should not exceed its worth, tax laws must be feasible,
practical and viable as a key source of promoting economic growth and
development; tax laws should be easily adapted to change in
circumstances and the environmental features (Efunboade, 2014).
political implications (Sushil K Sharma, 2006). In a digital
environment, the Internet's growth and e-commerce begins to create
fundamental change to government, societies, and economies with
social, economic and political implications (McGarvey, 2001).
Conceptual Review
Digital economy
The digital economy is also known as the new economy. It deals with
merging communications, information and computing which infers
that there is a drift from the traditional economy to an economy
categorized by information, services and intangibles without any need
for physical establishment. The fundamentals of the digital economy
include:
i.
Digitalization and intensive use of information and
communication technologies (ICT)
ii. Codification of knowledge
iii. Transformation of information into commodities
iv. New ways of organizing work and production.
Thus, a widely distributed access to the networks, the intranet and
Internet, and of skills to live and work in the Information Society, is the
basis for the digital economy. In a digital environment, the Internet's
growth and e-commerce begins to create fundamental change to
government, societies, and economies with social, economic and
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Tax System in Nigeria
Nigeria tax system constitutes and consists of tax policy, the tax laws
and the tax administration for the nation's economic goal attainment.
The main goal of the tax system in Nigeria is to promote national
prosperity and self reliant economy; securing maximum welfare,
justice and equity of its citizens via improved policy development and
implementation as well as judicious use of available natural resources
(National Tax Policy, 2016). There has been several restructuring in the
Nigeria tax system over the years which had been tailored towards
enhanced tax collection and administration process at the very least
cost. The recent development was the introduction of Tax
Identification Number (TIN) to all tax payers, e-payment and
automated tax system which enables smooth payment and direct
monitoring by the tax payers thereby reducing the occurrence of tax
hooligans.
Despite the reformations, Nigeria tax system has been unable to
achieve its objectives due to the following challenges among others:
the need to raise internally generated revenue (IGR) which has led to
the arbitrary exercise of taxing powers, unclear divisible
administrative powers and discrepancies among the tiers of
government, lack of awareness and information gaps between the
government and the tax payers leading to low level of compliance,
inadequate human capital and infrastructural facilities resulting to
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outsourcing of tax administration to consultants creating
complications in the tax system, use of aggressive and unorthodox
methods of tax collection, failure by tax authorities to honour refund
obligations to tax payers, infrequent reformations of tax laws to depict
recent economic trends leading to obsolete legislations and lack of
strict adherence to tax policy direction and procedural guidelines for
the operation of the various tax authorities (Abiola et al, 2012).
Tax laws
Tax Policy
Tax policy is the fundamental guidelines for the orderly development
of the Nigeria tax system. The policy is to guide the operation and
review of the tax system, provide the basis for future tax legislation and
administration, clarify the duties of the stakeholders in the tax system,
serve as a reference point and benchmark for the stakeholders'
accountability. Tax policy is a vital document needed for the smooth
running of a tax system.
For effective implementation of the tax policy, the interest of all
stakeholders involved should be considered in its formation else the
key objective of establishing the policy will be in futility. Brautigam et
al (2008), opined that “the best practice of tax transformation takes into
consideration the theories of taxation, empirical facts, political and
administrative experience, deep understanding of immediate
environmental knowledge, a rigorous evaluation of the recent
macroeconomics settings and global phenomenon to generate realistic
propositions adequately attractive to be executed and strong enough to
withstand the reasonable timing trends and still yield beneficial
results”.
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Tax laws are compilations of general tenets and directives in respect to
tax revenue as well as diverse forms of Nigeria taxes. Tax laws are
propounded by the legislatures and are consistently subjected to review
over time. Although in reality, the periods of review has been
inconsistent and as a result deters the fulfillment of the desired
objectives of the laws. Tax laws are subjected to amendment; according
to recent information in the Nigeria tax laws due to recent three years
projections in line with policy review in order to cater for economic
strength of the country, the following are some of the existing tax laws:
i.
The personal Income Tax (Amendment) Act 2011,
ii. Companies Income Tax Act- Cap C 21, Vol. 3 LFN 2004,
iii. Stamp Duties Act- Cap S8, Vol. 14 LFN 2004,
iv. Value Added Tax Act- Cap V1, Vol. 15 LFN 2004,
v. Petroleum Profit Tax Act- Cap P13, Vol. 13 LFN 2004,
vi. Capital Gains Tax Act- Cap C1, Vol. 2 LFN 2004,
vii. Customs Duties- Cap 45, Vol. 4 LFN 2004,
viii. Excised Duties- Cap 45, Vol. 4 LFN 2004,
Tax Administration
There are three key functions of tax administration; assessment,
compliance and enforcement of penalties as provided in the country's
tax tenets and policies (Bird, 2004).
The effective tax administration ensures tax payers identification,
assessment of the appropriate tax deductibles, collections and
remittances of tax generated revenues; it is a key tool of collecting tax
revenue across the globe both in developed and emerging nations
(Armah-Attoh, 2013).
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Tax administration has been subjected to various reviews due to global
increase in the number of taxable persons and the expansion of various
sectors of the economy. However, taxation mechanism in emerging
economies remains significantly different from the developed
countries. The assertion tends to be expected because most economic
activities in emerging economy occur in the informal sector and thus
bypasses taxation tenets. In addition, the tax administration capacities
for developing and transitional governments are usually feeble as a
result of poor infrastructural facilities usually in terms of technology
(Zakariya'u et al, 2015).
The study of Abiola and Asiweh (2012) on tax administration with a
focus on crucial role of reducing tax evasion revealed that effective
machinery on enforcement is very significant in increasing tax
revenue. In an attempt to address the challenges of tax administration
on collecting government revenue in developing countries, the goal of
tax revenue maximization should be in line with effective tax
administration that can assist in curbing corruption, tax evasion and all
other constraints of the system.
Slemrod (2016) opined that redesigning taxing institutions and policies
including what he calls “corruption resistant tax structures” should be a
central concern of the fiscal reform for developing countries. However,
while the informal economies of developing countries are composed
by low capital intensities, small scale of operation, traditional
technologies and often low profit margin; unsanctioned production in
transitional economies is more often done in big enterprises. The fiscal
reform should help to transform the informal sector into the formal
sector in order to allow the tax tenets and directives to work through
and enforce voluntary tax compliance.
Flavianus (2016) proposed that the governments of developing
countries should formulate policies that will enhance the entering and
capturing of the informal sector into the formal sector in an effort to
improve tax administration and maximize revenue generated through
taxation. Governments in emerging economy should work out
pragmatic internally degree of corruption and general administrative
inefficiencies in tax revenue collection.
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Challenges Facing Tax Administration
Prior studies on the enforcement efficiency of the tax identified the
poor use of information collected by the central intelligence branch,
ineffectiveness of surveys of business premises, absence of an
adequate system of tax payer identification numbers, absence of an
adequate system of third party information collection and deficiencies
in the record keeping system were key problems facing tax
administration system according to Das-Gupta et al, (2014).
Tax Payment Justification: Paying taxes is not particularly easy
anywhere in the world for someone who has expended time, energy and
other resources to earn the income. The major reason for this is that
there is no direct benefit for tax payment. How well you enjoy social
services and public infrastructure is not a function of how much tax you
pay hence, people will avoid paying if they can.
Database: According to the JTB, there are 10million people registered
for personal income tax purposes in all the states of the federation
including the FCT. Of this, 4.6million or 46% are registered with the
Lagos State Internal Revenue Service (LIRS) showing an average of
153,000 or 1.5% per state for others. There are fragmented databases of
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tax payers and weak structure for exchange of information by and with
tax authorities resulting in revenue leakage.
more difficult especially in an open economy while in the hands of tax
authorities, it may enable a more robust response to such challenges.
Ultimately the pace of change and the success of any new program
depend on human resources on the training and skills of the people who
are expected to use and operate them.
Utilization of Tax Revenue by the Government: An analysis of the
federal government budget for the past few years shows that revenue
has been essentially spent on debt financing and recurrent expenditure
with significant amount of which goes to salaries, travels, tours and
other overheads.
Although the capital expenditure of the 2016 budget is said to be about
30% of the budget further analysis reveals that this is not coming from
tax revenue given that the planned borrowing in the budget of
2.2trillion exceeds capital expenditure of N1.6trillion.
Over one –third of the federal government revenue will go into debt
servicing and financing in 2016 notwithstanding that Nigeria's debt to
GDP ratio is low and even also in the proposed 2017 budget.
Human and Infrastructural Capacity: Many who examine tax
administration in developing countries conclude that there is simply
insufficient human capital for smooth functioning of tax
administration especially in emerging economy like Nigeria.
Technology can and has substantially extended the capacity of tax
administration officials by permitting them to assemble and evaluate
the mass of information already available but not effectively used, but
technology cannot solely do the job of good tax administration; it
requires competent and skilled human forces to implement the
technological innovations.
Resistance to Change: As with most new technologies, IT is a double
edged sword. In the hands of tax payers, it may make tax administration
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Political Will: What really needs to be done to improve tax
administration in developing countries is well known and can
sometimes be implemented within a surprisingly short time span as
have been demonstrated in Brazil and Chile (Toro, 2005). But
technology may enable countries to leap over infrastructure gaps and
even overcome human capital deficiencies but it cannot circumvent the
critical political obstacles that plague tax administration in many
developing countries.
Other challenges as highlighted by the NTP of 1st February, 2017
include the following:
1. Lack of robust framework for the taxation of the informal sector
and high network of individuals thus limiting the revenue base
and creating inequity,
2.
Poor accountability for tax revenue,
3.
Lack of clarity on taxation powers of each level of government
and encroachment on the powers of one level of government by
another,
4.
Use of aggressive and unorthodox methods for tax collections,
5.
The non regular review of tax legislation, which has led to
obsolete laws that do not reflect current economic realities,
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6.
Lack of strict adherence to tax policy direction and procedural
guidelines for the operation of the various tax authorities and
7.
Insufficient information available to tax payers in tax compliance
requirements thus creating uncertainty and non-compliance.
Availability: It is crucial that the system be available always.
Downtime should be minimized otherwise tax payers will consider it
unreliable and therefore prefer the manual process. This is particularly
important during filing and payment deadlines. Given the last minute
compliance tendency of most tax payers the authorities must envisage
and cater for the high traffic in and around key tax filing and payment
deadlines such as 30th June for companies with 31st December end
date taxable under the Companies Income Tax Act.
Elements of a Good technology Driven Tax System
According to Oyedele (2016), a good and effective technology tax
driven system should have the following:
Smooth Transition: There should be concerted effort to ensuring that
tax payers are sensitized and educated to become fully aware of the esystem. Various media should be used to ensure wider reach including
print, electronic and social media. Short demo videos should be
available on the portal to serve as a guide to users as been done on the
Voluntary Asset Income Declaration Scheme (VAIDS) now. The
implementation should be in phases with proper testing before full roll
out. This also requires that existing tax payers' manual information
should be captured into the electronic system and validated by tax
payers' as a starting point.
Simplicity and Inclusiveness: The system should be easy to use with
minimum education. This will also make the system inclusive. Tax
payers should not be required to provide the same information twice
where it is necessary for data validation. Also, tax payers should not be
asked to provide redundant which serves no useful purpose. For
example, the tax calculator on the FIRS website requires information
about dividend which has suffered withholding tax (WHT). Also, it is
of little or no use to require TIN for non residents who have no filing
obligations such as recipients of dividend.
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Accessibility: The system should be able to efficiently collect,
electronically store, and easily retrieve tax payer information. Every
registered tax payer must be able to view their tax records online which
should contain all transactions by and on behalf of such tax payer
including any WHT deducted on the tax payers' income by third
parties. With this it should not be necessary to apply for WHT and the
lengthy verification process should become a thing of the past.
Accessibility also requires that the system should be of general
application and be compatible with other systems.
Affordability: This has to do with the cost benefit analysis both for the
tax authority and the tax payers in short, medium and long term. The
initial cost of any major system will likely be significant but the benefit
should be enduring. This will be the case if the system is well
maintained and constantly updated not abandoned post commissioning
as is the case with many systems in Nigeria which are merely symbolic
rather than functional.
Tax Payers Support: since there is no perfect system anywhere, there
should be a helpline and other forms of real time support for tax payers
who may encounter problems in using the system. Also, there should be
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detailed help manual on how to complete tax forms. Where necessary,
there should be free downloadable software on the website for
preparing tax returns.
For example, tax payable should not be negative or greater than turn
over figure.
Compliance Focus: The system should uniquely identify every tax
payer and should not allocate more than one TIN to any tax payer unlike
under the current tax identification system where many tax payers end
up with more than one number generated for them at different times.
The system should be used for tax payer profiling, provide reliable
online tax calculator, link with other agencies such as the Nigeria
Customs Service, Corporate Affairs Commission. This will make the
system truly integrated and should facilitate a risk based audit
approach.
Flexibility and Transparent Reporting: The system should make it
possible to transfer excesses tax payments or refund due in one tax head
to another. For example, excess WHT should be available to defray
Value Added Tax (VAT) liability be paid promptly within 90days as
provided by the law. Thus is important to win tax payer confidence in
the event that a tax payer is debited twice due to a system error. It should
also be possible to allow joint filing and payment of several taxes by a
tax payer. The system once implemented should be constantly
reviewed to address emerging problems and to evolve with the
changing economic landscape and increased complexity of today's
business environment.
Control and Monitoring: Relevant information about users should be
collected to evaluate usage and address challenges faced. Also to
provide data validation mechanism as is the case with smart systems.
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Security and Back-up Plan: The system must be secured to guarantee
tax payer confidentiality and minimize fraud especially with respect to
online payment. There should be a robust disaster recovery plan in case
of an attack. Online information exchange between tax payers and tax
officers should be done via secured protocols. For example, tax officers
should desist from using yahoo emails for official business.
Information Technology and Tax Administration in Nigeria
ICT is used to enhance performance in revenue administrations by
reducing human error and processing times, providing readily
accessible data for tax officers, promoting voluntary compliance
thereby minimizing tax evasion and facilitating better decision making
by tax authorities. The tax administration in Nigeria has been
automated which also include electronic processes and tailored made
projects to address specified areas of the tax system such as:
TIN (Taxpayer Identification Number): TIN project is an electronic
system of tax identification, involving the assignment of a computer
generated unique identifier called “TIN Number” to every taxable
person in Nigeria. This project helps in the development of National
Tax Database linking all revenue authorities and major stakeholders in
the country. The TIN registration captures the properties, assets, bio
data and biometric details of the tax payers to ensure highest accuracy
of identity uniqueness. It is now compulsory for any individual,
corporate entity, registered organizations and group of people that want
to carry out vital operations such as opening of Bank Account and ward
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of contract to have TIN which will reduce to the barest minimum the
incidence of tax evasion.
government should not be introduced by the same or another level of
government. The Federal, State and Local governments shall ensure
collaborations in harmonizing and eliminating multiple taxation.
Project FACT (Factual, Accurate, Complete and Timely): This is
an integrated electronic system of tax registrations, tax payment and
accounting.
RECOMMENDATIONS
ITAS (Integrated Tax Administration System): This system
includes: Business process Reengineering, Systems Development,
Change Management and automation of Finance and Accounts
Functions such as Tax clearance verification, Tax refund application
software and contact management centre (Ifueko, 2011).
The following recommendations are suggested for policy
implementation:
1. Developing countries need political, administrative and judicial
safeguards to protect the privacy of individuals and to protect
against potential misuse of information gathered for tax or other
purposes,
CONCLUSION
2.
Effective tax administration is all encompassing; improvements in
technology do not guarantee drastic improvements in tax policy or tax
administration in emerging economy. Over the last 40 years there have
been significant technological advances but developing countries still
have relatively low levels of tax collections as a percent of GDP and
relatively high levels of tax non compliance.
In order to improve tax revenue, there should be a broad tax base
strategy focusing on all key areas of the tax system with
measurable outcomes. Focus should be on simplification of the
tax system and ease of implementation with priority given to
quick wins and low hanging fruits while more challenging aspects
should be deferred until positive results are being recorded,
3.
Capacity building through both soft and technical training of
personal is germane. No leading tax authority in the world relies
on the use of consultants for sustainable capacity building so the
use of consultants should only be a stop gap measure if at all. Tax
authorities should undertake significant enlightenment and public
awareness and take advantage of technology and innovation
including social media,
4.
Transparency is critical; government should make full
information about revenue and expenses with detailed breakdown
available to Nigerians and
The challenges to designing and implementing effective tax regimes in
these countries cannot be met solely by better tools for tax
administrators without substantial changes in the institutional and
political environment.
In creating competitive edge and harmonization, taxes should be few in
number, broad based and high revenue yielding. The administration of
the taxes should also be simplified for ease of enforcement and
compliance. Taxes similar to those being collected by a level of
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5.
REFRENCES
The implementation of the 2017 NTP by the government through
management by objective practices will go a long way in
readdressing the challenges facing tax administration system in
Nigeria.
Abiola, J., & Asiweh, M. (2012). Impact of tax administration on
government revenue in a developing economy – A case study of
Nigeria. International Journal of Business and Social Science, 3
(8), 99 – 113.
Armah – Attoh, D., & Mohammed, A. (2013). “Tax Administration in
Ghana: perceived Institutional Challenges”. Afrobarometer
Briefing Paper No. 124.
Bird, R. M., & Zolt, E. M. (2008). Technology and Taxation in
Developing Countries: From Hand to Mouse. National Tax
Journal, 4 (2), 791 – 821.
Brautigam, D., Fjeldstad, O., & Moore, M. (2008). Taxation and Statebuilding in Developing Countries: Capacity and Consent, New
York: Cambridge University Press, 2008.
Das – Gupta, A., Mookerjhee, D., & Panta, D. P. (2014). Income Tax
Enforcement in India: A preliminary Analysis, New Delhi:
National Institute of Public Finance and Policy.
Efunboade, A. O. (2014). Impact of ICT on Tax Administration in
Nigeria. Computer Engineering and Intellignet Systems 5 (8),
26 – 30.
Falvianus, B. N. (2016). Tax Administration in Tanzania: An
Assessment of Factors Affecting Tax Morale and Voluntary Tax
Compliance towards Effective Tax Administration.
International Journal of Finance and Accounting, 5 (2), 90 – 97.
Ifueko, O. O. (2011). “Emerging Issues in Tax Administration: The
th
Way Forward” Being a lecture delivered at the 4 National
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Conference of the Dept. of Finance, Faculty of Business
Administration, University of Lagos on July 12th, 2011.
National Tax Policy (2016). Federal Ministry of Finance.
Oyedele, T. (2016). Guess how many Nigerians pay tax and how our
government spends the money. Tax watch, June, 2016.
Oyedele, T. (2016). The making of a good e-tax system. Tax Alert
September, 2013.
Shigeki, M. (2018, june14). Strategies For Taxing The Digital
Economy . pp. 1-13.
Slemrod, J. (2006). Taxation and Big Brother: Information,
personalization and Privacy in 21st – Century Tax Policy. Fiscal
Studies 27 (1), 1 – 15.
CHAPTER TWENTY-SEVEN
SYSTEMIC APPROACH TO SUSTAINING THE
NIGERIAN TAX SYSTEM
AKINTOYE Ishola Rufus
Professor of Accounting and Finance
Accounting Department
Babcock University, Ilishan-Remo, Nigeria
INTRODUCTION
As a machine runs on fuel, so the government runs on Revenue and one
of such is from taxation. Taxation is a global phenomenon, which
provides a predictable and stable flow of revenue for the government to
finance its activities. The fiscal policy is employed by governments to
foster wealth equality, encourage investments, and promote economic
growth and development. In developing and emerging economies,
taxation is used to foster industrial policies, promote economic
activities and facilities regional developments, which is achieved
through tax incentives for categories of taxpayers and tax treaties.
Several literatures have addressed the benefits and challenges plaguing
the tax systems especially in developing economies. Although taxes
are by nature distortive , some school of thought asserted that tax policy
should source revenues without negative effect on the firms' decision.
For instance, taxes chargeable on profit reduce returns on capital and
may negatively affect investment decision (Johansson et. al, 2008).
Also, upward review of Value Added Taxes might reduce the spending
behavior of consumers and in turn encourage saving behavior.
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Therefore, government must strike the balance between the effect of
tax policy on the investments and citizens. This can be achieved by
minimizing tax rates at the lowest level given revenue needs and
possibly impose a single tax rate (OECD, 2010 & World Bank, 2009).
Nigeria government is geared towards generating taxes indirectly.
However, many Nigeria tax policies have not necessarily
commensurate the desired economic development. Therefore, this
study is prone to review the effectiveness in the Nigeria Tripartite Tax
System.
Most nations, for instance, seek for capital externally because internal
resources are insufficient to meet the capital requirement for
sustainable development. Thus, governments are forced to turn
outward for capital supply from foreign investors. Virtually, all
governments are keen to subscribe to Foreign Direct Investment
among others (OECD, 2015). The resultant effect involves provision of
new employment opportunities, technologies advancement and
generally increase economic growth and development. Apart from
internally generated revenue, government also generates increased
revenue through taxes paid by foreign owned companies. Meanwhile,
governments continue to strike the balance by offering a competitive
tax environment for FDI, with the necessity to allocate appropriate
share of domestic tax collected from multinationals. Although tax is an
important factors to consider when making investment decision, but it
is not the main determinant . Countries attract foreign-owned
investors through availability of potential market and profit
opportunities; a favorable legal and regulatory framework; economic
and political stability; skilled and responsive labour markets; and
availability of infrastructures.
Diverse countries of the world have used taxation as a tool for
sustainable economic development. Nigeria tax policy tends to achieve
specific objectives, which include revenue generations and upholding
economic growth. The recent National Tax Policy introduced by
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Before the oil boom era, Nigeria's revenue has been largely derived
from primary products. Between 1960 and the early 1970s, agricultural
products dominated the country's revenues while rendering other
sources insignificant. However, since the oil boom of 1973-4, oil has
dominated the nation's revenue by accounting for at least 70% of the
revenue. Thus, indicating that traditional tax revenue has never
assumed a strong role in the country's management of fiscal policy
(Odusola, 2006). Among the instruments used by government to
generate revenue is taxes. Nigeria budget is financed largely by oil and
non-oil revenue tax. Apart from the taxes paid by individuals and legal
entities, the government revenues also include revenue from fees,
contribution, duties, import and export surcharges, levies, revenues
from sales of government securities. The laws of each country regulate
payment of tax in any country. The Nigeria Government also has
legislative power to impose taxes on its residents, like others in
different parts of the world.
The overdependence on oil revenue has led to unsustainable economic
development due to price volatility in oil market and less demand for
Nigeria crude oil, which plunge the nation into budget deficit. Nigeria
economy recently experienced an acute reduction in revenue due to the
decline in the international market price of crude oil and this has
resulted into economic instability since 2014. The country's annual
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gross domestic product (GDP) growth rate dropped from 6.22% in
2014 to 2.79% in 2015, before plunging into recession in 2016 ending
the year at about negative 2 percent growth (KMPG, 2017). Thus, there
is urgent need to diversify the economy to safeguard against the
volatility of crude oil prices. The economy will be only sustainable
when proactive actions are made towards diverting the revenue base
for Nigeria. It is necessary to revisit the primary source of revenues,
which is taxation to optimize the benefits.
government to provide goods and services needed by the people, tax
policies can and do stimulate economic growth and job creation
through its impact on investment and capital formation in the economy
(Ogbonna, 2009). In this respect, reform of the tax system that ensures
effectiveness, equity, and efficiency are necessary conditions for a
healthy public finance.
OVERVIEW OF NIGERIA TAX REFORMS
Historically, several systems of taxation in form of compulsory
services, contribution of goods, money and labour was controlled by
the Obas, Emirs, Ezes, Attahs, Ohinoyis, Amanyanabos and other
traditional law enforcement agents for development in the society and
to sustain the Monarch. The traditional rules imposed taxes in various
forms subject to specific jurisdiction. For instance, “Zakkat” was
levied on Moslems for educational, charitable and religious purposes;
“Kudin-kasa” equivalent to modern land ground rent was form of
agricultural tax on the utilization of land. “Owo-Ori” was payable by
individuals in cash or kind in return for services. “Osusu ImachiNkwu” are payable by individuals who harvest palm fruit and expected
to contribute certain sums or proportion of the palm fruit and palm
kernel oil.
The modern Nigeria tax system is a tripartite structure encompassing
Tax Policy, Tax Legislation and Tax Administration. Tax policy forms
the basis for tax laws while tax administration is the implementation of
the tax laws. Taxation is undoubtedly a veritable instrument for
national development. Apart from being a major source of revenue for
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Diverse tax reforms have occurred in Nigeria tax system. Nigeria
government has implemented different tax laws to achieve
macroeconomic objectives. Such tax laws include the introduction of
Personal Income Tax between 1904 and 1926 with aim to generate
revenue directly from the citizens; The grant of autonomy to the
Nigerian Inland Revenue emerged in 1945; The Raisman Fiscal
Commission of 1957; Formation of the Inland Revenue Board in 1958;
The promulgation of the Petroleum Profit Tax Ordinance No. 15 of
1959;The promulgation of Income Tax Management Act 1961;
Establishment of the Lagos State Inland Revenue Department; The
promulgation of the Companies Income Tax Act (CITA) 1979;
Establishment of the Federal Board of Inland Revenue under CITA
1979; Establishment of the Federal Inland Revenue Service between
1991 and 1992 and Tax policy and administration reforms amendment
2001 and 2004.
In 2003, the Nigeria government institutionalized Study Group on the
Nigerian Tax System constituting individuals from business,
academia, and other stakeholders. The group is saddled with the
responsibility to examine and recommend the appropriate tax reform.
The reasons for the reform were to restructure the existing tax system
and tackled the problems plaguing the tax system. As a result of the
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reform, nine (9) bills on tax reforms were approved by the Federal
Executive Council for the consideration of the National Assembly and
subsequently passed as Act. The Acts, are as enumerated as follows:
Federal Inland Revenue Service Act 2004; Companies Income Tax Act
2004; Petroleum Profit Tax Act 2004; Personal Income Tax Act 2004;
Value Added Tax Act 2004; Education Tax Act 2004; Customs, Excise
Tariffs, (Consolidation) Act 2004; National Sugar Development Act
2004 and National Automotive Council Act 2004.
responsibility to examine and update the 2012 National Tax Policy. The
updated policy outlines key provisions in line with Chapter 2 of Nigeria
constitution, which include honest declaration of income and payment;
fiscal responsibility and accountability; promoting a planned and
accountability; promoting a planned and balanced economic
development; securing justice and equity. The policy contains
measures designed to simplify complexity of tax laws and multiplicity
of Revenue Agencies, reduce income tax rates and compliance burden
for Micro, Small and Medium Enterprises, improve Nigeria's ranking
on the global ease of paying taxes index, encourage diversification,
expand the country's tax base and improve Tax to GDP ratio.
To this effect, major stakeholders in Nigerian tax system submitted a
memorandum on the proposed 2004 amendment. The objectives of the
memorandum include: to strengthen the powers of the Accountant
General of the Federation to monitor the revenue being generated by
ministries, extra-ministerial departments and parastatals; to enforce
remittance of the revenues collected to the consolidated revenue fund
or federation account; to strengthen the oversight functions of the
National Assembly in monitoring the revenue generated by ministries,
and increase the penalty for under declaration of revenue generated
from three to five years.
Recent Nigeria tax reform in 2012 has also led to introduction of
Taxpayer's Identification Number (TIN), which facilitates tracking of
tax positions of registered taxpayers. The introduction of electronic
payment system tends to enhance reliable payment procedure and
reduce incidence of tax touts. The establishment of Special Purpose
Tax Officers with collaboration with enforcement agencies tends to
ensure strict compliance in payment of taxes. Thus, the tax authority is
empowered to solely assess, collect and record tax. In 2016, a
committee on Nigeria Tax Policy Review was inaugurated with the
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TAXATION FOR SUSTAINABILITY: GLOBAL
PERSPECTIVE
General perspective of sustainability always refers to green
environment and climate by reducing carbon emissions and avoidance
of toxic chemicals. Economic sustainability concept deals with
meeting today's needs without depleting the future generations' needs.
Thus, the concept is beyond depletion of natural resources, also it
encompasses secured public goods and sustainable economic
development. Therefore, Governments need to implement sustainable
economic policy, which fosters favorable environment for small,
medium and large-scale enterprises. All economic policies must be
built around sustainability concept in which tax policy is not an
exemption.
Globally, international tax issues have drawn the attentions of
investors, other stakeholders and governments. This has alarmed
mandates on tax cooperation for development with the underlining
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goals to enhance the ability of countries to generate more revenues,
improve the tax systems for taxpayers and enhance accountability to
citizens over policy and public spending. National development fosters
prosperous nations where fair treatment from revenue authorities and
decent services are provided by the government held responsible for
tax generations and spending.
Collaboration on Tax” to engender global cooperation and dialogue on
tax matters. The Addis Tax Initiative involves 39 countries with the
corporate goals to collectively double respective Technical
Corporation in the area of domestic revenue mobilization by 2020,
upgrade domestic revenue mobilization and ensure Policy Coherence
for Development.
Since 20th century, cross-border trading has influenced international
tax corporation through tax treaties and tax incentives, which tend to
reduce double taxation challenges for individuals and foreign
investors. Across the world, there are diverse tax treaties among
countries embarked by the international laws. Interestingly, since
Shoup Mission to post-World War II, countries have supported each
other to develop their domestic tax systems . Donors from global
organization relatively depend on effective tax administration and tax
policy in different jurisdictions (International Monetary Fund, 2011).
The global tax support contributes to enabling environment for tax
reform in form of policy dialogue, civil society support, technical
assistance on tax policy, legislation and developing human resources
through training and mentoring (IMF/OECD/UN/WBG, 2016).
According to a study by IMF, it revealed that global losses is around
$650 billion a year due to tax avoidance scheme adopted by
multinational companies to transfer profits to tax havens. The study
further showed a greater percentage of the losses accounting for $200
billion for developing economies gross national product in which
Africa alone lose more than $50 billion per year through such illicit
activities. The adverse effect of the lack of fund will undermine stable
economic growth and investment in public goods. This would lead to
increase inequality, as the citizens will be taxed indirectly on goods and
services rather than income or profit. Although, the international
organizations are taken step to curb tax evasion by multinational
companies to strengthen tax policy and tax administration within
developing country governments, it can create unfair tax system
because of little contributions from developing countries.
Stakeholders across the global continue to demand for tax justice and
transparency. Recently, G20 and OECD sought to curb the problem of
transfer of wealth to tax haven or deliberate tax avoidance and evasions
and transfer pricing. In addition, diverse developing and emerging
economies have embraced the “Inclusive Framework” to implement
the Base Erosion and Profit Shifting (BEPS) initiated by G20 and
OECD. Introspectively, global organizations such as OCED, IMF,
World Bank and United Nations have invented a “Platform for
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IS NIGERIA TAX SYSTEM SUSTAINABLE?
Tax being a mandatory financial charge or levy imposed directly or
indirectly on taxpayers by the government to generate revenue.
Federal, state and local government enforces tax with each tier having
its own responsibility explicitly listed in the Taxes and levies Decree,
1988. Apart from revenue generation mechanism, it is also a channel to
redistribute income among the populace. A well-structured tax system
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TAX MANAGEMENT AND COMPLIANCE IN NIGERIA
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offers government opportunity to generate needed revenue to meet its
expenditures. Tax is a veritable and sustainable source of revenue for
government and a tool for fiscal policy and macro-economic
management. It is a potential tool for economic and social reform as it
pervades all aspect of the economy, individual, companies, citizens and
foreigners.
largest economy in Africa, Nigeria has one of the lowest tax revenue to
GDP ratios in the world especially if non-oil tax revenue only is
considered. In 2017, Nigeria reported 6% Tax-to GDP ratio, which
undermines the sustainable economic and requires improvement.
Although the ratio can be improved, but low tax administrative
capacity, paucity of data and emergence of informal sector tend to
delay the significant impact in the medium term.
Economic sustainability means the ability to meet today's economic
needs of a jurisdiction without depleting the future generations' needs
of same jurisdiction. There are two key aspects to examine whether a
tax system is sustainable or not: Is the tax revenue itself sustainable? In
addition, does the tax system as a whole facilitate or hinder
sustainability in society? An effective and efficient tax system and
administration would be necessary if Nigeria is to mobilize sufficient
resources to meet her sustainable development.
Prior 2014, Nigeria government had always ignored tax revenue as a
significant fiscal policy to promote economic development due to
overdependence to revenue from crude oil. Nigeria slipped into
recession as result of inappropriate tax policies implementation, fiscal
and revenue linkages and unguided spending. Stakeholders are
advocating for diversification of the economy. This has to be beyond
contribution from different sectors to Gross Domestic Product (GDP)
but also revenue accruing to government from the various sectors.
Tax-to-GDP ratio signifies tax sustainability of a country. Countries
with some of the lowest revenue-to-GDP ratios are also those where the
vast majority of the world's extremely poverty rate lives like
Bangladesh, China, India, and Nigeria all have tax-to-GDP ratios
below 15 percent (Junquera-Varela et al, 2017). Despite being the
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The recent recession experienced by the country prompted the need for
key tax reforms initiatives to improve the revenue collection. The
recent initiative adopted by government to increase revenue collection
across diverse tax categories include the Tax Amnesty Program, which
is a scheme to voluntarily declare personal assets and income and the
deployment of electronic devices to enhance tax administration in
Nigeria. Unfortunately, revenue generation via taxation would be
challenging especially in Nigeria where historically a very low concern
about tax exists. In addition, government is not reviewing tax
disincentives, which hinder growth, prevent productive diversification
of the economy and make it difficult to earn sustainable tax revenue
outside oil (Oyedele, 2015). Therefore, it is necessary for the Nigeria
government to address the existing tax disincentive, which includes
excess dividend tax, minimum tax, commencement rule, multiple
taxes and revenue agencies, and non-payment of tax funds.
Excess dividend tax: Based on the tax authority's interpretation of the
relevant provisions of the law, tax is imposed at 30% on the dividend
distribution of a company if it is more than the current year taxable
profit notwithstanding that the profit being distributed may have
already been taxed or legally exempted from tax. For instance, a
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company that delays the distribution of profit to its shareholders for
reinvestment in one period will be subject to the tax when subsequently
paid out as dividend. In addition, a company that distributes dividends
from realised capital gains after paying the applicable capital gains tax
will be subject to the 30% tax on the dividends paid notwithstanding
that the applicable tax on the gain being distributed had already been
paid. More importantly, no discerning investor would establish a
holding company in Nigeria amidst several choices. A holding
company that receives dividends from a subsidiary, associate and other
equity investments will suffer 30% tax when it further distributes the
dividends to its shareholders. This is absurd and contrary to another
provision of the tax law that protects dividend received by a company
from any further tax (Oyedele, 2015).
companies during their start-up phase. Companies should be made to
pay tax only on their actual profits on a preceding year basis right from
start to finish in the event of cessation of business (Oyedele, 2015).
Minimum Tax: The Companies Income Tax Act (CITA) imposes
minimum tax on companies where they have no taxable profits
resulting in lower than minimum tax. This minimum tax also applies, in
different forms, to some specific sectors such as insurance companies.
This effectively means that such companies would have to pay taxes
out of their capital. It is like forcing a man who is suffering from
excessive loss of blood to donate some blood. This increases the risk of
failure for such companies. If there are issues concerning the
genuineness of losses being declared by some companies, it should be
addressed as a separate issue through tax audit and transfer pricing
rather than paint all companies with the same brush (Oyedele, 2015).
Commencement rule: CITA sets out some rules for the taxation of a
company during commencement of business. These rules are
unnecessarily complicated and result in double taxation of such
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Multiple taxes and multiple revenue agencies: This is about
multiplicity of taxes but also specify taxes and statutory contributions.
Tax policies also establish diverse agencies for tax administration. It
also means multiple audits from different agencies that lack
coordination and collaboration thereby increasing the cost of doing
business. On the part of government, cost of revenue collection is
unnecessarily high given that tax revenue collection structures are
duplicated rather than centralised and strengthened (Oyedele, 2015).
Non-payment of tax refunds: Although there are specific provisions in
the various tax laws for tax refunds to be paid to taxpayers who have
genuine claims, in practice this is rarely the case. Certain provisions of
the law such as deduction of VAT at source by government agencies
and high withholding tax rates in some cases make the problem of tax
refund a permanent feature of the tax system. Tax authorities should be
more willing to refund genuine overpayment of taxes and government
should set aside funds out of tax collection for refunds both at the
federal and state levels (Oyedele 2015).
CHALLENGES OF SUSTAINABLE TAXATION
Multiplicity of taxes: Multiplicity of taxes has to do with levying of
tax on the same income by two or more jurisdiction. The situation
results to double taxation on earnings. The term “multiplicity of taxes”
is not a recognized word in the arena of taxation as such and “thus, the
term seems to be peculiar to Nigeria fiscal lexicography”. Individual
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taxpayers as well as corporate bodies are all complaining about the
triple effects related with the repetition.
Minimum Tax: The imposition of minimum tax on companies when
there is no taxable profit means increasing the loss of the company for
that year. That is, companies have no option than to pay tax from their
capital hence increasing the risk of a possible failure of companies
when recording low or no profitability. Minimum tax is seen as
coercing a man to donate blood, though the man is suffering from
excessive blood loss.
Bad administration: One of the main problems of tax in Nigeria is tax
administration and it leads to lack of transparency in the management
of taxpayers' money. Tax evasion characterizes the major problems of
tax administration in developing countries including Nigeria.
Non Availability of Database: Unavailability of database of all
individuals that are taxable, the tools used for assessing and collecting
of taxes are inadequate and the absence of firm methods in place are
issues that should be addressed for an effective tax system. There are no
efforts to collate or analyse the limited data available talk less of storing
the data, making it possible to be assessed or retrieved. This suggests
that the Nigerian tax system is inefficient and ineffective in its entirety.
Tax touting: Tax touting in the local governments is a common
practice especially at the level where individuals that are
unprofessional and not trained are saddled with the responsibility for
tax administration. In Obio/Akpor and Port Harcourt City local
governments in Nigeria, it is a common practice, where touts are
involved and used in collecting various taxes and levies.
Complex nature of the Nigerian tax laws: The Nigerian tax laws are
so complex that sometimes it is very difficult for even the educated
individuals in the society to understand. Due to the complex nature of
Nigeria's tax laws, it is not easy for ordinary taxpayers to understand
and sometimes even the learned officials find it difficult because of the
problematic nature of the tax laws.
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Commencement, Change of accounting date and cessation: The
Company Income tax Act (CITA) has set out some rules for levying of
taxes on a company when it commences business, changes her
accounting date and during cessation. On commencement, the first
three years of assessment are considered; the year the change occurred
and two years following the year of change of accounting date are
considered in change of accounting date while in cessation the last two
years of assessment are considered. These rules are not necessary and
complicated. The result of these rules is double taxation of the
companies and excess tax payment by the companies.
Non-payment of tax refunds: Numerous tax laws provides for
payment of tax refunds to taxpayers who with candid and sincere
claims; this is not the case in real practice. Some provisions of the law,
for example, VAT deduction at source by agents of the government and
in some cases the high rate of withholding tax; make the problem of tax
refund a perpetual feature of the tax system in Nigeria. Others include
lack of awareness, corruption, loopholes in tax laws resulting to tax
avoidance.
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RECOMMENDATIONS TOWARDS THE ACHIEVEMENT OF
SUSTAINABLE TAXATION
Simplifying the tax laws and abolishing some: One of the essential
principles of any tax system adjudged good must be simple, certain and
clear. The tax laws should be phrased to ensure that taxpayers and tax
officials understand it clearly.
Streamlining collection mechanism: The three tiers of government
should advance a solid base for taxpayers; restructure the means and
methods used for collection and end multiplicity of taxes, which has
been a reprieve to the industrial sector and the economy as a whole. In
addition, numerous taxes should be reduced and the approved taxes and
levies should be streamlined and strictly followed by the three tiers of
the government.
Ensuring good, effective and efficient tax administration The
government should ensure that professionals handle tax administration
and trained personnel. The personnel of the tax authorities of each of
the three tiers of the government should be trained and retrained to
bring the best from them and instil discipline in them.
Introduction of tax technology: Filling and payment online should be
introduced in Nigeria as this will reduce the time of compliance and
cost associated to it and should also accept tax technology in support of
electronic remittances and filling of returns which will ease the burden
on taxpayers, ease human contact existing between the taxpayers and
the tax officials. This can assist in checking sharp practices and make
doing business easier.
Tax awareness and communication: There is the urgent need for
public enlightenment. The media should be effectively used to
communicate the existing and new tax laws, the need for compliance
and the penalty for defaulters. This is because most tax payers are not
informed or are ill-informed.
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Moreover, some of the laws should be abolished such as the law on
minimum tax. Cases of genuine losses declared by any company
should be addressed as an issue that is separate by means of tax audit
and transfer pricing instead of using the same brush to paint all
companies. Concerning the commencement and cessation rule,
companies should pay tax on the actual profit using the preceding year
basis from the beginning to the end (if the business ceases to operate).
Refund of taxes overpaid: Tax authorities of the three tiers of the
government should embark on refunding genuine overpayment of
taxes. The government as a matter of urgency make funds available for
refund as this will boost the confidence of tax payers on the
government.
Other recommendations includes
Independent of tax authorities (boards of internal revenue): The tax
authorities in the local, state and federal governments should be given
an independent status. “Until independence is allowed in the system
there wouldn't be any way for the process to be impactful”. This will
allow the tax authorities take responsibility of their actions and how
they go about the business of tax administration.
Addressing the issue of corruption among tax officials Taxpayers will
prefer to pay a token as tax to the government and give kick back to tax
officials. The low salary of tax officials has made many of them
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compromises with tax offenders hence the need to address the issue of
corruption and corrupt practices among tax officials. The corrupt
officials should be prosecuted without allowing any top government
official to influence the outcome of the prosecution. The government
on her own should pay them adequately or contract out tax
administration for effectiveness.
with no option of fine, withdrawal of license (where applicable) among
others will enhance the administration of the tax system.
Strengthening of tax audit This is a function that has been neglected in
Nigeria. Tax Officials stay in their offices without proper audit of
companies. “Tax administrators often employ resources for checking
refunds from withholding schemes rather than going after the more
difficult but higher revenue yields that would come from aggressive
auditing of self-employed, professional and business firms”. The tax
official should be proactive so that they can discover companies and
individuals that stop filling annual returns, firms declaring suspicious
profits and firms reporting losses. Increase in audits will reduce tax
evasion, increase efforts to keep proper record by taxpayers and
accurate and timely filling of returns.
Establishing special courts to handle tax issues: The government
should establish or designate some courts as tax courts to tackle tax
problems. Issues concerning tax evaders, tax offenders, corrupt tax
officials and interpretation of the tax laws should be handled by this
special court. Lawyers should be given special and adequate training
on tax issues, as this will help greatly in addressing the many tax issues
inherent in the Nigerian tax system.
POLICY IMPLICATION
Tax policy is crucial to business environment as it creates incentives for
private sector development and source revenue to finance public
goods. Even though tax is distortive in nature, government must
minimize the distortive to significant level. Government tends to use
the fiscal policy beyond revenue generation and industries
development. IMF/ World Bank Group (2016) argue, “Instead of
focusing on incremental changes and aiming purely at tax collection,
domestic revenue mobilization efforts should take a broader and
longer-term perspective. Such efforts should be targeted to create an
environment conducive to sustainable revenue mobilization as part of a
legitimate social contract between the government and the citizens.”
From this standpoint, tax incentives are not always good and tax
increases are not always bad. Studies have revealed that tax incentives
or cuts most time undermine sustainability. Therefore, the
governments must strike the balance between the benefits and cost of
tax policies and ensure that the benefits of all tax policies outweigh the
cost.
Stiffer penalty for tax evasion and other tax offences: The present
penalties prescribed by the tax laws in Nigeria for tax offense cannot
deter offenders. Stiffer Penalties, such as asset forfeiture, jail terms
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