TAXATION FOR
ECONOMIC DEVELOPMENT
EDITORS:
MUHAMMAD AKARO MAINOMA
GODWIN EMMANUEL OYEDOKUN
SULEIMAN A. SALIHU ARUWA
TAIWO OLUFEMI ASAOLU
RAFIU OYESOLA SALAWU
TAXATION FOR ECONOMIC DEVELOPMENT
ISBN: 978-978-991-390-9
Copyright © 2022 – 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:
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Off Hakeem Balogun Street, Alausa
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NATIONAL LIBRARY OF NIGERIA CATALOGUING-IN PUBLICATION DATA
TAXATION for Economic development
1, Taxation—Nigeria –periodicals
2, Taxation—study and teaching—Nigeria
i, Mainoma, Akaro Mohammad
ii,Oyedokun, Godwin Emmanuel
iii, Aruwa, Suleiman, A, Salihu
iv, Asaolu, Taiwo Olufemi
v, Rafiu Oyesola Salawu
HJ 3081. TAX. 336.209669
ISBN 978-978-978-734-0. Pbk AACR 2
ii
TAXATION FOR ECONOMIC DEVELOPMENT
EDITORS
Professor Muhammad Akaro Mainoma
- Nasarawa State University, Keffi, Nigeria
Professor Godwin Emmanuel Oyedokun
- Lead City University, Ibadan, Nigeria
Professor Suleiman A. Salihu Aruwa
- Nasarawa State University, Keffi, Nigeria
Professor Taiwo Olufemi Asaolu
- Obafemi Awolowo University, Ile-Ife, Nigeria
Professor Rafiu Oyesola Salawu
- Obafemi Awolow University, Ile-Ife, Nigeria
iii
TAXATION FOR ECONOMIC DEVELOPMENT
For more information about the book, and order, please contact:
OGE Business School
10, Abiodun Sobanjo Street, Off Bayo Ajayi Street,
Off Hakeem Balogun Street, Alausa
Agidingbi, Ikeja, Lagos. Nigeria
godwinoye@yahoo.com; info@ogeprofessornal.com
www.ogeprofessional.com
+2348033737184, +2348055863944; +2348095419026
iv
DEDICATION
This book is dedicated to all Tutors, Teachers, Lecturers, Researchers, Professors and
Lovers of Tax Education.
v
PREFACE
Taxation for Economic Development 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.
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.
Taxation for Economic Development as an edited book has thirty (30) 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 thirty-eight (38) 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
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 taxation, therefore, emphasizes the thorough evaluation of the
strength and weaknesses and ways of increasing the compliance level and how it can in turn
develop Nigerian Economy.
This book contains various topics related to tax management and tax compliance in Nigeria
and as it is no new 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.
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.
Professor Taiwo Olufemi Asaolu, FCA
Professor of Management & Accounting
Obafemi Awolowo University, Ile-Ife, Nigeria
vii
ACKNOWLEDGMENTS
To God be the glory. We appreciate the time and contributions among other resources of all
contributors, reviewers and editors for their roles for the success of 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.
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.
Prof. Muhammad A. Mainoma
Prof. Godwin E. Oyedokun
Lead Editors
viii
ABOUT THE BOOK
This book titled Taxation for Economic Development is a follow up on the book on Tax
Management and Compliance in Nigeria, published in the year 2020, the current book have
twenty-five erudite scholars with vast knowledge in Taxation, Accounting, Law, Finance,
and Business among others. The Thirty (30) chapters therein critically evaluates
contemporary issues in taxation, tax management, tax compliance, tax reforms, Nigeria tax
system, tax law, regulatory framework, alternative tax policy, tax incentives, transfer
pricing, tax planning, tax assessment, tax risk, taxation for economic development 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.
Editors such as Professor Muhammad Akaro Mainoma, and Professor Godwin Emmanuel
Oyedokun, Professor Suleiman A. Salihu Aruwa, Professor Taiwo Olufemi Asaolu and
Professor Rafiu Oyesola Salawu, are the seasoned academics of repute that painstakingly
took time to review the chapters and edited this book and made it suitable use by tutors,
teachers, lecturers, researchers, Professors and all lovers of education.
This book will immensely benefit all Lovers of Tax 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.
ix
NOTES ON EDITORS
Professor Akaro Muhammad Mainoma is a Professor of Accounting & Finance in the
Department of Accounting, Faculty of Accounting, and the Immediate Past Vice Chancellor
Nasarawa State University, Keffi, Nigeria. He is a Governing Council Member and the
Immediate Past President of the Association of National Accountants of Nigeria (ANAN).
He is also a Governing Council Member and the Chairman of Education Committee of the
Chartered Institute of Taxation of Nigeria (CITN).
Professor Godwin Emmanuel Oyedokun is a Professor of Management & Accounting in
the Department of Management and Accounting, Faculty of Management and Social
Science, Lead City University, Ibadan and Principal Partner, Oyedokun Godwin Emmanuel
Co. (Chartered Accountants, Tax Practitioners & Forensic Accountants) of OGE
Professional Services. He is a Governing Council Member and the Chairman of Education
Committee of the Chartered Institute of Taxation of Nigeria (CITN).
Professor Suleiman A. Salihu Aruwa is Professor of Accounting & Finance in the
Department of Accounting, Faculty of Administration, Nasarawa State University, Keffi,
Nigeria. He is a Governing Council Member of the Association of National Accountants of
Nigeria (ANAN).
Professor Taiwo Olufemi Asaolu is a Professor of Accounting and Finance in the
Department of Management and Accounting, Obafemi Awolowo University, Ile-Ife,
Nigeria
Professor Rafiu Oyesola Salawu is a Professor of Management & Accounting, in the
Department of Management and Accounting, Faculty of Management and Social Sciences,
Obafemi Awolowo University, Ile-Ife, Nigeria.
x
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
NOTES ON CONTRIBUTORS
Adeagbo, Khadijat Ayobami is a lecturer in the Department of Accountancy, Faculty of
Financial Management Studies, The Polytechnic, Ibadan, Nigeria
Adebayo, Ganiyu Adebowale, PhD, is of the Department of Management and Accounting,
Faculty of Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Adegbenro, S. A., PhD, is of the Department of Management & Accounting, Lead City
University, Ibadan, Nigeria
Adejuwon, Oluwakemi Adefisayo is a lecturer in the Department of Management and
Accounting, Faculty of Management and Social Sciences, Lead City University, Ibadan,
Nigeria.
Adeolu-Akande, Modupeola Atoke, PhD is of Lead City University, Ibadan, Nigeria
Adewale, Olusesan Taiwo is a lecturer in the Department of Management and Accounting,
Faculty of Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Adewumi, Moyosore Akingbade is a lecturer in the Department of Management and
Accounting, Faculty of Management and Social Sciences, Lead City University, Ibadan,
Nigeria.
Aiwoho, Doris is of the Department of Accounting, Edo State Polytechnic, Usen, Nigeria.
Ajibola, Joseph Olusegun, PhD, is a Professor of Economics, Department of Economics,
Veronica Adeleke School of Social Sciences, Babcock University, Ilishan-Remo, Ogun State,
Nigeria and the Past President, Chartered Institute of Bankers of Nigeria
Akingbehin, K. O. is of the Department of Management & Accounting, Lead City University,
Ibadan, Nigeria
Amafa, Etupu Olufunmilayo is of the Department of Management and Accounting, Faculty of
Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Aruwa, Suleiman A. Salihu is Professor of Accounting & Finance in the Department of
Accounting, Faculty of Administration, Nasarawa State University, Keffi, Nigeria.
Asaolu, Taiwo Olufemi, PhD, is Professor of Management & Accounting, Obafemi Awolowo
University, Ile-Ife, Nigeria
Christopher, M. is of the Department of Management and Accounting, Faculty of
Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Dopemu, Olawale Samson, PhD, is a Manager at the Federal Inland Revenue Services, Lagos,
Nigeria.
Ekpe, Malthus Timothy is of Department of Accounting, Igbinedion University, Okada, Edo
State, Nigeria.
Friday, E. Akpan is a Director, Centre for Financial and Accounting Research (CEFAR)
Nigerian College of Accountancy, Jos.
Haruna, Roselyn Afor, PhD, is a Senior Lecturer in the Accounting Department, College of
Management and Social Sciences, Salem University, Lokoja, Nigeria Nigeria.
Igboyi, Linus Sunday, PhD, is a Lecturer at Nigerian College Of Accountancy, Kwall, Near Jos
and Managing Partner, Linigboi and Associates (Tax Practitioners).
Josiah, Mary, PhD, is the Head of the Department of Accounting, Igbinedion University,
Okada, Edo State, Nigeria.
xi
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
Kennedy, Iwundu, PhD, is of the Managing Partner, Accounting Tools Consulting, FCT, Abuja,
Nigeria and President, FCT Tax Practitioners Association.
Kupoluyi, Adewale K, PhD, is of the Department of Political Science and Public
Administration, Veronica Adeleke School of Social Sciences, Babcock University, IlishanRemo, Ogun State, Nigeria.
Lawal Babatunde Akeem, PhD is an Associate Professor and Head, Department of Accounting
& Finance, McPherson University, Seriki-Sotayo, Ajebo, Ogun State, Nigeria.
Lawal, Busayo Olawumi is a Lecturer in the Department of Accounting, Dominican
University, Ibadan, Nigeria
Mainoma, Akaro Muhammad, PhD is a Professor of Accounting & Finance in the Department
of Accounting, Faculty of Accounting, Nasarawa State University, Keffi, Nigeria.
Ogwuche, Emmanuel Ejeh is of Department of Accounting, College of Business and
Management Studies, Igbinedion University, Okada, Nigeria.
Oladejo, James Olusola, PhD, is a Lecturer in the Department of Management & Accounting,
Lead City University, Ibadan, Nigeria
Olanrewaju, Ademola is a Managing Partner, Ascension Consulting Services, Lagos Nigeria.
Olawale, Mathew Kunle is of the Department of Management and Accounting, Faculty of
Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Oloyede, Funmilayo Lizzy, PhD, is of the Department of Political Science and Public
Administration, Veronica Adeleke School of Social Sciences, Babcock University, IlishanRemo, Ogun State, Nigeria.
Oluyombo, Onafowokan O. is a Professor of Financial Accounting, and Head, Department of
Accounting, School of Management and Social Sciences, Pan Atlantic University, Lagos,
Nigeria.
Omoruyi, Bright Inuaghata is of the Department of Accounting, College of Business and
Management Studies, Igbinedion University, Okada, Edo State, Nigeria.
Oni, Olaosebikan Simeon, PhD, is a Barrister at Law and Lecturer in the Department of Law,
Faculty of Law, Lead City University Ibadan, Nigeria.
Orumwense, Kenny Esosa is of the Department of Accounting, Igbinedion University, Okada,
Edo State, Nigeria.
Oyedokun, Godwin Emmanuel, PhD is a Professor of Management & Accounting in the
Department of Management and Accounting, Faculty of Management and Social Science,
Lead City University, Ibadan and Principal Partner, Oyedokun Godwin Emmanuel Co.
(Chartered Accountants, Tax Practitioners & Forensic Accountants) of OGE Professional
Services.
Oyetunji, Oluwayomi Taiwo, PhD, is a Lecturer in the Department of Accounting & Finance,
McPherson University, Seriki-Sotayo, Nigeria
Sayo, Enoch is of the Department of Accounting & Finance, McPherson University, SerikiSotayo, Nigeria
Suleiman, Mustapha Aikins is of the Department of Management and Accounting, Faculty of
Management and Social Sciences, Lead City University, Ibadan, Nigeria.
Yaru, Mohammed Aminu, PhD, is a Lecturer in the Department of Economics, University of
Ilorin, Kwara State, Nigeria.
xii
TABLE OF CONTENTS
CONTENTS
PAGE
COPYRIGHT
ii
DEDICATION
v
PREFACE
vi
FOREWORD
vii
ACKNOWLEDGMENTS
viii
NOTES ON EDITORS
x
NOTES ON CONTRIBUTORS
xi
CONTENTS
xiv
TAXATION FOR ECONOMIC DEVELOPMENT
Oyedokun, Godwin Emmanuel
1
DETERMINANTS OF TAX MORALE AND TAX COMPLIANCE:
EVIDENCE FROM NIGERIA
Orumwense, Kenny Esosa; Josiah, Mary and Aiwoho, Doris
33
TAX REVENUE GENERATION IN THE FACE OF
COVID-19 PANDEMIC IN NIGERIA
Ogwuche, Emmanuel Ejeh; Josiah, Mary and Omoruyi, Bright Inuaghata
47
ENVIRONMENTAL TAXATION: ISSUES AND BENEFITS
Ekpe, Malthus Timothy and Josiah, Mary
60
DIGITAL ECONOMY AND COMMUNICATION TAX
Ademola, Olanrewaju and Adewumi, Moyosore Akingbade
74
TAX ADMINISTRATION AND TAXPAYERS' COMPLIANCE
IN NIGERIA
Kupoluyi, Adewale K.., Oloyede, Funmilayo Lizzy and
Oyedokun, Godwin Emmanuel
89
TAX AUDIT AND TAX INVESTIGATION
Igboyi, Linus Sunday
105
xiii
TAXATION AND THE EFFECT OF COVID-19 ON
NIGERIA BUSINESSES
Oyedokun, Godwin Emmanuel and Haruna, Roselyn Afor and
Adeolu-Akande, Modupeola Atoke
119
TAXATION OF SPECIALIZED BUSINESS IN NIGERIA
Friday, E. Akpan
139
TAX MANAGEMENT
Igboyi, Linus Sunday
157
TAX POLICY: IMPERATIVE FOR NIGERIAN REVENUE GENERATION
Oyedokun, Godwin Emmanuel and Christopher, Michael
168
ADDRESSING FISCAL CHALLENGES THROUGH BUDGET
TRANSPARENCY: THE CASE OF KWARA STATE
Yaru, Mohammed
193
PARENTS SOCIO-ECONOMIC STATUS AND CHILDREN
ACADEMIC PERFORMANCE
Oluyombo, Onafowokan O.
208
PROSPECT AND CHALLENGES OF DIGITAL SERVICES
TAX IN A 21ST CENTURY SOCIETY
Oyedokun, Godwin Emmanuel and Oni, Olaosebikan Simeon
232
TAX PLANNING AND MANAGEMENT: IMPERATIVES
OF TAXPAYERS' INCENTIVES
Iwundu, Kennedy and Aruwa, Suleiman A. Salihu
243
REVIEW OF CHAPTER: NEXUS BETWEEN TAXATION
AND SUSTAINABLE BUSINESS DEVELOPMENT
Suleiman, Mustapha Aikins
254
REVIEW OF CHAPTER: RELEVANCE OF CULTURE IN ENSURING
SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
Amafa, Etupu Olufunmilayo
256
RECOVERY ENGAGEMENT: STAMP DUTY, EXCESS BANK
CHARGES AND GENERAL TAX AUDIT
Oyedokun, Godwin Emmanuel and Dopemu, Olawale Samson
260
REVIEW OF CHAPTER: IMPACT OF VALUE ADDED
ECONOMIC GROWTH IN NIGERIA
Olawale, Mathew Kunle
286
xiv
REVIEW OF CHAPTER: TAX COMPLIANCE AND ITS CHALLENGES
IN NIGERIA: THE PRACTICAL PERSPECTIVE
Adejuwon, Oluwakemi Adefisayo
290
FINANCE ACT 2020: FACTS AND POLICY IMPLICATION
Oyedokun, Godwin Emmanuel and Mainoma, Akaro Muhammad
293
FRAUD IDENTIFICATION IN FORENSIC TAX INVESTIGATION
AND RULE OF EVIDENCE
Oyedokun, Godwin Emmanuel and Asaolu, Taiwo Olufemi
298
EXAMINATION OF ETHICAL ISSUES FOR TAX PRACTITIONERS
IN NIGERIA
Kennedy, Iwundu and Adeolu-Akande, Modupeola Atoke
318
INTERNATIONAL FINANCIAL REPORTING STANDARDS' (IFRS)
ADOPTION AND TAXATION IN SOUTH WESTERN NIGERIA
Adegbenro, S. A., and Akingbehin, K. O.
328
TAXATION OF ENTERPRISES IN FREE TRADE ZONES IN NIGERIA
Oladejo, James Olusola
340
BUSINESS DISRUPTION AND CONTINUITY: REPOSITIONING
FOR TAX RESILIENCE
Ajibola, Joseph Olusegun
345
REVIEW OF CHAPTER: TAX COMPLIANCE AND ITS CHALLENGES
IN NIGERIA: THE PRACTICAL PERSPECTIVE
Adeagbo, Khadijat Ayobami
367
COMPANY INCOME TAX AND PROFITABILITY OF MULTINATIONAL
COMPANIES IN NIGERIA
Lawal, Babatunde Akeem; Oyetunji, Oluwayomi Taiwo;
Lawal, Busayo Olawumi, and Sayo, Enoch
371
BUILDING A SOCIAL CONTRACT: UNDERSTANDING TAX
MORALE IN NIGERIA
Adebayo, Ganiyu Adebowale
INCOME TAXES AND FINANCIAL PERFORMANCE OF SMALL
AND MEDIUM ENTERPRISES IN NIGERIA.
Adewale Olusesan Taiwo, Oyedokun Godwin Emmanuel
and Adewumi, Moyosore Akingbade
xv
394
404
CHAPTER ONE
TAXATION FOR ECONOMIC DEVELOPMENT
Oyedokun Godwin Emmanuel
Professor of Management & Accounting
Faculty of Management & Social Sciences
Lead City University, Ibadan, Nigeria.
godwinoye@yahoo.com; +2348033737184
ABSTRACT
Taxation refers to wealth from households or businesses to the government whose effects could
increase or reduce economic growth and economic welfare. On the other hand, a country's economic
development is usually indicated by an increase in citizens' quality of life. This chapter discussed the
concept, classes, purposes, history, effects, forms and principles of taxation, analyze the concept,
goals and policies of economic development, made a distinct difference between economic growth and
economic development. Reviewed the roles of taxation in financing economic development and why
tax is essential for development. It also presented taxation as a tool for economic management and
development, itemized the Schedule to Nigeria Taxes and Levies, objectives and guiding principles of
the National Tax Policy, and reviewed the revenue statistics in Africa 2020, focused on Nigeria as
well examine the tax-to-GDP ratio. It will also enable reader understood economic development
indicators and indices among many others.
Keywords: Economic development, Economic growth, Taxation.
INTRODUCTION
Revenue generated by an individual, organization or government determines the extent of
socio-economic infrastructural provision as well as the living standard of the people. From
ancient times, public finance is majorly funded through taxes often imposed on subjects by
the government in power. Revenues may be derived from tax and non-tax sources, oil and
non-oil, internally and externally generated, among other sources or classification.
Whatever the source or classification, taxation revenue is the most potent, reliable and
efficient source of revenue to both developed and developing economies (Konrad, 2014).
Taxation as a major source of government revenue is meant to foster growth and
development of individual nation if adequately collected and properly utilized. This
manual will be guided concepts of taxation, economic development and how taxation can
foster development.
1
Taxation For Economic Development
LITERATURE REVIEW
Concept of Taxation
While tax is a compulsory financial charge or some other type of levy imposed on a taxpayer
(an individual or legal entity) by a governmental organization in order to fund government
spending and various public expenditures. A failure to pay, along with evasion of or
resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may
be paid in money or as its labour equivalent. The first known taxation took place in Ancient
Egypt around 3000–2800 BC.
Taxation on the other hand is the imposition of compulsory levies on individuals or entities
by governments. Taxes are levied in almost every country of the world, primarily to raise
revenue for government expenditures, although they serve other purposes as well.
Oyedokun (2019) defined taxation as the concept and science of imposing tax on taxable
income of tax payers within a particular jurisdiction. Through taxes collected on these
taxable incomes, government ensures that resources are channeled towards important
projects in the society, while giving relief to the weak.
Abomaye (2017) is of the view that tax is a compulsory contributions made by animate and
inanimate beings to government being a higher authority either directly or indirectly to
fund its various activities and any refusal is meted with appropriate punishment. He went
on to say that Tax is an involuntary payment made by a resident of a state in obeisance to
levy imposed by a constituted authority of a sovereign state at a particular period of time;
and that Taxation is the process put in place by government (whichever tier) to exercise
authority on and over the imposition and collection of taxes based on enacted tax laws with
which projects are financed. Taxation is therefore seen as the transfer of resources as income
from the private sector to the public sector for its utilization to achieve some if not all the
nation's economic and social goals such as provision of basic amenities, social services,
educational facilities, public health, transportation, capital formation etc.
Most countries have a tax system in place to pay for public, common, or agreed national
needs and government functions. Some levy a flat percentage rate of taxation on personal
annual income, but most scale taxes based on annual income amounts. Most countries
charge a tax on an individual's income as well as on corporate income. Countries or
subunits often also impose wealth taxes, inheritance taxes, estate taxes, gift taxes, property
taxes, sales taxes, payroll taxes or tariffs.
In economic terms, taxation transfers wealth from households or businesses to the
government. This has effects which can both increase and reduce economic growth and
economic welfare. Consequently, taxation is a highly debated topic.
2
Taxation For Economic Development
In modern economies taxes are the most important source of governmental revenue. Taxes
differ from other sources of revenue in that they are compulsory levies and are unrequited
i.e., they are generally not paid in exchange for some specific thing, such as a particular
public service, the sale of public property, or the issuance of public debt. While taxes are
presumably collected for the welfare of taxpayers as a whole, the individual taxpayer's
liability is independent of any specific benefit received.
Purposes and Effects of Taxation
During the 19th century the prevalent idea was that taxes should serve mainly to finance the
government. In earlier times, and again today, governments have utilized taxation for other
than merely fiscal purposes. One useful way to view the purpose of taxation, attributable to
American economist Richard A. Musgrave, is to distinguish between objectives of resource
allocation, income redistribution, and economic stability. (Economic growth or
development and international competitiveness are sometimes listed as separate goals, but
they can generally be subsumed under the other three.) In the absence of a strong reason for
interference, such as the need to reduce pollution, the first objective, resource allocation, is
furthered if tax policy does not interfere with market-determined allocations. The second
objective, income redistribution, is meant to lessen inequalities in the distribution of income
and wealth. The objective of stabilization—implemented through tax policy, government
expenditure policy, monetary policy, and debt management—is that of maintaining high
employment and price stability.
There are likely to be conflicts among these three objectives. For example, resource
allocation might require changes in the level or composition (or both) of taxes, but those
changes might bear heavily on low-income families—thus upsetting redistributive goals.
As another example, taxes that are highly redistributive may conflict with the efficient
allocation of resources required to achieve the goal of economic neutrality.
The levying of taxes aims to raise revenue to fund governing or to alter prices in order to
affect demand. States and their functional equivalents throughout history have used
money provided by taxation to carry out many functions. Some of these include
expenditures on economic infrastructure (roads, public transportation, sanitation, legal
systems, public safety, education, health care systems), military, scientific research, culture
and the arts, public works, distribution, data collection and dissemination, public
insurance, and the operation of government itself. A government's ability to raise taxes is
called its fiscal capacity.
When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes
may be used to service past debts. Governments also use taxes to fund welfare and public
3
Taxation For Economic Development
services. These services can include education systems, pensions for the elderly,
unemployment benefits, and public transportation. Energy, water and waste management
systems are also common public utilities.
According to the proponents of the Chartalist theory of money creation, taxes are not
needed for government revenue, as long as the government in question is able to issue fiat
money. According to this view, the purpose of taxation is to maintain the stability of the
currency, express public policy regarding the distribution of wealth, subsidizing certain
industries or population groups or isolating the costs of certain benefits, such as highways
or social security.
Effects can be divided in two fundamental categories:
i. Taxes cause an income effect because they reduce purchasing power to taxpayers.
ii. Taxes cause a substitution effect when taxation causes a substitution between taxed
goods and untaxed goods.
Classes of Taxes
In the literature of public finance, taxes have been classified in various ways according to
who pays for them, who bears the ultimate burden of them, the extent to which the burden
can be shifted, and various other criteria. Taxes are most commonly classified as either
direct or indirect, an example of the former type being the income tax and of the latter the
sales tax. There is much disagreement among economists as to the criteria for
distinguishing between direct and indirect taxes, and it is unclear into which category
certain taxes, such as corporate income tax or property tax, should fall. It is usually said that
a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an
indirect tax can be, they are:
i. Direct Taxes
Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically
based on the taxpayer's ability to pay as measured by income, consumption, or net wealth.
What follows is a description of the main types of direct taxes.
Individual income taxes are commonly levied on total personal net income of the taxpayer
(which may be an individual, a couple, or a family) in excess of some stipulated minimum.
They are also commonly adjusted to take into account the circumstances influencing the
ability to pay, such as family status, number and age of children, and financial burdens
resulting from illness. The taxes are often levied at graduated rates, meaning that the rates
rise as income rises. Personal exemptions for the taxpayer and family can create a range of
income that is subject to a tax rate of zero.
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Taxation For Economic Development
Taxes on net worth are levied on the total net worth of a person—that is, the value of his
assets minus his liabilities. As with the income tax, the personal circumstances of the
taxpayer can be taken into consideration. Personal or direct taxes on consumption (also
known as expenditure taxes or spending taxes) are essentially levied on all income that is
not channeled into savings. In contrast to indirect taxes on spending, such as the sales tax, a
direct consumption tax can be adjusted to an individual's ability to pay by allowing for
marital status, age, number of dependents, and so on. Although long attractive to theorists,
this form of tax has been used in only two countries, India and Sri Lanka; both instances
were brief and unsuccessful. Near the end of the 20th century, the “flat tax”—which
achieves economic effects similar to those of the direct consumption tax by exempting most
income from capital—came to be viewed favourably by tax experts. No country has
adopted a tax with the base of the flat tax, although many have income taxes with only one
rate.
Taxes at death take two forms: the inheritance tax, where the taxable object is the bequest
received by the person inheriting, and the estate tax, where the object is the total estate left
by the deceased. Inheritance taxes sometimes take into account the personal circumstances
of the taxpayer, such as the taxpayer's relationship to the donor and his net worth before
receiving the bequest. Estate taxes, however, are generally graduated according to the size
of the estate, and in some countries they provide tax-exempt transfers to the spouse and
make an allowance for the number of heirs involved. In order to prevent the death duties
from being circumvented through an exchange of property prior to death, tax systems may
include a tax on gifts above a certain threshold made between living persons (see gift tax).
Taxes on transfers do not ordinarily yield much revenue, if only because large tax payments
can be easily avoided through estate planning.
ii. Indirect Taxes
Indirect taxes are levied on the production or consumption of goods and services or on
transactions, including imports and exports. Examples include general and selective sales
taxes, value-added taxes (VAT), taxes on any aspect of manufacturing or production, taxes
on legal transactions, and customs or import duties.
General sales taxes are levies that are applied to a substantial portion of consumer
expenditures. The same tax rate can be applied to all taxed items, or different items (such as
food or clothing) can be subject to different rates. Single-stage taxes can be collected at the
retail level, as the U.S. states do, or they can be collected at a pre-retail (i.e., manufacturing
or wholesale) level, as occurs in some developing countries. Multistage taxes are applied at
each stage in the production-distribution process. The VAT, which increased in popularity
during the second half of the 20th century, is commonly collected by allowing the taxpayer
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to deduct a credit for tax paid on purchases from liability on sales. The VAT has largely
replaced the turnover tax; a tax on each stage of the production and distribution chain, with
no relief for tax paid at previous stages. The cumulative effect of the turnover tax,
commonly known as tax cascading, distorts economic decisions.
Although they are generally applied to a wide range of products, sales taxes sometimes
exempt necessities to reduce the tax burden of low-income households. By comparison,
excises are levied only on particular commodities or services. While some countries impose
excises and customs duties on almost everything from necessities such as bread, meat, and
salt, to nonessentials such as cigarettes, wine, liquor, coffee, and tea, to luxuries such as
jewels and furs, taxes on a limited group of products, alcoholic beverages, tobacco
products, and motor fuel yield the bulk of excise revenues for most countries. In earlier
centuries, taxes on consumer durables were applied to luxury commodities such as pianos,
saddle horses, carriages, and billiard tables. Today a main luxury tax object is the
automobile, largely because registration requirements facilitate administration of the tax.
Some countries tax gambling and state-run lotteries have effects similar to excises, with the
government's “take” being, in effect, a tax on gambling. Some countries impose taxes on
raw materials, intermediate goods (e.g., mineral oil, alcohol), and machinery.
Some excises and customs duties are specific i.e., they are levied on the basis of number,
weight, length, volume, or other specific characteristics of the good or service being taxed.
Other excises, like sales taxes, are ad valorem levied on the value of the goods as measured by
the price. Taxes on legal transactions are levied on the issue of shares, on the sale (or
transfer) of houses and land, and on stock exchange transactions. For administrative
reasons, they frequently take the form of stamp duties; that is, the legal or commercial
document is stamped to denote payment of the tax. Many tax analysts regard stamp taxes as
nuisance taxes; they are most often found in less-developed countries and frequently bog
down the transactions to which they are applied.
The Proportional, Progressive, and Regressive Taxes
Taxes can be distinguished by the effect they have on the distribution of income and wealth.
A proportional tax is one that imposes the same relative burden on all taxpayers i.e., where
tax liability and income grow in equal proportion. A progressive tax is characterized by a
more than proportional rise in the tax liability relative to the increase in income, and a
regressive tax is characterized by a less than proportional rise in the relative burden. Thus,
progressive taxes are seen as reducing inequalities in income distribution, whereas
regressive taxes can have the effect of increasing these inequalities.
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The taxes that are generally considered progressive include individual income taxes and
estate taxes. Income taxes that are nominally progressive, however, may become less so in
the upper-income categories especially if a taxpayer is allowed to reduce his tax base by
declaring deductions or by excluding certain income components from his taxable income.
Proportional tax rates that are applied to lower-income categories will also be more
progressive if personal exemptions are declared.
Income measured over the course of a given year does not necessarily provide the best
measure of taxpaying ability. For example, transitory increases in income may be saved,
and during temporary declines in income a taxpayer may choose to finance consumption
by reducing savings. Thus, if taxation is compared with “permanent income,” it will be less
regressive (or more progressive) than if it is compared with annual income.
Sales taxes and excises (except those on luxuries) tend to be regressive, because the share of
personal income consumed or spent on specific good declines as the level of personal
income rises. Poll taxes (also known as head taxes), levied as a fixed amount per capital
obviously regressive.
It is difficult to classify corporate income taxes and taxes on business as progressive,
regressive, or proportionate, because of uncertainty about the ability of businesses to shift
their tax expenses (see below Shifting and incidence). This difficulty of determining who
bears the tax burden depends crucially on whether a national or a sub-national (that is,
provincial or state) tax is being considered.
In considering the economic effects of taxation, it is important to distinguish between
several concepts of tax rates. The statutory rates are those specified in the law; commonly
these are marginal rates, but sometimes they are average rates. Marginal income tax rates
indicate the fraction of incremental income that is taken by taxation when income rises by
one dollar. Thus, if tax liability rises by 45 cents when income rises by one dollar, the
marginal tax rate is 45 percent. Income tax statutes commonly contain graduated marginal
rates i.e., rates that rise as income rises. Careful analysis of marginal tax rates must consider
provisions other than the formal statutory rate structure. If, for example, a particular tax
credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate
is 20 percentage points higher than indicated by the statutory rates. Since marginal rates
indicate how after-tax income changes in response to changes in before-tax income, they are
the relevant ones for appraising incentive effects of taxation. It is even more difficult to
know the marginal effective tax rate applied to income from business and capital, since it
may depend on such considerations as the structure of depreciation allowances, the
deductibility of interest, and the provisions for inflation adjustment. A basic economic
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theorem holds that the marginal effective tax rate in income from capital is zero under a
consumption-based tax.
Average income tax rates indicate the fraction of total income that is paid in taxation. The
pattern of average rates is the one that is relevant for appraising the distributional equity of
taxation. Under a progressive income tax the average income tax rate rises with income.
Average income tax rates commonly rise with income, both because personal allowances
are provided for the taxpayer and dependents and because marginal tax rates are
graduated; on the other hand, preferential treatment of income received predominantly by
high-income households may swamp these effects, producing regressively, as indicated by
average tax rates that fall as income rises.
History of Taxation
The first known system of taxation was in Ancient Egypt around 3000–2800 BC in the First
Dynasty of Egypt of the Old Kingdom of Egypt. The earliest and most widespread form of
taxation was the corvée and tithe. The corvée was forced labour provided to the state by
peasants too poor to pay other forms of taxation (labour in ancient Egyptian is a synonym
for taxes). Records from the time document that the Pharaoh would conduct a biennial tour
of the kingdom, collecting tithes from the people. Other records are granary receipts on
limestone flakes and papyrus. Early taxation is also described in the Bible. In Genesis
(chapter 47, verse 24 of the New International Version), it states “But when the crop comes
in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and
as food for yourselves and your households and your children”. Joseph was telling the
people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%)
of the crop was the tax (in this case, a special rather than an ordinary tax, as it was gathered
against an expected famine) The stock made by was returned and equally shared with the
people of Egypt and traded with the surrounding nations thus saving and elevating Egypt.
Samgharitr is the name mentioned for the Tax collector in the Vedic texts. In Hattusa, the
capital of the Hittite Empire, grains were collected as a tax from the surrounding lands, and
stored in silos as a display of the king's wealth.
In the Persian Empire, a regulated and sustainable tax system was introduced by Darius I
the Great in 500 BC; the Persian system of taxation was tailored to each Satrapy (the area
ruled by a Satrap or provincial governor). At differing times, there were between 20 and 30
Satrapies in the Empire and each was assessed according to its supposed productivity. It
was the responsibility of the Satrap to collect the due amount and to send it to the treasury,
after deducting his expenses (the expenses and the power of deciding precisely how and
from whom to raise the money in the province, offer maximum opportunity for rich
pickings). The quantities demanded from the various provinces gave a vivid picture of their
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economic potential. For instance, Babylon was assessed for the highest amount and for a
startling mixture of commodities; 1,000 silver talents and four months' supply of food for
the army. India, a province fabled for its gold, was to supply gold dust equal in value to the
very large amount of 4,680 silver talents. Egypt was known for the wealth of its crops; it was
to be the granary of the Persian Empire (and, later, of the Roman Empire) and was required
to provide 120,000 measures of grain in addition to 700 talents of silver. This tax was
exclusively levied on Satrapies based on their lands, productive capacity and tribute levels.
The Rosetta Stone, a tax concession issued by Ptolemy V in 196 BC and written in three
languages “led to the most famous decipherment in history—the cracking of
hieroglyphics”.
Islamic rulers imposed Zakat (a tax on Muslims) and Jizya (a poll tax on conquered nonMuslims). In India this practice began in the 11th century.
Policy, Legal and Institutional Reforms: A Historical Overview
Policy, legislative and administrative reforms of the Nigeria tax system predate
independence and can be traced back to early twentieth century when the then High
Commissioner of the [then] Northern Protectorate issued the Stamp Duties Proclamation in
1903, followed immediately thereafter in 1906 by the Native Revenue Proclamation. This
latter Proclamation systematized all the pre-colonial taxes by defining taxable rates; and
procedures for assessment and collection, as well as penalties for default thus eliminating
arbitrariness that had hitherto characterized the Nigerian tax system. It introduced the four
certainties essential in tax practice: what to pay, when to pay, where to pay and who to pay
to. The same Proclamation was re-issued as the Native Revenue Ordinance in 1917 to cover
the Southern territories and by 1927, was applicable in the whole country. The year 1943 was
a watershed period in the history of the Nigerian tax system as it witnessed the creation of
the Inland Revenue Department (renamed the Federal Board of Inland Revenue in 1958),
the precursor to the present day Federal Inland Revenue Service (FIRS). Following
independence in 1960, other legal and institutional reforms were effected in 1961 through
the establishment of the Federal Board of Inland Revenue (FBIR) and the Body of Appeal
Commissioners as the first point of call for tax dispute resolution. In the same year, the Joint
Tax Board (JTB) was created with the primary responsibility of ensuring uniformity of
standards and application of Personal Income Tax.
Other major reforms to the tax system were effected in 1982 with the establishment of the
Chartered Institute of Taxation of Nigeria and 1993 with a review of the composition of the
FBIR and establishment of the present day Federal Inland Revenue Service (FIRS) as the
operational arm of the FBIR; as well as a review of the functions of the JTB. Further changes
were effected in 2007 with the granting of financial and administrative autonomy to the
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FIRS following the recommendations of the 'Study and Working Group on Nigerian Tax
System' which had been set up in half a decade earlier. These and other reforms represented
the first major attempt at shifting focus away from oil to a more sustainable source of
revenue, that is, the non-oil sector. Since then, a raft of changes that cut across
organisational restructuring of the Federal and State authorities, the enactment of a
National Tax Policy, funding, legislation, taxpayer education, dispute resolution
mechanism, taxpayer registration, human capacity building, automation of key processes,
refund mechanism and several other areas have been effected.
Why so many reforms in our tax system? Given the low tax to GDP ratio, it is plausible to
assume that the need to address the problem of low tax returns motivated the Nigerian
Government to embark on these reforms. The scope of, and frequency with which tax
reforms have been implemented should however, be viewed within the broader context of
the structure of Nigeria's economy and the centrality of taxes to the attainment of national
development objectives. In specific terms, four main considerations seem to have informed
these frequent tax reforms: the need to diversify the revenue portfolio to safeguard against
the oil price volatility in the global market; the need for an accurate and reliable
determination of the optimal tax rate, since Nigeria operates on a cash budget system,
where expenditure proposals and overall fiscal management are anchored on revenue
projections; historical overreliance on petroleum and trade taxes while overlooking direct
and broad-based indirect taxes such as value added tax (VAT); and the ever-widening fiscal
deficit, an ever-present threat to macroeconomic stability.
According to the objectives of tax reforms in Nigeria include the need to bridge the gap
between the national development, needs and the funding of the needs; achieve improved
service delivery to the public; improve on the level of tax derivable from non-oil activities,
vis-à-vis revenue from oil activities; constantly review the tax laws to reduce/manage tax
evasion and avoidance; and improve the tax administration to make it more responsive,
reliable, skillful and taxpayers friendly, as well as achieve other fiscal objectives such as
managing inflation and improving balance-of-payment conditions. But the fiscal objectives
were only a means to an end. The end objectives of the tax policy reforms were to generate
revenue; promote growth and development; ensure effective protection for local industries
and encourage greater use of local raw materials; promote value addition and greater
geographical dispersion of domestic manufacturing capacities; and create jobs. And
although specific policy, legal and institutional measures have varied over time, these
objectives have remained relatively unchanged.
Schedule to Nigeria Taxes and Levies
Approved List for Collection of Taxes (ACT AMENDMENT) ORDER, 2015 (NBS, 2015).
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1. Taxes Collected by the Federal Government
Company income tax.
Withholding tax on companies, residents of the Federal Capital Territory,
Abuja and non-resident individuals.
Petroleum profits tax.
Education Tax.
Value Added Tax.
Capital gains tax on residents of the Federal Capital Territory, Abuja,
corporate and non-resident individuals.
National Information Technology Development Levy
Stamp duties on bodies corporate and residents of the Federal Capital
Territory, Abuja.
Personal income tax in respect of
a.
Members of the armed forces.
b.
Members of the Nigeria Police Force.
c.
Residents of the Federal Capital Territory, Abuja; and
d.
Staff of the Ministry of Foreign Affairs and non-resident individuals
2. Taxes and levies collected by the State Government.
Personal income tax in respect of:
a.
Pay-As-You-Earn (PAYE);
b.
Direct taxation (Self-assessment)
Withholding tax for Individuals
Capital gains tax for individuals
Stamp duties on instruments executed by individuals.
Pools betting, lotteries, gaming and casino taxes.
Road tax.
Business premises registration
Development levy for individuals
Naming of street registration fees in State Capitals.
Right of Occupancy fees on lands owned by the State Government.
Market taxes and levies where State finance is involved.
Hotel, Restaurant or Event Centre Consumption Tax, where applicable
Entertainment Tax, where applicable
Environmental (Ecological) Fee or Levy
Mining, Milling and Quarry Fees, where applicable
Animal Trade Tax, where applicable
Produce Sales Tax, where applicable
Slaughter or Abattoir Fees, where state finance is involved
Infrastructure Maintenance Charge or Levy, where applicable
Fire Service Charge
Economic Development Levy, where applicable
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-
Social Services Contribution Levy, where applicable
Signage and Mobile Advertisement, Jointly collected by States and Local
Governments
Property Tax
Land use charge, where applicable.
3. Taxes and Levies to be collected by Local Government
Shops and, kiosks rates
Tenement rates
On and off liquor license 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 fee on lands in rural areas, excluding those
collectable by the Federal and State Governments.
Market taxes and levies excluding any market where State Finance is
involved.
Motor Park levies.
Domestic animal license fees.
Bicycle, truck, canoe, wheelbarrow and cart fees, other than a
mechanically propelled truck.
Cattle tax payable by cattle farmers only.
Merriment and road closure levy.
Radio and television license fees (other than radio and television
transmitter).
Vehicle radio license fee (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 fees.
Religious places establishment permit fees.
Signboard and advertisement permit fees
Wharf Landing Charge, where applicable
Forms of Taxation
In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the
tax on the creation of money.
Other obsolete forms of taxation include:
i. Scutage, which is paid in lieu of military service; strictly speaking, it is a
commutation of a non-tax obligation rather than a tax as such but functioning as a
tax in practice.
ii. Tallage, a tax on feudal dependents.
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iii. Tithe, a tax-like payment (one tenth of one's earnings or agricultural produce), paid
to the Church (and thus too specific to be a tax in strict technical terms). This should
not be confused with the modern practice of the same name which is normally
voluntary.
iv. (Feudal) aids, a type of tax or due that was paid by a vassal to his lord during feudal
times.
v. Danegeld, a medieval land tax originally raised to pay off raiding Danes and later
used to fund military expenditures.
vi. Carucage, a tax which replaced the danegeld in England.
vii. Tax farming, the principle of assigning the responsibility for tax revenue collection
to private citizens or groups.
viii. Socage/Burgage, a feudal tax system based on land rent.
Principles of Taxation
The 18th-century economist and philosopher Adam Smith attempted to systematize the
rules that should govern a rational system of taxation. In The Wealth of Nations (Book V,
chapter 2) he set down four general canons:
Although they need to be reinterpreted from time to time, these principles retain
remarkable relevance. From the first can be derived some leading views about what is fair
in the distribution of tax burdens among taxpayers. These are:
(i)
The belief that taxes should be based on the individual's ability to pay, known as
the ability-to-pay principle, and
(ii)
The benefit principle, the idea that there should be some equivalence between
what the individual pays and the benefits he subsequently receives from
governmental activities. The fourth of Smith's canons can be interpreted to
underlie the emphasis many economists place on a tax system that does not
interfere with market decision making, as well as the more obvious need to
avoid complexity and corruption.
Distribution of Tax Burdens
Various principles, political pressures, and goals can direct a government's tax policy. What
follows is a discussion of some of the leading principles that can shape decisions about
taxation.
Horizontal Equity
The principle of horizontal equity assumes that persons in the same or similar positions (so
far as tax purposes are concerned) will be subject to the same tax liability. In practice this
equality principle is often disregarded, both intentionally and unintentionally. Intentional
violations are usually motivated more by politics than by sound economic policy (e.g., the
tax advantages granted to farmers, home owners, or members of the middle class in
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general; the exclusion of interest on government securities). Debate over tax reform has
often centered on whether deviations from “equal treatment of equals” are justified.
The Ability-to-pay Principle
The ability-to-pay principle requires that the total tax burden will be distributed among
individuals according to their capacity to bear it, taking into account all of the relevant
personal characteristics. The most suitable taxes from this standpoint are personal levies
(income, net worth, consumption, and inheritance taxes). Historically there was common
agreement that income is the best indicator of ability to pay. There have, however, been
important dissenters from this view, including the 17th-century English philosophers John
Locke and Thomas Hobbes and a number of present-day tax specialists. The early
dissenters believed that equity should be measured by what is spent (i.e., consumption)
rather than by what is earned (i.e., income); modern advocates of consumption-based
taxation emphasize the neutrality of consumption-based taxes toward saving (income
taxes discriminate against saving), the simplicity of consumption-based taxes, and the
superiority of consumption as a measure of an individual's ability to pay over a lifetime.
Some theorists believe that wealth provides a good measure of ability to pay because assets
imply some degree of satisfaction (power) and tax capacity, even if (as in the case of an art
collection) they generate no tangible income.
The ability-to-pay principle also is commonly interpreted as requiring that direct personal
taxes have a progressive rate structure, although there is no way of demonstrating that any
particular degree of progressivity is the right one. Because a considerable part of the
population does not pay certain direct taxes—such as income or inheritance taxes—some
tax theorists believe that a satisfactory redistribution can only be achieved when such taxes
are supplemented by direct income transfers or negative income taxes (or refundable
credits). Others argue that income transfers and negative income tax create negative
incentives; instead, they favour public expenditures (for example, on health or education)
targeted toward low-income families as a better means of reaching distributional
objectives.
Indirect taxes such as VAT, excise, sales, or turnover taxes can be adapted to the ability-topay criterion, but only to a limited extent—for example, by exempting necessities such as
food or by differentiating tax rates according to “urgency of need.” Such policies are
generally not very effective; moreover, they distort consumer purchasing patterns, and
their complexity often makes them difficult to institute.
Throughout much of the 20th century, prevailing opinion held that the distribution of the
tax burden among individuals should reduce the income disparities that naturally result
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from the market economy; this view was the complete contrary of the 19th-century liberal
view that the distribution of income ought to be left alone. By the end of the 20th century,
however, many governments recognized that attempts to use tax policy to reduce inequity
can create costly distortions, prompting a partial return to the view that taxes should not be
used for redistributive purposes.
Challenges of Nigeria Tax System
Despite the potentials of taxation as a dynamic tool for sustainable national development,
Nigeria tax system has been unable to achieve its objectives due to the following challenges,
among others:
i. Lack of robust framework for the taxation of informal sector and high network
individuals, thus limiting the revenue base and creating inequity;
ii. Fragmented database of taxpayers and weak structure for exchange of information
by and with tax authorities, resulting in revenue leakage;
iii. Inordinate drive by all tiers of government to grow internally generated revenue
which has led to the arbitrary exercise of regulatory powers for revenue purpose;
iv. Lack of clarity on taxation powers of each level of government and encroachment on
the powers of one level of government by another;
v. Insufficient information available to taxpayers on tax compliance requirements
thus creating uncertainty and non-compliance;
vi. Poor accountability for tax revenue;
vii. Insufficient capacity which has led to the delegation of powers of revenue officials
to third parties, thereby creating complications in the tax system;
viii. Use of aggressive and unorthodox methods for tax collection;
ix. Failure by tax authorities to honour refund obligations to taxpayers;
x. The non-regular review of tax legislation, which has led to obsolete laws, that do not
reflect current economic realities; and
xi. Lack of strict adherence to tax policy direction and procedural guidelines for the
operation of the various tax authorities.
Theories of Taxation
The following are some of the theories of Taxation;
i. Diffusion Theory of Taxation
According to diffusion theory of taxation, under perfect competition, when a tax is levied, it
gets automatically equitably diffused or absorbed throughout the community. Advocates
of this theory, describe that when a tax is imposed on a commodity by state, it passes on to
consumers automatically. Every individual bears burden of tax according to his ability to
bear it. For instance, a specific tax is imposed on say, cloth. Manufacturer raises prices of
commodity by the amount of tax. Consumers buy commodity according to their capacity
and thus share burden of tax. The diffusion theory of taxation has never gained any
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importance in the world of reality. It has never been seen that a tax gets automatically
equitably distributed among people. It is true that in some taxes, diffusion or absorption
does take place but that too is not throughout the community. Accordingly, another
criticism of the theory of taxation is that there are few taxes like income tax, inheritance tax,
toll tax in which there is no absorption at all.
ii. Benefit Theory of Taxation
According to this theory, the state should levy taxes on individuals according to the benefit
conferred on them. The more benefits a person derives from the activities of the state, the
more he should pay to the government. If, in accordance with the “benefits theory of
taxation,” we conceive of taxes as payments in exchange for government benefits, perhaps
states should be obliged to confer personal tax benefits on residents who contribute to their
tax coffers. The benefits theory would imply that a resident should be able to collect
personal tax benefits to the extent that her tax payments to the source state exceed the
money value of any source state government benefits she already receives, including
infrastructure, regulated labour and capital markets, and so on. Although intuitively
attractive, the benefits theory of taxation suffers from several major draw backs. It would be
impossible to implement precisely due to the difficulty of determining the amount of
government benefits, including diffuse benefits such as military protection received by
each resident and non-resident taxpayer.
iii. Ability to Pay Theory
The adjudged most popular and commonly accepted principle of equity or justice in
taxation is that citizens of a country should pay taxes to the government in accordance with
their ability to pay. The ability to pay principle, people with higher incomes should pay
more taxes than people with lower incomes. It appears very reasonable and just that taxes
should be levied on the basis of the taxable capacity of an individual. The economists are not
unanimous as to what should be the exact measure of a person's ability or faculty to pay. The
main viewpoints advanced in this connection are as follows:
a. Ownership of Property
Some economists are of the opinion that ownership of the property is a very good basis of
measuring one's ability to pay. This idea is out rightly rejected on the ground that if a
person's earns a large income but does not spend on buying any property, he will then
escape taxation. On the other hand, another person earning income buys property; he will
be subjected to taxation. It is therefore absurd and unjustifiable that a person, earning large
income is exempted from taxes and another person with small income is taxed.
b. Tax on the Basis of Expenditure
It is also asserted by some economists that the ability or faculty to pay tax should be judged
by the expenditure which a person incurs. The greater the expenditure, the higher should
be the tax and vice versa. The viewpoint is unsound and unfair in every respect. A person
having a large family to support has to spend more than a person having a small family. If
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we make expenditure as the test of one's ability to pay, the former person who is already
burdened with many dependents will have to' pay more taxes than the latter who has a
small family. So this is unjustifiable.
c. Income as the Basics
Most of the economists are of the opinion that income should be the basis of measuring a
man's ability to pay. It appears very just and fair that if the income of a person is greater than
that of another, the former should be asked to pay more towards the support of the
government than the latter. That is why in the modern tax system of the countries of the
world, income has been accepted as the best test for measuring the 'ability to pay' of a
person.
Concept of Economic Development
Economic growth deals with an increase in the level of output, but economic development
is related to an increase in output coupled with improvement in the social and political
welfare of people within a country. Economic development refers to “a policy intervention
effort targeted at the economic and social wellbeing of people. The focus of economic
development is on improvement in the quality of life of people, introduction of new goods
and services using modern technological, mitigation of risk and dynamics of innovation
and entrepreneurship” (Hadjimchael, Kemeny & Lanadan, 2014). 'Economic development'
is a term that practitioners, economists, politicians, and others have used frequently in the
20th century. The concept, however, has been in existence in the West for centuries.
Modernization, Westernisation, and especially Industrialisation are other terms people
have used while discussing economic development. Economic development has a direct
relationship with the environment.
A country's economic development is usually indicated by an increase in citizens' quality of
life. 'Quality of life' is often measured using the Human Development Index, which is an
economic model that considers intrinsic personal factors not considered in economic
growth, such as literacy rates, life expectancy, and poverty rates. Having economic growth
without economic development is possible. Economic growth in an economy is
demonstrated by an outward shift in its Production Possibility Curve (PPC). Another way
to define growth is the increase in a country's total output or Gross Domestic Product
(GDP). It is the increase in a country's production.
In general context, economic development is the growth of the standard of living of a
nation's people from a low-income economy to a high-income economy, moving the poor
put of the poverty level. When the local quality of life is improved, there is more economic
development. “It is a process whereby the people of a country utilize the available resources
in such a way that the per capita income of the country increase”. This implies that the
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people in a country becoming wealthier, healthier and with a longer average life expectancy
following improved productivity, higher literacy rates, and better public education.
In real terms, economic development is measured by the Human Development Index
(HDI), which the United Nations Development Programme (UNDP) (2014) described as “a
composite measure of long-term progress in three basic areas of human development
namely: access to safe and healthy life, access to education and a decent living standard”.
“It is a process by which a nation improves the economic, political and social well-being of
its people.” UNDP (2014) went further to explained that HDI “is an index that measures key
dimensions of human development which are: A long and healthy life-measured by life
expectancy, a decent standard of living-measured by Gross National Income per capita
adjusted for the price level of the country”.
The aforementioned measures of economic development and the key features of Human
Development Index (HDI) justify the adoption of the variable as proxy for economic
development in this study. The implication is that if government faithfully and
purposefully channels tax revenues to socio-economic projects, it is transcending to a
higher standard of living among the citizens.
Economic Development Goals
The development of a country has been associated with different concepts but generally
encompasses economic growth through higher productivity, political systems that
represent as accurately as possible the preferences of its citizens, the extension of rights to
all social groups and the opportunities to get them and the proper functionality of
institutions and organizations that are able to attend more technically and logistically
complex tasks (i.e. raise taxes and deliver public services). These processes describe the
State's capabilities to manage its economy, polity, society and public administration.
Generally, economic development policies attempt to solve issues in these topics.
With this in mind, economic development is typically associated with improvements in a
variety of areas or indicators (such as literacy rates, life expectancy, and poverty rates), that
may be causes of economic development rather than consequences of specific economic
development programs. For example, health and education improvements have been
closely related to economic growth, but the causality with economic development may not
be obvious. In any case, it is important to not expect that particular economic development
programs be able to fix many problems at once as that would be establishing
unsurmountable goals for them that are highly unlikely they can achieve. Any
development policy should set limited goals and a gradual approach to avoid falling victim
to something Prittchet, Woolcock and Andrews call 'premature load bearing' (Pritchett,
Woolcock & Andrews, 2013).
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Taxation For Economic Development
How Economic Development Works
Now we know that the goal of economic development is to improve the well-being of
everyone, irrespective of race, background or class, but how does it actually work?
As Britannica.com points out, there is no single definition of what constitutes the process of
economic development. But there are key indicators and learnings that have shown
success. It might sound like a pretty big project to try to improve the social and political
well-being of a country through economic strategies, and it is. That's why it's important to
not try to solve it all at a national or international level, but at the local and regional levels.
As Michael Porter, a professor at the Harvard Business School puts it: “While macro policies
and regulatory reforms set important conditions for growth and access to opportunity, it is
ultimately the role of local and regional actors and institutions to address the unique
market failures and opportunities in their community.” This is why local and regional
economic development organizations are so vital. Every metropolitan area has its own
unique set of circumstances, and there's no blanket approach that will work across the
diverse economic landscape of a country like the United States (or anywhere else, for that
matter).
Denver's challenges in providing affordable housing, for example, are going to be much
different than in New York City. Construction costs are different, timelines will vary based
on weather, and managing relationships between private and public sectors will be subject
to unique regional policies.
Economic Development Policies
In its broadest sense, policies of economic development encompass two major areas:
i. Governments undertaking to meet broad economic objectives such as price
stability, high employment, and sustainable growth. Such efforts include monetary
and fiscal policies, regulation of financial institutions, trade, and tax policies.
ii. Programs that provide infrastructure and services such as highways, parks,
affordable housing, crime prevention, and K–12 education.
iii. Job creation and retention through specific efforts in business finance, marketing,
neighborhood development, workforce development, small business
development, business retention and expansion, technology transfer, and real
estate development. This third category is a primary focus of economic
development professionals.
Development Indicators and Indices
There are various types of macroeconomic and sociocultural indicators or "metrics" used by
economists and geographers to assess the relative economic advancement of a given region
or nation. The World Bank's "World Development Indicators" are compiled annually from
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Taxation For Economic Development
officially recognized international sources and include national, regional and global
estimates.
a. GDP Per Capita: Growing Development Population
GDP per capita is gross domestic product divided by midyear population. GDP is the sum
of gross value added by all resident producers in the economy plus any product taxes and
minus any subsidizes not included in the value of the products. It is calculated without
making deductions for depreciation of fabricated assets or for depletion and degradation of
natural resources.
b. Modern Transportation
European development economists have argued that the existence of modern
transportation networks- such as high-speed rail infrastructure constitutes a significant
indicator of a country’s economic advancement: this perspective is illustrated notably
through the Basic Rail Transportation Infrastructure Index (known as BRTI Index) and
related models such as the (Modified) Rail Transportation Infrastructure Index (RTI).
c. Introduction of the GDI and GEM
In an effort to create an indicator that would help measure gender equality, the UN has
created two measures: the Gender-related Development Index (GDI) and the Gender
Empowerment Measure (GEM). These indicators were first introduced in the 1995 UNDP
Human Development Report.
i. Gender Empowerment Measure
The Gender Empowerment Measure (GEM) focuses on aggregating various indicators that
focus on capturing the economic, political, and professional gains made by women. The
GEM is composed of just three variables: income earning power, share in professional and
managerial jobs, and share of parliamentary seats.
ii. Gender Development Index
The Gender Development (GDI) measures the gender gap in human development
achievements. It takes disparity between men and women into account in through three
variables, health, knowledge, and living standards.
d. Community Competition
One unintended consequence of economic development is the intense competition
between communities, states, and nations for new economic development projects in
today's globalized World. For example, when Amazon was looking for the next location to
place their second headquarters (Amazon HQ2), cities and regions across the nation began
submitting bids to Amazon. Other countries, such as Canada and Mexico, also submitted
proposals in an attempt to win. With the struggle to attract and retain business, competition
is further intensified by the use of many variations of economic incentives to the potential
business such as: tax incentives, investment capital, donated land, utility rate discounts,
and many others. IEDC places significant attention on the various activities undertaken by
economic development organizations to help them compete and sustain vibrant
communities.
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Taxation For Economic Development
Additionally, the use of community profiling tools and database templates to measure
community assets versus other communities is also an important aspect of economic
development. Job creation, economic output, and increase in taxable basis are the most
common measurement tools. When considering measurement, too much emphasis has
been placed on economic developers for “not creating jobs”. However, the reality is that
economic developers do not typically create jobs, but facilitate the process for existing
businesses and start-ups to do so. Therefore, the economic developer must make sure that
there are sufficient economic development programs in place to assist the businesses
achieve their goals. Those types of programs are usually policy-created and can be local,
regional, statewide and national in nature.
Evidence of Economic Growth and Economic Development
a. Economic Growth occurs when:
i.
There is a discovery of new mineral/metal deposits.
ii. There is an increase in the number of people in the workforce or the
quality of the workforce improves. For example, through training and
education.
iii. There is an increase in capital and machinery.
iv. There is an improvement in technology.
b. Measures of Economic Development will look at:
i.
An increase in real income per head – GDP per capita.
ii. The increase in levels of literacy and education standards.
iii. Improvement in the quality and availability of housing.
iv. Improvement in levels of environmental standards.
v. Increased life expectancy.
Role of Taxation in Financing Economic Development
Tax policy plays two important roles in financing economic development. One is to
maintain an economy at a higher employment level so that the saving capacity of the people
is raised with an increase in income per head. The second is to raise the marginal propensity
to save of the community as far above the average propensity to the maximum extent
possible without discouraging work effort or violating canons of equity. Savings can be
generated in two ways: by increasing real output or by a reduction in real consumption.
At the early stage of development, when the rate of raising is low, there is need for
compulsion in forcing people to consume less and save more. Only through taxation it is
possible to generate forced saving which is so essential for accelerating the rate of capital
formation which is the sine qua non of high rate of per capita income growth. Tax policy to
raise the MPS above APS is concerned with the design and implementation of taxes to
reduce private consumption. Tax revenue as a percentage of GNP is low in most developing
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Taxation For Economic Development
countries, averaging between 15—20%, compared to 25—30% in developed countries.
Moreover, direct taxes especially taxes on income, are a minor source of tax revenue compared with indirect taxes.
The proportion of the population that pays income tax in developing countries is
correspondingly low, averaging about 10% compared to the vast majority of the working
population in developed countries which constitutes between 20 to 40% of the total
population. There would, therefore, appear to be a greater scope for using tax policy to raise
the level of aggregate saving relative to income. Two important points may be noted in this
context.
i. Nature of Tax System
First, the rudimentary nature of the tax system in developing countries is partly a reflection
of the stage of development itself. Thus, the scope for increasing tax revenue as a proportion
of income may in practice is limited.
ii. Measuring the Tax Base
Secondly, there are the difficulties of defining and measuring the tax base and of assessing
and collecting taxes in circumstances where the population is scattered throughout the
country, and primarily engaged in producing for subsistence and where the illiteracy rate is
also high. There is also the fact that, as far as income tax is concerned, the income of the vast
majority of income-careers is so low that they fall outside the scope of the tax system.
Whereas 70% of national income is subject to income tax in developed countries, only about
50% is subject to such taxation in developing countries.
In this context, A.P. Thirwall has argued that, “even if there was scope for raising
considerably more revenue by means of taxation, whether the total saving would be raised
depends on how tax payments are financed — whether out of consumption or saving —
and how income (output) is affected. It is often the case that taxes which would make tax
revenue highly elastic with respect to income are taxes which would be met mainly out of
saving or have the most discouraging effects on incentives.”
Taxation as a Tool for Economic Management and Development
According to the National Tax Policy (2017), the tax system should support sustainable
growth and development at all times. In this regard, the tax system should be geared
towards meeting the following goals:
a. Wealth Creation and Employment
The tax system should be designed to promote social, political and economic development.
Accordingly,
i.
Tax policies shall promote employment, export and local production;
ii.
Tax policies and laws shall not be retroactive;
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Taxation For Economic Development
iii.
iv.
v.
vi.
vii.
Tax policies and laws should ensure equal investment opportunities and support
for businesses whether local or foreign;
Tax policies and laws on investments should be long term focused and tenured to
enable investors plan with reasonable certainty;
Any incentive to be granted should be broad, sector based, tenured and
transparent. Implementation should be properly monitored, evaluated,
periodically reported and kept under review;
Revenue forgone from tax incentives or concessions should be quantified against
expected benefits and reported annually. Where the benefits cannot be quantified,
qualitative factors must be considered; and
Tax policies on investments should not promote monopoly such as entry barriers
or otherwise prevent competition.
b. Taxation and Diversification
There should be concerted efforts to attract investments in all sectors of the economy, with
more focus on promoting investment in specific sectors as may be identified by government
in the overall interest of the country from time to time. This will boost the revenue base for
optimum revenue generation.
c. Focus on Indirect Taxation
The tax system should focus more on indirect taxes which are easier to collect and
administer and more difficult to evade.
Tax rates should be progressive and should be designed to promote equality. The tax
system should gradually seek a convergence of personal income tax and capital gain tax
rates with corporate income tax rates to reduce opportunities for tax avoidance.
d. Convergence of Tax Rates
Tax rates should be progressive and should be designed to promote equality. The tax
system should gradually seek a convergence of the highest marginal rate of personal
income tax, capital gains tax rates and the general companies income tax rates to reduce
opportunities for tax avoidance.
e. Special Arrangements and Other Incentives
Special arrangements should be sector based and not directed at entities or persons. Also,
special arrangements such as free zones and other tax incentives or waivers should not be
arbitrarily terminated except as provided in the enabling legal framework or treaties at the
time of creation. Government may provide tax incentives to specific sectors or for such
specific activities in order to stimulate or retain investment in the sector.
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Taxation For Economic Development
The process of granting and renewing incentives, waivers and concessions shall be
transparent and comply strictly with legislative provisions and international treaties.
f. Creating a Competitive Edge
i. Reduction in the Number of Taxes
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.
ii. Avoidance of Multiple Taxation
Taxes similar to those being collected by a level of Government should not be
introduced by the same or another level of Government. The Federal, State and
Local Governments shall ensure collaboration in harmonizing and eliminating
multiple taxation.
g. International and Regional Treaties
A wide network of International and Regional treaties would be beneficial to the economy.
In this regard, Nigeria shall continue to expand its treaty network in the best interest of the
Nigerian State. Generally, treaties should prevent double taxation without creating
opportunities for non-taxation.
Existing treaties should be reviewed regularly and where necessary renegotiated in line
with international best practices. New treaties should consider benefits to Nigeria both in
the short, medium but more importantly long term.
Nigeria's model double tax treaty should be regularly reviewed to adequately cater for the
best interests of the country. Appropriate measures shall be taken to ensure that all treaties
duly signed and ratified are implemented.
The National Tax Policy
One of the remarkable efforts of the Nigerian Government towards a streamlet a tax
administration was the National Tax Policy which provides the fundamental guidelines for
the orderly development of the Nigeria tax system. The Policy has the following specific
objectives, among others;
a. guide the operation and review of the tax system;
b. provide the basis for future tax legislation and administration;
c. serve as a point of reference for all stakeholders on taxation;
d. provide benchmark on which stakeholders shall be held accountable; and
e. Provide clarity on the roles and responsibilities of Stakeholders in the tax System.
With the following guiding principles:
a.
Equity and Fairness: Nigeria tax system should be fair and equitable devoid of
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Taxation For Economic Development
b.
c.
d.
e.
f.
g.
discrimination. Taxpayers should be required to pay according to their ability.
Simplicity, Certainty and Clarity: Tax laws and administrative processes should be
simple, clear and easy to understand.
Convenience: The time and manner for the fulfillment of tax obligations shall take into
account the convenience of taxpayers and avoid undue difficulties.
Low Compliance Cost: The financial and economic cost of compliance to the taxpayer
should be kept to the barest minimum.
Low Cost of Administration: Tax Administration in Nigeria should be efficient and
cost-effective in line with international best practices.
Flexibility: Taxation should be flexible and dynamic to respond to changing
circumstances in the economy in a manner that does not retard economic activities.
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.
Why is Tax Essential for Development
According to the World Bank, illicit flows of cash from developing economies amount to
between $500-$800 billion a year. How much of this is in the form of tax evasion is unclear,
but it is not unreasonable to estimate that the lost revenue is equivalent to many times
global bilateral development aid and more than the national income of several poor
countries combined. It is money foregone that could be spent on healthcare, education and
infrastructure. It means lives are lost that could be saved.
The ratio of tax to GDP in poorer countries is only about half of what it is in the developed
world. Though sub- Saharan Africa is not expected to match Scandinavian levels of
taxation, many low-income countries could boost their tax take by improving their fiscal
systems, and by doing so reinforce development. This is not a theory, as, for example,
reforms in Rwanda have shown. The Rwandan Revenue Authority, with strong
international support, carried out changes to strengthen internal organisational structures
and training, as well as relationships with local government. The result was a sharp increase
in domestic revenue from 9% of GDP in 1998 to nearly 15% in 2005 in what has been one of
Africa's better performing economies.
Tax is more than just a source of revenue and growth. It also plays a key role in building up
institutions, markets and democracy through making the state accountable to its taxpayers.
Just as excessive tax burdens might hinder growth in wealthier countries, in developing
economies a lack of tax structures is a major cause of weak, unresponsive governance. It also
leads to an overreliance on aid. With tax, the public can hold governments to account for
their decisions, and not feel tied to the will of aid donors. And because tax revenues are
relatively predictable, governments can plan ahead with greater certainty.
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Taxation For Economic Development
True, developing countries need aid and will continue to do so, but they can also use it to
help strengthen their tax capacity, increase their autonomy and reduce their long-term
dependence on external assistance. This idea is not new. Indeed, rich and poor country
governments have agreed on the importance of tax for development for years. The 2002
Monterrey Consensus, for instance, which launched a new focus on development,
recognised the key role of taxation in mobilising domestic resources-90% of domestic
revenue is usually derived from tax. However, recognising the importance of tax is one
thing, improving its impact and operation is another bearing in mind cultural barriers,
institutional weaknesses, and corruption, as well as international factors including capital
flight, aggressive tax planning and trade pressures. Consider tariffs, which many African
countries rely on for over half of their government revenue.
Though opening up trade is expected to bolster long-term economic growth, countries
participating in initiatives such as Doha are required to cut their tariffs. This presents a
major challenge to maintaining current revenue bases, let alone increasing them. In other
words, trade talks are more than just about reducing tariffs and subsidies to improve
market access, but about tax systems too. Before removing tariffs on cross-border trade,
governments must feel assured that alternative sources of revenue are already in place.
This is a complex task, which is why weak tax administrations must be strengthened.
Corruption is just one major obstacle. Developing countries have the misfortune to have tax
systems run by poorly trained and underpaid officials working in antiquated
administrative structures, often still based upon the old colonial models, with their
separate departments to deal with income and consumption taxes. A dramatic
improvement in these administrations is needed if developing countries are to move
beyond the poverty trap, with the confidence to reduce tariffs and carry out reforms, such as
broadening the tax base. Improvement requires independent revenue services led by
strong visionary tax commissioners, working with better paid officials within an integrated
administration.
It requires clear direction and focus including risk management systems that strike a
balance between enforcement and taxpayer service, as well as between public and business
demands. These improvements will be extremely hard to achieve without renewed and
carefully targeted efforts on the part of aid agencies and civil society groups, as well as
donor governments, to support projects aimed at improving tax capacity in poorer
countries. In 2006 less than 0.1% of aid went into the tax area. If development is to take off in
the years ahead, this ratio will have to be dramatically increased. Aid used in this way can
provide the seeds for African driven development.
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Taxation For Economic Development
The recent initiative of African tax commissioners from 30 countries to create an African Tax
Administration Forum deserves strong support. This is an initiative designed by Africans,
for Africa with bilateral and multilateral donors, including the African Development Bank
and the OECD, playing a supportive role. The International Tax Dialogue-a grouping of the
EU, IMF, Inter-American Development Bank, World Bank, the OECD and the UK's
Department for International Development-can also help co-ordinate donor efforts and
provide benchmarks for measuring and guiding progress among tax administrations. This
work would be reinforced if the UN and more national aid agencies joined the grouping.
Strengthening and improving tax administration will not happen overnight. In the
meantime, the pressure on tax havens must continue. Tax havens which have no or nominal
taxation and lack transparency, effective exchange of information and "real activities" are
everywhere, and those with wealth to invest from developing and developed countries
have easy access to them. If taxes on income flowing to these jurisdictions were collected by
the rightful authorities, then billions of dollars would become available to finance
development.
The OECD knows this, which is why for over a decade we have been leading the fight
against tax havens by encouraging countries to agree to higher standards of transparency
and exchange of information in tax matters. Our tax standards have achieved a global
endorsement from the G20 and the UN, and implementation is moving forward.
There is much left to be done of course, including on the technical side. New efforts are
required to develop an internationally accepted methodology to measure the actual size of
the offshore sector and the precise amounts of revenue lost to tax havens too. After all,
though we may have a handle on the global loss of revenue to tax havens generally, for
policy responses to be effective, we need to know how many specific countries, and
particularly developing countries, are losing to particular offshore jurisdictions (Nipun,
2015).
The global economic crisis has refocused public and political attention on the importance of
defeating illicit tax abuse and improving bank transparency. It has ushered in a longoverdue public and political intolerance of regimes that flout tax laws and standards and
deprive countries of their rightful earnings and assets. Properly and transparently
organised tax systems are now accepted as engines of development, not constraints.
Accepting this message is important for all countries, and implementing it would be a
major step forward for developing countries.
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Taxation For Economic Development
Revenue Statistics in Africa 2020 Nigeria
Tax Revenues: Tax-to-GDP Ratio
The tax-to GDP ratio in Nigeria increased by 0.6 percentage points from 5.7% in 2017 to 6.3%
in 2018. In comparison, the average for the 30 African countries increased by just under 0.1
percentage points over the same period, and was 16.5% in 2018. Since 2010, the average for
the 30 African countries has increased by1.4 percentage points, from 15.1% in 2010 to 16.5%
in 2018. Over the same period, the tax-to-GDP ratio in Nigeria has decreased by 1.0
percentage points, from 7.3% to 6.3%. The highest tax-to-GDP ratio in Nigeria was 9.6% in
2011, with the lowest being 5.3% in 2016.
RESULTS
Figure 1
* The Africa (30) average was 16.5% in both 2017 and 2018 due to rounding. The Africa (30) average is not available
before 2009 due to missing data in some countries. In 2009, it is calculated based on estimated tax-to-GDP ratios for
Chad and Nigeria in that year, as data were not available prior to 2010 in these countries.
Source: NBC; Tax-to-GDP ratio, 2018
Nigeria's tax-to -GDP ratio in 2018 (6.3%) was lower than the average of the 30 African countries in
Figure 1 (16.5%) by 16.7 percentage points and also lower than the Latin America and the Caribbean
(23.1%).
Figure 2
NO SOURCE
28
Taxation For Economic Development
Tax Revenues: Structure
Tax structure refers to the share of each tax in total tax revenues. The highest share of tax
revenues in Nigeria in 2018 was contributed by corporate income tax (50%). The secondhighest share of tax revenues in 2018 was derived from value added taxes (VAT) (14%).
Figure 3
NB: The data for the OECD are for 2017 as the data for 2018 are not available
.
NB: The data for the OECD are for 2017 as the data for 2018 are not available.
Non-Tax Revenues
In 2018, Nigeria's non-tax revenues amounted to 3.1% of GDP. This was lower than the
average non-tax revenues for the 30 African countries (6.5% of GDP). Rents and royalties
represented the largest share of non-tax revenues in 2018, amounting to 2.0% of GDP and
66.6% of non-tax revenues.
Figure 4
Source: Revenue Statistics in Africa, 2020
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Taxation For Economic Development
Figure 5
Source: Revenue Statistics in Africa, 2020
CONCLUSION
In modern economies, taxes are the most important source of governmental revenue. Taxes
differ from other sources of revenue in that they are compulsory levies and are
unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a
particular public service, the sale of public property, or the issuance of public debt. While
taxes are presumably collected for the welfare of taxpayers as a whole, the individual
taxpayer's liability is independent of any specific benefit received.
The contributions of tax revenue to the Nigerian pulse is evidently very low and must be
enhanced and efficiently allocated if this country must attain development. The process
must start from registration of all taxable persons to ensuring that they comply with the
provision of the tax to pay and remit as at when due. Efficient administration of tax laws,
creating technology that will work and foster the operation of administration, and also a
dispute resolution system that is structured to serve the people.
In addition, Chapter 2 of the Constitution of the Federal Republic of Nigeria 1999 contains
Fundamental Objectives and Directive Principles of State Policy which are relevant to the
NTP, appropriate tax laws, administrative processes and procedure should therefore be
made to advance the Constitutional provisions. Hence the effective implementation of the
National Tax Policy is very crucial for Nigeria to attain development.
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Taxation For Economic Development
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32
CHAPTER TWO
DETERMINANTS OF TAX MORALE AND TAX COMPLIANCE:
EVIDENCE FROM NIGERIA
Orumwense, Kenny Esosa1; Josiah, Mary2 and Aiwoho, Doris3
Department of Accounting,
Igbinedion University Okada, Edo, Nigeria.
1
esosagabriel@gmail.com; +234-7065381495
2
+234-8037381270
3
Department of Accounting
Edo State Polytechnic, Usen.
aiworodoris03@gmail.com; +234-7034558073
ABSTRACT
This study examined the determinants of tax morale in Nigeria. The study adopted cross sectional
research survey design as a method of investigation, four (4) private companies in Nigeria formed the
basis upon which the sample size was derived for this study. Questionnaire was used as research
instrument to elicit responses. A total of four hundred (400) questionnaires were administered out of
which three hundred and eighty two were retrieved. Multiple-regression was used to analyse the
data. The study revealed that trust in government, employment , religion, age have significant
relationship with tax morale and tax compliance, while culture and education have insignificant
relationship with tax morale and tax compliance in Nigeria. The study recommends understanding
the social psychological of a taxpayer would help in ameliorating the issue of tax compliance in
Nigeria.
Keywords: Avoidance, Compliance, Demographic, Morale, Tax evasion.
INTRODUCTION
Tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an
individual or legal entity) by a governmental organization in order to fund government
spending and various public expenditures (Charles, 2015). Failure to pay liabilities is
punishable by law of the country. Taxes consist of direct or indirect taxes and may be paid in
money or as its labour equivalent. The first known history of taxation took place in Ancient
Egypt around 3000–2800 BC. Today subject of taxation has received considerable
intellectual and theoretical attention in accounting several literatures. Taxation is one of the
most vital subjects in governance both in developed and developing countries, taxes and
other incomes are important source of revenue to the government (Teera & Hudson, 2004).
33
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
But the amount of revenue to be generated by the government from such taxes for its
expenditure depends among other things the willingness of the taxpayers to comply with
tax laws of the country (Eshag, 1983). Tax is not voluntary but mandatory in as much one
earn income, make profit, gains, sell goods and services, a proportion out of that profit must
be paid as tax to the government, to enable government finance its expenditure for
economic growth and development, failure to comply with the tax provisions suggests that
a taxpayer may be committing an act of noncompliance (Kirchler, 2007).
The ability of a taxpayer to pay their tax liability makes a tax system a fair and equitable one.
Tax non-compliance occurs through failure to file tax return, misreporting income or
misreporting allowable subtractions and expenses from taxable income (Soos, 1991).Tax is a
powerful tool that have been used by successive government all over the world for the
growth and development of the nation., Nigeria as a country is not exceptional, the truth of
the matter is that Nigeria has not had efficient and concrete tax administration this was
evidence in Nzotta (2007) when he asserted that despite the tax audit and investigation,
Nigeria was still trying struggling with the issue of loses from its tax revenue. The then
executive chairman Babatunde Fowler of Federal Board of Internal Revenue in 2019
asserted that Nigeria has lost over ? 15 billion to tax evasion.
Tax is a social contract between the citizen and the government of a nation, both are parties
expected to be oblige to their responsibility, the citizen are expected to pay their taxes while
the government is also expected to utilize these taxes for the welfare and benefits of the
citizens. The trust relationship concept between the citizen and the government, shows it is
expected that these taxpayers should be utilised for the benefits and purpose of the society,
but over the years there have been gap in this contract of both parties are not yielding and
living up to their responsibility, this has resulted in low level of tax compliance, tax evasion,
tax avoidance. In recent times, cases of low level of tax compliance, tax evasion and tax
avoidance has affected the capacity of the government of not been able to raise adequate
revenue to finance its economic activities rather government had resorted to external
borrowing for finances, recently Nigeria debt management office (DMO) revealed that the
country debt has hit thirty-one (31) trillion naira, it was also revealed that Nigeria
government has used 1.1 trillion naira to service debt in the second quarter of 2020, a
country blessed with enormous resources. Mismanagement of public funds, corruption
orchestrated by the country public officers has caused the country backwardness.
Transparency international corruption perception index 2019 published in January 2020,
rated Nigeria at 146 out of 180 countries that was surveyed with a perceived level of
corruption in public sectors (corruption perception index, 2019).
34
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
In this regard a great amount of attention have been drawn on the part the government to
enhance accountability and transparency and to deviate from the norms of using economic
model as a benchmark for explaining the concept of tax compliance in the society as this
hasn't yielded any positive result in terms of tax revenue drive. Tax evasion is a common
phenomenon especially this part of sub-Saharan Africa like Nigeria (Modugu, Eriagbe &
Izedomni, 2012). This study is sacrosanct looking beyond the idea of using economic model
to explain the concept of tax compliance in the society; this concept was first advocated by
Allingham and Sandmo (1972). Allingham and Sandmo (1972) work was an extended work
of Becker model (1962) they specified that deterrence measures are the key factors to
increasing tax compliance, because tax evasion is negatively correlated with audit
probability, tax rate, fines, punishment and penalties.
Observing the issue of tax compliance registered around the world, many researchers
rarely linked using noneconomic factor to explain the issue of tax compliance. This study
has singled out tax morale as a concept in understanding the nature of tax compliance in the
society, hence understanding the determinants of tax morale would help in reducing the
issue of tax evasion, tax avoidance, low level of tax compliance and ensure adequate tax
compliance in the society.
Statement of Problem
The issue of tax evasion, tax avoidance, low level of tax compliance over the years have
been a major problem for the Nigerian government and the relevant tax authorities of not
been able to generate adequate revenue to finance its economic activities, rather the
government on a daily basis had resorted to external borrowings for finances. So finding
the determinants of tax morale by understanding the social psychological of a taxpayer
using social demographic factors would help in explaining an alternative concept to the
idea of the economic model concept that have dominated the concept of tax compliance for
years. There have been numerous empirical studies published that have continued to
encourage or uphold the idea of economic model concept in explaining the nature of tax
compliance behaviour and yet no positive result have been achieved. James, Zaimah and
kamil (2011) examined the role of financial condition and risk preference as important
variables in determining the nature tax compliance behaviour; they felt understanding the
financial condition and risk preference of a taxpayer would help explain better the idea of
tax compliance in the society. Kennedy, Modugu and Anyaduba (2014)examined the
impact of tax audit and other qualitative attributes on the tax compliance level in Nigeria.
Their result shows that there exists a positive relationship between tax audit and tax
compliance. This study intend to analyse in detail the determinants of tax morale which
has rarely been studied to best of my knowledge as a topic anywhere, this study intend to
rectify the gap in knowledge and to further contribute to the frontier of knowledge.
35
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
Objectives of the Study
The main objective of this study is to determine the determinants of tax morale. The specific
objectives are to: find if trust in government has any impact on tax morale, investigate if
culture has any impact on tax morale, examine if age plays a significant role on tax morale,
investigate if religion has any effect on tax morale, determine if level of education affect tax
morale, and find if nature of employment has any impact on tax morale.
Research Questions
The following questions are drawn to provide understanding on the determinants of tax
morale in Nigeria:
Does trust in government have any relationship with tax morale?
What is the effect of culture on tax morale?
Does age have any significant effect on tax morale?
Does religion affect the level of tax morale?
Does the level of education have any impact on tax morale?
Does nature of employment have any significant impact on tax morale?
Hypotheses
The hypotheses on which this research study is based are stated in null form as follows: Ho:
Trust in government does not have significant relationship with tax morale,
Culture of the people does not have significant relationship with tax morale,
Age does not have significant relationship with tax morale,
Religious belief of the people does not affect the level of tax morale,
Level of education does not have significant relationship with tax morale, and
Nature of employment does not have any significant effect on tax morale.
LITERATURE REVIEW
Conceptual Review of Tax Morale
This chapter presents a review of extant literatures on the study as well identifying the
dependent variables and independent variables that make up the study. This chapter
expatiates on the concept of tax morale, determinants of tax morale, prior empirical studies
as well as the theoretical framework of the study as it relates to determinants of tax morale.
In this study the Independent variables represent inputs or causes, thus, potential reasons
for variation of the dependent variable. As the issue of tax compliance is becoming rampart,
understanding the determinants of tax morale become necessary in helping to understand
the issue of tax evasion, tax avoidance in the society. According to Ajzen (1975) and Kirchler
(2008) suggest that some taxpayer see tax evasion as ethical because they seems to be
benefiting from the system and they seems less compliant, why some taxpayers sees tax
evasion unethical and complain more.
36
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
Finding the determinants, the motivational factors, the drives, the value as to why
taxpayers would want to pay their taxes voluntarily without coercion is very paramount to
this study. The enforcement strategies and policies as advocated by Alligham and Sandmo
which is been adopted by our contemporary tax administrators and most accounting
literatures as a way of ensuring tax compliance is gradually giving way for other areas to
be explored in order to ensure adequate compliance in the society for the realisation of
economic goals and objectives. Tax morale has been singled out by this study as a major
concept that can lead to high level of tax compliance in the society.
The primary purpose of taxation is to bring about economic growth and development
rather than the citizens seeing it as a pecuniary burden that can lead to discouragement of
investment. Modern approaches and researches are beginning to identify other areas as a
way of ensuring adequate tax compliance in the society rather than sticking to the
economic model or traditional model of tax compliance behaviour concept that have
dominated the nature and concept of tax compliance for years now, the model seek to
explain that taxpayer are rational being who always want to maximises his or her expected
utility and in order to discourage this act, sanction must be meted on those taxpayer who
tries to defaults from obliging to their tax responsibilities. One of the bordering questions
over the years that have continued to trail on debate is that, why do some people pay their
taxes and some other does not want to pay. Exploring the role of tax morale as a major
determinant of tax compliance is a major stride in the right direction towards ensuring
adequate compliance to tax laws and its policies (Alm, McClelland & Schulze, 1992).
Concept of Tax morale
The term “tax morale” was first coined by Schmölders back in 1960 who defined it as “the
attitude of a group or the whole population of taxpayers regarding the question of
accomplishment or neglect of their tax duties; it is anchored on citizens tax mentality and in
their consciousness of being a citizens, which is the base of their inner acceptance of tax
duties and acknowledgement of the sovereignty of the state (Schmölders, 1960). Despite the
definition given by Schmölders, tax morale is still a debated notion with different
meanings.
Torgler and Schneider (2006) defined tax morale as the “moral obligation” or an “intrinsic
motivation” to pay tax. Torgler (2002) and Frey (2003) stressed its relevance to understand
the high observed level of tax compliance in the society. Luttmer and Singhal (2014)
provide a survey and summarize the role of non-pecuniary motives and intrinsic
motivations on actual compliance in detail. Dwenger et al. (2016) use the term intrinsic
motivations for tax compliance while some other papers use tax ethics or tax honesty to
describe what we label tax morale. Tax morale encompasses an umbrella term capturing
37
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
non pecuniary motivations, non-economic motive for tax compliance as well as factors that
fall outside the standard of expected utility framework. It is now widely acknowledged
that the decision to evade taxes is not only driven by extrinsic pecuniary factors such as
economic gains, but also by intrinsic non-pecuniary motives. Following Luttmer and
Singhal (2014), describe the term tax morale as an umbrella term for such intrinsic taxcompliance motives. For example, individuals may have some intrinsic motivation to pay
taxes or feel guilt or shame for failure to comply.
Researchers like Frey and Feld (2002); Frey and Feld (2002) have attributed the response of
voluntary compliance to a set of intrinsic motivation or attitude often referred to as tax
morale. Tax morale emphasizes taxpayers' internal motivation; a large part of existing
literature recognizes social interaction variables as determinants of tax morale. Besley,
Jensen and Persson (2015), and Bénabou and Tirole (2011) showed for example, that the
intrinsic motivation of taxpayers to pay their taxes is affected by social norms.
Preliminary research was conducted during the 1960s by the Cologne School of Psychology,
they tried to narrow the bridge between economics and social psychology of tax
compliance by emphasizing that tax compliance should not only be analyzed from the
traditional neoclassical point of view, but also from social psychology perspective. They
saw tax morale as a major determining factor that could leads to high level of tax
compliance, this early work foreshadowed the emerging importance of behavioural
economics as a concept in understanding individual and group behaviour, and it is
reflected in a range of related approaches, which is roots in the psychology of taxation
(Lewis, 1982; Kirchler, 2007).
For several years the economic model used as a benchmark for understanding tax evasion
has been advocated by Alingham and Sandmo (1972) model emphasized that selfinterested taxpayers choose how much income to report to the tax authority by trading off
the benefits of tax evasion against the costs (the possibility of being caught and punished),
in this model, the key policy parameters affecting tax evasion are the tax rate, the detection
probability, penalties and fines imposed.
Low level of tax compliance is still been observed even as with the economic model is still
being advocated by orthodox researchers and policy makers, tax authorities. Researchers
are now beginning to find out why pecuniary measure are not been yielding as much as
expected, searching for alternative means of ensuring adequate tax compliance and
reducing tax evasion outside economic model is now becoming an indispensable
phenomena in the hands of the researchers, tax authorities, policy makers. Allingham and
Sandmo (in Alm, 1992) were also the first to recognize that the model did not capture all
38
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
motivations for tax compliance, in writing, this is a very simple theory, and it may perhaps
be criticized for giving too little attention to non-pecuniary factors in the taxpayer's
decision on whether or not to evade taxes. Many scholars, therefore, concluded that the
explanation for the tendency to comply should not only be based on explanation from
economic perspective alone but also from social psychological perspective using social
demographic factors.
Determinants of Tax Morale
Trust in Government
When a taxpayer perceived that the system corrupt and there is an inefficiencies in the
distribution of wealth and resources of the nation, lack of provision of social amenities,
the taxpayers may tend to act more reluctantly in paying their taxes, and this can
consequently lead to lack of trust on the part of the government in place for their
inefficient use of the nation resources for the benefits of the citizens, for example trust in
government can lead to high level of tax morale in other word leading to adequate tax
compliance in the society, once the citizen trust the government in place they are willing to
support the government by paying their taxes regularly. A government that seems to be
making good use of tax revenue collected, providing social amenities, infrastructure, good
roads, electricity etc. will enjoy the support of its people in all ramifications. Tax morale
decreases when people believes that taxpayers money is not judiciously been spent. A
notion supported by survey research, for example, Slemrod (2003), Freys and Torgler (2007)
find significant positive effects of different trust in state variables on tax morale. Using a
similar intuition, taxpayers who are proud of their country of residence may well be more
willing to pay taxes because their government is doing well, investigating the link between
the inefficiency of public spending and tax morale, Barone and Mocetti (2011) report that
the attitude towards paying taxes (i.e., tax morale) improves when public resources are
spent more efficiently.
Religion
Studies show that those who claim faith or religious identity have more positive attitudes
towards paying taxes, because they believe so much that, it is a sin to their religion to evade
tax. Empirical research on crime behaviour by Hull (2000) reveals that delinquent
behaviour and religious beliefs are negatively correlated. Torgler (2006) conducted an
extensive investigation on this relationship and finds a strong causal relationship between
different variables capturing religiosity and tax morale. The results are confirmed by
Konrad and Qari (2009) for European countries and Torgler (2005) for Latin America.
Religion is a belief and worship of a supernatural being. It is believed that there is
supernatural being that demands moral uprightness in everything one does. People who
seem more religious in nature would always want to live a moral life, thereby seeing tax
evasion has unethical phenomena against their religion and doctrine, in other words people
39
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
who seem more religious are always conscious and wanting to obey the norms of the society
by paying their taxes, while those who are not religious sometimes may seem neutral. From
40
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
Company. Taro Yamane formula (n = 1+ N/I + N(e)^2 was used in determining the sample
size which gave rise to n = 400 , using a population of approximately 180,000,000 Nigerians
(National population commission 2018), with an error limit of 5%, a sample size of 400 is
considered adequate as computed above.
The dependent variable in this study is represented by tax morale while the independent
variables are represented by trust in government, age, religion, culture, education and
nature of employment. Multiple regression analysis was conducted to assess the relative
predictive power of the independent variables on the dependent variable.
The Regression Model:
TMOR = âO + â1TIG + â2EDU + â3CUL+ â4REL + â5AGE + â6EMP + ut
Where:
TMOR = Tax Morale
TIG = TRUST IN GOVERNMENT
REL= RELIGION OF THE PEOPLE
EDU= LEVEL OF EDUCATION
AGE = AGE GROUP
CUL = CULTURE OF THE PEOPLE
EMP = NATURE OF EMPLOYMENT
ut = Is the error term
aporiri expectation : â1 - â6> 0
41
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
RESULTS
Table 1: Result Presentation
Variable
Coefficient
C
1.716247
TIG
0.199
EDU
0.025611
CUL
126501.3
REL
13395373
AGE
3051399.
EMP
-16.61110
R-squared
0.673638
Adjusted R-squared 0.639126
S.E. of regression
0.248609
Sum squared resid 11.80504
Std. Error t-Statistic
0.559334
3.068375
0.4100
4.849
0.012317
2.079340
213899.1
0.591407
5999331.
2.232811
1372685.
2.222942
-16.61110 -2.498989
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Log likelihood
-2.285150
F-statistic
Durbin-Watson stat 1.895293
Prob(F-statistic)
Source: Researchers Computation 2020
42
Prob.
0.0025
0.000
0.0597
0.5652
0.0454
0.0462
0.0280
2.336396
0.253620
0.084113
0.184109
2.596185
0.026818
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
In the table 1 above, with the coefficient of the constant of 1.716247, it implies that when the
independent variables.
Education, culture, religion, age and nature of employment are held constant; the tax
morale of Nigerians (TMOR) will be at a minimum level of 1.716247.
The coefficient of trust in government (TIG) shows a positive value of 0.199, implying that
one unit positive improvement in trust in government in Nigeria will bring about positive
increase in tax morale of Nigerians by 0.199 units and significant.
The coefficient of education (EDU) shows a positive value of 0.026, implying that one unit
positive improvement in education in Nigeria will bring about positive increase in tax
morale of Nigerians by 0.026 units and insignificant.
Culture of the people (CUL) shows a positive value of 126501.3, implying that one unit
improvement in Culture of the people towards paying tax in Nigeria will bring about
positive tax morale among Nigerians by 126501.3 and insignificant.
The coefficient of religion (REL), shows a positive value of 13395373, implying that one unit
improvement in religion will bring about a positive tax morale by 13395373 and significant.
The coefficient of Age (AGE), shows a positive value of 3051399, implying that one unit
change in Age in Nigeria will bring about a positive tax morale by 3051399 units and
significant in Nigeria.
The coefficient of nature of employment (EMP) shows a negative value of 16.611, implying
that one unit positive improvement in employment to public sector in Nigeria will bring
about decrease in tax morale of Nigerians by 16.611 units and significant in Nigeria.
Using the rule of thumb, which specifies that if the value of Durbin Watson (DW) is “2” it
means that, there is no positive autocorrelation in the residuals. This means that the model
is not bias. With the DW statistic of '1.90', approximately '2', means that the equation has no
autocorrelation, which means that equation is not biased.
CONCLUSION AND RECOMMENDATIONS
From the study, the following were found as determinants of tax morale and good
instruments to measure tax morale in Nigeria, they are: trust in government (TIG), age
(AGE), religion (REL), nature of employment (EMP), show a significant relationship to tax
morale while education (EDU), culture (CUL) variables show insignificant relationship
with tax morale.
43
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
The essence of paying tax is to enable the government raise adequate revenue to finance its
economic activities, provide essentials services, infrastructures etc., but the question that
often arises and been asked over time, is that why do some people like to pay their taxes
voluntarily without coercion and some do not like to pay. Over the years the methods,
strategies and models the relevant tax authorities have been adopting in dealing with the
issue of tax compliance in Nigeria hasn't really yielded much as expected in terms of tax
achievement, hence this has created gap in Nigeria tax system with the persistence of tax
evasion, tax avoidance. The study concludes that the economic model that have formed the
benchmark for understanding the concept of tax compliance behaviour for over forty (40)
years now have not yielded any positive results in tax related matters. Understanding the
social psychology perspective of a taxpayer by looking at social demographic factors would
help in ameliorating the issue of tax compliance in the society, strengthen government
commitment towards economic development and ensure a better society.
The study therefore recommended base on the findings that:
The government should ensure transparency and accountability in utilisation of taxpayers'
money;
The government should ensure better tax policy formulation and modernise tax
administration procedures, as this would help reducing the issue of corrupt practises and
improve the taxpayer ideology;
The taxpayers should try as much as possible to see the immediate society as their own by
paying their taxes voluntarily without coercion;
The government is no doubt the sole administrator of taxes, they should ensure, they
judiciously utilise generated tax revenue for the benefits of its people, so that the citizen can
have more confidence in them and support their administration;
The tax authorities should try as much as possible to seek for cooperation between them
and the taxpayers as this can reduce the cost of tax administration;
Solely relying on economic model to determine tax compliance matters should be limited in
nature as it possess some element of threat and deterrence, understanding the social
psychology of a taxpayers by looking at their social demographic factors will help in
ameliorate the issue of tax compliance in the Nigeria, and Human being are rational being
and difficult to deal with in reality, the traditional neoclassic economic model that stresses
deterrence factors, tax audit, reward, penalties and fines should not completely be eroded
because tax compliance needs some element of enforcement, the economic model should
be complemented with the idea of social psychological perspective for adequate tax
compliance.
44
Determinants Of Tax Morale And Tax Compliance: Evidence From Nigeria
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Europe. Journal of Economic Psychology, 27(2), 224-246.
Alm, J. (2012). Measuring, explaining, and controlling tax evasion: Lessons from theory,
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Barone, G. & Mocetti, S. (2011). Tax morale and public spending inefficiency. International
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Becker, G. S. (1968). Crime and punishment: An economic approach. The Journal of Political
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Besley, T., Jensen, A. & Persson, T. (2015).Norms, enforcement and tax evasion. Technical
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Charles, E. (2015). Taxation britannica. Retrieved September 2020.
Dwenger, N., Kleven, H., Rasul, I. & Rincke, J. (2016). Extrinsic and intrinsic motivations for
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Eshag, E. (1983). Fiscal and monetary policies and problems in development countries. Cambridge
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Frey, B. (2003). The role of deterrence and tax morale in taxation in European countries.
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Hull, B. B. (2000). Religion still matters. The Journal of Economics,26(2), 35-48.
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Kirchler, E. (2007). The economic psychology of tax behaviour. Cambridge University Press,
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compliance. IZA Discussion paper Series, 4121.
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46
CHAPTER THREE
TAX REVENUE GENERATION IN THE FACE OF COVID-19 PANDEMIC
IN NIGERIA
1
2
3
Ogwuche, Emmanuel Ejeh ; Josiah, Mary and Omoruyi, Bright Inuaghata
1, 2, 3
Department of Accounting
College of Business and Management Studies
Igbinedion University Okada, Nigeria.
1
ejehemmanuel123@gmail.com
2
majoel2003@yahoo.com; +234-8051104541
3
brightomoruyi1980@gmail.com
ABSTRACT
This study investigated tax revenue generation in the face of COVID-19 pandemic in Nigeria. The
study covered a period of last quarter of 2019 to second quarter of 2020. The specific objectives of this
study were to determine the relationship between petroleum profit tax, company income tax, value
added tax and coronavirus pandemic (COVID-19).
The Ordinary Least Square (OLS) regression technique was employed to estimate the data as well as
testing the stated hypotheses. Findings revealed the existence of a positive and insignificant
relationship between Petroleum Profit Tax, Value Added Tax and Coronavirus Pandemic, while the
variable of Company Income Tax exhibited a negative and insignificant relationship.
The study recommended that government should encourage the officials in charge of tax collection
and administration by providing the necessary COVID-19 protective equipments, so as to enhance
the performance of tax officials.
Keywords:
Company income tax, COVID-19, Petroleum profit tax, Value added tax.
INTRODUCTION
The world have for some time now living in fear due to the emergence of recent global
pandemic known as coronavirus (also refers to as COVID-19). The origin of the virus
(pandemic) was traced to a city called Wuhan in the People's Republic of China in
December, 2019. Wuhan is an ever busy city (business community) in the province of Hubei
in the People's Republic of China. According to Oladele, Olakunde, Oladele, Ogbuoji and
Yamey, (2020) the World Health Organization (WHO) was notified of the virus on 30th
December, 2019. Consequently, World Health Organization renamed the virus as
Coronavirus Disease-19 (COVID-19). By 30 January 2020, WHO declared the outbreak a
47
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
public health emergency of international concern (Onyeaghala & Olajide, 2020). The virus
is said to have spread across the continents of the world and it is currently active in two
hundred and sixteen (216) nations (Oladele, Olakunde, Oladele, Ogbuoji & Yamey, 2020).
Otache (2020) say that “the disease has become a global pandemic, and that pandemic has
caused massive economic disruptions across the globe.” Not only that the pandemic have
disrupted economic activities globally, it is also reported to have claimed several lives
across the globe. According to Nigeria Centre for Disease Control (NCDC) COVID-19
situation report as at Midnight 10th October, 2020, a total number of COVID-19 cases
globally stood at 36,754,395 and 1,064,838 death so far recorded.
The first case of COVID-19 was reported in Nigeria on the 27th day of February, 2020 and
the index case was a 44 year old Italian origin who returned from Milan, Italy. He visited a
health facility on the 26th day of February, 2020 having developed sign and symptom of the
virus, upon which he was confirmed positive to the deadly virus (Ajisegiri, Odusanya &
Joshi, 2020). Since the news of the index case broke out, “the country has continued to
experience an increase in the number of cases, which has spread across several states”
(Ajisegiri, Odusanya & Joshi, 2020). Ajisegiri, Odusanya and Joshi (2020) said that “majority
of the initial cases were imported, most of the new cases have no travel history or contact
with such people. This is highly suggestive of ongoing community transmission.”
This pandemic (COVID-19) has since spread across the thirty-six states of the federation of
Nigeria including the Federal Capital Territory (FCT), Abuja, as at 10th day of October,
2020, total reported cases in Nigeria stood at 60,103, total treated and discharged cases
stood at 51,711 and 1,115 death recorded.
Otache (2020) affirmed that, “there is no denying that the pandemic has brought untold
hardships on Nigerians, as many people have lost their jobs, lives and businesses, even the
Nigeria's economy has also been badly affected.” Otache (2020) buttress that “the
pandemic has affected negatively various sectors of the economy such as education,
banking, manufacturing, sports, agricultural, aviation, transportation and hospitality, as
well as tax revenue generation in Nigeria.”
Government of every nation on earth relies solidly on tax revenue (both oil and non-oil tax
revenues) to enable it charge it constitutional duty to the citizens of their country. Adegbie,
Nwaobia and Osinowo (2020) posited that there is existence of mutual relationship among
the government and the nationals (citizens) in all the country of the world, hence the
governments guarantee conducive environment for commerce, industry and trade to
flourish where the nationals will be gainfully employed. In reciprocating the enabling
environment provided by the government, the nationals bear the responsibility of the
48
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
expenses of the infrastructure provided by the government through the payment of tax
(Adegbie, Nwaobia & Osinowo (2020). Adeusi, Uniamikogbo, Erah and Aggreh (2020)
defined tax as a fee government charged or collected on goods, earnings or activity. Adeusi,
Uniamikogbo, Erah and Aggreh (2020) explained that tax charged directly on person(s) or
corporate organization(s) is regarded as direct tax, but if it is charged on the amounts of
products or services, then, it could be best described as indirect tax. Tax payment enable
government accomplish it constitutional duties in terms of making available essential
amenities of living like better roads, good drinking water, electricity, good and affordable
health care as well as security of life and property (Onoja & Ibrahim, 2020).
Statement of the Research Problem
Due to the fact the COVID-19 pandemic is quite new, little or no journals/articles may have
talk about tax revenue generation in the face of COVID-19 Pandemic in Nigeria. To this end,
the dearth of empirical evidence from Nigeria in this area, therefore create knowledge gap,
as to what people perceived to be the fate of tax revenue generation in the face of COVID-19
pandemic in Nigeria, hence this study is carry out to examine tax revenue generation in the
face of COVID-19 pandemic in Nigeria with the aim to boost empirical evidence from
Nigeria.
Premised on the above problem, this study would seek to answer the following research
questions;
1. What is the relationship between petroleum profit tax and coronavirus pandemic?
2. What is the relationship between company income tax and coronavirus pandemic?
3. What is the relationship between value added tax and coronavirus pandemic?
Objectives of the Study
The broad objective of this study is to examine the relationship between taxation and
infrastructural development in Nigeria. Specifically, the study seeks to:
1. Find out the relationship between petroleum profit tax and coronavirus pandemic.
2. Investigate the relationship between company income tax and coronavirus pandemic.
3. Identify the relationship between value added tax and coronavirus pandemic.
Research Hypotheses
The hypotheses of this study are stated in null form as follows:
H01:
There is no significant relationship between Petroleum Profit Tax and coronavirus
pandemic.
H02:
There is no significant relationship between Company Income Tax and coronavirus
pandemic.
H03:
There is no significant relationship between Value Added Tax and coronavirus
pandemic.
49
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Concept of Tax/Taxation
Taxation is described as a tool utilized by government of a nation in making money
available for the general funds (Anyaduba & Aronmwan, 2015). According to Oliver, Edeh,
& Nnenna (2017) opined that in developing country such as Nigeria, taxes can be employed
as a tool for accomplish both micro and macroeconomic purposes.
Tax payment is a vital means of revenue generation to government of both developed and
developing countries because taxation enables the government discharge her
constitutional duty by providing social amenities, safeguarding the life/property as well as
the provision of infrastructural development to her citizens (Ogbogbo, Omoregie &
Eguavoen, 2019). Kimsen and Siti (2018) describe tax as one of the instruments for revenue
generation that is fundamental for the accomplishment and improvement of economic
development that is targeted at promoting the prosperity as well as general wellbeing of the
citizens of a nation.
Petroleum Profit Tax
According to Yahaya and Yusuf (2019) revenue generated from taxes on payable by oil and
gas companies in Nigeria as known as oil tax revenues. It can be best described as Petroleum
Profit Tax (PPT) and payment from economic rent relating to oil extraction.
Oliver, Edeh and Nnenna (2017) described “petroleum profit tax as a tax applicable to
upstream operations in the oil industry as it is related to rent, royalties, margin, oil mining
prospecting and. exploration leases.” Odusola (2006) described this type of tax is the most
vital type of tax in Nigeria, because it contribute more than 70% of revenue generated by
government in Nigeria and over 95% of foreign exchange income.
Company Income Tax
According to Olagunji, Omotola, Nuga and Ademola (2019) Company income tax have
being in existence in Nigeria since 1961. The law guiding this form of tax have undergone
series of amendment and currently is it known as Company Income Tax Act 1990 (CITA).
Olagunji, Omotola, Nuga and Ademola (2019) explained that the only institution
empowered by law to manage this form of taxation is the Federal Inland Revenue Services
(FIRS) of the Federal Board of Inland Revenue. Adeusi, Uniamikogbo, Erah and Aggreh
(2020) clarified that 30% rate of computable earnings of corporate organization is being
charged as Companies Income Tax
Value Added Tax
As explained by Adeusi, Uniamikogbo, Erah and Aggreh (2020) Value Added Tax (VAT) is
regarded as tax which a marketer, dealer or producer add to the price of goods and services
before a product is been sold. Similarly, Yahaya and Yusuf (2019) say that Valued Added Tax
50
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
(VAT) is also known as “consumption tax which is payable on the goods and services
consumed.”
Value Added Tax (VAT) has turned out to be leading revenue generation means in various
countries (at least in development countries) (Adereti, Adesina & Sanni, 2011). Adereti,
Adesina and Sanni (2011) are of the opinion that the extraordinary performance of Value
Added Tax in practically the entire countries where VAT is being practiced obviously
formed Nigeria government decision to institute VAT in Nigeria in January 1994
Omesi, Ngoke and Ordu (2020) investigated the association between non-oil revenue and
economic development of Nigeria for a period of 30 years i.e. 1989–2018. They utilized
descriptive and historical research design for the purpose of this study. The estimated and
interpreted the data they sourced from Central Bank of Nigeria Statistical Bulletin with the
aid of regression analysis. The study discovered a positive association between non-oil
revenue and economic development of Nigeria.
Another study on non-oil taxes and economic growth was conducted by Adegbie, Nwaobia
and Osinowo (2020). The study covered a period of 1994–2017. Descriptive and inferential
statistics were employed in analysis the data using multiple regressions. At the end of their
analysis, it was discovered that non-oil tax variables of custom and excise duties, capital
gain tax, company income tax, tertiary education tax and value added tax exhibited
significant influence on economic growth.
Onoja and Ibrahim (2020) determine the connection between tax revenue and economy
growth of Nigeria. To achieve the purpose of this study, they generated data through
secondary source. They used Strata econometric software to estimate the data they
generated. The study discovered that non-oil tax variables of Value Added Tax and
Companies Income Tax possessed significant association with economic growth of Nigeria.
Okoror, Uwaleke, Mainoma and Oyedokun (2019) conducted a study of the impact of Value
Added Tax (VAT) on infrastructural development in Nigeria. Ex post facto research design
was adopted by the researchers. The utilized secondary data sourced from Central Bank of
Nigeria (CBN) statistical bulletin, Federal Inland Revenue Service (FIRS) and National
Bureau of Statistics. The study covered a period of 1994 – 2017. The study relied on
Autoregressive Distributed Lag (ARDL) model approach to co-integration in estimating
the data. The result showed that Value Added Tax exhibited a positive and significantly
influences infrastructural development of Nigeria.
Ajiteru, Adaranijo and Bakare, (2018) examine the association between tax revenue and
infrastructural development in Osun State. They utilized survey research design for the
purpose of this study. The study population comprises of staff of the Ministry of Finance,
51
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Osun State and the inhabitants of the state. A total of one hundred and two (102) respondents
were selected using purposive sampling technique. Descriptive statistics was employed in
analyzing the responses to the questionnaires used in this study. The study uncovered that
revenue generated from tax is a vital solid instrument for infrastructural development in the
State.
METHODOLOGY
Research Design
This study relies on longitudinal research design in view of the fact that it involves time series
data. Secondary data was utilized for the purpose of this study. Federal Inland Revenue
Service (FIRS) official website and NCDC official website constituted the main sources of data
used in this study. The sourced data covered a period of last quarter of 2019 – Second Quarter
of 2020.
Model Specification
The model is stated in functional form as:
COVID-19 = f(PPT, CIT, VAT)
----------(i)
In mathematical form, it is expressed as:
COVID-19 = o + 1PPT + 2CIT + 4VAT + et
----------(ii)
Where:
COVID-19
=
Coronavirus pandemic (coded as COVID-19).
PPT
=
Petroleum Profit Tax
CIT
=
Company Income Tax
VAT
=
Value Added Tax
Method of Data Analysis
In estimating the sourced data, the Ordinary Least Square Technique (OLS) was employed.
The study also considered the use of descriptive statistics, correlation matrix to confirm the
association between the selected variables.
Table 1: Operationalisation of Variable
S/N
Variable
1.
2.
Corona virus pandemic
Petroleum Profit Tax
Variables
Acronym
COVID-19
PPT
3.
Company Income Tax
CIT
4.
Value Added Tax
VAT
Measurement
This is taken as total revenue on Petroleum
Profit Tax
The variable is measured using total revenue
generated from Company Income Tax
The variable is measured using total revenue
generated from Value Added Tax
Source: Author Computation, 2020.
52
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
DATA ANALYSIS AND INTERPRETATION
Descriptive Statistics
The results of the descriptive statistics are analyzed in the table below:
Table 2: Descriptive Statistics
COVID_19
PPT
CIT
Mean
58423.17
514.6106
369.1087
Median
58392.00
512.8311
340.7403
Maximum
58848.00
592.5475
513.3817
Minimum
58062.00
440.3014
229.8280
Std. Dev.
290.8322
50.41450
117.2827
Skewness
0.253270
0.105902
0.297470
Kurtosis
1.837262
2.519869
1.559694
VAT
306.9485
310.2130
327.1954
275.1161
20.01850
-0.537920
2.035861
Jarque-Bera
Probability
0.402135
0.817857
0.068847
0.966162
0.607109
0.738190
0.521749
0.770378
Sum
Sum Sq. Dev.
350539.0
422916.8
3087.664
12708.11
2214.652
68776.15
1841.691
2003.703
6
6
6
Observations
6
Source: Author Computation, 2020.
The descriptive statistics in table 2 above shows the characteristics of the variables that were
used as the study sample. As discovered, the mean value of the dependent variable
Coronavirus Pandemic (coded as COVID-19) showed positive values ranging from
58062.00 to 58848.00 suggesting that Coronavirus Pandemic in Nigeria for the period under
review skewed towards the positive. The mean values of all the other independent
variables [Petroleum Profit Tax (PPT), Company Income Tax (CIT) and Value Added Tax
(VAT)] showed positive values with mean values of 514.6106, 369.1087 and 306.9485
respectively. The standard deviations of each of the variables showed minimal dispersion
(±) from the mean values which are highly desirable. More so, the probability values of the
Jargue Bera test for all factors are significantly lower than the 0.05 indicating that the series
are uniformly distributed.
The figure below revealed the outcome of the histogram normality and other descriptive
statistics of the variables selected in this study. The outcome accounted for a mean JarqueBera test of 0.822010 and related probability value of 0.822010 which is significantly lower
than the 5% level indicating that the variables are not steadily distributed. Thus, the issue of
endogeneity arising from the heterogeneous nature of the data are likely evident.
53
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Figure 1: Normality Test
3
S eries: Residuals
S ample 1 6
Observations 6
2
1
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
4.84e-12
-17.87845
200.3241
-194.8198
147.8933
0.134834
1.777173
Jarque-Bera
Probability
0.392007
0.822010
0
-200
-150
-100
-50
0
50
100
150
200
250
NO SOURCE
Table 3: Correlations Analysis
Covariance Analysis: Ordinary
Date: 10/01/20 Time: 11:36
Sample: 1 6
Included observations: 6
Correlation
t-Statistic
Probability
COVID_19
COVID_19
1.000000
---------
PPT
PPT
-0.063633
-0.127525
0.9047
1.000000
---------
CIT
-0.246756
-0.509259
0.6374
0.474166
1.077117
0.3421
1.000000
---------
0.676788
1.838651
0.1398
Source: E-views 9 (2020)
-0.659753
-1.755869
0.1540
-0.385454
-0.835467
0.4505
VAT
54
CIT
VAT
1.000000
---------
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Table 3 above presents the outcome of the correlations analysis variables used. The reason
for this test is to explain the extent to which selected variables are connected to each other. It
also affords us the opportunity to confirm if there is likely excessive association which
might lead to the issue of multi-collinearity. As gathered from the outcome, a significant
negative correlation exists between the dependent variable Coronavirus Pandemic (coded
as COVID-19) and the variables of Petroleum Profit Tax (PPT). An insignificant negative
correlation exists between the dependent variable Coronavirus Pandemic (coded as
COVID-19) and the variable of Company Income Tax (CIT) at -0.246756; while the variables
of Value Added Tax (VAT) showed insignificant positive associations with the dependent
variable Coronavirus Pandemic (coded as COVID-19) respectively. However, the variables
that have significant association with the dependent variable of Coronavirus Pandemic
(coded as COVID-19) did not passed the scale at 1% level of confidence. The good news is
that the coefficient is not problematic as none of the coefficient is more than 90; hence the
problem of multi-collinearity is not noticed.
Diagnostic Tests
Table 4: Variance Inflation Factors
Date: 10/01/20 Time: 11:37
Sample: 1 6
Included observations: 6
Variable
Coefficient
Variance
PPT
8.470973
CIT
1.038169
VAT
48.91358
C
10598028
Source: E-views 9 (2020)
Uncentered
VIF
Centered
VIF
248.1217
16.82574
507.4713
1162.892
1.968690
1.305777
1.792362
NA
The result of the variance inflation factor in table 4 above shows the absence of multicollinearity. The centered VIF values of the explanatory variables are far below the
benchmark of 10. The explanatory variables of Petroleum Profit Tax (PPT) reported a
centered VIF of 1.968690; Company Income Tax (CIT) 1.305777 and Value Added Tax
1.792362. All the variables of the model recorded are centered VIFs that are not substantially
different from 1.00 and are not indicative of the problem of multi-collinearity.
55
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Table 5: Heteroskedasticity Test: Breusch-Pagan-Godfrey
Heteroskedasticity Test: Breusch-Pagan-Godfrey
F-statistic
Obs*R-squared
Scaled explained SS
3.994148
5.141781
0.222003
Prob. F(3,2)
Prob. Chi-Square(3)
Prob. Chi-Square(3)
0.2067
0.1617
0.9740
Source: Researcher’s Compilation (2020)
Table 5 above shows the assessment of Heteroskedasticity. The reason for this test is to
check for the existence of non-constant variable that may cause the collapse of the BLUE
properties which may result for the loss of the effectiveness and steadiness property. The
decision rule for this is that there is no Heteroskedasticity should the F-statistic values is
correspondingly larger than 5% which is the critical values. If this is not existed (i.e. if the
critical values at 5% is greater than the F-statistic and observed R-square value), we assume
the existence of Heteroskedasticity. We discovered in the above table that, the p-value
(3.2%) of the corresponding experimental chi-square value is greater than 5%.
Consequently, we agree to the null hypothesis of heteroskedasitic error term which is
desirable. The consequence of this outcome is that the results can be relied upon.
RESULTS
The result obtained from the preliminary ordinary least square estimation technique is
presented below:
6: OLS Regression Analysis
Dependent Variable: COVID_19
Method: Least Squares
Date: 10/01/20 Time: 11:31
Sample: 1 6
Included observations: 6
Variable
Coefficient
Std. Error
t-Statistic
Prob.
PPT
CIT
VAT
C
4.306972
-0.436968
16.00180
51456.31
2.910494
1.018906
6.993824
3255.461
1.479808
-0.428860
2.287991
15.80615
0.2771
0.7098
0.1494
0.0040
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
0.741410
0.353525
233.8398
109362.1
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
56
58423.17
290.8322
13.98187
13.84304
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Log likelihood
F-statistic
Prob(F-statistic)
NO SOURCE
-37.94561
1.911416
0.361608
Hannan-Quinn criter.
Durbin-Watson stat
13.42613
2.202409
The table 6 above exposed that the R-squared of 0.74 this means that about the variables
explains about 74% of the systematic variations in Coronavirus Pandemic (coded as
COVID-19). Statistics reveal Adjusted R2 of 0.35. This suggests that about 35% of the
systematic variation of the dependent variable Coronavirus Pandemic (coded as COVID19) is accounted for by the independent variables, leaving about 65% unaccounted for by
these variables. The model is however significant and good as shown by the f-statistic of
1.911416 and probability value of 0.361608 with little or no indication of the presence of auto
correlation (the Durbin Watson is 2.202409).
The assessment of the slope coefficients of the independent variables revealed the existence
of positive relationship among Petroleum Profit Tax (PPT), Value Added Tax (VAT) and the
dependent variable Coronavirus Pandemic (coded as COVID-19) as portrayed by the slope
coefficient of 4.306972 and 16.00180 correspondingly. Also, the variables of Company
Income Tax (CIT) have negative relationships of -0.436968 with the dependent variable
Coronavirus Pandemic (coded as COVID-19) as shown in the table. It is worthy to note that
none the variables of [Petroleum Profit Tax (PPT), Company Income Tax (CIT) and Value
Added Tax (VAT)] passed the significance test at either 1%,, 5% or 10% level meaning they
did not significantly influence Coronavirus Pandemic(coded as COVID-19) during the
period under review as depicted by the findings of this study. Thus, a positive change in
Coronavirus Pandemic (coded as COVID-19) may likely increase Petroleum Profit Tax
(PPT), Company Income Tax (CIT) and Value Added Tax (VAT) significantly by up to
0.2771, 0.7098 and 0.1494 respectively.
CONCLUSION AND RECOMMENDATIONS
In line with the broad objective of our study which is to investigate tax revenue generation
in the face of COVID-19 pandemic in Nigeria. Following the result of our investigation, we
found out that:
There is a positive and insignificant relationship between petroleum profit tax and
coronavirus pandemic.
There is a negative and insignificant relationship between company income tax and
coronavirus pandemic.
There is a positive and insignificant relationship between value added tax and coronavirus
pandemic.
57
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
The purpose of this study is to empirically examine tax revenue generation in the face of
COVID-19 pandemic in Nigeria. Specifically, the study looked at how the variables of
Petroleum Profit Tax (PPT), Company Income Tax (CIT) and Value Added Tax (VAT) are
affected by the Coronavirus Pandemic (coded as COVID-19). The study employed multiple
regression estimation approach on the data extracted from Federal Inland Revenue Service
(FIRS) official website and NCDC official websites between the first and second quarters of
2020. The model was regressed to check for the existence of significant relationships
between the dependents (Coronavirus Pandemic – coded as COVID-19) and independent
variables (value added tax, custom and excise duties, stamp duties and total tax revenue).
The results from the study showed the existence of a positive and insignificant relationship
between Petroleum Profit Tax (PPT), Value Added Tax (VAT) and Coronavirus Pandemic
(coded as COVID-19), while the variable of Company Income Tax (CIT) exhibited a
negative and insignificant relationship between it and Coronavirus Pandemic (coded as
COVID-19). This means of Coronavirus Pandemic (coded as COVID-19) does significant
affect tax revenue generation in the face of Coronavirus Pandemic (coded as COVID-19).
With this result, we can conclude that by saying that Nigeria performed and are still
performing extremely well in terms of tax revenue generation in the face of Coronavirus
Pandemic (coded as COVID-19).
Following the analyses and the findings of this research work, these recommendations are
made:
The study recommends that government should encourage the officials in charge of tax
collection and administration by providing the necessary COVID-19 protective
equipments. This is further enhanced the performance of tax officials in the administration
and collection of taxes, this will in turn enhance tax revenue generation in the face of
COVID-19 pandemic.
The study also recommends that government should create the enabling environment that
promotes business activities, this is will not only boost business performance and
encourage investors, but also enhance tax revenue generation in the face of COVID-19
pandemic.
REFERENCES
Adegbie, F. F., Nwaobia, A. N. & Osinowo, O. (2020). Non-oil tax revenue on economic
growth and development in Nigeria. European Journal of Business and Management
Research, 5(3), 1–10.
Adereti, S. A., Adesina, J. A. & Sanni, M. R. (2011). Value added tax and coronavirus
pandemic of Nigeria. European Journal of Humanities and Social Sciences, 10(1),
456–471.
58
Tax Revenue Generation In The Face Of Covid-19 Pandemic In Nigeria
Adeusi, A. S., Uniamikogbo, E., Erah, O. D. & Aggreh, M. (2020). Non-oil revenue and
economic growth in Nigeria. Research Journal of Finance and Accounting, 11(8),
95–106.
Ajisegiri, W. S., Odusanya, O. O. & Joshi, R. (2020). COVID-19 outbreak situation in Nigeria
and the need for effective engagement of community health workers for epidemic
response.Global Biosecurity, 1(4), 1–10.
Anyaduba, J. O. & Aronmwan, E. J. (2015).Taxes and infrastructural development in
Nigeria. Nigerian Journal of Banking, Finance and Entrepreneurship Management, 1(1),
14–28.
Kimsen, I. K. & Siti, M. (2018).Profitability, leverage, size of company towards tax
avoidance. Jurnal Ilmiah Akuntansi Fakultas Ekonomi, 4(1), 29–36.
Odusola, A. (2006). Tax policy reforms in Nigerian. World Institute for Development
Economic Research. Research Paper, 3, 1–145.
Ogbogbo, S. N., Omoregie, N. A. E. & Eguavoen, I. (2019). Corporate determinants of
aggressive tax avoidance: Evidence from Nigeria. IOSR Journal of Business and
Management, 21(4), 1–9.
Okoror, J. A., Uwaleke, U., Mainoma, M. A. & Oyedokun, G. E. (2019).Value added tax and
infrastructural development in Nigeria. Journal of Taxation and Economic
Development, 18(2), 134–157.
Oladele, T. T., Olakunde, B. O., Oladele, E. A., Ogbuoji, O. & Yamey, G. (2020). The impact of
COVID-19 on HIV financing in Nigeria: A call for proactive measures. BMJ Global
Health, 5(1), 1–4.
Olagunji, K. J., Omotola, A. A., Nuga, K. A. & Ademola, P. S. (2019). Statistical analysis of
impact of non-oil tax revenue on the Nigeria economy. Journal of Economics and
Sustainable Development, 10(6), 80–90.
Oliver, I. I., Edeh, A. C. & Nnenna, C. V. (2017).Relevance of tax revenue resources to
infrastructural development of Nigeria. International Journal of Managerial Studies
and Research, 5(10), 74–81.
Onoja, E. E. & Ibrahim, A. S. (2020). Tax revenue and Nigeria economic growth. European
Journal of Social Sciences, 3(1), 30–44.
Otache, I. (2020). The effects of the COVID-19 pandemic on the Nigeria's economy and
possible coping strategies. Asian Journal of Social Sciences and Management Studies,
7(3), 173–179.
Yahaya, K. A. & Yusuf, K. (2019). Impact of non-oil tax revenue on economic growth in
Nigeria. Journal of Accounting and Management, 9(2), 56–69.
59
CHAPTER FOUR
ENVIRONMENTAL TAXATION: ISSUES AND BENEFITS
1
Ekpe, Malthus Timothy and Josiah, Mary
Department of Accounting,
Igbinedion University.
1
maltusekpe@gmail.com;+234-7037819183
2
majoel2003@yahoo.com; +234-8051104541
2
ABSTRACT
This study examined environmental taxation; issues and benefits with the objectives of identifying
issues and revealing the benefits of taxation using a descriptive statistics where content analysis of
literature of past journals, articles, conference papers and books were reviewed. The study found that
adopting environmental taxation in Nigeria is advantageous as it enables revenue generation;
curtailment of certain behaviour of organizations and environmental conservation while issues of
determining effective tax rate for local polluters, inability of policy makers to acquire sufficient
information, weak institutions and corruption, poor reforms, non-voluntary compliance etc. as
impeding environmental taxation in Nigeria. The study further emphasised that application of
environmental taxes should be done with optimum precaution given it might affect businesses
negatively due to multiplicity of taxes and negative competitive nature of Nigerian businesses. The
paper concluded by recommending government to adopt environmental taxation, instituting
stringent penalties against polluters of the environment and plugs loop holes in the Nigerian laws
and caution in the implementation.
Keywords: Accounting, Policy, Pollution, Sustainability, Taxation.
INTRODUCTION
Environment has been at the centre stage of world discussed over the past few decades.
Human and economic survival of nations largely depends on the environment. Without it
there will be no life. Therefore, it is important to take issues relating to environment very
seriously. Over the years activities of man as a result of industrial and technological
advancement has hampered the environment thereby affecting humans through causing
climate change, depletion of ozone layer, high emission of radioactive elements leading to
different types of ailments not known to man in the past. The quest for solutions on making
the environment sustainable and fit for living led to recent movements by environmentalist
and nations in addressing how man should respond to dangers posed to the environment.
60
Environmental Taxation: Issues And Benefits
In 1972 the United Nations Conference on Environment was held in Stockholm with major
aim of addressing these concerns. Environmental sustainability and sustainable
development are concepts which emphasis on meeting the economic and environmental
needs of today without compromising meeting the same objectives in the future (WCED,
1987). This has been on the news till today and series of debates have been going on the
subject. Society has become so conscious and more concern of the impact organizations
plays or need to play in ameliorating these environmental issues. The quest for solutions
led to environmental accounting and environmental taxation. While environmental
accounting covers both corporate level and national environmental performance activities
and associated stakeholder interactions and includes the processing of both non-financial
and financial information regarding environmental and ecological impacts (Islam, 2018;
Schaltegger, 1997), environmental taxation on the other hand means to collect taxes from
impersonal entities or individuals which are engaged in developing, defending or utilizing
environmental resources, according to the degree of the exploitation, pollution or
protection of the environmental resources (Oyedokun, Fowokan, Hassan & Akintoye,
2018).
Environmental taxation could be a major tool but in applying it serious caution need to be
taken. The National Tax Policy provided the scope under which to have fees, charges, fines
as well as environmental taxes none of which is in existence today. When payments are not
related to costs associated with particular participants, but more loosely related to a
discrete group of participants/an industry, then it's a 'tax if it is otherwise then it is not a tax'.
The question that could be asked is would placing pollution tax on fumes from millions of
generators or aged vehicles on Nigerian roads with no proper or efficient/affordable mass
transportation system be fair? (Amokaiye, 2020). He further stated that it will be counterproductive for the government to introduce new form of environmental taxes given that
multiplicity of taxation is already levied on businesses thereby causing them to face a
competitiveness issue. The better approach to adopt is for the government to review and
plug areas of lacuna or gaps in the environmental laws and regulations (in addition
introducing stringent financial sanctions and penalties and strengthening the capacity of
relevant tax agencies in order to enhance enforcement. It is against this backdrop that this
paper examined the issues and benefits of environmental taxation and accounting in
Nigeria using descriptive or content analysis of past literature or journals.
The subject of environment had been on heated debate over the last decades. The quest for
environmental sustainability has awaking consciousness on individuals, organizations
and nations all over the world. Environmental taxation has been adopted by some countries
like South Africa, Malaysia etc. The effectiveness and impact of the adoptions in reducing
harmful environmental practices or modeling good eco-friendly behaviour has been
61
Environmental Taxation: Issues And Benefits
diverse. While some believe that environmental taxation is not necessary as it has no
positive impact on environmental conservation, that rather the government should enforce
compliance with traditional environmental laws and regulations, others believe
environmental taxation will encourage eco-friendly practices and model environmental
behaviour of organizations as well as generating revenue for the government. Given this
lacuna in global standards and diverse opinions this research is undertaken to examine the
issues and benefits of environmental taxation.
The study objective is majorly to examine the issues and benefits of environmental taxation
and accounting in Nigeria. While the specific objectives are:
1. Identify the issues that will arise from adopting environmental taxation in Nigeria.
2. Reveal the various benefits to be derived from environmental taxation in Nigeria.
LITERATURE REVIEW
This section deals with the extant review of literature on environmental taxation with a
view of analysing the content of journals and make appropriate recommendations for
future studies.
Concepts of Environmental Taxation
Environmental taxation has a significant role to play in addressing environmental
challenges. Taxes are more effective if they are designed properly and levied as close to the
pollutant or activity causing the environmental damage as much as possible and also being
set at appropriate rate. (OECD, 2011). Stephen (2013) opined that developing countries are
faced with increasing environmental pressures across a range of directions. At the same
time, the ability of the governments to effectively pursue policy goals is often constrained
by a lack of resources, with tax revenues in many countries not measuring to that of
developed economies. For some, these are distinct issues that should be considered
separately. For others, they can and should be dealt with together. According to EC (2001)
economic instruments for pollution control and natural resource management are an
increasingly important part of environmental policy in the EU and OECD countries and
there are considerable interests in information about these topics. The instruments include
deposit refunds systems and subsidies for environmental protection etc. Information about
environmental taxes is significant for areas of environmental policy and fiscal policy as well
as for analytical purposes and environmental or climate change decision making. A policy
issue of interest in recent years is green or environmental tax system which involves
increasing taxes on the use of the non-environmentally friendly products and reducing
taxes on other tax bases in particular labour. The environmental effect of a tax emanates
mainly from its impact on the relative prices of environmentally related products and
activities in addition to the relevant price elasticities (OECD, 2000). Therefore,
environmental taxes put more emphasis on the potential effect of a given tax in relation to
62
Environmental Taxation: Issues And Benefits
its effects on costs and prices of goods and services. It focuses on the tax bases that have a
particular environmental relevance and to consider all taxes levied on these tax bases as
environmental. It is a tax whose tax base is a physical unit (or a proxy of it) of something that
has proven, specific negative impact on the environment (EC, 2001).
Main Categories of Environmental Taxes
EC (2001) for analytical purposes divided the environmental taxes into four main
categories:
Energy taxes (including CO2-taxes); Transport taxes; Pollution taxes; and Resource taxes
(excluding taxes on oil and gas).
Energy Taxes
These taxes on energy products normally used for transportation and for the purpose of
stationary. The most important and relevant energy products for this transportation
purpose are majorly petrol and diesel. Energy products for stationary use include fuel oils,
natural gas, coal and electricity. The CO2-taxes are included under energy rather than
under pollution taxes. There are several reasons for this. First of all, the inability to identify
separately CO2 taxes from other taxes. e.g. via differentiation of mineral oil tax rates. In
addition, the revenue from these taxes are always large as compared to those from pollution
taxes aside that they introduced as substitutes thereby distorting international
comparisons. If they are identifiable, CO2-taxes should be reported as a separate category
next to energy taxes. SO2-taxes may be subject to the same problem as CO2-taxes.
Transport Taxes
These are the form of taxes charged and paid by owners of motor vehicles due to the
emissions caused by the vehicles to the environment. Other taxes on this category are flights
(air planes) and other related transportation services. These taxes are charged when they
conform to the definition.
Pollution Taxes
These are form of taxes on measured or estimated emission to air and water; they also
include the management of noise and solid waste materials. An exception is the CO2-taxes,
these form are included under energy taxes as discussed in the previous literatures.
Resource Taxes
Taxes on resources pose some particular problems. Opinion differs among practitioners,
regulators as to whether extraction of resource constitute harm to the environment, though
there is broad consensus that extraction can cause some environmental problems such as
pollution, soil erosion, degradation and destruction of organic and inorganic substances
within the earth surface and underneath.
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Environmental Taxation: Issues And Benefits
Prior Studies on Environmental Taxation and Accounting
Akinwande (2014) on Green House Gas emission in South Africa stated that for tax to be
environmentally effective, the tax rate should equal the social marginal damages from
producing an additional unit of emissions or, more or less equivalently the social marginal
benefit from abating a unit of emissions. Thus the optimal tax rate would be where the
marginal benefit of abatement equals the marginal cost of abatement. That climate change
is a global problem meaning that damage costs have to be assessed globally. Therefore
asking local polluters to pay the global damage costs seems unfair. Such can probably
succeed if there were an international carbon tax.
From literature on environmental taxes, environmental taxes cannot guarantee
environmental certainty. This is because at the time of setting the tax, policy makers do not
have all the required information regarding technological progress and price sensitivities,
so setting the tax at the required level to meet the emission targets becomes difficult.
Secondly new entrants into the polluting industry can also upset the whole arrangement in
that their activities could lead to increased emissions. To ensure that the environmental goal
is not diluted by reason of new polluting sources, the tax level has to be adjusted.
As further opined by Akinwande (2014) using Nigeria as example that section 3 of the
Associated Gas Reinjection Act outlaws gas flaring, but allows polluters to continue to flare
on payment of a fine. The troubling question is, has the imposition of a fine (tax) ever being
successful? Despite the fines imposed by the federal government of Nigeria on gas flaring
there is a negligible rate of reduction in gas flaring in Nigeria thereby raises questions on
whether environmental taxes significantly discourage pollution. Also raises questions on
the effectiveness of the monitoring and reporting system put in place to ensure the
reduction rates are proactively disclosed and verified. Setting the tax at the desired rate is
complicated; the proposed plan by Nigeria (NNPC) to set the flare penalty to the
international market value of the gas flared is a big challenge given that the market value of
gas varies across continents. Another key factor that weakened the flare penalty regime in
Nigeria is weak enforcement and corruption. In fact weak enforcement, bribery and
corruption have been the bane of the environmental tax law in Nigeria.
The observation made by the Nigerian Extractive Industries Transparency Initiative thus
confirms the above statement. NEITI observed that the volumes of gas produced by oil and
gas companies were never declared before flaring. The figures are calculated by the
company and forwarded to Department of Petroleum Resources (DPR) after the gas must
have been flared. This is as a result of serious control and monitoring weakness by DPR
whose responsibility is to ensure JV companies provide with accurate and reliable
information. DPR should rise to their responsibility of carrying out oversight function of
64
Environmental Taxation: Issues And Benefits
ensuring the monitoring of the upstream sector of oil and gas industry in Nigeria
(Akinwande, 2014).
Agbo and Udeh (2018) examined environmental taxation and accounting in Nigeria using a
content analysis (literature review) stated environmental challenges are majorly emanated
from industrialization, economic, scientific and technological advancement all over the
world. That many scholars and organizations have come up with strategies to ameliorate
the quality of their environment. Further tax systems in several countries are yet to
sufficiently provide policy reforms that support levying taxes across the sources off
emission of harmful substances and tax alignment with external damages and scaling back
redundant energy taxes to address global warming, it finally recommended the
introduction of environmental taxation on emission of harmful substances in Nigeria to
curtail incessant environmental pollution and ensure future of green accounting.
Akinwande (2014) stated that carbon tax is one of the policy instrument canvassed for the
reduction of greenhouse gases. That an economic instrument which levies taxes on the
carbon content of goods and services, getting increasingly popular among policy makers all
over the world.
Oyedokun et al. (2018) stated that environmental problems in Nigeria are caused by
industries while the public are mounting pressure on government to find solution by way
of reducing environmental damage while reducing harm to economic growth. Using
descriptive survey design revealed that environmental taxation is significantly
coterminous with improved quality in Nigeria as it existence will ensure restoration and
maintaining environmental quality in the country. That the both form have not reduced
environmental problems. The study recommended government to ensure the structure and
administration of environmental related taxes premised on sound accounting system, void
of loopholes and provisions that can allow evasion and that proceeds from such taxation
should be channelled to the development of infrastructural facilities in Nigeria to ensuring
an improved standard of living while organizations are also advised to keep and maintain
environmental accounting records that depict relevant financial transactions of the
company.
Garba and Gundawardana (2015) found that the industries are just making mere promises
to the government in their effort to control pollution through regulatory mechanisms with
compliance. That government should design and formulate a tax process that encompass
environmental tax policies so that levy of tax be designed placing its burden over those
responsible for causing particular environmental problem or problems and provide
statutory incentives to reduce administrative cost to the government and compliance cost
imposed on the tax payers.
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Environmental Taxation: Issues And Benefits
Hu, Dong, Jiang and Zhu (2020) analysis the marginal abatement cost (MAC) of water
pollution and air pollution in key industries in China and found that MAC of pollutants in
various industries is quite different in different industries. They further stated that rate of
environmental taxes in 2018 were low thereby not enough to force enterprises to reduce
pollution. That without the governments mandatory environmental laws and regulations
measures, many investors will not inject large sums of funds to execute technological
innovations for green production, as such are highly capital intensive. The study
recommended the need for government to increase the rate of environmental tax, gradually
approach the cost of corporate pollutant treatment and force companies to implement
technological transformation. The government should on the other hand do a good job of
tax neutrality, increase the compensation for environment protection behaviours of
companies and encourage them to adopt green development policies. Monitoring and
Supervision should be enforced and tax violations should be checked strictly for avoidance
of tax cuts against rules.
Andrei, Mieila, Popescu, Nica and Cristina (2016) found that environmental taxes provide
increase in GDP and effective in preventing environmental degradation by reducing the
level of pollution and as well harmful environmental supplies and practices.
Olatunji and Olaoye (2015) found out the environmental taxation is coterminous with
improved environmental quality, that the cost effectiveness of Nigerian firms has not led to
or improve standards of living as such taxation has no significant influence.
Uwuigbe, Uwuigbe and Iyoha (2015) revealed a significant positive relationship between
environmental tax on nylon packages and floods reduction and concludes that
implementing such tax will affect the use of nylon as the major system of packaging
products in Nigeria.
Dike and Micah (2018) recommended for stakeholders to increasingly require companies to
manufacture goods efficiently and at competitive prices without harming the environment,
to enhance sustainable development by reducing the environmental impact while
increasing the value of the enterprise, satisfying human needs and contributing to the
quality of life.
Issues Arising from Environmental Taxation
ISAR (1991) in Agbo and Udeh (2018) found the following issues as relating to
environmental taxation and accounting:
The belief by heads of corporate organizations the environmental information was not
necessary for a true and fair view of the financial performance and the impossibility of
66
Environmental Taxation: Issues And Benefits
distinguishing environmental cost from other expenses;
The non-formulation of national accounting standard with specific provision for
environmental information disclosure in the financial reports;
Disclosures were qualitative, descriptive and difficult to compare; and the reluctance of
organizations to show or disclose voluntarily calls for the need for comprehensive national
and international standard to guide environmental reporting.
Amokaiye (2020) stated that environmental tax would negatively impact on tax
competitive rating in Nigeria.
He further argued that creating additional environmental taxes would be counterproductive given that multiplicity of taxes is still a concern issue in business
competitiveness in Nigeria. That a better way should be to review and plug areas where
gaps exist in environmental laws and regulations (including instituting stringent
sanctions) and strengthening relevant enforcement agencies.
In addition he raises some concerns about environmental tax in Nigeria given the structure
we are operating. The concern is majorly who would impose pollution taxes, Nigeria being
operating a federal system of government. How will the revenue generated from this form
of taxation be shared? Even if the issue of structure is resolved who will bear the burden of
such tax upon Nigerians facing excessive taxation already? That the Nigerian state having
increased cases of corruption in civil service and its poor legal system it will be more
suitable to use the traditional instruments of environmental law instead imposition of
environmental taxes that may be highly sensitive to corruption menace.
He also expressed concern that even the traditional instruments of environmental
legislations are also to be enforced by the civil servants. Therefore, Nigeria should fix her
corruption malaise before its shuts down governance and public institutions as well as the
nation.
In support of assertion made by Amokaiye (2020), Iliya and Kenedy (2015) examined the
challenges and barriers of introducing environmental taxation in Nigeria and found that
industries were just deceiving the government by making mere promises to the
government in their effort to control pollution through regulatory mechanisms and
compliance. And recommend on the government to design environmental tax policies that
will place the burden of tax on those responsible for causing a particular environmental
problem and incentive to minimize administrative and compliance cost.
The following issues were deduced from the literature:
67
Environmental Taxation: Issues And Benefits
Determining the effective tax rate for local polluters giving that damage cost to
environment is assessed globally.
Inability for policy makers to acquire sufficient information and the influence of new
entrants thereby causing environmental uncertainty.
Weak institutions and corruption thereby impeding efficient/effective monitoring of
compliance.
Poor reforms supporting levying of taxes across the sources off emission of harmful
substances and tax alignment with external damages and scaling back redundant energy
taxes to address global warming.
Non voluntary compliance with regulatory mechanism by different organizations.
The problem of multiplicity of taxes in Nigeria.
The issue of who to impose pollution taxes in Nigeria giving that we operate a federal
system of government and how the revenue can be shared.
The issue of who bears the burden of environmental taxes.
Benefits of Environmental Taxation
Okafor and Igbinovia (2017) investigated the perception of different professionals on the
introduction and practicability of such taxes using cross sectional research design and
found that environmental taxes will not affect the economy negatively and no significant
difference on how environmental taxes are perceived on economic development in Nigeria
and recommended immediate introduction of environmental tax in Nigeria as is beneficial
in terms of areas of revenue and environmental conservation.
According to Organization for Economic Corporation and Development (OECD, 2011)
environmentally related tax account for approximately 5% of total tax revenues in the
OECD countries. Beredugo and Mefor (2012) established that environmental accounting
and taxation enhances the quality of decision making requiring the need for organizations
to baseline standard of its greenhouse gas emissions, energy usage and other
environmental indicators and set reduction targets.
Environmental taxation can play a significant role in assisting governments make well
founded decision regarding climate change. (INTOSAI, 2010)
Blidisel, Popa and Farcane (2011) on the significance of environmental taxation in
accounting/finance practice and environmental accounting states the following disclosures
to be made in the note to financial statement–that government incentives related to
environment protection received by the organization. The accounting treatment selected
68
Environmental Taxation: Issues And Benefits
for such should be disclosed. Furthermore payment of such taxes reveals information of
great significance in awareness of situation faced by business regarding environmental
questions. More so, in some instances initiating payment of environmental taxes by
organizations may be linked to the availability or existence of public service whose use
could reduce the extent environmental destruction.
Baba (2015) on the advantages of implementing environmental accounting and taxation
within the economy opined that:
Environmental accounting is for both internal and external users; Provision of useful
information regarding decision making for value of investment, environmental cost etc.
Identifies and analysing of environmental cost and identifies and manages the ratio
between the environmental expenses and afferent; Analysis data about raw materials,
energy and other information about the impact of the business on environment that will
lead to decision making with implications for profitability and environmental protection;
Manages the acquisition, including waste and sales of materials and consumption; Better
management of energy and water costs; Provision of information regarding performance of
an economic entity which leading a better relationship between the organization and the
external environment; Enables management of purchasing materials that will minimize the
costs; Environmental accounting is used in order to present the social and environmental
responsibility as environmental costs (Carciani & Jianu, 2007).
Benefit Principle
The benefit principle as already known is concept in the theory of taxation from public
finance literature. The benefit principle bases taxes to pay for public-goods expenditures on
a politically-revealed willingness to pay for benefits received. That taxes should be paid
based on the benefits enjoyed by the tax payer. The principle is related to the function of
pricing in the allocation of private goods and services to competing users.(Neumark
&McLure, 2013). It is used for assessing the efficacy and effectiveness of the tax system and
to appraise fiscal policy framework of the government. This approach was developed by
Knut in 1896 and Lindahl in 1919. They were two renowned economists from Stockholm
School. Paul Samuelson later extended the approach. This has been applied to subjects like
progressive taxation, property tax and corporate taxes.
Ability to Pay Principle
Ability to pay is an economic principle that states that the payment of taxes by individuals
should be based on the level of burden such tax will create in relation to the wealth
accumulated by the individual or organization. The principle suggests the real amount of
tax chargeable and paid by an individual or organization is not the only factor to be
considered in taxation. That tax authorities on determining tax to be paid should also
69
Environmental Taxation: Issues And Benefits
consider the ability of such individual or organization to pay.
This study is anchored on the above theories of taxation.
METHODOLOGY
The method applied in this study is a descriptive statistics where an in-depth use of past
journals, conference papers, articles, newspapers, books were reviewed and conclusions as
well as recommendations drawn.
CONCLUSION AND RECOMMENDATIONS
Following the review of literature on the issues and benefits of Environmental Taxation the
following issues were deduced:
Determining the effective tax rate for local polluters giving that damage cost to
environment is assessed globally;
Inability for policy makers to acquire sufficient information and the influence of new
entrants thereby causing environmental uncertainty;
Weak institutions and corruption thereby impeding efficient/effective monitoring of
compliance;
Poor reforms supporting levying of taxes across the sources off emission of harmful
substances and tax alignment with external damages and scaling back redundant energy
taxes to address global warming;
Non voluntary compliance with regulatory mechanism by different organizations;
The problem of multiplicity of taxes in Nigeria;
The issue of who to impose pollution taxes in Nigeria giving that we operate a federal
system of government and how the revenue can be shared; and
The issue of who bears the burden of environmental taxes.
The following benefits were also deduced from the literature:
Revenue generation;
Environmental conservation;
Enhancement of quality decision making;
Enabling organizations to make sound decisions on climate change; and
Curtailment of the behaviour of organizations.
Environment has been at the centre stage of world discussed over the past few decades.
Human and economic survival of nations largely depends on the environment. Without it
there will be no life. Therefore, it is important to take issues relating to environment very
seriously. Over the years activities of man as a result of industrial and technological
advancement has hampered the environment thereby affecting humans through causing
climate change, depletion of ozone layer, high emission of radioactive elements leading to
different types of ailments not known to man in the past. The quest for solutions on making
the environment sustainable and fit for living led to recent movements by environmentalist
70
Environmental Taxation: Issues And Benefits
and nations in addressing how man should respond to dangers posed to the environment.
In 1972 the United Nations Conference on Environment was held in Stockholm with major
aim of addressing these concerns. This study was undertaken to examine environmental
taxation; issues and benefits and thereby made below recommendations.
The study recommended for Nigerian government to adopt environmental taxation and
making stringent penalties against polluters of the environment, institute institutional
reforms to enable effective monitoring of the taxes, reduce multiple taxes and set effective
tax rate. The study also recommended for proper caution while implementing
environmental taxation given that Nigeria already faced with problem of multiple taxation
and negative competitiveness rating of businesses.
REFERENCES
Agbo, E. I. & Udeh, N. S. (2018). Environmental taxation and accounting in Nigeria. Journal
of Taxation and Economic Development,17(2).
Akinwande, G. (2014). The prospects and challenges of the proposed carbon tax regime in
South Africa: Lessons from the Nigerian experience. Afe Babalola University.
Journal of Sustainable Development Law and Policy, 3(1).
Amokaiye, D. (2020). Time for environmental taxation in Nigeria? Retrieved from
https://www.lexology.com/library/detail.aspx?g=0376f503-715f-4eaaa9c7dcc74b75c
859 12th September, 2020.
Andrei, J., Mieila, M., Popescu, G. H., Nica, N. & Manole, C. (2016).The impact and
determinants of environmental taxation on economic growth communities in Romania
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Baba, C. M. (2015).Advantages of implementing environmental accounting within an economic
entity.
Beredugo, S. B. & Mefor, I. P. (2012).The impact of environmental accounting and reporting
on sustainable development in Nigeria. Research Journal of Finance and
Accounting, 3(7), 55-63.
Blidisel, R. G., Popa, A. S. & Farcane, N. (2008).Challenges of environmental accounting and
taxation in Romania. Analele Universitãþii din Oradea. Retrieved from
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Carciani, C. & Jianu, I. (2007). Contabilitatea verde – o perspectivã a schimbãrii
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Bucureºti, partea I ºi II.
Dike, W. J. & Micah, C. L. (2018). Environmental accounting practices and sustainable
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European Communities (2001).Environmental taxes – A statistical guide. ISBN 92-894- 1358-1.
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Hu, B., Dong, H. Jiang, P. & Zhu, J. (2020).Analysis of the applicable rate of environmental
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INTOSAI (2010).Environmental accounting: Current status and options for SAIs.
Islam, M. A. (2018). Environmental accounting. Springer International Publishing AG,
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Neumark, F. & McLure, C. E. (2013).Taxation: The benefit principle. Encyclopædia Britannica,
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Olatunji, T. E. & Olaoye, C. O. (2015).Development implications of environmental
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Environmental Taxation: Issues And Benefits
Protection Measures. Economic and Social Council. Commission on Transnational
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73
CHAPTER FIVE
DIGITAL ECONOMY AND COMMUNICATION TAX
1
Olanrewaju, Ademola and 2Adewumi, Moyosore Akingbade
1
Managing Partner ,Ascension Consulting Services, Lagos Nigeria; +234 809 856 8889
2
Department of Management and Accounting,
Faculty of Management and Social Sciences,
Lead City University, Ibadan, Nigeria; +234 808 080 6179
INTRODUCTION
The digital economy is simply a transformation of the traditional economy owing to the use
of the internet and other digital tools. The digital transformation of the economy calls into
question whether the international tax rules, which have largely been in place for a long
time, remain fit for purpose in the modern global economy. While good progress has been
made in tackling base erosion and profit shifting (BEPS) through the BEPS Project, some of
the more fundamental tax challenges posed by digitalization have remained unaddressed.
Recent international efforts to address these issues have highlighted the divergent
positions of many jurisdictions and discussions on how to address the tax challenges that
arise from digitalization are ongoing.
Components of Digital Economy
There are three main components of this economy, namely;
1. e-business infrastructure (hardware, software, telecoms, networks, human capital,
etc.);
2. e-business (how business is conducted, any process that an organization conducts
over computer-mediated networks); and
3. e-commerce (transfer of goods, for example when a book is sold online)
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Digital Economy And Communication Tax
Diagrammatic representation of component of the Digital Economy; real value - added
average annual growth 1998 – 2017
What is Digitalization?
Digitalization means the use of digital technologies and of data (digitized and natively
digital) in order to create revenue, improve business, replace/transform business processes
(not simply digitizing them) and create an environment for digital business, whereby
digital information is at the core. It aims at changing a business model and provides new
revenue and value-producing opportunities.
Characteristics of Digitalized Businesses (The Models)
Cross-jurisdictional Scale without Mass
This is a situation where digitalisation makes it possible for businesses to locate the stages
of their production processes across various countries while also accessing customers
around the globe.
Reliance on Intangible Assets especially Intellectual Property
Digitalized enterprises (DEs) have a sense of growing importance of the investment in
intangibles (IPs) either through ownership or lease. The use of software or algorithms
supports their platforms, websites and other functions and central to their business
models.
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Digital Economy And Communication Tax
Data, User Participation and their Synergies with IP
User-participation, as in the case of social networks, tells us how digitalised businesses
would not exist without data, networks and user-generated content. In some case, like
cloud computing, the degree of user participation does not necessarily correlate with the
degree of digitalization.
Implementation of the BEPS Package
The work on tax and digitalization has been a key aspect of the BEPS Project since its
inception. Published as part of the BEPS package in October 2015, the Action 1 Report found
that, as a result of the pervasive nature of digitalization, it would be difficult, if not
impossible, to ring-fence the “digital economy” from the rest of the economy for tax
purposes because of the increasingly pervasive nature of digitalization. In other words,
countries agreed that there is no such thing as a “digital economy”, but rather that the
economy itself had become digitalized and that this trend was likely to continue.
Nevertheless, the OECD under the BEPS package has continued to seek a consensus
approach to address tax challenges arising from digital taxation. This has been evident in
the “programme of work” that ultimately gave rise to the “Pillar One” and “Pillar Two”
Blueprints aimed resolving crucial tax issues, such as profit allocation, rights allocation
amongst member jurisdictions. Details of both Pillars have been provided below:
Pillar One Blueprint:
In a nutshell, Pillar One seeks to address issues bordering on profit allocation, tax right
allocation, determination of “Nexus rule”, amongst others. This would be addressed based
on 3 elements. These are:
1. Amount A: a new taxing right for market jurisdictions with a share of a
multinational entity's (MNE's) residual profit being reallocated;
2. Amount B: a fixed return for certain baseline marketing and distribution activities
taking place physically in a market jurisdiction. These outcomes should be
consistent with the arm's length principle.
3. Lastly, processes to improve tax certainty through effective dispute prevention and
resolution mechanisms.
Pillar Two Blueprint:
Pillar Two aims to establish a global framework for the application of minimum taxation
across jurisdictions. This is envisioned to be done by the underlisted considered
mechanisms;
1. The Income Inclusion Rule (IIR) operates as a top-up tax when incomes of
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controlled foreign entities are taxed below an effective minimum tax rate.
2. The Switch-over Rule (SoR) complements the IIR by removing treaty obstacles in
situations where a jurisdiction uses an exemption method that could frustrate the
application of a top-up tax to branch structures. It would be interesting to see the
underplay of this rule vis-à-vis the Double Taxation Agreement entered by Nigeria.
3. The Undertaxed Payments Rule(UTPR) serves as a backstop to the IIR through
application to certain constituent entities; the top-up tax computation is the same as
under the IIR.
4. The Subject-to-tax Rule (STTR) would help source countries protect their tax base
by denying treaty benefits for deductible intra-group payments made to
jurisdictions with low or no taxation.
While the above Blueprints appear promising, further consultation and approval by the
OECD/G20 countries would still be required for the Blueprints to be implemented.
Impact of the BEPS package on BEPS issues
The impact of BEPS package is obvious on the tax planning and structuring decisions of
MNE groups. The implementation of the measures has made a number of cross-border tax
planning schemes unfeasible or no longer financially attractive, including for highly
digitalised businesses. This will restore both source and residence taxation in a number of
cases where cross-border income would otherwise go untaxed or would be taxed at very
low rates. There are also expectations that this should help establishing a more level playing
field where domestic SMEs and MNEs are taxed similarly.
Challenges brought about by Digital Economy
The challenges brought about by digital economy include the following:
i)
Determining the Jurisdiction in which tax should apply
Taxation is largely presence/residence based, and many online businesses, depending
on the perspective, either have no presence, or are multi-resident; touching more than
one jurisdiction/territory. There is thus difficulty in identifying the state(s) or country
(ies) with tax jurisdiction over electronically generated income.
ii) Possibility of Double (and Non) Taxation
In addition to creating high administrative / compliance costs for governments and
taxpayers, the implementation of inconsistent laws and definitions could result in
double taxation or unintentional non-taxation of digital transactions.
iii) Locating Taxpayers
In the event that liability is to be imposed on online businesses for tax avoidance,
and/or evasion, many of these businesses lack physical offices to be served notice of
said liability, as they conduct business through virtual stores.
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Opportunities being harnessed from Digitalisation
i)
Increasing e-administration
There has been a significant shift towards e-administration with increasing options
for online filing of tax returns as well as online payments. Presently, the FIRS has
adopted the Integrated Tax Administration System (ITAS), an electronic filing
platform that captures registration of taxpayers, filing of returns, payment of taxes.
ii)
Exchange of Information amongst tax authorities
Digitalization has enabled the exchange of tax and financial information of
taxpayers operating in multi jurisdictions, as the national governments do not have
complete details about income, wealth and financial transactions that take place
outside the legal jurisdiction of the domestic authorities.
iii)
Review of Tax processes and laws
The digital economy has significantly contributed to the review of current tax rules
and capacity of the tax authorities
Where there are gaps in current tax laws or where the laws do not support the use of
such systems, necessary amendments have been made to ensure that the use of the
systems are in line with the law.
Digitalization and the International tax rules
Prior to the release of BEPS, political leaders, the media, and civil society around the world
have expressed growing concern about tax planning by multinational enterprises (MNEs)
that takes advantage of gaps in the interaction of different tax systems to artificially reduce
taxable income or shift profits to low-tax jurisdictions in which little or no economic activity
is performed.
BEPS was structured around the following three (3) key pillars:
1. Improving coherence in the domestic rules that affect cross-border activities
2. Reinforcing substance requirements to ensure alignment of taxation with the location
of economic activity and value creation enhancing transparency and certainty for
businesses and governments.
3. Currently, there is no international consensus for taxation of digital economy. The
OECD is championing multilateral efforts to address the challenges of taxation of the
digital economy.
Digital Economy and Indirect Tax
In the area of indirect tax, the 2015 Action 1 Report recognised that new challenges arose in
particular with respect to the collection of value-added tax/goods and services tax
(VAT/GST) on the continuously growing volumes of goods and services that are purchased
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online by private consumers from foreign suppliers. The recent increase in online
transactions involving digital content which cannot be subject to border controls in the
same way as tangible goods and so the VAT on imports which is generally collected at the
same time as custom duties cannot be applied.
To address these indirect tax concerns, it was recommended that countries implement the
OECD's International VAT/GST Guidelines (OECD, 2017), and in particular the destination
principle for determining the place of taxation of cross-border supplies, and consider
implementing the mechanisms for the effective collection of VAT/GST presented in the
Guidelines.
Prospects for Taxation of the digital Economy in Nigeria
Given the rising statistics on the digital economy and its immense potential, it has become
expedient for the Nigerian tax authorities to explore a more creative approach to ensure
effective taxation of the digital economy. Nigeria will need to borrow a leaf from other
nations that have taken bold steps to tackle tax leakages in the digital economy through
innovative tax legislation just like India's equalization levy. Consequently, the government
has expanded the scope of "fixed base" under Section 13 of the CITA to effectively captured
the digital economy and avoid the continuous loss of revenue.
Some of the objectives of the Finance Act, 2019 (the Act) were to promote fiscal equity and
reform domestic tax laws. The Act modified the provisions of Section 13 of the Companies
Income Tax Act (CITA) by creating a taxing right on income earned by foreign companies
from the remote provision of technical, management, consultancy or professional services
to a person resident in Nigeria. Withholding tax is to be deducted from the payment for
these services.
The Act also introduces provisions to tax any foreign company that “transmits, emits or
receives signals, sounds, messages, images or data of any kind from cable, radio,
electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect
of any activity, including electronic commerce, application store, high frequency trading,
electronic data storage, online adverts, participative network platform, online payments
and so on, to the extent that the company has significant economic presence in Nigeria and
profit can be attributable to such activity.”
The implication of this amendment is that NRCs engaged in digital transactions, who
previously had no Nigerian tax obligations, will be liable to Nigerian income tax where
they meet the SEP threshold. The Finance Act does not define what constitutes “significant
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economic presence,” but empowers the Minister of Finance to define the term.
The introduction of a 'digital' fixed base in Nigeria will certainly increase the tax base,
thereby ensuring an increase in government revenue. Furthermore, tax authorities should
leverage the automatic exchange of information between jurisdictions and employ
innovative technology to secure a proper database of the various online suppliers of goods
and services. This will go a long way in providing the tax authorities with sufficient data to
go after tax defaulters directly.
New trends and laws for taxing digital economy
The rapid transformation of the global economy due to digitalisation has put new pressures
on corporate tax systems internationally and locally. However, misalignments between the
place where the profits are taxed and the place where value is created occur more-and-more
often, leading to increased tax avoidance and loss of public revenues.
In addressing these issues, The OECD and the EU have already planned various initiatives
to address the above tax issues.
EU Proposal
On 21 March 2018, the Commission advanced two Directive proposals:
The first proposal aims to reform corporate tax rules so that profits are registered and taxed
where businesses have significant interaction with users through digital channels. This
forms the Commission's preferred long-term solution. The second proposal responds to
calls from several EU states for an interim tax which covers the main digital activities that
currently escape tax altogether in the EU.
OECD Proposal
To address the tax challenges of the digital economy, the OECD Inclusive Framework
proposes different approaches for allocating taxing rights among jurisdictions. These
proposals include:
1. User contribution: This allocates taxing rights based on value created by an entity
in a jurisdiction by focusing on user base, data and content generation in a highly
digitized business. The U.K. has adopted this principle for taxing the digital
economy.
2. Marketing intangibles: This has a broader application by focusing on aspects of
commercial exploitation of a product or service, and includes trademarks, customer
list, proprietary market, etc.
3. Global minimum tax: This represents a prescriptive approach to allocating taxing
right by which jurisdictions impose a minimum tax threshold to revenue derived
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therein by foreign companies. This has been adopted by both Germany and France.
4. Significant Economic Presence (SEP): For the broader challenges of nexus, data,
and income characterization, OECD has suggested a new concept of “significant
economic presence” as an alternative to current permanent establishment rules.
This allocates taxing rights based on evidence of a combination of factors that create
purposeful and sustained interaction with the economic life of a jurisdiction via
digital means. India and Israel have already adopted SEP and Nigeria is now
adopting same now with the passing of Finance Act 2019.
Unilateral actions
Others unilateral and uncoordinated actions include:
- alternative applications of the PE threshold;
- withholding taxes;
- turnover taxes; and
- specific regimes targeting large MNEs.
Common Features in Unilateral Actions
a.
They aim at protecting and/or expanding the tax base in the country where the
customers or users are located, generally based on an expanded view of the
enterprise's engagement in that country;
b.
Many include elements linked to a market in the design of the tax base (e.g., sales
revenue, place of use or consumption); and
c.
They appear to reflect a discontent among some countries with the taxation
outcomes produced by the current international income tax system.
Countries with unilateral measures to fix the tax challenges of the digital economy
In Israel, introduction of significant economic presence (SEP) test which is applicable only
to foreign enterprises that are resident in countries that have no double tax agreements with
Israel;
Austria, France and Italy have all introduced a DST;
In Africa, Kenya automated its tax administration system in 2013 by introducing an “iTax
system” to capture direct and indirect taxes on a real-time basis. In 2014 and 2015, South
Africa and Kenya, respectively, adopted the destination principle for collection of valueadded tax (VAT) on services and intangibles supplied by a foreign company to a consumer
in each country. By implementing this principle, South Africa collected as much as 585
million South African rand ($40.6 million) for 2016–2017. Rwanda also introduced
electronic cash registers in 2013 to improve its VAT collection.
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Interim Measures
Interim measures are urgent measures that usually applied only where there is an
imminent risk of loss of tax revenue. The length of an interim measures is generally set to
cover defined period of time (shorter period) until required and necessary laws are made.
A tax challenge raised by digitalization concerns how some businesses can now be
significantly involved in the economic life of a tax jurisdiction with little or no taxable
presence. These businesses have business models that rely heavily on intangible property,
data, user-participation and network effects.
There is no consensus on the need for, or the merit of, interim measures with a number of
countries being opposed to such measures irrespective of its design. These countries
further consider that there are a number of risks and adverse consequences that could arise
in respect of such a tax including:
i.
Impact of interim measure on investment, innovation and growth
An interim tax measure will increase the cost of capital and reduce the incentive to invest
with a resulting negative effect on growth.
A measure only applicable to digitalized sectors risks slowing down investment in
innovation for those businesses that are subject to the tax or indirectly affected by it.
Although the effect will also depend on the financing of the investment, without proper
constraints, like an exemption for SMEs.
A tax measure (tax on a gross basis) could effectively penalize start-ups and other growing
firms with losses or limited profitability and provide a competitive advantage to mature
profitable existing businesses, helping to create a barrier to entry that cements the
dominance of established firms.
ii.
Impact on Welfare
Another challenge with a tax measure is that it is equivalent to a tax on inputs. This implies
that it is likely to distort firms' choices of inputs thus distorting production itself. In other
words, when such a tax is introduced, either production could decline or more resources
will need to be employed to reach the same level of production. Consequently, there is likely
to be a negative impact on the overall welfare of an economy and on its output.
Considerations for the Design of Interim Measures
Countries that are in favour of the introduction of interim measures recognise the need to
take the following considerations into account:
a. Be compliant with a country's international obligations.
b. Be temporary.
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c. Be targeted.
d. Minimise over-taxation.
e. Minimise impact on start-ups, business creation and small businesses more
generally; and
f. Minimise cost and complexity.
Digital Economy and the Finance Act, 2019
Prior to the introduction of Significant Economic Presence as a basis of taxation of NonResident Companies (NRCs), Section 13 (2) of the Companies Income Tax (CIT) Act listed
the bases for the taxation of NRCs carrying on businesses in Nigeria.
“The profits of a foreign company are taxable in Nigeria only to the extent that it is deemed
derived in Nigeria and not attributable to any part of the operations of the company
carried on outside Nigeria.
The profits of a Non-Nigerian company from trade or business shall be deemed to
be derived from Nigeria:
a. If that company has a fixed base of business in Nigeria and to the extent that the
profit is attributable to the fixed base, hence the profit from such activity would be
deemed to be derived from Nigeria;
b. If it does not have such a fixed base in Nigeria but habitually or regularly operates a
trade or business through a person in Nigeria authorised to conduct business on its
behalf or on behalf of some other companies controlled by it or which have
controlling interest in it; or habitually maintains a stock of goods or merchandise in
Nigeria from which deliveries are regularly made by a person on behalf of the
company, to the extent that the profit is attributable to the business or trade or
activities carried on through that person;
c. If that trade or business or activities involves a single contract; for surveys,
deliveries, installations or construction,t he profit from that contract; and
d. Where the trade or business or activities is between the company and another
person controlled by it or which has controlling interest in it and conditions are
made or imposed between the company and such person in their commercial or
financial relations which in the opinion of the Board is deemed to be artificial or
fictitious, so much of the profits adjusted by the Board to reflect arm's length
transaction”
The taxable profit in Nigeria, in any of the above instances, is the profit attributable to that
fixed base. This implies that a non-resident company must have physically performed
activities in Nigeria, directly or indirectly, before such a company can be liable to income tax
in Nigeria. It is clear that the applicable rules for corporate taxation in Nigeria do not
effectively capture the realities of a modern economy in the world of fast-paced digital
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transactions. Given that non-resident companies are taxed in Nigeria based on profits
derived from Nigeria, the question as to whether a foreign company is liable to income tax
in Nigeria is usually controversial.
The Finance Act, 2019 modified the provisions of Section 13 of the Companies Income Tax
Act (CITA) by creating a taxing right on income earned by foreign companies from
customers resident in Nigeria. The Finance Act 2019, introduced “Significant Economic
Presence” as a basis of taxing NRCs. A foreign company shall have a SEP in Nigeria in any
accounting year, where:
a. derives ? 25 million annual gross turnover or its equivalent in other currencies from any
or combination of the following digital activities:
i. streaming or downloading services of digital contents, including but not limited to
movies, videos, music, applications, games and e-books to any person in Nigeria;
or
ii. transmission of data collected about Nigerian users which has been generated from
such users' activities on a digital interface including website or mobile applications;
or
iii. provision of goods or services other than those under sub-paragraph 5 of the Order,
directly or indirectly through a digital platform to Nigeria; or
iv. provision of intermediation services through a digital platform, website or other
online applications that link suppliers and customers in Nigeria;
b. uses a Nigerian domain name (i.e., ng) or registers a website address in Nigeria; or
c. has a purposeful and sustained interaction with persons in Nigeria by customizing its
digital page or platform to target persons in Nigeria, including reflecting the prices of its
products or services in Nigerian currency or providing options for billing or payment in
Nigerian currency.
In determining if the ? 25million threshold have been met, the activities carried out by
connected persons (associates/business associates, companies/persons with direct or
indirect control, management or capital in one or both companies) in that accounting year
shall be aggregated.
Where a foreign company does not have a SEP in Nigeria, the withholding tax deducted on
the transactions become the final tax payable on such income.
Imperatives for Taxing the Digital Economy
Global Collaboration
It is in the common interest to maintain a single set of relevant and coherent international
tax principles to promote economic efficiency and global welfare. Despite efforts to work
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towards a consensus-driven global solution, some countries have started to take unilateral
action.
Going it alone on policy for taxing the digital economy will increase regulatory
fragmentation, which is harmful to the health, resiliency and growth of the global economy.
Fragmented regulation is not only costly in terms of resources, but also in terms of added
risk to the financial system. Creating good, global tax policy is a rigorous and intensive
process that requires identifying and pursuing clear objectives and transparent and open
consultation.
Learning from the past
While the largest digital services companies weren't quite so dominant at the turn of the
21st century, the dot com boom two decades ago can provide us important lessons for
navigating taxing the digital economy.
We can draw upon learnings from the Ottawa Taxation Framework, which was developed
at the turn of the century, to address the challenges of then-emerging Internet enterprises.
The Ottawa framework laid out several important principles to bring tax practices into the
digital age. It is of essence to collaborate on policy that balances accuracy and simplicity. It
must be administrable by both developing and developed countries and have a good
dispute resolution mechanism.
Developing Tax Policy that enhances Trust
Strong and equitable tax systems are key to maintaining public trust in government, tax
authorities and other institutions throughout the economy. Research shows that citizens
feel strongly about tax minimization, and whether multinational companies are paying
enough tax.
Tax relationships in recent changes at Ministry of Communication
On October 23, 2019, the Ministry of Communication was renamed as Ministry of
Communications and Digital Economy in order to further the ministry's mandate to
capture the goals of digitalisation of the economy in line with the Economic Growth and
Recovery Plan (EGRP) of the present government. The erstwhile name was obsolete and
limiting in pursuing the objectives of a digital economy as it did not reflect the trends as
emphasized by the International Telecommunications Union (ITU). ICT contribution to the
Country's Gross Domestic Product (GDP) stood at 13.85% as against 8.82% from Oil Sector
in the second quarter of 2019 according to the Minister of Communications and Digital
Economy. This signifies a willingness to devote more attention to the other sources of
wealth currently attracting the most attention globally.
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Digital Economy And Communication Tax
The intention of the government is to adopt global best practice which will position the
country to take advantage of digital economy. Examples of global and African economies
like Scotland, Thailand, Tunisia, Benin Republic and Burkina Faso among others who have
adopted deliberate strategies and created Ministries of Digital Economy in line with global
best practice.
The Communication Services Tax Bill (the Bill)
It is essential to state that there is no communication tax in Nigeria at the moment. However,
The Federal Government of Nigeria introduced the Communication Services Tax Bill (the
Bill). The Bill seeks to impose and collect communication services tax (CST or levy) on
charges payable by consumers of electronic communication services in Nigeria (excluding
private electronic communication services) at the rate of 9%. The bill is still at National
Assembly yet to be passed.
Focus of the Communication Service Tax Bill:
i.
Electronic communication services subject to the levy include voice calls, SMS, MMS,
data usage (both from Telecommunication Services Providers and Internet Service
Providers), Pay per View TV Stations etc.
ii.
The tax is to be paid together with the electronic communication service charge
payable to the service provider by the user of the service.
iii. The tax is payable whether the person making the supply is permitted or authorized
to provide electronic communications services.
iv. The Federal Inland Revenue Service (FIRS) is responsible for collecting the tax from
service providers and remitting it into the Federation Account.
v.
All service providers are expected to file monthly returns not later than the last
working day of the month immediately after the month to which the tax returns and
payment relate.
vi. Penalty for failure to file returns on or before the due date is ? 50,000 and an
additional ? 10,000 for each day the returns are not submitted.
Challenges of the Communication Service Tax Bill
i.
Penalties for Government Monitoring Agents: The Bill does not provide for penalties
for the Government monitoring agents for abuse or data protection violation.
Confidentiality of the customers using the infrastructure must be guaranteed and any
consequential claims for damages should be borne by such agents or government
officials.
ii.
The Bill does not clarify whether there will be a charge if the subscriber of the
telecommunication or television service is outside Nigeria or for foreign interconnect
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Digital Economy And Communication Tax
iii.
charges billed from Nigeria to foreign telecommunication providers.
The CST Bill still imposes the payment of 5% of annual revenue tax after a court
upholds the introduction of the Government monitoring equipment into the
network. This will discourage service providers from challenging the Government
where it merely suspects that such introduction may create risks and affect the quality
of service enjoyed by subscribers. Interestingly there is no compensation to the
service provider where the court rules otherwise.
CONCLUSION AND RECOMMENDATIONS
The digital economy may not require a separate tax regime, what is required is the capacity
or dexterity of tax authorities to adapt current tax rules to respond to the digitization of the
economy. As the existing tax laws are being left behind by the ever-dynamic digital
economy through various business models, and to tackle the gaps, various governments
are introducing both unilateral and interim measures to avoid unnecessary loss of revenue.
Conscious of the significance and urgency of the issue, the tax policymakers are working to
establish rules that offer certainty for business that promote investment and growth, while
acknowledging that the world around us continues to change rapidly, and often in ways
that are difficult to predict. Tax administrations have many new opportunities to simplify
the taxpayer's experience of the tax system and improve efficiencies; however, the digital
transformation has also given rise to several emerging threats.
Ensuring that relevant tax systems are ready to meet the changes brought about by the
digital transformation, as well as to leverage its opportunities and provide protection from
its potential risks, is a critical challenge. In particular, the review of the international tax
rules in light of the impact of digitalization will be a significant component of this work, and
has important ramifications for MNEs and governments, as well as the future of the tax
systems.
REFERENCES
ADB Brief (2019) Taxation challenges in a digital Economy- The case of the Peoples
republic of China.
Chris Whitehouse (1999). Revenue Law Principles and Practice. (17th Ed.) London:
Buuerworths.
Companies Income Tax Act, Cap 60 LFN 2004 (as amended)
Federal Inland Revenue Service (Establishment) Act No 13 of 2007
Finance Act, 2019
Okauru-Omoigui, I. (2012) FIRS and Taxation Reforms in Democratic Nigeria, Safari Books
Ltd, Ibadan
Olakanmi, J. (2012) Compendium of Tax Laws, 3rd Edition, Law Lords Publications.
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Digital Economy And Communication Tax
Oyebanji, J.O. (2005). Principles and Practice of Taxation in Nigeria. Ibadan: Frontline
Publisher.
Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from
the Digitalisation of the Economy, adopted on 28 May 2019.
OECD (2019), “Tax and Digitalisation”, OECD Going Digital Policy Note, OECD, Paris.
OECD (2018), Tax Challenges arising from Digitalization-Interim Report 2018: Inclusive
Framework of BEPS
OECD (2018), Using Digital Technologies to Improve the Design and Enforcement of Public
Policies.
OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final
Report, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241046-en
https://www.export.gov/article?id=Nigeria-E-Commerce
http://kluwertaxblog.com/2019/06/05/withholding-taxes-in-the-digital-economy-era/
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CHAPTER SIX
TAX ADMINISTRATION AND TAXPAYERS' COMPLIANCE IN NIGERIA
Kupoluyi, Adewale K1 ;Oloyede, Funmilayo Lizzy2 and Oyedokun, Godwin Emmanuel3
1
Department of Political Science and Public Administration
Veronica Adeleke School of Social Sciences
Babcock University, Ilishan-Remo, Nigeria.
adewalekupoluyi@yahoo.co.uk
2
Department of Political Science and Public Administration,
Veronica Adeleke School of Social Sciences,
Babcock University, Ilishan-Remo, Nigeria.
lizzyoloyede@gmail.com
3
Department of Management and Accounting
Faculty of Management and Social Sciences
Lead City University, Ibadan, Nigeria
godwinoye@yahoo.com; +234-8033737184
ABSTRACT
Taxation is recognized as a very important process for the attainment of national development in
many democratic societies of the world. When a nation is blessed with abundant wealth, growth and
development can be promoted through economic activities that serve as the tonic for generating
meaningful employment for the citizens, encourage the establishment of social and infrastructural
facilities for the country and vice versa. Tax is a major source of revenue for the government. A good
tax regime involves the timely and correct payment of taxes and hence, an important component of
public finance in Nigeria. Tax compliance makes taxpayers fulfil their obligations to the regulatory
agencies. There is a functional linkage between tax administration and compliance, based on the
comparative analysis of tax management in some selected countries as well as Nigeria. This paper
examined the effect of tax administration on taxpayers' compliance in Nigeria. The study is
qualitative and has used secondary data sources with the Expectancy Theory of Motivation as its
theoretical framework. Findings show that tax administration if appropriately carried out will bring
about tax compliance in Nigeria which will increase tax revenues, discourage tax evasion, bring
about good governance and sound public administration. The paper recommends that tax
administration and compliance should both be pursued for virile public finance and national
development in Nigeria.
Keywords:
compliance.
National development, Public finance, Taxation, Tax administration, Tax
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Tax Administration And Taxpayers' Compliance In Nigeria
INTRODUCTION
Taxation is an age-long practice, which could be traced to the days of early civilization. It is
demonstrated in the payment of tangible tributes either by compulsion or by way of duty
requirement (Appah, 2010). Such contributions in the early days were not monetized. In
Nigeria, the contributions required were farm produce and physical labour (Kiabel, 2011).
In many countries of the world, payment of taxes is taken with the seriousness it deserves
because a large chunk of government's revenues come from taxes. Tax revenues remain an
important instrument for economic growth and development in many developing
economies like Nigeria since the internal revenue generated through taxes go a long way in
providing funds for the provision of public goods. Tax compliance, on the other hand, is the
willingness of the citizens to pay or remit their taxes. Over the years, various tax reforms
have been taken to encourage tax compliance; the results of the efforts have been
discouraging as the level of the revenue generated has been increasingly low. However,
from all the taxes being generated that from the personal income tax remains consistently
the lowest in the Nigerian tax system (Alabede, 2011; Sani, 2005; Asada, 2005). Furthermore,
non-oil income tax to total revenue collected in Nigeria has dropped significantly from
19.8% in the year 1999 to 11.7% in 2008 and where the tax ratio was 11%, it indicated a sharp
drop from the expected 15% of the low-income countries (CITN, 2010; IMF, 2005). The
revenue contributed by personal income tax has always been comparatively low in the
Nigerian tax revenue collection. This trend has been different when compared to other
African countries like South Africa, as the behaviours of taxpayers towards compliance are
shaped by individual attitudes that are influenced by various factors (Alm, 1999; Brooks,
2001). Understanding taxpayers' behaviours with respect to those factors that guide their
attitudes towards compliance are crucial in motivating taxpayers towards compliance and
curbing non-compliance. To address the issue of tax non-compliance, the knowledge of
determinants of the tax compliance is of paramount importance towards influencing
individual decisions to comply with a provision of tax laws. As such, previous researchers
on tax compliance have tailored their work towards economic factors with the suggestions
that tax rate, penalty and detection should constitute the major determinants of taxpayers'
compliance behaviour (Allingham & Sandmo, 1972).
The importance of taxation in the activities of any government cannot be over-emphasised.
The world over, the tax is one major source of revenue. However, not every national
government has been able to effectively exploit this great opportunity of revenue
generation. This can be attributed to a number reasons including the system of taxation,
weak tax compliance, tax legislation, tax administration, policy issues, over-reliance on
other sources of revenue, corrupt practices in the system with reference to the system of tax
collection and the behaviour of citizens towards tax payment and the ease of tax payment.
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Tax Administration And Taxpayers' Compliance In Nigeria
According to Azubike (2009), the tax is a major player in every society of the world and the
tax system is an opportunity for the government to collect additional revenue needed in
discharging its pressing obligations. A tax system is one of the most effective means of
mobilising a nation's internal resources and it lends itself to creating an environment
conducive to the promotion of economic growth. Tax constitutes the compulsory levy
imposed on a subject by the government, to provide food, security, social amenities and
conditions for the economic well-being of the society (Appah, 2004;Appah &
Oyandonghan, 2011). Anyanfo (1996) and Anyanwu (1997) have observed that taxes are
imposed to regulate the production of certain goods and services, protection of infant
industries, control business and curb inflation, thereby reducing income inequalities. The
main purpose of the tax is to raise revenue to meet government expenditure, redistribute
wealth and improve the management of the economy (Ola, 2001; Jhingan, 2004; Bhartia,
2009).
Concerted efforts are made by the government to generate significant incomes through
taxation, to ensure that enough resources are available. The willingness to pay tax remains a
key taxation challenge in Nigeria. In the ease of tax payment, evidence from the World Bank
Doing Business Report 2011 and 2012 show that Nigeria ranked 109 and 138, respectively,
out of 183 countries; in Sub-Saharan Africa, it ranked 27 out of 46 countries surveyed. This
not too encouraging result is that despite some improvements that the government has
made to the tax system in the recent past, in order to improve tax compliance. These efforts
include those made by the Federal Inland Revenue Service (FIRS), which was first
established as an operational arm of the Federal Board of Inland Revenue (FBIR) in 1993,
but later became autonomous in 2007 and saddled with the responsibility of controlling and
administering different taxes as well as accounting standards for the taxes collected.
Another innovation by the government is the Tax Identification Number (TIN) programme,
which has the goal of carrying out a successful roll-out and implementation of TIN for
Nigeria. The system was developed as a relational database that is linked to relevant
stakeholders in the Nigerian tax administration. There is also the Joint Tax Board (JTB),
which is set up to address problems of the tax policies and its implementation, tax
collection, and the taxpayers' compliance in the country.
The Expectancy Theory of Motivation stresses the place of people's attitude towards tax
payment. Further evidence includes the multiplicity of taxes that is, paying similar taxes on
the same or substantially similar tax base, ineffective and inefficient tax collection structure,
poor tax awareness, tax transparency and tax accountability. The issues raised have
implications on the willingness to pay tax in Nigeria, with the indirect effects on actual
revenue generated from taxation. The end-point implication of strong unwillingness to pay
tax is a crippled government that is unable to implement its growth and development
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Tax Administration And Taxpayers' Compliance In Nigeria
objectives.The willingness to pay is better related to the case of the informal sector, where
the government is limited in terms of monitoring their affairs. Therefore, the study seeks to
examine the nexus between tax compliance and administration in Nigeria with a view to
making the essence of taxation felt in public finance. The objective of the study, therefore, is
to examine the effect of tax administration on taxpayers' compliance in Nigeria
LITERATURE REVIEW
Evolution of Taxation
Taxation is the process of collecting taxes in a country. The fundamental purpose of taxation
is to raise revenue effectively, through measures that suit each country's circumstances and
administrative capacity. In fulfilling the revenue function, a well-designed tax system
should be efficient in minimising the distortionary impact on resource allocation, and
equitable in its impact on different groups in society (Bolnick, 2004). It is important that the
country's situation is properly analysed before employing any tax policy in order to have a
properly working tax system. Many of the difficulties with the tax authorities are the
consequence of poorly-conceived tax policies and a lack of certainty regarding future policy
changes. The objective of a tax policy should be to achieve collection cost savings while
minimising the revenue loss, disruption to the economy, the inequity and capriciousness of
the tax burden.
For an economy such as Nigeria's that is still in the throes of a recession, the tax regime must
be versatile enough to encourage savings, stimulate investment, reward social
responsibility and research funding. To widen the tax net, policymakers should not forget
the urgency to provide infrastructure; create jobs and reduce unemployment; expand the
productive sectors of the economy; stimulate exports, and substantially raise public
revenues from non-oil sources (The Punch, 2018). Hence, tax policies should aim at
bringing all taxable adults into the tax net with a graduated rate that should ensure that the
well-off citizens pay their own share while the low-income earners are given savingsenhancing incentives. Fiscal policy is one of the main components of public finance and its
tasks have been considered in a double context: first, the core of fiscal policy, and second,
the consistency with the monetary policy (Holban, 2007).
\
Taxes have been in existence from ages. It is a system of charging individuals and corporate
bodies by the government for the development of the state. Abdullahi (2014) traced the
history of taxation as far back as human creation with precepts from both the Holy Bible and
the Quran, which call on adherents to reserve their wealth annually. The earliest known tax
records, dating from approximately 6000 BC were in the form of clay tablets found in the
ancient city-state of Lagash in modern day Iraq. During the various reigns of the Egyptians,
Greeks and Romans, tax policies have been used in funding their centralised governments.
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Tax Administration And Taxpayers' Compliance In Nigeria
Egyptian Pharaohs tax collectors were known as Scribes, imposing a tax on cooking oil, in
the Greece area, the Athenians imposed a tax referred to as Eisphora, which was used to pay
for special wartime and the earliest taxes in Rome were customs duties on imports and
exports called Portoria (Quentin, 2010). In the middle ages, fair taxation was a key issue to
all English citizens during the medieval period, where most citizens were subjected to poll
tax, which was a flat tax on every adult in a jurisdiction, as well as properties and church
taxes. Taxation policies were developed in Africa during the colonial period as wealth
began to flow into Europe from its colonies. Great Britain enforced the first general income
tax in 1799, to help finance their war against Napoleonic France and this tax was scaled
according to income, much like the income taxes levied in most modern systems (Quentin,
2010).
The history of taxation in Nigeria can be traced to the native rule even before the colonial era
when traditional ways of collecting taxes were practiced. The British colonialists capitalised
on the administrative system in the North by introducing the indirect rule harmonised all
the traditional taxes under the Native Revenue Proclamation No. 4 of 1904 as well as the
Native Revenue Proclamation No. 2 of 1906.Taxation was introduced into the Western part
of the country in 1918 through the enactment of the Native Revenue Ordinance. In 1927, the
Native Revenue (amendment) Ordinance was enacted and consequently, taxation was
introduced into the Eastern province, Warri Province and Asaba Division, though it met
with some resistance. Various ordinances that were enacted include the Non-Native
(Protectorate) Ordinance of 1931 that was replaced with the Ordinance of 1937. The Native
Direct Taxation (Colony) Ordinance of 1937 and was followed by the Colony Taxation
Ordinance of 1937. These ordinances were replaced with the Direct Taxation Ordinance No.
4 of 1940 and the Income Tax Ordinance No. 3 of 1940. The Direct Taxation Ordinance was
applicable to all Nigerians, excluding those residing in Lagos. Other laws were also enacted
in 1943 such as the Income Tax Ordinance of 1943 and Direct Taxation (Amendment) of 1943
and they abrogated those of 1940(Abdullahi, 2014; Fakile, 2011).
Nigeria became a federation in which the assessment and collection of taxes were carried
out by regional governments in respect of taxes paid by Africans. In 1962, the regional
governments were allowed to access and collect taxes from non-Africans. The Eastern
region was the first that enacted the law that replaced the Direct Taxation Ordinance. The
region passed the Finance Law No.1 of 1956, which introduced the Pay-As-You-Earn
(PAYE) tax. The Eastern Region Finance Law of 1962 repealed that of 1956 and the law was
adopted by Eastern states with amendments. In 1957, the Western region enacted the
Income Tax Law in 1957, which repealed the Direct Taxation Ordinance of 1943. In 1961,
another law came into effect in the Western region, which introduced PAYE and it was also
applicable to non-Africans. The law was later adopted by the Western states, but with
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amendments. The Northern Region joined the other regions in 1962 by enacting the
Northern Nigeria Personal Tax Law. In 1961, the Federal Capital Territory enacted a law
known as Personal Income Tax (Lagos) Act, which was applicable to the territory and it
repealed the Income Tax Ordinance of 1943.
In 1970, Lagos State passed an edict, which adopted the Federal Government Personal
Income Tax (Lagos) Law Amendment Edict of 1968. This edict of 1968 had only been
applied in Lagos. An effort was made to harmonise all the taxes in the federation by
enacting the Income Tax Management Act of 1961, which addressed certain issues such as
determination of residence, chargeable income and taxation of partnership, among others,
but it did not fix a uniform tax rate, allowances and relief for the country. The establishment
of the Joint Tax Board by the Income Tax Management Act of 1961 was another attempt to
harmonise all the taxes in the country but unfortunately, the Board could not achieve this. In
1975, the Federal Military Government took a bold step towards the harmonisation of the
tax rates, allowances and reliefs by promulgating the income Tax Management (Uniform
Taxation Provisions) Decree No. 7 of 1975, which amended the Income Tax Management
Act of 1961 and the Income Tax, Armed Forces and Other Persons (Special Provisions)
Decree No. 51 of 1972.
The Decree No. 7 of 1975 provided for uniform taxation in respect of Personal Income Tax. It
unified all rates, reliefs and allowances throughout the country. The Income Tax
Management Act of 1961 was amended severally until it was repealed by the Personal
Income Tax Decree 1993. This Decree also repealed the Income Tax, Armed Forces and other
persons (Special Provisions) Decree No. 51 of 1972. The Personal Income Tax Decree of 1993
is still in force with the amendments of Decrees 30, 31, and 32 of 1996; Decrees 18 and 19 of
1998; Decree 30 of 1999, Personal Income Tax Act (Cap P8 LFN 2004) and Personal Income
Tax (PIT) Amendment Act No. 20 of 2011 (Abdullahi, 2014; Fakile, 2011). The PIT is subject
to taxation, based on the provision of Personal Income Tax Act (PITA) of 1993 (as amended).
PIT covers the Taxation of Sole Trader, Taxation of Partnership, Taxation of Settlements,
Trust and Estates.
Tax Administration
Tax administration is the process and procedure involved in the management of taxes in a
country. An effective and efficient tax administration system is integral to any country's
well-being, it is as a result of this that Baurer (2005) believes that the tax administration
should provide a level playing field for all taxpayers to meet their tax-filing and paying
requirements. The rationale behind the whole system of tax is consistent with two major
theories of tax namely; the Ability-to-Pay Principle and the Equal Distribution Principle.
These two principles stress equality and fairness while the Ability-to-Pay system believes
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Tax Administration And Taxpayers' Compliance In Nigeria
that individuals should be levied taxes based on their ability to pay, the Equal Distribution
Principle suggests that income, wealth, and transaction should be taxed at a fixed
percentage; that is, people who earn more and buy more should pay more taxes, but will not
pay a higher rate of taxes. Purposes of taxation can be fulfilled if and when citizens pay their
taxes regularly and correctly. Governance will be strengthened; there will be buoyancy in
the economy in meeting the state's need and as a strong component for nation-building.
McKerchar and Evans (2009) emphasised that taxes and tax systems are strong components
necessary for nation-building, which give enablement to states to carry out their goals and
also shape the balance between the accumulation and redistribution of wealth that gives
states their social character in line with the Social Contract Theory (Appadorai, 1974).
Despite all the benefits derived from taxation, as funds utilised by the government for the
benefit of the citizenry, it has been observed that only the minority pay their taxes in
Nigeria. Taxpayers are not always willing and ready to comply when it comes to the
fulfilment of the obligations imposed on them by law (Adesina & Uyioghosa 2016). This
limits the fundamental goals and aspirations of tax administrators, whose duties are to
process the collection of taxes and giving the necessary procedure of creating necessary
awareness that will make people pay their taxes. Tax administration is faced with the
challenges of non-compliance and loss of revenue to the government by limiting funds for
the execution of national projects (Alabede, 2014).
McKerchar and Evans (2009) emphasised that no tax is better than its administration, so tax
administration matters a lot and that, the essential objective of tax administration is to
ensure the maximum possible compliance by taxpayers of all types with their taxation
obligations. Supporting this view, Bird (2015) argued that tax administration can play a
critical role, not only in shaping economic development but in developing an effective state.
In most countries, especially in Africa, multiple taxes are collected from taxpayers; there is
the problem of evasion, non-compliance, corruption and coercion on the part of the
regulatory body and efficiency in tax revenue productivity. There are numerous taxes
collected by the government that often lead to the payment of double taxation by the
citizenry, causing tax administration inefficiency of not being able to separate the taxes
from each other.
Tax Compliance
Tax compliance has to do with the ability of the people to abide by the principles of tax
administration in a country. According to Marti (2010), tax compliance is a complex term to
define. Simply put, tax compliance refers to fulfilling all tax obligations as specified by the
law freely and completely. It has been found that regulatory burdens fall
disproportionately on small and medium enterprises internationally (Pope& Abdul-
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Tax Administration And Taxpayers' Compliance In Nigeria
Jabbar, 2008). According to Ogundele (1999), tax compliance is the act of subjecting oneself
to the demands of the tax laws either voluntarily, by persuasion, inducement or
compulsion. Voluntary tax compliance occurs when a taxpayer willingly submits
himself/herself, as best as he/she can, to the requirements of the tax laws. Enforced tax
compliance is when he/she is compelled or coerced to do same. Thus, not all noncompliance is due to evasion. As Ogundele (1999) had noted, it is quite conceivable that
non-compliance might be driven by simple incapacity to comply or even ignorance of what
to do. Compliance has been a great problem in the Nigerian tax system as a result of the
large-scale informal sector while the administrative burden of applying the tax provisions
had equally been very cumbersome for some of these entities.
The various enforcement measures under the Nigerian Tax Act include litigation, exercise
of power of search and seizure, exercise of power to lay distress, denial of Tax Clearance
Certificate (TCC), imposition of penalty and interest, authority to the Attorney-General of
the Federation (AGF), to deduct un-remitted withholding tax from funds due to relevant
agencies of government and authority to the Nigeria Customs Service (NCS), to refuse
clearance to any defaulting shipping company (Arogundade, 2005). By Section 104 of the
Personal Income Tax Act, 2004 (as amended), the relevant tax authority, may for the purpose
of enforcing payment of tax due to (a) distrain the taxpayer by his goods, other chattels,
bonds or other securities, or (b) distrain upon any land, premises or places, in respect of
which the taxpayer is the owner.
There are some administrative measures for tax enforcement purposes. The most
prominent of these is the Special Investigation (Compliance) Branch, which deals with
suspected cases of tax fraud and serious non-compliance. The offences dealt with include
failure to file returns, non-disclosure or non-declaration of income, false or incorrect claims
and similar offences (Part XIII, CITA). The police, as well as the Office of the AttorneyGeneral (OAG), are also involved in tax enforcement. Other criminal tax offences such as
conversion or diversion of drafts or other financial instruments for payment of tax, forgery
of tax receipts, embezzlement, bribery and corruption and other fraudulent Acts are
handled by the police or the Economic and Financial Crimes Commission (EFCC), as the
case may be (Arogundade, 2005).
Theoretical Framework
Tax compliance theories can be broadly classified into economics-based theories and
psychology-based theories. However, drawing from the Expectancy Theory of Motivation
(Tamunomiebi & Zeb-Obipi, 2009), there are identifiable and attractive rewards if taxes are
paid which are capable of satisfying taxpayers' unsatisfied needs such as roads, electricity,
water, security and so on. The theory was proposed in 1964 by Victor Vroom of Yale School
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of Management, USA. In effect, it states that since individuals cannot provide public goods,
seeing the government doing so could motivate the collective obligation to comply with tax
payment (Alm, 2013). In other words, since individuals are motivated, not simply by selfinterest, but also by group notions like social norms, social capital and tax morals, they will
comply with the social norm of paying taxes so long as government comply with social
norms and attaching specific goals to specific taxes and principles in formulating tax
policies (Alm, 2013). This paper has, therefore, adopted the Expectancy Theory of
Motivation in explaining the relationship between tax compliance and administration
because of the interrelationships between the two concepts.
METHODOLOGY
This study adopted qualitative research design which is largely based on the review of
extant literature.
Discussion
Tax Administration and Compliance in Selected Countries
Various studies have been conducted to examine the effect of tax administration and tax
compliance. Most of the studies suggest that the high tax rate causes high tax noncompliance (Hai &See 2011). According to Spicer and Becker (1980), there is the perception
by taxpayers that higher tax rate can outweigh their payment rate through tax evasion.
Taxpayers' underreporting behaviour is positively correlated with a high tax rate
(Clotfelter, 1985; Joulfaian & Rider, 1998). This scenario is what the Expectancy Theory of
Motivation seeks to do in explaining the relationship between tax compliance and
administration. Findings also show that high tax rate is positively related to tax evasion and
negatively related to tax compliance (Ali, Cecil & Knoblett, 2001; Christian & Gupta, 1993;
Feinstein, 1991). The high tax rate is also positively related to tax evasion and negatively
related to tax compliance while other studies found either no relationship or even positive
relationship between tax rate and tax compliance.
In many African countries, tax rates do not have any positive or negative effect on tax
compliance (Modugu, Eragbhe, & Izedonmi, 2012). Other studies found a negative
relationship between tax administration and tax compliance (Alm, Sanchez, & De Juan,
1995; Feinstein, 1991). The effect of tax rate on tax compliance is not only limited to
countries. In a cross-country analysis of determinants of tax evasion, internationallyconducted with the developed countries facts, indicate that there is an insignificant
correlation between marginal tax rate and tax evasion (Richardson, 2006). There are mixed
findings on the relationship between tax administration and tax compliance (Richardson,
2006). In Asian countries, as well as Latin American countries, Gillis (1989) observed that
Indonesia was one of the typical developing countries relying on natural resource exports,
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Tax Administration And Taxpayers' Compliance In Nigeria
but the reform of its tax administration increased its tax to GDP ratio to about 50%, which is
a phenomenal improvement. Sewel and Thirsk (1997) and Bulutoglu and Thirsk (1997)
reviewed tax administration reforms in Morocco and Turkey, respectively. The
International Tax Compact (ITC) and OECD reviewed tax administration reforms in
Bangladesh, Vietnam, Afghanistan, Bosnia-Herzegovina, Georgia, Paraguay and Rwanda
(ITC & OECD, 2015) and credited tax administration to improved tax compliance.
However, in fragile and post-conflict states, such as Afghanistan and Rwanda, there were
improvements in their tax revenue due to tax reforms even though tax revenue generation
in developing countries such as Nigeria remains inadequate.
Although there have been about 40 years of tax administration reforms in developing
countries, these nations' tax to GDP ratios remains far below the IMF and UN
recommended benchmarks. Recently, the OECD (2014) classified 51 developing countries
as "fragile" – i.e. states prone to failure. The OECD stated that these countries' fragility arises
from their inability to generate adequate tax revenue in the face of falling prices of natural
commodities exports and dwindling receipts from aids. This shows that tax
administrations in developing countries are still unable to generate adequate tax revenues,
despite having undergone reforms. The IMF and other multilateral organizations have
continued to work on the challenges of tax revenue generation in these countries. Recently,
Richard Bird, arguably one of the most prolific experts on tax administrations in
developing countries, has acknowledged the persistence of the problem of tax revenue
generation despite years of reforms (Bird, 2015).
The underlying question in this discussion is: what are the challenges facing tax
administrations in developing countries, which have resulted in huge gaps in revenue
generation? While this question has been explored by scholars and practitioners alike, the
5th Annual Tax Administration Research Center (TARC) Workshop provided researchers
with a unique opportunity to further explore this question. This workshop was unique in
the sense that it brought together scholars and practitioners working in developing
countries, thus providing a rich blend of theory and practice. Scholars from universities in
Malaysia, South Africa and Nigeria were present, as well as practitioners from the revenue
authorities of Nigeria, Kenya and Indonesia. Moreover, there was a presentation by a
member of the staff of the Fiscal Affairs Department of the IMF, who is a Tax Administration
Diagnostic Assessment Tool (TADAT) expert, with wide-ranging field experience in
developing countries. TADAT is an assessment tool developed by the IMF to evaluate and
improve tax administration especially in developing countries.
As to be expected from such a diverse group, discussions at the workshop were enriched by
papers from multidisciplinary backgrounds and practitioners' field experiences. This
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discussion paper provides an analytical synthesis of the various papers presented at the
workshop, thus providing useful insights and takeaways from the workshop. While the
workshop presenters discussed a wide range of factors that constitute challenges to tax
revenue generation in developing countries, our analysis shows that these factors fall into
two broad categories: factors within the control of tax administration and factors outside
the control of tax administration. The discussion proceeds as follows: section two discusses
the challenges facing tax administrations as described by presenters at the workshop.
Section three discusses findings from the workshop papers relating to analytical insights
about factors within the control of tax administrations and those outside of their control. It
also discusses how the contribution of the workshop advances knowledge of the challenges
of tax administrations in developing countries. Section four concludes the discussion.
Realizing the strategic role of tax revenue adequacy in the developmental aspirations of
developing countries, the UN, IMF, Organisation for Economic Co-operation and
Development (OECD), Department for International Development (DFID), and other
international organizations have been at the forefront of driving tax policy and
administration reforms in these countries. Initially, the emphasis was on tax structure and
policy. Developing countries were dependent on taxes on imports and exports (trade taxes),
and the IMF introduced a major policy instrument, Value Added Tax (International
Monetary Fund, 2011). Despite policy reforms, the challenges of tax revenue generation
persisted and this led to the realisation that much more than policy reforms would be
needed to improve tax revenue generation in developing countries. Several studies have
examined the effects of tax rate and tax compliance. Most of the studies found that the high
tax rate causes high tax non-compliance (Hai &See, 2011). In a recent study, the tax rate does
not seem to have any clear positive or negative effect on tax compliance in Africa (Modugu,
Eragbhe, & Izedonmi, 2012). Other studies have found a negative relationship between tax
rate and tax evasion or positive relationship between tax rate and tax compliance (Alm,
Sanchez, & De Juan, 1995; Feinstein, 1991).
In a cross-country analysis of determinants of tax evasion internationally conducted with
the OECD countries evidence showed that there is an insignificant correlation between
marginal tax rate and tax evasion (Richardson, 2006). However, the only study comes across
by the current study which examines the effect of marginal tax rate on tax evasion or tax
non-compliance. From the foregoing review, it is evident that there are mixed findings on
the relationship between tax administration and tax compliance. It is suggested that since
the economic literature on the effect of tax rate and tax compliance is not conclusive, the
issue still require further investigation (Freire-Serén & Panadés, 2013). Thus, it is based on
this premise that this study is undertaken to review the effect of tax administration on tax
compliance with reference to Nigeria.
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Tax Administration And Taxpayers' Compliance In Nigeria
Tax Administration and Compliance in Nigeria
The degree of voluntary compliance in any tax system is influenced by the effectiveness of
enforcement actions in place. The institutional arrangements in place to achieve high
compliance in the Nigerian tax system include tax audit, collection monitoring and the
Inspection Units (Arogundade, 2005). Tax non-compliance may be in one of many forms; it
could either be a failure to submit a tax return within the stipulated period or nonsubmission, understatement of income, overstatement of deductions, failure to pay
assessed taxes by the due date. (Kasipillai & Abdul Jabbar, 2006) and in some cases, noncompliance may mean an outright failure to pay levied taxes while the problem of tax
evasion is a widespread one (Kasipillai & Abdul Jabbar, 2006).
Furthermore, Fagbemi, Uadile and Noah (2010) found that it is prevalent in developing
countries by hindering development, thereby leading to economic stagnation and other
socio-economic problems. Chipeta (2002) identified tax rates as one of the causes of tax
evasion. He pointed out that a higher tax rate increases taxpayers' burden and reduces their
disposable income. Therefore, the probability of evading tax is higher. Small taxpayers
under the regular system of taxation are discriminated against, since the compliance
requirements, cost of compliance and tax rate are the same for both small and large
enterprises.
Reducing the compliance costs and tax rate increases the small enterprise's profit margin. It
also increases the government's tax revenue, since the simplified provisions for small and
medium enterprises reduce the size of the informal economy and the number of noncomplying registered taxpayers (Vasak, 2008). Furthermore, organisations usually have to
operate in an overbearing regulatory environment with the plethora of regulatory agencies,
multiple taxes, cumbersome importation procedure and high port charges that constantly
exert serious burden on their operations. A poorly executed tax system also leads to low
efficiency, high collection charges, waste of time for taxpayers and the staff, and the low
amounts of received taxes and the deviation of optimum allocation of resources (Farzbod,
2000).
Tax compliance and administration are affected by the trustworthiness of government by
taxpayers, provision of infrastructural amenities, tax accountability by government, level
of government delivery, income, moral ethics, tax knowledge, tax rate, and the system of tax
payment. Compliance with the willingness of citizens to pay tax is very important and
cannot be ignored. The government should put in place, the enabling factors that influence
the willingness of citizens to pay tax and even improve on them. Trustworthiness entails
government paying attention to and encouraging citizens to build trust in them and doing
would make tax accountability on the part of government very crucial and in such a way
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that, high level of delivery on the promises made by the government would be met. Not
only that, the system of taxation should be transparent, and the government should be
honest about the use of tax proceeds. Provision of infrastructural and social amenities
should be pursued because the common idea is that, if individuals have to provide their
electricity and water themselves, suffer bad roads and live from the fear of accidents, and
more, why will they be willing to pay tax. They are not likely to abide by tax compliance. In
order to encourage voluntary tax compliance, the government needs to be more responsive
to the needs of the citizens and embark on tax awareness so as to promote tax compliance
and administration.
CONCLUSION AND RECOMMENDATIONS
Tax compliance is central to the administration of taxes in Nigeria. To ensure tax
compliance, there is the need to show trustworthiness on the part of the government,
provide infrastructural amenities and putting in place, the enabling legislation that would
make it work. On the part of the citizens, there should be better compliance through the
willingness to pay taxes, as responsible citizens. In line with the Expectancy Theory of
Motivation, the government should pay closer attention to the factors that influence the
willingness of citizens to pay tax and improve on them for virile tax compliance and
administration in Nigeria.
The paper recommends as follows:
Taxes should be properly administered in order to increase the revenue of government.
There should be better accountability and transparency in tax administration.
Taxpayers should be levied commensurate amounts so that they will be able to pay as at
when due.
The government should consider increasing tax incentives and exemptions as this will not
only attract investors, who are potential taxpayers, it will also encourage voluntary
compliance.
The existing legislation should be strengthened to discourage tax evasion and promote
compliance.
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Christian, C. & Gupta, S. (1993). New evidence on secondary evasion. Journal of the American
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Clotfelter, C. T. (1985).Federal tax policy and charitable giving. University of Chicago Press,
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Fagbemi, O. T., Uadile, O. M.& Noah, A. O. (2010). The ethics of tax evasion: Perpetual
evidence from Nigeria. European Journal of Social Sciences,17(3), 360-371.
Fakile, A. S. (2011). History of taxation in Nigeria. National Tax Journal, (45), 107-115.
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Feinstein, J. S. (1991). An econometric analysis of income tax evasion and its detection. The
RAND Journal of Economics,22(1),14-35.
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Publications, New Delhi. InJoulfaian, D. (1998).The Federal estate and gift tax:
Description, profile of taxpayers and economic consequences. OTA Paper 86. US
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improved taxpayer compliance: Challenges for policy makers and revenue
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tax compliance in Nigeria. Research Journal of Finance and Accounting,3(5), 69-76.
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Ola, C. S (2001). Income tax law and practice in Nigeria. Heinemann Educational Books,
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CHAPTER SEVEN
TAX AUDIT AND TAX INVESTIGATION
Igboyi, Linus Sunday
Lecturer: Nigerian College Of Accountancy, Kwall, Near Jos.
Managing Partner: Linigboi and Associates (Tax Practitioners)
linigboi50@gmail.com
ABSTRACT
In Nigeria, the overall objective of the tax authorities is to improve tax compliance activities with tax
laws and instill confidence in the tax payers, tax system and tax administration. A survey carried out
in 2019 by the Nigerian Economic Summit Group on households and businesses reveals that very
low percentage of Nigerians pay taxes and about 59% do not pay any form of taxes at all. These noncompliance issues are attributable to tax payers' ignorance, carelessness, recklessness or deliberate
evasion. In the event of such non-compliance, government and the communities are denied the tax
revenue they need to provide the needs of the citizens. These non- compliance issues have been
addressed exclusively through regulatory enforcement of tax audits and tax investigations.
In recent times, revenue authorities have come to realize that the factors underlying tax payers'
compliance behaviors' are varied and complex. These problems are likely to be treated successfully
with a “Single Action” strategy i.e. through regulatory enforcement of tax audits and investigations.
Tax audit remain a major tool for tackling non-compliance issues in revenue bodies and has resulted
in increase in revenue generation to meet revenue targets.
Tax audit/investigation can be very challenging for taxpayers, as mismanagement of the process can
lead to prolonged reconciliation meetings and increased tax liabilities. Therefore, proactive
management of the exercise is very important.
Keywords: Assessment, Audit, Back–duty, Investigation, Tax.
INTRODUCTION
Definitions of Tax Audit and Tax Investigation
a. Tax audit is simply an examination of accounts, tax records and financial affairs of a
company to verify that they have declared the correct amount of tax. It is also an
examination of whether a taxpayer has correctly assessed and reported their tax
liability and fulfilled other obligations. Tax audits are often defined as systematic
examination and verification of a tax payer's business records and other related
documents by the relevant tax authority for the purpose of proper assessment to tax.
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Kirchier (2008). Ola (2001) stated that the process of tax audit involves tax returns
that are selected for audit using some selection criteria.
Generally, an audit will examine the issues seen as most significant to achieving an
accurate assessment of a taxpayer's tax liability. Typically, these issues will include
any indications of significant unreported income (for example, as may be suggested
by a very low ratio of net/gross business income ratio computed from a taxpayer's
return) or potentially over-claimed deduction items that may be apparent from an
examination of a taxpayer's tax return and other information.
b. Tax investigation on the other hand is usually carried out on a taxpayer who is
suspected of tax evasion. The aim of the tax investigation is to gather sufficient
evidence on the tax evasion scheme and then prosecute the tax evaders in court in
order to send a strong deterrent message to the public. In order to preserve the
documentary evidence for prosecution, a surprise visit is necessary for tax
investigation cases.
Tax audit is an inspection of the tax filing with an objective of rectifying errors and
educating taxpayers. A taxpayer usually receives an advanced notification from the
revenue tax auditor prior to the auditor's visit. Such visit by auditor is called a field
audit. Audit can also be in the form of desk audit where query letters are sent and
the tax payer is required to bring the necessary documents to the office for
inspection. Tax Audit Process is less complicated than the Tax Investigation Process
but they both serve as a compliance / enforcement tool under Nigerian's assessment
scheme.
Objectives of Tax Audit and Tax Investigation
Both the Personal Income Tax (PIT) and the Companies Income Tax (CIT) administration in
Nigeria do not reflect best practices. It is difficult to track the self- employed businesses who
earns more than the salary paid employment. A lot of the informal sector income earners
evade tax. The audit and investigation is necessary here to monitor the effectiveness of these
group.
The objectives of tax audit and tax investigation can be summarised as follows:
a. Regulatory Requirements
Both tax audit and tax investigations are carried out to meet regulatory
requirements.
b. Proper Assessment of Tax
Under the self-assessment regime in Nigeria, the taxpayer has the obligation to
compute his tax liability, make payment based on the computation and provide
evidence of tax paid when filing the returns on the due date. The taxpayer signs
the self-assessment form and declares to the correct status of the returns filed.
The assumption is that the taxpayer is honest and will pay the correct tax. The
FIRS takes the returns as filed and later subjects it to risk assessment by
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Tax Audit And Tax Investigation
c.
d.
e.
f.
g.
h.
i.
examining the returns. Tax audit therefore plays a major role in ensuring that
the correct taxes are paid.
Improved Compliance
Taxation plays significant roles in the process of economic development.
However, these goals would not be achieved, if the level of tax compliance is
low. For taxation to achieve the short term and future goals in Nigeria the level
of tax compliance needs to be improved; and tax audit plays a major role in this
direction. Tax audit therefore remains a major tool for enforcing noncompliance.
Corrective Measure
Tax is a creation of the law and in the application of the self-assessment regime;
varied interpretations are given to the laws in arriving at the taxes paid.
Instances of failure to comply with the laws abound due to carelessness,
recklessness, deliberate evasion or weakness in administration. Given that
returns are accepted as they were until further examination, tax audit will
provide an avenue for proper interpretation of the law. This will enable the
taxpayer to take corrective action for future years.
Tool for Tax Recovery Tax being a charge imposed by government authority on
property, individual and organization implies that it is compulsory. The
taxpayer is ever unwilling to pay the right tax. The objective of the Revenue
authority is optimizing revenue collection under the law. Tax audit is therefore
used as a recovery tool for unpaid or underpaid taxes.
Discouraging Tax Evasion
Tax audit is one of the veritable tools for preventing tax evasion. Tax audit,
while improving voluntary compliance detects and brings into account those
who do not pay correct amount of tax.
Educate Taxpayers
Tax audit and investigation can assist in clarification of certain aspects of the tax
laws, identify improvement in treatment of tax issues, which in the end will
contribute to the overall performance and better educate taxpayers on what it
takes to comply.
Gather Intelligence: Tax audit can be used to gather information on the health
of a tax system. It can be used to get an understanding on the overall level of tax
compliance in a tax system.
Identify Areas of the Laws that may Require Clarifications
Tax audit may be used to identify grey areas of the tax laws and practice.
Revenue will make further efforts to clarify the requirements of the law in those
areas.
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Tax Audit And Tax Investigation
Tax Audit and Tax Investigation in Nigeria
Tax audit entails a review of taxpayer's records such as desk checks, compliance reviews
etc. to ascertain compliance with the relevant provisions of the Nigeria tax laws. This
review is usually carried out within a 5 to 6 years' period from the date of submission of the
relevant returns. However, if the tax authority suspects fraud, neglect or willful default, an
investigation may be conducted without any time limit. In Nigeria, tax audit is the primary
activity of the tax authorities under self-assessment regimeto encourage voluntary
compliance with the tax laws. Tax audit and investigation should be an area of great
concern to taxpayers, since if it not properly managed; the outcome of the exercise could
have a negative impact on their reputation and operations. This is in terms of the penalty
and interest that the Relevant Tax Authority (RTA) may impose on additional tax liabilities
(except) Companies Income Tax and Education Tax) established by the audit. Prior to the
introduction of the self-assessment scheme, there was no specific provision in Companies
Income Tax (CIT) Act for tax audit and tax investigation. However, the CIT Act, based on
subsequent amendment, empowers the FIRS to carry out tax audit or investigation of tax
payers' books of accounts and records. Thus, under the self-assessment tax filing regime,
the Relevant Tax Authority (RTA) would need to periodically review and verify the tax
returns submitted by taxpayers by way of an audit and/or investigation. The exercise
essentially is meant to enable the Relevant Tax Authority (RTA) satisfy itself that the
relevant returns submitted by the taxpayer agree with the underlying records and are
sufficient for the purpose of determining the taxable profits of the taxpayer and,
consequently, the tax payable.
Tax Investigation involves the gathering of admissive evidence which is aimed at
recovering underpaid taxes on one hand and enforcing criminal aspects of tax laws on
evasion on the other hand. The selection criteria for tax audit and or investigation are
determined by the appropriate Relevant Tax Authority (RTA). The FIRS (Establishment)
Act of 2007 S.26(4) 35 and first schedule of the Act provides the legal basis for the tax
authority's powers with regards to tax audit and investigation.
The fundamental tasks of tax audit and investigation are implementation of the tax laws,
investigating and penalizing tax offenses, safe guarding the tax order, promoting tax
compliance, improving tax revenue and achieving efficient and effective tax system.
Documents Required For Tax Audit and Tax Investigation
The documents required for a tax audit and tax investigation are largely the same and may
depend on the relevant tax authority conducting the audit or investigation and the focus of
the audit or investigation. The list of documents is not exhaustive and may include any
information or document that can assist the tax officials to form an opinion regarding the
right taxes to be paid by the taxpayer or evidence to be extracted in the event of a tax
investigation.
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Tax Audit And Tax Investigation
List of documents required by tax authorities - FIRS
Documents Required
S/N
1
Audited financial statements (AFS)
2
Management accounts
3
Trial balance
4
General Ledgers/transaction listings
5
Audit adjustment journals
6
Income tax computations
7
Fixed assets register
8
Self-assessment forms/evidence of tax filing
9
Monthly VAT returns (Form VAT 002)
10
Schedule of Input VAT
11
Sales Invoices
12
Evidence of payment of all taxes (receipts, bank transfers etc.)
13
Summary of Staff Cost as per Audited Financial Statement
14
Staff payroll
15
Tax files/Correspondences with Tax Authorities
16
Minutes of Board Meetings
17
Rent/Lease Agreements
18
List of Suppliers
19
Contracts Award Documents/Agreements
20
Management and Technical Service Agreements
21
Bank Statements for all the banks
22
Minutes of Tender Board meetings
23
Other relevant documents
Source: Federal Inland Revenue Service.
List of Documents Required for a Tax Audit Exercise - LIRS
1
General requirements
1
Certificate of incorporation
2
C.A.C Form (CO2 & CO7)
3
Audited financial statements
4
Management accounts
5
Trial balance/general ledger
6
Evidence of business premises paid
7
List of branches in Nigeria
8
List of location/office in Lagos
9
Evidence of previous year audit
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Tax Audit And Tax Investigation
2
9
10
11
12
13
14
15
16
3
17
18
19
20
21
22
23
24
25
26
27
PAYE
Staff monthly payroll
Schedule upfront/quarterly payment
Schedule non-payroll payment to staff
Staff salary schedule to bank
Employer annual declaration form (H1)
Sample of employment letters
Scheme of pension remittance
Evidence of development levy paid
Directors & Senior Management Staff
Directors’ emolument/Senior management staff payroll
Direct/staff assessment
Contract of employment/contract agreement
Schedule of benefits-in-kind (perquisites)
Schedule of pension remittance
Evidence of PAYE remittance
Evidence of development levy paid
Evidence of Life Assurance Policy
Evidence of Gratuities
Evidence of NHIS
Evidence of NHF
4
Expatriate
28
29
30
31
32
33
34
35
36
37
38
39
Expatriate payroll
Expatriate contract/terms of employment
Employer’s Annual Declaration form completed for expatriate
Company’s expatriate quota grant/permit
Monthly expatriate returns to Immigration
Registration/renewal of CERPAC
Schedule of benefits-in-kind
Rent agreement for expatriate residence
Evidence of salary paid in Nigeria and abroad
Scheme of pension remittance
Evidence of PAYE remittance
Evidence of development levy paid
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Tax Audit And Tax Investigation
5
40
41
42
43
44
Withholding tax
List of vendors/suppliers
Schedule of WHT payment of vendors and suppliers
Schedule dividend paid to shareholders
Schedule of interest paid to customers
Schedule of commission paid to agents/market
Source: Lagos State Internal Revenue Service
Back - Duty Assessment
The tax laws prescribe that taxpayers have an opportunity to recover any overpayment of
tax within a six-year period. Thus, the tax laws impose a six-year limitation (from the
relevant year of assessment) on the timeframe within which the tax authority may raise
additional assessment in connection with the returns filed by the tax payer. Back-duty
refers to collection of all kinds of taxes in arrears.
Back duty assessment could be achieved through the instrumentality of a tax audit, a tax
investigation or a desk query. Nigeria has limitation provisions of six years for tax purposes
and it is a period in which a right relating to tax issues can be enforced. The legal weapon
used by the tax authorities to open the barred period for recovery of tax is on the basis that
the taxpayer has probably been fraudulent in the tax returns filed or has willfully defaulted
or neglected to file appropriate returns with the tax authorities or otherwise has actively
facilitated the circumstances from which he now seeks to benefit.
Conditions That Trigger Tax Audit and Tax Investigation
Trigger Points and Management Strategies notwithstanding the above approaches, certain
identifiable items are primary triggers for a tax audit or investigation:
i. High Operating Expenses Ratio to Revenue: The RTA could typically conduct a
ration analysis of some items in the financial statements, with a view to ascertaining
compliance with predetermined parameters. A high operating expenses ratio to
revenue is a trigger, as the RTA would seek to scrutinize the components of the
expenses and confirm if they meet the tax deductibility test. (Wholly, Reasonably,
Necessary, and Exclusively). Relevant information on the expenses would be
required e.g. documentary support for the cost, the entity to which the cost relates,
whether the costs were incurred by, or on behalf of a related party, compliance with
the arm's length rule etc. maintaining proper documentation and records is key to
managing potential exposure that could result from a review under this trigger.
ii. Deductibility of Cost: Financial vs Tax: While the relevant Accounting Standards
determine the basis on which expenses can be accrued and treated in the records of
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Tax Audit And Tax Investigation
iii.
iv.
v.
vi.
companies, the tax laws provide for the basis of their deductibility. The CIT Act, for
example, allows only costs that are “wholly”, “reasonably”, “exclusively” and
“necessarily” (WREN) incurred in the production of profits as tax deductible. While
some costs are specifically not allowed by the CIT Act, e.g., donations (other than
th
donations made to bodies listed in the 5 Schedule to the CITA), general bad debt
provisions, etc., other costs are required to satisfy the WREN test to be tax
deductible. Tax payers should ensure that, in addition to reporting financial
transactions in line with the relevant accounting standards, their costs are reviewed
for compliance with the provisions of the tax laws to determine their deductibility.
Significant Fluctuations in Assessable Profits: Where there is a significant
increase or decrease in the taxpayer's assessable or total profits, the RTA may be put
on inquiry with a view to conducting an audit or investigation. In this case, proper
clarification supported by adequate documentation will assist in resolving any
concerned issue.
Significant Value Added Tax (VAT) and Withholding Tax (WHT) Receivable:
Most companies have challenges obtaining their WHT credit notes from customers.
This creates a massive WHT receivable in the taxpayers' books and in turn attracts
the attention of the RTA to scrutinize their records. The scrutiny will assist the RTA
to ascertain the rationale for non-utilization of the WHT credits. From experience, it
may be more efficient for a company with significant WHT receivables to outsource
the tracking and collection of their WHT credit notes to a tax consultant unless it is
willing to dedicated resources internally for the exercise. Furthermore, companies
that provide services to oil and gas companies and government agencies face a
peculiar situation where there is an enormous unutilized allowable input VAT. This
is as a result of the amendment to the VAT Act in 2007 which requires oil and gas
companies and government agencies to deduct VAT at source in respect of
payments made to contractors. In this case, the taxpayer will not have output VAT
from this source against which to offset its allowable input VAT. Its default option in
the circumstances will be to claim a refund from the FIRS. Based on the provisions of
the FIRS (Establishment) Act, the RTA will audit or investigate the taxpayer's
records to establish the validity of any claim for refund. Such companies are advised
to maintain relevant records, such as purchase invoices, import documents etc, for
the purpose of claiming the VAT refund.
Business Restructuring: A taxpayer may restructure business operation as a
growth strategy or to better manage its operations. However, the RTA may be put on
inquiry and seek to re-evaluate such restructuring through a tax audit or
investigation to forestall tax avoidance by the taxpayer.
Transfer Pricing (TP) Arrangement: A taxpayer conducting significant
transactions with related parties is susceptible to review. The RTA would seek to
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Tax Audit And Tax Investigation
confirm that the related party transactions are conducted at arm's length and that
there is no tax avoidance scheme (such as by way of base erosion and profit shifting,
etc), in such arrangements. Maintaining proper transfer pricing documentation in
the form of TP policies, TP benchmark studies, TP at 2017 KPMG Advisory Services,
a partnership registered in Nigeria, and a member of the KPMG network of
independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved disclosure and
declaration etc. would go a long way to address any concern in this regard.
Other key triggers which may attract the attention of the RTAs include situations where;
i. A taxpayer engages in aggressive tax planning,
ii. Have significant unutilized capital allowance,
iii. Inconsistency in filing of tax returns,
iv. Frequency of acquisition and disposal of qualifying capital expenditure,
v. Mergers and acquisition,
vi. Claims under Double Taxation Agreement etc.
Although tax audit or investigation could be daunting, adequate preparation and a well
thought-out approach could assist to mitigate its burden. For instance, the taxpayer may
decide to keep its records in electronic form for ease of retrieval during future tax audit or
investigation, and or appoint a tax consultant for professional support. Furthermore, on
completion of a tax audit exercise and issuance of the appropriate report by the RTA,
adequate preparation and availability of supporting documents would enable the taxpayer
address the issues raised in the tax audit and investigation reports and during the
reconciliation process. The importance of this cannot be overemphasized, as it is important
to ensuring timely closure of tax audits and investigations.
Qualities of a Good Auditor
Staff with the right competencies are required for the audit objectives to be achieved.
Revenue authorities in developing their audit workforce build capability and competency
models by specifying skills set required to achieve a successful audit/investigation. The
competence of an auditor is developed based on the analysis of the activities required to
achieve a successful audit.
The tax auditor requires an understanding of the business environment in which he
operates. A knowledge of political, economic, social, technological, cultural and religious
environment of the taxpayer is critical in the performance of an auditor. Adequate
knowledge of the business environment will provide the auditor enough background to
make decisions.
Specialization by the auditors is required for effective audit. The cases should be grouped
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Tax Audit And Tax Investigation
into industries and depth of technical knowledge required. The tax auditors are trained
along industry lines and thus become specialist in specific areas.
A good tax auditor should possess the following skills:
a. Investigative skills
b. Research and analytical skills
c. Technical skills
d. Tax accounting and financial analysis skills
e. Excellent communication skills
f. Good interpersonal relationship
A good tax auditor should be a person of high integrity and should be able to apply work
processes and procedures to achieve results.
Regulatory Framework for Tax Audit and Tax Investigation
The tax audit is an integral part of the self-assessment system in Nigeria. The Federal Inland
Revenue Service and State Internal Revenue Services are empowered to carry out tax audit
and investigation.
Section 60(1)of the Companies Income Tax Act, Cap C21 LFN 2004 provides as follows: “For
the purpose of obtaining full information in respect of the profits within the time specified
by the notice to any person the Service shall give notice to that person requiring him to: (a)
complete and deliver to the Service any return specified in such notice; (b) appear
personally before an office of the Service for examination with respect to any matter relating
to such profits; (c) produce or cause to be produced for examination books, documents and
any other information at the place and time stated in the notice, which time may be from
day to day to such periods as the Service may deem necessary; or (d) give orally or in
writing any other information including a name and address specified in such notice:
Section 60 (4) provides as follows: “Nothing in this section or in any other provision of this
Act shall be construed as precluding the Service from verifying by tax audit or investigation
into any matter relating to the profits of a company or any matter relating to any return or
entry into any book, document, accounts, including those stored in computer, digital or
magnetic, optical or electronic media as may, from time to time be specified in any guideline
by the Board.
The above provision is similar to Section 26(4) of Federal Inland Revenue Service
(Establishment) Act 2007(FIRSEA).Similar provisions are contained in Section 47 of
Personal Income Tax Act 2004 Cap P8 LFN and Section 32 of the Petroleum Profit Tax Act
Cap P.13 LFN 2004.
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Tax Audit And Tax Investigation
Furthermore, FIRSEA Section 35(2) provides that notwithstanding anything to the contrary
in any other enactment or law, the Service shall have the power to investigate or cause
investigation to be conducted to ascertain any violation of any tax law whether or not such
violation has been reported to the Service.
Other specific provisions that provide the legal framework for audit and investigation in
the tax system are as follows:
a. Section 26(1) of the Federal Inland Revenue Service (Establishment) Act (FIRS
Act)...an officer of a company may be required to deliver the returns of the
organization, provide explanations, books, documents, and any other
information it deems necessary to ascertain the profits or income of the
company.
b. Section 29(1) of the FIRS Act...“an authorized officer of the Service shall at all
reasonable times have free access to all lands, buildings, places, books and
documents for the purpose of inspecting the books and documents for the
purpose of collecting any tax under any relevant enactment or law.
c. Section 60(1) of Companies Income Tax Act (CITA)... the Board may give notice
in writing to any company when and as it thinks necessary requiring it to deliver
within a reasonable time limited by such notice fuller or further returns in
respect of any matter as to which returns is required.
d. Section 47(1)(c) of Personal Income Tax Act (PITA): “For the purpose of obtaining
full information in respect of the income or gain of a person, the relevant tax
authority may give notice to the person requiring him, within the time limited by
the notice, to produce or cause to be produced for examination at the place and
time stated in the notice which time may be from day-to-day for such period as
the relevant tax authority may consider necessary, for the purpose of the
examination any book, document, account and return which the relevant tax
authority may deem necessary.”
e. Section 55 of PITA: “If the relevant tax authority discovers or is of opinion at any
time that a taxable person liable to income tax has not been assessed or has been
assessed at a less amount than that which ought to have been charged, the
relevant tax authority may, within the year of assessment or within six years after
the expiration thereof and as often as may be necessary assess the taxable person
at such amount or additional amount as ought to have been charged.”
Provided that where any form of fraud, willful defraud or neglect has been
committed by or on behalf of a taxable person in connection with any tax imposed
under this Act, the relevant tax authority may at any time and as often as may be
necessary assess that taxable person at such amount or additional amount as may be
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Tax Audit And Tax Investigation
necessary for the purpose of making good any loss of tax attributable to the fraud,
willful default or neglect.
Post Audit Meetings
Post audit meetings refer to all meetings held between the Revenue officials and the
taxpayers on conclusion of the fieldwork and release of the audit findings.
The objectives of post audit meetings/reconciliation are as follows:
a. Protection of the interests of the taxpayer
b. Minimize conflicts and disputes
c. Ensure speedy resolution and conclusion
d. Challenge unjustified assessment
e. Reduce additional tax liability to the barest minimum
f. Ensure compliance with the laws
To achieve the above objectives of a post-audit reconciliation, the following steps have to be
taken:
a. Adequate information and explanations that would aid the tax officials should be
provided;
b. All relevant information and supporting documents should be made available
upon request;
c. Before the end of the field exercise, all the parties should have a close-out meeting
where all the outstanding information and yet to be resolved issues can be
documented;
d. Issues raised should be clarified before the issuance of the tax audit report;
e. Presence at reconciliation meeting is key and where the tax authorities are not
forthcoming the tax payer could initiate one;
f. Objections to assessment raised by the tax authorities should be responded to
before the deadline and where the deadline cannot be met an extension should be
sought for.
Towards an Effective Audit
According to Adam Smith's “The wealth of nations” an ideal tax system should meet the
four canons of taxation. One of the four canons is economy/efficiency. Efficiency addresses
both the cost of collection and the cost of compliance. In achieving an effective and efficient
audit and investigation process, the following measures should be considered:
The Revenue authority should establish a regulation that will fix a predetermined
completion time for audit and investigation. This will give certainty to taxpayers that after a
period they would not be answerable to issues arising from the audit except in the case of
fraud, willful default or neglect.
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Continuous training and exposure of the tax officials is important in building capacity.
Specialized training should be provided to enable the tax auditors function effectively. The
era of cut and paste should be jettisoned. Some requests by tax auditors during tax audit
exercises could give them away as lacking industry skills and sectorial expertise.
The fieldwork is a very crucial stage of the audit and should be properly utilized in
obtaining all documents required to form an opinion. Also, all clarifications should be
sought on field and minor reconciliations concerning accounting records should be carried
out on field. This will greatly contribute to the reduction of the audit cycle.
A tax audit should be properly planned and its scope determined. Where there is handover
of an engagement due to redeployment, transfer or exit of staff, there should be an adequate
handover of the status of the engagement.
The Team leads should be involved in all phases of the audit to ensure consistency and a
policy should be put in place on the timing for release of the tax audit report after field
exercise. Audit file should speak for itself and provide evidence of work carried out and
conclusion. Minutes of meetings and all understanding should be properly documented
and circulated.
There is the need to secure documents and information provided by tax consultants and
taxpayers to reduce the cost of compliance.
Proper documentation of a company's tax and accounting transactions and ease of retrieval
of information by the taxpayer contribute immensely to effective audit. The interest of the
tax man is to check documentations to substantiate the tax returns for the period. Taxpayers
are therefore required to ensure that copies of all documents required to support
transactions are properly kept.
CONCLUSION AND RECOMMENDATION
Tax audit or tax investigation is a continuous exercise that requires adequate planning and
preparation. The process may, no doubt, result in extra cost to a taxpayer. They are
important because they increase tax compliance, lead to better understanding of the tax
laws, maintain economic and financial stability and generate more revenue to the
government. It is noted that many tax authorities have invested in capacity building and
resources needed for effective and efficient tax audit and tax investigations.
In conclusion, the relevant stakeholders including, but not limited to, the relevant tax
authorities (RTAs), taxpayers, tax consultants and practitioners should perform their
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respective responsibilities diligently and conscientiously for a fair outcome. The processes
may be tedious, but the prospect of a seamless tax audit and tax investigation process is
possible.
REFERENCES
Adeniji, A. (2004). Auditing and Investigation. Lagos, Value Analysis Publishers.
Appah, E. (2013). A causality analysis between tax audit and tax compliance in Nigeria.
European Journal of Business and Management 5(2), (Online), www.iiste.org. ISSN 22222839
Appah, E. (2014). “Self-Assessment Scheme and Revenue Generation” developing
Country's Studies. ISSN-224-607x.
Cheng & co. (2014). Tax audit and tax investigation – What are the differences? Retrieved
from http://www.proeknowledge.com/cc/ Templated32d.html?menuld=56 on 2
Companies and Allied Matters Act, (CAMA) 1990
Federal Inland Revenue Service (FIRS) Establishment Act. 2007
Kiechier, E. (2009). “Sequences of tax audit, tax compliance and tax paying strategies.”
Journal of Economic Psychology 30 (3) 405-418.
Nigerian Economic Summit group, 2019.
Okonkwo, A.I. (2014). Critical evaluation of tax audit & investigation process in enhancing
tax compliance; Being paper presented at the CITN MPTP.
Ola,C.S. (2001). Income tax law and practice in Nigeria, Ibadan Heinemann Educational
Books (Nigeria) Plc.
Onuoha, L.N. & Dada, S.O. (2016).Tax audit and investigation as imperatives for efficient
tax administration in Nigeria. Journal of Business Administration and Management
Sciences Research 66-76.
Oyedokun, G.E. (2013). Tax audit, tax investigation and forensic accounting: Exploring
Nexus (Nigerian Experience); Being a lecture delivered at the member's forum at
District Society of ICAN held at Lagos Airport Hotel on March 21, 2015.
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CHAPTER EIGHT
TAXATION AND THE EFFECT OF COVID-19 ON NIGERIA BUSINESSES
2
1
Oyedokun, Godwin Emmanuel and Haruna, Roselyn Afor
and Adeolu-Akande, Modupeola Atoke3
1&3
Faculty of Management & Social Sciences
Lead City University Ibadan, Nigeria.
1
godwinoye@yahoo.com
1
+2348033737184, +2348132445878
2
Accounting Department, Salem University, Lokoja, Nigeria
ro.haruna@gmail.com; +234 706 934 3608
INTRODUCTION
The COVID-19 Pandemic was one of the events that have the most impact on modern
history. It spread to over 216 countries and territories around the world and induced the
most economic downturn since the Great Depression (World Health Organization, 2020;
International Monetary Fund, 2020).
The COVID-19 pandemic is not only the most serious global health crisis since the 1918
Great Influenza (Spanish flu), but is set to become one of the most economically costly
pandemics in recent history. COVID-19 has disrupted the economy of the world. The effect
of the Pandemic has been devastating on the World's economy.
Experience with past epidemics provides some insights into the various channels through
which economic costs could arise in the short as well as longer term. At the same time,
COVID-19 differs from previous episodes in several important ways. Notably, the globally
synchronized lockdowns and trauma of financial markets reinforce one another into an
unprecedented economic sudden stop. For these reasons, the COVID-19 global recession is
unique. However, past epidemics can shed light on transmission channels to the economy,
especially when stringent containment policies are not in place.
COVID-19 was first identified in Wuhan, China, in December 2019 and has caused colossal
death and has spread to almost all parts of the world (Akanni & Gabriel, 2020). The first case
of COVID-19 was identified in Nigeria on February 27, 2020. According to WHO (2020), as
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of Nov 16, 2020, the total number of confirmed cases worldwide was 55,502,641, while there
were confirmed deaths of 1,335,057 in countries, areas or territories of the world. As of Nov
16, 2020, the Nigerian Centre for Disease Control (NCDC) reported 65,305 cases, 61,162
discharged patients, and 1,163 deaths, and the number of tests in Nigeria was 705,809 (in a
population of about 200 million people).
No company was likely to have prepared for COVID-19, irrespective of business size.
Public Health Research has informed business owners to always make for this type of
emergency, but in the real sense, only big businesses often have formalized plans
(Rebmann, Wang, Swick, Reddick & Delrosano, 2013). The 1918 pandemic killed about 40M
people worldwide from the early spring 1918 through to late spring 1919 (Turner &
Akinremi, 2020). Economists at Goldman Sachs estimated that the United States is likely to
have a gross domestic decline of 3.8% for 2020 due to the virus (Hatzius, Phillips, Mericle,
Hill, Struyven, Choi, Briggs, Taylor & Walker, 2020).
Igwe (2020) noted that the world economy faces the worst ever economic recession due to
the outbreak of the COVID-19. The global economy is expected to account for economic
losses via three transmission channels: Supply Chain, Demand, and The Financial Market.
These channels will negatively impact businesses, household consumption, and
international trade. COVID-19 Pandemic has put pressure on policymakers and
supervisory institutions across the globe, sparking off several mitigating initiatives by
Government agencies to combat the potential negative social-economic impacts on
households and businesses (KPMG, 2020). A pandemic impacts both supply and demand
(Swift, 2009).
The COVID-19 Pandemic, most negative, will impact all companies, some positively. The
Pandemic is still ongoing; therefore, it is not easy to estimate its long-term economic,
behavioral, or societal consequences as this aspect has not been done with past Pandemic
(Donthum, & Gustafsson, 2020). The COVID-19 outbreak is likely to cause bankruptcy for
many well-known brands in many industries as consumers stay at home, and economies
are shutdown (Tucker, 2020). The impact of COVID-19 on the global economy is likely to be
unprecedented since the 1930s Great Depression (Euronews, 2020). The short term impact
of COVID-19 is immediately and effortlessly felt, due to the widespread lockdown and
social distancing measures globally (He & Harris, 2020).
Understanding the COVID-19 Pandemic
Global Context
The coronavirus began in Wuhan, Hubei Province, China. Residents who lived in Wuhan
had some link to a large seafood and live animal market, which suggest that the mode of
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transmission of coronavirus was from animal to person. The virus has been named “SARSCoV-2” and the disease it causes has been named “coronavirus disease 2019” (abbreviated
“COVID-19”). The first known patient of Coronavirus started experiencing symptoms in
Wuhan, China on 1 December 2019. Since then, there have been over 800,000 reported cases
around the world.
The U.S. had the largest reported cases, followed by India and Brazil as at Nov 15, 2020. In
Africa, South Africa, Morocco, Libya and Nigeria has the largest reported cases, on the
reporting date.
Impact on the Global Economy
The outbreak of Coronavirus disease (COVID-19) and its rapid spread across the world has
introduced a new wave of disruption never seen before. The health systems have been
stretched to the limits and the economic impacts are taking their toll on government
revenues, businesses, families and individuals across the world. This has prompted various
governments across the world to introduce fiscal and economic stimulatory measures to
ameliorate the impact of the pandemic on taxpayers and save their economies from
collapse.
The COVID-19 pandemic affected the global economy in two ways.
1. The spread of the virus encouraged social distancing which led to the shutdown of
financial markets, corporate offices, businesses and events.
2. The rate at which the virus was spreading and the heightened uncertainty about
how bad the situation could get, led to flight to safety in consumption and
investment among consumers and investors (Ozili & Arun, 2020).
There was a general consensus among top economists that the coronavirus pandemic
would plunge the world into a global recession. Top IMF economists such as Gita Gopinath
and Kristalina Georgieva stated that the COVID-19 pandemic would trigger a global
recession.
In financial markets, global stock markets erased about US$6 trillion in wealth in one week
from 24th to 28th of February. The S&P 500 index also lost over $5 trillion in value in the
same week in the US while the S&P 500's largest 10 companies experienced a combined loss
of over $1.4 trillion due to fear and uncertainty among investors about how the pandemic
would affect firms' profit (Ozili & Arun, 2020).
The travel restriction imposed on the movement of people in many countries led to massive
losses for businesses in the events industry, aviation industry, entertainment industry,
hospitality industry and the sports industry. The combined loss globally was estimated to
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be over $4 trillion. Several governments in developed countries, such as the U.S. and U.K.
responded by offering fiscal stimulus packages including social welfare payments to
citizens while the monetary authorities offered loan relief to help businesses during the
pandemic. There were also spillovers to poor and developing countries. The effect was
more severe on developing countries that have a weak public health infrastructure and
non-existing social welfare programs.
Review of Nigeria Economy Pre-COVID-19
Prior to COVID-19 outbreak, the economy showed signs of fragility as businesses were
finding it difficult to compete given the unfavorable business climate.
The outbreak of the coronavirus pandemic with its attendant restriction on economic
activities: travel bans, border closures and inter-state movement restrictions coupled with
slump in the crude oil prices, reduction in foreign reserves are evident on Nigeria's
Purchasing Managers' Index (PMI) which slide to 42.4 points in May 2020 from 59.2 in
January down to 51.1 points in March, 2020. The PMI tracks the performance of the business
aspect of the economy.
The GDP growth has experienced a slow but positive growth since Quarter 2, 2017. The
country advanced by 1.87% year-on-year in the first quarter of 2020 compared to a 2.55%
growth in the previous period, against the backdrop of significant global disruptions
resulting from the COVID-19 public health crisis, a sharp fall in oil prices and restricted
international trade.
Real Gross Domestic Product
In the first quarter of 2020, Nigeria's Gross Domestic Product (GDP) grew by 1.87% (yearon-year) in real terms. This performance was recorded against the backdrop of significant
global disruptions resulting from the COVID-19 public health crisis, a sharp fall in oil prices
and restricted international trade.
The performance recorded in Q1 2020 represents a drop of –0.23% points compared to Q1
2019 and –0.68% points compared to Q4 2019, reflecting the earliest effects of the disruption,
particularly on the non-oil economy. Quarter on quarter, real GDP growth was –14.27%
compared to 5.59% recorded in the preceding quarter.
Sectoral Contribution to GDP
The Service Sector remain the largest sector contributing to GDP with 54.39% contribution
in Q1 2020, up from 53.64% recorded in the preceding quarters while Agriculture and
Industries contributed 21.96% & 23.65% respectively.
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Crude Oil Output
During the first quarter of 2020, an average daily oil production of 2.07 million barrels per
day (mbpd) was recorded. The production level was higher than the 1.99mbpd recorded in
the same quarter of 2019 by 0.08mbpd and the fourth quarter of 2019 by 0.06mbpd.
The oil sector recorded a real growth rate of 5.06% (year-on-year) in Q1 2020 indicating an
increase of 6.51% points relative to the rate recorded in the corresponding quarter of 2019.
However, growth decreased by –1.30% points when compared to Q4 2019 which was 6.36%.
Quarter-on-quarter, the oil sector recorded a growth rate of 11.30 per cent in Q1 2020.
Price of Crude Oil
The Prices of Crude was relatively stable in 2019. The price peaked in May, 2019 to $73.65
per barrel and was lowest in October, 2019 at $59.1 per barrel. In 2020, the prices started well
with $66.44 per barrel but plummeted to $15.7 per barrel in April, 2020 no thanks to the
COVID-19 pandemic. The fall in price of crude oil coupled with staggering production will
definitely affect government finances and worsen the
Foreign Reserve
Nigeria has witnessed a deteriorating foreign reserves and a weaken naira prior to COVID19. The outbreak of the pandemic has further dampened the economic outlook. The figure
shows continuous decline in foreign reserve since May, 2019 till April 2020.
The country's foreign reserves declined to its lowest in over 2 years to US$33.42 billion in
April, 2020, from US$37.2 billion in January before climbing to US$36.6 billion in June, 2020.
The recent decline stems from a fall in crude oil prices occasioned by a slowdown in global
economic activities following the Corona virus outbreak. Perhaps in reaction to the
declining external reserves, CBN has decided to suspend the multiple exchange window
policy which was hitherto used to determine the value of the Naira. The decision to collapse
the multiple window rates is a step in the right direction as this will forestall some inherent
demerits in using different rates which include currency round tripping, non-reflective
production costs, rent-seeking and corruption.
COVID-19: The Nigerian Experience
The spread of COVID-19
The coronavirus entered Nigeria through an infected Italian citizen who came in contact
with a Nigerian citizen who was subsequently infected with the coronavirus. The
coronavirus infected people in Lagos and then spread to other parts of the country from
March to November.
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COVID-19 spillover to the Nigerian economy
Economic crises are not new in Nigeria. During the 2016 economic crisis, the monetary
authority in Nigeria defended the local currency from forced devaluation against the dollar
and adopted a managed-float foreign exchange system, which worked well from 2016 to
2019. After the 2016 economic crisis or recession, it was widely believed that the unexpected
and sustained decline in oil price was the most important cause of economic crises in
Nigeria. But in 2020, nobody thought that a public health crisis could trigger an economic
crisis in the country.
What made the 2020 economic crisis different from other economic crises or recessions in
Nigeria was that most economic agents, who could have helped to revive the economy,
were unable to engage in economic activities due to fear of contracting the COVID-19
disease. Also, economic agents did not engage in economic activities when the government
imposed and enforced its social distancing rules and movement lockdown in Abuja, Lagos
and Ogun states on the 30th March of 2020.
Although the coronavirus outbreak which started in the Wuhan province of China had
spillover problems in Nigeria, the reason why the outbreak was severe in Nigeria and
caused suffering to poor citizens was because of weak institutions that were ineffective in
responding to the pandemic and the lack of adequate social welfare programs that would
have catered for majority of the poor citizens and vulnerable citizens who were affected by
the crisis. The fear of financial and economic collapse led to panic buying, hoarding of
foreign currency by individuals and businesses mostly for speculative reasons, flight to
safety in investment and consumption, households stocking up on essential food and
commodity items, businesses asking workers to work from home to reduce operating costs.
Direct Effect
There are five main ways through which the COVID-19 pandemic spilled over into Nigeria.
1. The COVID-19 pandemic affected borrowers' capacity to service their loans, which
gave rise to non-performing loans (NPLs) that depressed banks' earnings and
eventually impaired banks' soundness and stability. Subsequently, banks were
reluctant to give additional loans to borrowers as more and more borrowers
struggled to repay the loans granted to them during the COVID-19 outbreak.
2. There were oil demand shocks which were reflected in the sharp decline in oil price.
The most visible and immediate spillover was the drop in the price of crude oil,
which dropped from nearly US$60 per barrel to as low as US$30 per barrel in March.
During the pandemic, people were no longer travelling and this led to a sustained
fall in the demand for aviation fuel and automobile fuel which affected Nigeria's net
oil revenue, and eventually affected Nigeria's foreign reserve.
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3. There were supply shocks in the global supply chain as many importers shut down
their factories and closed their borders particularly China. Nigeria was severely
affected because Nigeria is an import-dependent country, and as a result, Nigeria
witnessed shortage of crucial supplies like pharmaceutical supplies, spare parts,
and finished goods from China.
4. The national budget was also affected. The budget was initially planned with an oil
price of US$57 per barrel. The fall in oil price to US$30 per barrel during the
pandemic meant that the budget became obsolete and a new budget had to be
formed which had to be repriced with at low oil price.
5. Finally, the COVID-19 pandemic affected the Nigerian stock market. Major market
indices in the stock market plunged when investors pulled out their investments
into so-called safe havens like US Treasury bonds. Stock market investors lost over
NG ? 2.3 trillion (US$5.9bn) barely three weeks after the first cases of coronavirus
was confirmed and announced in Nigeria on January 28, 2020. The market
capitalization of listed equities, which was valued at NG ? 13.657 trillion
(US$35.2bn) on Friday, February 28, 2020 depreciated by at NG ? 2.349 trillion to at
NG ? 11.308 trillion (US$29.1bn) on Monday 23 March 2020. The All-share index
closed at 21,700.98 from 26,216.46 representing 4,515.48 points or 20.8 per cent drop.
A Weak and Underdeveloped Digital Economy
Before the COVID-19 outbreak began, Nigeria already had a weak and underdeveloped
digital economy. Currently, Nigeria has eight (8) operational telecom service providers,
namely, MTN Nigeria, Globacom, Airtel, 9Mobile, M-Tel, Telkom, Econet Wireless and
Vodacom. According to the Nigerian Communications Commission (NCC), the number of
mobile phone subscribers in Nigeria decreased by 49,060 in April to 173.38 million from
173.43 million in March. Also, MTN, the largest telecom provider, had 64.73 million users in
April which is a drop of 302,448 from 65.03 million in March. Also, Statistia reports that
there are 96 million internet users in Nigeria.
Yet, during the COVID-19 pandemic, there were hardly any university or school that
offered a full educational curriculum online from start to finish. Many businesses operated
using the traditional 'come-to-the office-to-work' model as opposed to the 'working-fromhome' model. The outbreak of the novel coronavirus brought challenges to the business
environment in Nigeria. It impacted industries and markets in the short term. The
operations of these markets and industries would have been minimally affected if they had
a large digital infrastructure. The only services that were offered through the existing
digital infrastructure during the COVID-19 outbreak were telecommunication services,
digital bank transfers and internet services.
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The digital economy would have played a major role in driving recovery from the economic
crisis if Nigeria's digital economy was robust and well-developed. For instance, in Nigerian
schools, universities and educators can put coursework online so that students quarantined
at home don't have to miss out on key aspects of their education while school is closed or
when students cannot get to school. E-commerce apps that enable online buying and selling
can allow buyers and sellers to make purchases and sales while staying in their homes.
Also, tele-health apps for health and wellness checks can allow individuals in all affected
areas to take extra precautions to monitor their vital signs and learn how to reduce their risk
of infection. Also, family members can visually check on their parents, grandparents and
siblings without physically visiting them which provides a level of comfort that would be
impossible over the phone.
Online delivery businesses can use virtual assistants to help ensure that goods purchased
from online grocery stores are delivered when customers need them. Businesses that don't
want their workers to travel or whose employees are uncomfortable taking trips can stay
connected with team members, clients and prospective clients around the world using
online video conferencing technologies. All these are possible when there is a robust and
well-functioning digital economy.
Outside Nigeria, digital technology helped many businesses in developed countries
survive the effect of the COVID-19 outbreak, and it created an opportunity to enhance the
country's digital economy. In the future, a well-developed digital economy in Nigeria,
achieved through intense digital technology penetration, will play a greater role in
reducing the effect of recessions in the country, and will also help in supporting economic
activities, social activities and the development of good health care systems.
Lack of Social Welfare Program
Before the COVID-19 outbreak, there were major social welfare problems in Nigeria which
include child abandonment, armed robbery, homelessness, mental health problems,
divorce, and problems of single parenting. These social welfare problems can only be
addressed with serious social welfare policy and programs. But, currently, social welfare
activities in Nigeria is under developed, poorly funded and is unavailable to majority of
those who need them (Ahmed, Alhassan & Alshammari, 2017). For instance, the Nigerian
government created the 'N-Power' social welfare program to address poverty among
unemployed youth in Nigeria. The purpose of the N-Power program was to provide job
training and skills to young (and educated) Nigerians, as well as a monthly stipend of
30,000 Nigerian naira (USD $83.33). The problem with the N-Power was that it isolated
uneducated people, needy children, and older adults that need to be empowered as well.
This is just one example of how Nigeria's social programs did not provide a social welfare
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safety net for all citizens in need of social welfare. In fact, Nigeria does not have a national
social welfare program that offers assistance to all individuals and families in need of health
care assistance, food stamps, unemployment compensation, disaster relief and educational
assistance.
The consequence of not having a national social welfare program became evident during
the coronavirus outbreak of 2020. During the outbreak, people had little to rely on; many
poor citizens did not have welfare relief that could help them cope with the economic
hardship at the time. There were no housing subsidies, no energy and utilities subsidies to
individuals that were most affected by the coronavirus outbreak. In the literature, there are
debates on the benefit of using social welfare programs to alleviate poverty and to help
citizens cope with disasters (Luenberger, 1996; Dolgoff, Feldstein & Skolnik, 1980;
Abramovitz, 2001), and social welfare theories provide different perspectives on how social
welfare can be designed to meet the basic needs of the people (Fleurbaey & Maniquet, 2011;
Arrow, Sen & Suzumura, 2010; Andersen, 2012). So far, the provision of social welfare
services to vulnerable citizens in the population is the most proven way to protect them
from economic hardship in bad times (Ewalt & Jennings Jr., 2014). In Nigeria, the lack of
such welfare services for vulnerable people, households and poor individuals during the
coronavirus outbreak caused severe pain and economic hardship to households and poor
individuals. The implication of this is that social welfare has not been a policy priority by
policy makers in Nigeria.
The Effect of the COVID-19 on SMEs
The few studies show that the last millennium's major historical pandemics have typically
been associated with subsequent low returns as assets (Jorda, Singh & Taylor, 2020). SMEs
have a lack of financial resources as the biggest challenge to short and long term recovery in
the COVID-19 situation (Cumbie, 2017).
Bartik, Bertrand, Cullen, Gbeser, Luca, and Stanton (2020), conducted a survey of more than
580 SMEs, between March 28 and April 4, 2020. The result revealed that there were mass
layoffs, closure of business, different beliefs about the likely duration of the COVID related
disruptions, many businesses are financially on the brink, and most businesses planned to
seek funding. COVID 19 has caused a significant economic shock (Seth, Ganaie, & Zafar
2020). Drop-in oil prices, Naira under severe pressure to Dollar current official rate, rising
inflation, significant job losses. In March 2020, the ILO estimated that the impact of COVID19 would result in a rise in global unemployment of between 5.3m (low scenario) and 24.7m
(high scenario) ILO, 2020).
Another impact of COVID-19 is the continuous protection of workers' health and safety and
reducing workers' exposure to COVID-19 in the workplace. (KPMG, 2020). A characteristic
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of the Pandemic has been the switch from face to face to digital connection for schooling,
higher education, business meetings, health consultations, shopping, and cultural events
(Phillipson, Gorton, Turner, Shucksmit, Aitken-McDermott, Area, Cowie, Hubbard,
Maioli, McAreavey, Souza-Monteiro, Newbery, Panzone, Rowe, & Shortall, 2020).
The consequence of COVID-19 on the economy and financial markets in Nigeria: economic
lockdown of major cities (Abuja, Lagos, & Ogun State) on March 30, 2020, leading to
economic loss especially for daily income earners from small-medium scale businesses,
withdrawal of money by investors from the stock exchange market and fall in oil prices
(Ozili, 2020). Some of the impacts of the COVID-19 include disruption of business cash flow,
missing important compliance deadlines, employees working from home, an employee
working outside their country because of the travel ban, restriction for directors to attend
board meetings as a result of the travel ban, disruptions in supply chains (KPMG, 2020).
The lockdown of the major cities in Nigeria and the current foreign exchange devaluation
due to a drop in crude oil prices arising from the COVID-19 Pandemic has impacted all
sectors in Nigeria.
Figure 1: Top 10 Challenges faced by Enterprise during the Pandemic
No Source
The top 10 challenges as identified by enterprises depicts some of the resultant effect the
lockdown and restriction of movement of goods and persons, unless essentials goods have
on business as well as individuals. As reflected in business, growing concerns on security
and high rate of crimes was witnessed during the lockdowns. It would lead further to high
stockpiling of inventory and falling customer demand.
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Key Issues that Enterprise are currently facing
i. Enterprises were requested to identify critical issues they faced as a result of the
COVID-19 and resulting effects of lockdown. Irrespective of the size of companies,
below is a reflection of the wide range of challenges facing enterprise.
ii. 93.4 per cent of enterprise stated that one of the critical challenges currently facing
as a result of COVID-19 was cash flow to maintain staff and business operations,
which would prevent them from fully restoring operations, when the lockdown
eased.
iii. 92.3 per cent of respondents informed that their customers/clients purchasing
power have been badly affected, which resulted to lower demand than normal.
Business Continuity Plan (BCP)
Business Continuity Planning is the process involved in creating a system of prevention
and recovery from potential threats to a company. The plan ensures that personnel and
assets are protected and are able to function quickly in the event of a disaster.
Research respondents were asked if they have the BCP plan in place before the COVID-19.
About 71.4% informed that they have the BCP policy in place. It is worrisome and could be
significantly delay the full recovery process for the 28.6 per cent of the enterprises.
Survival Strategies
Measures taken by the Nigerian government and agencies to assist companies
Governments of various nations have responded to the Pandemic, by lockdowns,
shutdowns of economic activities, giving out what is termed palliatives in many countries
to workers and companies (OECD, 2020). Due to the rapid spread of the virus, governments
worldwide have taken unprecedented measures to contain the rate of spread. The
measures that include travel restrictions, total country lockdown, and curfew have caused
disruption in various forms around the world (KPMG, 2020). The discovery of the
coronavirus and the spread has led many governments to take drastic measures. The
lockdown of large parts of society and economic life has come as an exogenous shock to
many businesses, not least innovative startups (Kuckertz, 2020).
The lockdown measures as a response to the spread of the new coronavirus threaten the
existence of many innovative startups (Kuckertz, 2020). In the United Kingdom, the
government instituted various schemes that will help various business groups. This
includes Business interruption loan scheme, Job retention scheme, business rate holidays,
small business grant fund, deferral of VAT and business tax payments, deferral of selfassessment payments, retail, and hospitality grant scheme. However, there are some
exceptions (Rouse, Hart, Prashar, & Kumar, 2020). Policymakers and supervisory
parastatal worldwide have put a lot of palliative measures that can reduce the negative
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effect of the impact of COVID-19 Pandemic on businesses and households (KPMG, 2020).
Like many other countries of the world, Nigeria has put up palliative measures to ensure
the stability of its economy. These measures
The Central bank of Nigeria (CBN) on March 16, 2020, announced some palliative measures
to ensure the stability of the economy;
i. Reduction of interest rate on all CBN intervention loans from 9% to 5% per annum.
ii. Extension of Moratorium period on all principal repayment on CBN facilities by
one year, effective from March 1, 2020.
iii. ? 50b ($129.5m) credit facility through Nigeria Incentive-Based Risk Sharing for
Agricultural lending (Nistral) Microfinance bank for household SMEs has gone
through an adverse effect of Pandemic.
iv. Consideration of a temporary and time-limited restructuring of the tenure and loan
terms for households and business by Deposit money banks (DMRs).
v. Extension of ? 100billion credit support pharmaceutical firms that intend to expand
or start drug manufacturing plans in Nigeria and healthcare practitioners who plan
to build or expand first-class health facilities.
Furthermore, the Nigerian stock exchange extended the filing of accounts by 60 days and
Waiver of import duties on medical goods from March 1 to December 31, 2020. The Federal
Inland Revenue Service (FIRS) also came up with some measures: Extension of filings for
monthly Value Added Tax (VAT) and Withholding tax (WHT) from 21st day to the last
working day of the following month to the Returns is applicable. Extension of filing of
Accounts by one month for companies with a year ended December 31, from June 30 to July
31, filing of companies income tax returns with unaudited accounts. Federal Inland
Revenue Service (FIRS) also encourages the use of electronic platforms to conduct desk
reviews, tax audits, and responses by taxpayers.
Extension of filing of personal income tax returns by Lagos state government by two
months, March 31 to May 31, 2020, while the Federal Inland Revenue Service is covering
Abuja by extended its returns from March 31 to June 30, 2020.
Under the COVID-19 Regulation 2020, the federal government implemented a three-month
repayment moratorium for all farmer money, trader money, and market money loans.
Direct food/cash distribution to vulnerable households. Provision of ? 1trillion for loans to
increase local production and manufacturing in critical sectors of the economy. On March
24, 2020, the House of Representatives passed the Emergency Economic Stimulus bill, 2020.
The highlight of the bill includes 50% income tax rebate on Pay as You Earn to protect
employees from loss of their jobs; suspension of import duties on medical equipment,
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personal protective gears, and medicine; three months in the first instance deferral on
mortgage obligations on residential mortgages obtained by individual contributors to the
National Housing Fund.
Survival Strategies for SMEs during and After COVID-19 in Nigeria
SMEs need to consider digitalization. This is part of the new normal; Digital marketing
through social media is like marketing products and services without a boarder. SMEs need
to examine their expense lines to cut costs. This can involve cutting down on rent by taking
smaller office space, sharing office space, staff reduction, and investing in solar energy
instead of using generators. SMEs can also consider their staff working on alternative days,
working from home, usage of contract staff, leave for idle staff, temporary pay cuts, revision
of variable pay schemes, staff rotation, salary restructuring, hazard pay for frontline staff
that cannot work from home (KPMG, 2020). SME owners need to motivate and galvanize
their staff to achieve the maximum possible.
SME owners need to think outside the box and come up with innovations that can elevate
their business; also, it is an opportunity for owners and staff of SMEs to educate themselves.
Concerning their areas of business, there are a lot of Webinars that relate to various sectors
of the economy during this period. SME owners can also collaborate in the areas of
information technology, research, and development. SME owners can become hybrid
entrepreneurs by investing in order forms of business to boost their income. Business
owners can take advantage of various government initiatives, like loans rescheduling,
various palliative measures, and loans at low-interest rates made available by the
government, e.g., ? 50b loan packages made available to individuals and SMEs.
Tax Measures by the FIRS
On Monday, 23 March 2020, the FIRS announced health and safety protocols for physical
visits to its offices and the following measures to mitigate the impact of COVID-19 on
taxpayers:
I. Extension of timeline for filing of value added tax and withholding tax from the 21st day
to the last working day of the month, following the month of deduction
ii. Extension of the due date for filing of companies' income tax (CIT) returns by one month
iii. Use of electronic platforms for payment of taxes and processing of tax clearance
certificates
iv. Filing of tax returns by taxpayers without audited financial statements which must be
submitted within two months of the revised due date of filing
v. Proposed creation of a portal where documents required for desk reviews and tax audits
will be uploaded by taxpayers for online access by the tax authority
vi. Submission of tax returns online by taxpayers via efiling.firs.gov.ng or by designated email accounts published by the FIRS.
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Economic Measures by the CBN
The CBN announced policy measures worth ? 3.5 trillion, which include:
I. Additional moratorium of 1 year on CBN intervention facilities
ii. Interest rate reduction on intervention facilities from 9% to 5%
iii. Creation of ? 50 billion target credit facility for affected households and small and
medium enterprises
iv. Granting regulatory forbearance to banks to restructure terms of facilities in affected
sectors
v. Improving FX supply to the CBN by directing oil companies and oil servicing
companies to sell FX to the CBN rather than the Nigerian National Petroleum
Corporation
vi. Additional ? 100 billion intervention fund in healthcare loans to pharmaceutical
companies and healthcare practitioners intending to expand/build capacity
vii. Identification of few key local pharmaceutical companies that will be granted funding
facilities to support the procurement of raw materials and equipment required to boost
local drug production
viii. ? 1 trillion in loans to boost local manufacturing and production across critical sectors.
Additionally, the CBN has taken steps towards adoption of a uniform US Dollar to Naira
exchange rate by increasing its intervention rate at the Investors and Exporters' (I&E)
Window of the FX market from ? 366 to ? 380 to the dollar and prescribing a similar rate at
the end users' retail market. While increasing the official rate from ? 306 to ? 360 per dollar
has narrowed the gap between the official rate, the end user rate, and I&E Window
intervention rate, it has only effectively replaced the multiple exchange rate regime with a
dual exchange rate regime. It is hoped that sooner than later, the CBN will move from the
new dual exchange rate to a market-driven uniform exchange rate regime for full
transparency in the operation of the FX market and accounting for public revenue and
expenditure.
Fiscal Measures by the House of Representatives (HORs) under the Bill
The HORs on Tuesday, 24 March 2020 passed the Bill which seeks to:
I. Protect employees from loss of jobs as a result of COVID-19 by granting a 50% income
tax rebate on the total actual amount due or paid as pay-as-you-earn (PAYE) tax under
the Personal Income Tax Act, 2004 (as amended), to Nigerian companies who retain all
their employees from 1 March 2020 to 31 December 2020
ii. Suspend import duties on medical equipment, medicines and personal protective gears
required for the treatment and management of COVID-19 for three months, effective 1
March 2020.
iii. Introduce a new moratorium on mortgage obligations of Nigerians under the National
Housing Fund.
The Bill was sponsored by all principal officers of the House
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Other Notable Measures
Mention must be made of reduction of petrol pump price from ? 145 to ? 125/litre by the
Federal Government. While this is a welcome development, the Government must move
away from a fixed price regime for fuel, and use the opportunity of the current low crude oil
prices to fully deregulate and privatize the downstream sector of the petroleum industry. If
this is done, the price per litre of these refined products will move in response to market forces,
engender competition between operators, promote efficiency, eliminate the long-standing
fuel subsidy albatross once and for all and release the much-needed cash to fund
infrastructural development. It will be easier for consumers to accept and adjust to fuel
subsidy withdrawal as they enjoy the benefit and bear the burden of deregulated fuel pricing
depending on the crude oil price trajectory.
Lessons Learnt and Good Practice
From the above, it is obvious that businesses are operating in a seemingly unfriendly
environment with many Government bottlenecks hindering business survival. The pandemic
exposed the appalling state of public health systems and the fickleness of global economies.
Unlike other climes where businesses had significant support from Government, the Nigerian
experience is different.
Encouraging Examples of Government support could be drawn from the following
Countries:
COUNTRY
GOVERNMENT SUPPORT
Australia
Tax-free cash-flow boost for employers;
Apprentice wage subsidy; boosted instant
asset write-off
France
Rescheduled loans; utilities bills (rent,
gas, electricity) suspension; creation of
solidarity fund
Germany
Short term work allowances for
employers
Italy
Suspension of taxes and social security
contributions. Tax credit equals 60% of
the rent and 50% of sanitation costs.
Japan
Support to businesses to pay leave
allowance to workers. Loans at low
interest rate.
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Maldives
Deferment of loan payment. 40% and 30%
subsidies on electricity and water bills
respectively. 3 months allowance for
people who lost their jobs.
New Zealand
Wage subsidy schemes for struggling
businesses. Leave and self-isolation
support, business cash-flow and tax measures.
North Macedonia
Direct financial support to MSMEs.
Support to companies in salary payment.
Subsidies to companies in sectors with
greater impact such as tourism, transport,
aviation, etc.
Singapore
A rebate of 8% of wages for 3 months.
Wage credit to employers. Property tax rebate.
South Africa
Agreement between social partners to
work together in managing issues arising
from COVID-19.
Spain
Tax deferrals. Special financing line for
hard-hit sectors. Cash transfer support to
businesses. Temporary Employment
Regulation Schemes created.
Sweden
Creation of a crisis package worth 300
billion kronor to protect businesses and jobs.
Take-over of sick pay responsibilities in
April and May. Deferred contribution by
employers for social security.
United Kingdom
Business interruption loan, small business
grant, business rate relief, SME grants, etc.
New Zealand
Wage subsidy schemes for struggling
businesses. Leave and self-isolation
support, business cash-flow and tax measures.
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CONCLUSION AND RECOMMENDATIONS
The recent economic crisis in Nigeria is analyzed and it showed that the spillover of
COVID-19 pandemic into Nigeria coupled with declining oil price, which were external
shocks, caused to the economic crisis in Nigeria in 2020. The structural problems in Nigeria
at the time prolonged the economic crisis.
The implication is that policy makers should pay attention to three areas of the economy for
economic and structural reform. One, policy makers should introduce economic reforms to
diversify the economy and reduce Nigeria's dependence on revenue from crude oil export.
Two, policymakers in Nigeria should invest in health care infrastructure to improve the
ability of the national health system to withstand the outbreak of contagious diseases.
Three, there is also a need to build appropriate digital infrastructure to facilitate the
transition from 'face-to-face' business activities to a 'digital or online' business activities,
which can help to grow the digital economy. Also, policy makers should use legislation to
create a robust social welfare safety net for all citizens particularly for unemployed citizens
and poor households. Finally, the government needs to focus on rebuilding institutions,
and pay more attention to institutions like National Agency for Food and Drug
Administration and Control (NAFDAC), and the Nigeria Centre for Disease Control
(NCDC).
The scope and severity of the economic crisis in Nigeria, caused by the fall in oil price and
the COVID-19 pandemic, is a clear signal that growth and development reforms are needed
in Nigeria. In retrospect, the Nigerian government was wise to use fiscal and monetary
stimulus package as a partial solution to revive the falling aggregate demand during the
pandemic. It used public money to slow the spread of coronavirus. There is no full
knowledge on how bad the increasing spread of COVID-19 will become in Nigeria in the
coming months if not years. But what is known is that this crisis creates an opportunity to
reconstruct Nigeria's economy. The economy shutting down and the overloaded public
healthcare systems show that the entire public healthcare system and the economic system
need to be reinvigorated. This opportunity to rebuild the country's infrastructure should
not be wasted. If the economy is not in order, then there will be severe punishment in the
months and years ahead when the next crisis comes. At the national level, the President
needs to implement a reconstruction and development program for the country. At the
individual level, citizens should not waste this crisis. This is a time to enrich their physical,
spiritual, and emotional health, and not just focusing on avoiding the coronavirus. Create a
new normal daily routine by eating well, exercise, and get sufficient rest. Enrich their mind
by reading some great books, learning a new skill, visualize and document their long-term
goals and plan to pursue those goals with passion when the COVID-19 pandemic is over.
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From the analysis, it is obvious that the Nigerian economy struggled in the pre-COVID
period, with GDP growth rate averaging 1.87% from Q2, 2017 to Q1, 2020. A major concern
for the economy is the twin challenge of dwindling revenue due to declining crude oil price
(which forms over 50% of revenue and over 90% of foreign exchange earnings), as well as
the compounding impact of the COVID-19 on household earnings and general standard of
living.
The challenges ahead would impact negatively in the management of the economy hugely
as there is growing concerns in debt management profile of the economy, and like to worsen
amid the steep decline in revenue associated with falling oil prices. It is expected that the
effect of the COVID-19 would impact on aggregate demand, which is believed will
ordinarily fall, as more lockdowns of the economy is prevalent, also, Government
expenditure will tend to rise in order to stimulate the economy.
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CHAPTER NINE
TAXATION OF SPECIALIZED BUSINESS IN NIGERIA
Friday, E. Akpan
Director, Centre for Financial and Accounting Research (CEFAR)
Nigerian College of Accountancy, Jos, Nigeria
INTRODUCTION
…for a government seeking to simplify the tax system and improve tax compliance, it is conventional
wisdom that the harder we make tax compliance, the more we provide the incentive for noncompliance and outright evasion. Taiwo Oyedele (PWC).
Taxes are established by law in Nigeria. Such tax must have been passed into law through
enactment of relevant statute (Act, By-law, decree among others). The tax law establishes
the administrative body and specifies its jurisdiction. Tax structure in Nigeria is tailored
towards Nigerian governance hierarchy (Federal, State and Local Government).
Basis of Tax Administration
Taxes are established by tax statutes which form the basis of tax administration. These tax
statutes usually specify the tax rate, due date, basis of assessment, offences, and penalties of
the identified taxes.
Tax administration involves the registration, assessment, returns, collection, compliance
monitoring, compliance enforcement, sanction, taxpayer's education and awareness and
any other activity that can improve the efficiency and effectiveness of taxation.
i. Registration of Taxpayer: Taxpayer registration is done by submitting relevant
information as required by relevant tax authority. Taxpayer registration usually
precedes tax assessment, collection, compliance monitoring and enforcement. Federal
Inland Revenue Service (FIRS) and State Board of Internal Revenue register taxpayer for
taxes within their jurisdiction.
ii. Assessment of Taxpayers: Tax authorities assess taxpayers to taxes administered by
them and they can also reassess tax return rendered by taxpayers. The basis of assessing
tax (tax rate, basis period, and tax deduction) is stipulated in tax statute.
iii. Returns: Tax authorities usually require taxpayer to file information as required by
relevant tax statute and as further required with them. This is usually on a periodic basis
(annually, monthly) or as the need arises.
iv. Tax Collection: Tax collection is the next step after assessment either the taxpayer selfassess himself or is assessed/reassessed by tax authority. Mode of tax remittance is
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usually determined by relevant tax authority.
v. Compliance Monitoring: Tax authorities usually monitor tax compliance of taxpayers
by assessing their adherence to the provisions of relevant tax statute. This is usually
done by tax authorities at their respective offices by checking taxpayer's file and/or visit
taxpayer to obtain further relevant information to complement information at their
disposal to assess taxpayer's compliance with the provision of relevant tax statute.
vi. Compliance Enforcement: Tax authority compliance can be enforced on taxpayer.
Sanction
Contravention with provision of relevant tax statute may lead to penalty or conviction.
Contravention includes failure to furnish required information or failure to keep required
record, or any other non-compliance with relevant provision of required tax statute. Tax
education is very important as it is a platform in which loopholes can be corrected.
Tax education and awareness: This is usually done through issuance of tax circulars and
other publications to aid taxpayer's understanding of tax statutes.
The FIRS on 24 July 2014 stated at a stakeholder meeting that the income tax returns filed by
foreign companies doing business in Nigeria will no longer be accepted unless
accompanied with audited financial statements as well as tax and capital allowance
computations among other requirements.
The Company Income Tax Act (CITA) defines a “Nigerian company” as any company
incorporated under the Companies and Allied Matters Act or any enactment replaced by
that Act. A “foreign company” means any company established under any law in force in a
territory or country outside Nigeria. Such foreign companies are generally referred to as
non-resident entities. While a Nigerian company is taxable on its worldwide income, a nonresident entity is liable to tax in Nigeria on its profit attributable to the business or trade
carried on in Nigeria. Although there are legal questions regarding what a foreign company
can and cannot do in Nigeria without incorporating a Nigerian company, it is nonetheless
legally possible.
Tax is a compulsory levy or financial charge imposed on a taxpayer or upon his property by
the government to provide security, social amenities and other services/provisions for the
wellbeing of the society. The main purpose of taxation is to raise funds to defray the
expenses incurred for the common interest of the citizens without reference to special
benefits conferred.
In addition to the normal rules on assessment and computation of tax payable by
companies, Company Income Tax Act (CITA), 1979 contains special provisions with
regards to companies engaged in a special business. The special business includes the
following:
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-
-
Shipping or air transportation and companies other than a Nigerian company
carrying on the business of transmission of messages by cable or by any form of
wireless apparatus;
Insurance companies;
Banks; and
Unit trust
Characteristics of Specialised Business
Special Business Tax (SBT) is another kind of indirect tax introduced in 1992 to replace
Business Tax. Certain businesses that are excluded from VAT will instead be subject to SBT.
Special Businesses are so classified because of the peculiar nature of their income,
expenditure and the impact on tax payable. SBT include Insurance businesses, Air
Transport, shipping and Telecommunication and Unit Trust scheme.
The insurance business is of two types: Life Insurance and Non-life Insurance Businesses.
For a life insurance business, the adjusted profit is obtained by deducting the management
expenses and commissions from investment incomes which include every dividend, rent,
or interests received.
However, it should be noted that for Nigerian income tax purpose, premium incomes and
surpluses on actuarial valuations are not to be considered as income chargeable to tax. The
surplus on actuarial valuations that would be subjected to tax is limited to the amount
distributed to shareholders as dividend.
Also, as a reminder that from 1995 year of assessment, any profit generated from the Life
Business cannot be utilized to reduce any loss made from the Non-Life business. This is
because, from 1995, a Life Business was considered as a different line of business, different
from the Non-life business.
More so, where a portion of the profit is derived from abroad then the income chargeable to
tax in Nigeria shall be the proportion of the total investment income of the company as the
premium receivable in Nigeria bears to the total premium receivable less the agency
expenses in Nigeria and a fair proportion of the head office expenses.
For a Non-Life Insurance business, on the other hand, the adjusted profit is arrived at by
aggregating all premiums to arrive at the Gross premium. From the gross income, Premium
is deducted and payments on reinsurance and returns to the insured to obtain the net
premium. From the net premium, add investment incomes, commissions received and
other taxable incomes. Deduct claims and commissions, agency fees, administration
expenses, the share of head office expenses and other allowable expenses.
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Taxation Of Specialized Business In Nigeria
For Nigerian company, the income chargeable to tax is the global income irrespective of
whether or not there are branches outside Nigeria. On the other hand, for a Non-Nigerian
company, the income chargeable to tax is limited to the income derived from Nigeria while
the allowable expenses are limited only to those incurred in Nigeria.
Another special Business Taxation is the Air Transport, Shipping, and Telecommunication
Business, for these businesses, the tax liability will generally arise on the profit in the
normal way for any other company. This is achieved by taking the net profit or loss and then
addition or deduction of items. What however makes them special is the fact that the
businesses may apply to Federal Inland Revenue Service (FIRS) to be subjected to tax using
two ratios which are Adjusted Profit Ratio and Depreciation Ratio.
It should be noted that a taxpayer is only able to exercise this option where it can be proved
that the tax authority of the country where the company is normally resident computes and
assesses tax on basis that is not materially different from that of Nigeria.
For any company that wants to take advantage under this provision, a formal application to
be assessed on the basis of the two ratios should be made not later than six years from the
year of assessment concerned.
Special Business Tax also includes the Unit Trust Scheme which was established for the
purpose of providing facilities for the participation of the public, as beneficiaries under a
trust, in profits or income arising from the acquisition, holding, Management or disposal of
securities or any other property whatever in respect of the income arising to the trustees of
an authorized unit trust have effect; and confirm the following:
i. As if the trustees were a company whose business consists mainly in the making of
investment and the principal part of whose income is derived therefrom.
ii. As if the rights of unit holders were shares in the company
iii. As if so much of the income accruing to the trustees is available for payment to the
unit holders as dividends on such shares.
The adjusted profit of a Trust Scheme is obtained by deducting management expenses and
Unit Trust managers' remuneration from investment income.
Taxation of Special Business in Nigeria
This paper devolves the taxation of special business in Nigeria. Businesses have to pay tax,
but there are some that are subjected to taxation at the lower of 20%. These are businesses
that are classified as small. A small business was originally defined as one whose turnover is
not more than ? 500,000, but sooner, it became different.
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The 1995 amendment now requires that a small business in the Agricultural,
manufacturing and mining sector shall be ones whose turnover does not exceed ? 1,000,000.
This is applicable for the first three years of commencement of business but may be
extended to five years.
It is not applicable to companies formed to acquire the whole or part of an existing business
as a subsidiary company.
Special Companies/Businesses in Nigeria
As mentioned above, there are basically the following types of specialized businesses
provided for under the Nigeria tax laws.
They are;
i. Shipping and Air Transport Companies
ii. Taxation of Insurance Companies
iii. Taxation of Banks
iv. Unit Trust Business Taxation
v. National Information Technology Development Levy (NITDL)
1. Shipping and Air Transport Companies
For Nigerian companies, the income chargeable to tax is the global income irrespective of
whether or not there are branches outside Nigeria.
This means that for Nigerian shipping or air transport business, the global income is
charged to tax after giving effect to the global expense. For company other than a Nigerian
company which carries on the business of transport by air or sea, the amount of profit
chargeable to tax in Nigeria should be based on the profit derived from the carriage of
passengers, livestock or goods shipped or loaded on to an aircraft in Nigeria.
The significance is that no cognizance is given to profit derived from operations outside
Nigeria or where Nigeria is merely a transit in the course of its operation.
The business operations of air and sea transportation may be carried on by companies
incorporated in Nigeria as Nigerian company or other companies known as Non-Nigerian
companies.
The taxation of these businesses is contained in section 12 and section 13 of a Nigerian
company which carries on the business of transport by sea or air, and ship or aircraft owned
or chartered by it, calls at any port or airport in Nigeria, its profit or loss to be deemed to be
derived from Nigeria shall be the full profit or loss arising from carriage of passengers,
mails, livestock or goods, shipped or loaded into an aircraft in Nigeria. This is not applied to
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passengers' mails, livestock or goods which are brought to Nigeria solely for transshipment or for transfer from one aircraft or in either direction between aircraft and a ship.
Where the board is satisfied that the tax authority of any other country computes and
assesses on a basis not materially different from that prescribed by CITA, the profit of a
company which operates ship or aircraft, the authority will certify.
Ratio of profit or loss of an accounting period, before any allowance by way of depreciation
to the total sum receivable in respect of the operations:
Profit or Loss Ratio = Adjusted Profit x 100
Global Profit
The depreciation Ratio: the ratio of allowances by way of depreciation for that period to the
total.
Depreciation Ratio = Depreciationx 100
Global Profit
The profit or loss of that period shall be taken to be that proportion of the total sum
receivable in respect of the carriage of mails, Passengers, livestock goods shipped or loaded
in Nigeria.
From 1988 tax year, a tax payable for the any year of assessment shall not be less than 2% of
the full sum receivable in respect of the carriage of passengers, mails, livestock or goods
shipped or loaded into aircraft in Nigeria.
Nigerian companies engaged in shipping or air transport business will be subjected to tax
as any other company incorporated in Nigeria. It is their worldwide income that will be
subjected to the provisions of any applicable double taxation agreement and/or any
exemption in other parts of CITA.
Methods of Assessment
- Determine the global income of the business;
- Determine the Nigeria income;
- Determine the global adjusted profit (GAP);
- Apply the global adjusted profit (GAP) on the global income. The results of which is
known as global depreciation ratio;
- The APR should be applied on the Nigeria income to obtain the Nigeria adjusted
profit;
- The depreciation ratio when applied on the Nigerian income gives capital
allowances claimable;
- Deduct capital allowance from adjusted profit from depreciation ratio to arrive at
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-
the taxable profit; and
Apply company tax rate to arrive at the tax liability.
2. Taxation of Insurance Companies
There are two types of insurance companies, namely Life insurance companies and Nonlife insurance companies. It is also known that in practice, some insurance companies have
both life and non-life insurance departments.
A Nigerian insurance company which engages in insurance business; the assessable profit
shall be ascertained in a similar manner as described for Non-Nigeria Company. However,
all premium and investment incomes of the company shall be deemed to be derived in
Nigeria and all expenses and other outgoing shall be treated as having been incurred in
Nigeria.
Thus, the provisions relating to adjusting profit, granting loss relief, computing capital
allowances and total profit which apply to other Nigeria companies under capital
allowances and total profit which apply to other Nigerian companies under CITA shall
apply to Nigerian insurance companies with minor differences.
Where this arises, adequate care must be taken to give the fact that there are basic
differences in the manner of computing the adjusted or assessable profit of the two
businesses.
The adjusted or assessable profit for the two departments must be separately determined.
Taxation of insurance companies is covered by section 14 of CITA 2007.
This section deals with taxation of both Nigerian and Non-Nigerian companies engage in
insurance business. It also distinguished between Life assurance business and non-Life
insurance business. It also distinguished between Life assurance business and Non-Life
insurance business; Section 14 of CITA 1990 which was in operation until the 2007
amendment.
Non-Life Insurance Business
In the case of a Non-Nigerian company engaged in a non-life insurance business through a
permanent establishment in Nigeria and whose profit accrues in part from outside Nigeria,
the profit on which tax may be imposed shall be ascertained by taking into consideration
the gross premium, interest and other income, received in Nigeria, less premium to
reinsurance and returns to insured and deducting from the balance so arrived at, a
provision for unexpired risks carried forward (at the end) subject to 45% of total premium
for marine for general insurance (other than marine) and 25% of total premium cargo. In
addition, to provide for deduction for other reserves, claims outgoing of the company, a
deduction from its premium of 25% of total premium is to be made. After the deduction of
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reserves and capital allowances in any tax year, not less than an amount equal to 15% of the
total profit of the company shall be payable as income tax.
The format is as follows for easy perusal:
This involves the determination of the assessable profit of a non-life insurance business,
payment of re-insurance and return made to the insured are deducted from the Gross
Premium received to obtain the Net Premium Income.
The following income is added:
i. Investment income
ii. Commission received
iii. Provision for unexposed risks at the beginning of the year and any other sundry
income.
From the sum total above, the following expenses are deducted:
i. Provision unexplored risks at the year end
ii. Administrative expenses
iii. Commission and,
iv. Agency fees.
v. A reasonable proportion of head office expenses and other allowable expenses.
When an insurance company carries out life insurance business in conjunction with
insurance business of other class, the life insurance business shall be treated as a separate
business from any other class of insurance business carried on by the company.
The implication is loss relief schemes in that the loss from a life insurance business may not
be utilized to reduce profit from a non-life insurance business or vice versa.
Life Insurance Business
The adjusted profit of a life insurance business is determined by deducting management
expenses and commission from investment. Income management expenses here are made
up of all the normal administrative establishment and financial expenses.
It is therefore required that the details of those expenses be thoroughly reviewed to separate
the inadmissible portion. Investment income is defined to include any premiums or
surpluses on actuarial valuation of any unexplored risks. It will appear; however, than
practice the premium is never considered for computing the tax liability of a life business.
Similarly, surplus on actuarial valuation is only subjected to taxation where it has been
distributed to the shareholder as dividend.
The confusion inherent in this practice is the basis of determining whether or not the
dividend paid to the shareholders of a life insurance company arose from the surplus of an
actuarial valuation, or from some other sources.
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Where a Non-Nigeria company engages in life assurance business by carrying on business
through a permanent establishment in Nigeria and whose profit arises wholly in Nigeria,
the profit liable to tax shall be ascertained as follows:
In a situation where the profit of the company accrues partly outside Nigeria, the profits on
which tax shall be imposed shall be in proportion of the total investment income of the
company as premium receivable (or received) in Nigeria bear to the total (global) premium
less agency expenses in Nigeria and proportion of head office expenses.
Investment Income for Life Business
Investment income for a life business includes income from investments such as dividend,
interest rent, royalty lease, premium and other income. It will also include any surplus
arising from actuarial valuation of the reserves for unexpired risk. Investment income does
not include the premium received by the company from the assured. This is because such
premium will be paid back or indemnified either at death or the attainment of a specified
age under endowment policy.
It is important to stress that the fundamental difference between non-life and a life business
for tax purposes is in the treatment of premium received and claims payable. In non-life
business, premium received and investment income are treated as income liable to tax
while in a life business, only investment income is treated as liable to tax. Also, claims
payable are allowable expenses for non-life business but (since the premium is not taken as
income) claims payable are not allowable expenses for life business.
Reinsurance Company
Section 14 (10) of CITA as amended in 2007 also include the following deductions from
gross profit to be credited to general reserve fund for Reinsurance Company.
These are an amount not more than:
a. 50% of the reinsurer's gross profit for the year if the general reserve fund is less than
the initial statutory minimum authorized share capital; or
b. 25% of the reinsurer's gross profit for the year if the general reserve fund is equal to
or exceed the initial statutory minimum authorized share capital.
Other Issues on Taxation of Insurance Companies
a. Where an insurance company carries on a life class and a general class insurance
business, the funds and books of account of one class shall be kept separate from the
other as though on class does not relate to the other class, and the annual tax returns
of the two classes of insurance business be made separately. Thus, each class of
business is to be assessed separately as “Life assurance Assessment “and “Non-Life
Insurance Assessment”. (Not to be assessed together).
b. Since the income from a company carrying on both life and non-life business is
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c.
d.
e.
f.
assessed and taxed separately, a loss incurred from life business cannot be relieved
against income from non-life business.
Loss incurred in one class of insurance business is available to be carried forward
and relieved from the profits of the same class of insurance business subject to a
maximum period of four years. (Note that losses can be carried forward indefinitely
for other companies from 2007 tax year).
For a Non-Nigerian insurance company to be liable to tax in Nigeria, it must have a
permanent establishment means in Nigeria. In relation to insurance company,
business in Nigeria but does not include an agency in Nigeria unless the agent has,
and habitually exercise a general authority to negotiate and conclude contracts on
behalf of such company.
An insurance company that engages the services of an insurance agent, a loss
adjuster an insurance business shall include in its annual tax return, a schedule
showing the names and addresses of insurance agent, a loss adjuster and an
insurance broker, the date their services were employed and terminated and
payments made to them.
Like any other company, dividends received by insurance companies are treated as
Franked Investment Income and are exempted from tax. For better presentation,
they should be added up initially to other incomes to arrive at the Gross income and
deducted immediately form the gross income.
3. Taxation of Banks
Prior to 1991 year of assessment, banks were subjected to tax on excess profit. Excess profit
here refers to the difference between the total profits (i.e profit assessable to tax) and
Normal profit. Normal profit is the sum obtained by applying the percentages specified
below to the amount of capital employed as at the end of the relevant accounting year of the
company.
These were:
a.
Normal tax
This is the tax liability arrived at by multiplying the total profit of the back by the ruling tax
rate i.e. the company income tax rate.
b.
Special Levy
This is based on excess profit made by the bank. This became effective from 1st April, 1979
and the rate was 10% (though from 1989 year of assessment, it was increased to 15%).
The excess profit of any particular bank is arrived at by calculating the amount by which its
total profit exceeds its normal profit. Normal profit on the other hand is arrived at by
applying certain percentages on some balance sheet items of the bank as at the end of the
accounting year. These rates as follows:
40% of issued or paid-up share capital
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20% of capital or statutory reserve
20% of general reserve
20% of long-term loan
The summation of the figures arrived at from these rates is the normal profit while the
summation of figures arrived at in (a) and (b) above is the bank's tax liability for any
particular year.
Effective from 1991 year of assessment however, banks became subject to minimum tax
payable and the special levy was thus replaced by it.
The minimum tax payable by any bank is determined thus:
a. Where the turnover of the bank is equal to or below ? 500,000, the highest of the
following:
i.
0.5% of gross profit
ii. 0.5% of net assets
iii. 0.25% of paid up capital
iv. 0.25% of turnover for the year.
b. However, for banks with turnover in excess of ? 500,000 and where the total profit
produces tax less than the minimum tax, minimum payable will be the highest in (a)
above plus 0.25% of turnover in excess of ? 500,000.
Interest Exempted from Taxation
1. Section 9 of CITA can be divided into three subsections:
2. Taxation of interest on foreign loan granted by banks for the purpose of
manufacturing goods for export; the exemption is subjected to the presentation
of a certificate by the Nigerian export Promotion Council stating that not less
than 50% of a company is manufactured goods sold in the relevant accounting
year were sold outside Nigeria and were not re-exported into Nigeria.
3. Taxation of interest on loans granted by banks for agricultural purposes
The table for the computation of (1-3) above is as follows:
Repayment Period
Moratorium (Grace Period)
Rate of Interest
Exempted
Above 7 years
Not less than 24 months
100%
5 – 7 years
Not less than 18 months
70%
2 -4 YEARS
Not less than 12 months
40%
However, effective from January 1991, interest from agricultural loans (3 above) by banks
shall be exempted from tax provided the following requirements are fulfilled:
a. The moratorium is not less than 18 months, and
b. The rate of interest on loan is not more than the base lending rate. The “base lending
rate “means the weighted average of the cost of fund to any bank.
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4.
Unit Trust Business Taxation
The profits earned by a unit trust are subject to tax in the hands of the trustees. The dividend
received by a limited liability company from a unit trust scheme is exempt from tax.
Therefore, there is no obligation to withhold tax on the dividend payable to companies that
are unit holders in the scheme
Unit Trust Tax Issues
The decision to operate a unit trust scheme or invest in one should not be made without a
good understanding of the tax implications.
A unit trust is a form of collective investment which allows investors with similar
investment objectives to pool their funds together and thereafter invest in a portfolio of
securities or other assets that would be of beneficial interest to the investors. A unit trust
scheme may be open-ended or close-ended. The Investments and Securities Act (ISA), 2007
is the legislation that regulates the operation of collective investment.
ISA defines a collective investment scheme as “a scheme in whatever form, including an
open-ended investment company, in which members of the public are invited or permitted
to invest money or other assets in a portfolio. The investors share the risk and benefit of
investment in proportion to their participatory interest or on any other basis as determined
in the deed. There are several collective investment schemes that are considered acceptable
by the Security and Exchange Commission (SEC) in Nigeria. The prominent schemes
include the following:
Open-ended Investment Scheme
This is a collective scheme that continually issues and redeems units (shares) after the initial
public offer. The price of the unit is based on the net asset value, which is the sum of all the
asset of the fund less all liabilities as at date of acquisition or redemption.
Closed-ended Investment Scheme
The closed-ended fund does not constantly reissue nor redeem additional issue of new
units. Most times, it is listed and traded on the Stock Exchange and its price is determined
by the market forces.
Real Estate Investment Scheme (REIS)
This scheme directly invests in both profit-making real estate and related companies'
properties by utilizing pooled funds from subscriptions of its participant investors / unit
holders.
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Venture Capital Fund
This is profit seeking scheme by entrepreneurs, whose primary objective is to provide fund
to new and growing businesses with the sole aim of long- term profit. It is usually an initial
stage of financing new and developing companies seeking to develop quickly. Institutional
investors (i.e. pension fund administrators and insurance companies, etc.), affluent
individuals and corporate organizations are some of the sources of venture capital funds.
The risk of return under this scheme is very high.
Specialized Fund
This is mutual fund that invests in securities of a particular sector, industry or geographical
location. This kind of fund is notable for higher risks and return when compared to other
funds as a result of lack of diversification of the portfolio of investment.
In Nigeria today, unit trust scheme and REIS are the most practiced schemes. Several
financial institutions operate unit trust schemes. The scheme is considered to be beneficial
for the development of the Nigerian capital market and gives assurance to investors as
regards the management of their funds.
The decision to operate a unit trust scheme or invest in one should not be made without a
good understanding of the tax implications. The Companies Income Tax Act (CITA)
recognizes the importance of an authorized unit trust. The trustee of an authorized unit
trust scheme is treated as a company and the unit holders treated as shareholders. The
profits earned by a unit trust are subject to tax in the hands of the trustees. Furthermore, any
income distribution to the unit holders is treated as dividends since the rights of such unit
holders are deemed to be shares in the unit trust scheme.
The dividend received by a limited liability company from a unit trust scheme is exempt
from tax. Therefore, there is no obligation to withhold tax on the dividend payable to
companies that are unit holders in the scheme.
However, where any dividend is received by an individual from a unit trust scheme,
personal income tax (PIT) is required to be accounted for on such income, as there is no
specific exemption stipulated in the Personal Income Tax Act (PITA) in this regard.
Consequently, the trustee of the scheme will apply withholding tax at 10% on the dividend
and remit same to the relevant State Internal Revenue Service.
In recent times, Lagos Internal Revenue Service (LIRS) has been aggressive in its drive to
collect tax from unit trust scheme with respect to dividend distributed to individual unit
holders.
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There have been stories of trustees of unit trust schemes resisting this aggressive posture of
LIRS on the ground that the exemption that applies to corporate unit holders should be
extended to individual unit holders. This is a matter of what is good for the goose is not
good for the gander, as the tax law does not appear equitable to individual unit holders in
this particular instance.
In view of the above, it is expected that an amendment would be made to the tax law to
address the seeming controversy highlighted about the unit trust scheme.
5.
National Information Technology Development Levy (NITDL)
This is the type of tax levied on the profit before tax of Companies in Nigeria. It is governed
by the National Information Technology Development Agency Act (NITDA). The
applicable rate is 1% profit before tax with an annual turnover of N100, 000 and above. The
levy is computed and filed alongside when Company Income Tax returns is being
submitted for a self-assessment. The penalty of non-payment of the levy within 30 day of a
demand notice by NITDA include the unpaid amount plus 10% of unpaid amount and
interest at the prevailing minimum rediscount rate of the Central Bank of Nigeria.
Finance Act 2020: Companies Income Tax Act
The followings are some of the changes made to the Act by the Finance Act, 2020:
Tax Identification Number (TIN)
TIN is now a requirement for business transactions undertaken by companies. These
requirements also include displaying the TIN on documents relating to business
transactions and making TIN to serve as requirements for opening and operating bank
accounts.
Profit of Non-Nigerian companies
Non-Nigerian companies are now liable to Companies Income Tax provided they transmit,
emit, or receive signals or data from Nigeria. This is an amendment to the basis of taxation
of Non-Nigerian companies which was previously based on existence of 'fixed base'
(permanent establishment) in Nigeria.
Notable impacts of Companies Income Tax amendments on insurance companies
The Act has impacted on the insurance industry by granting companies the opportunity to
carry forward their loss reliefs, indefinitely. The Act has also granted the provision for
minimum tax to be the higher of 20% of gross income and 0.5% of gross premium for nonlife insurance business or 0.5% of gross income for life assurance business.
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Dividends
Dividends are no longer taxed as profit when dividend paid exceed profit provided that
such dividend was paid out of present or prior year profit already subjected to tax under the
Companies Income Tax Act or Petroleum Profit Tax Act.
Profit Exempted from Companies Income Tax
The profit of companies with turnover of less than ? 25 million in any year of assessment is
exempted from Companies Income Tax provided that such companies comply with the
provisions of Companies Income Tax Act in that year of assessment.
The dividend received from small companies in the manufacturing sector is exempted from
Companies Income Tax provided it is within its first five years of operation. Also, the profit
of Nigerian companies in respect of goods exported is exempted from tax provided the
proceeds are used to purchase raw materials, plants, equipment and spare parts.
Ascertainment of Profit (Dividend and Rental Income)
Before the enactment of the Finance Act, rental income and dividend received by real estate
investment companies on behalf of its shareholders are subjected to income tax.
In order to encourage dividend distributions to shareholders, the Act exempts dividend
and rental incomes received by real estate investment companies on behalf of its
shareholders from being subjected to income tax, provided that a minimum of 75% of
dividend and rental income is distributed and such distribution is made within 12 months of the
end of the financial year in which the dividend or rental income was earned.
However, the Finance Act amends Section 24 of CITA by specifying that dividends or
mandatory distributions made by a real estate investment company that is duly approved
by the Securities and Exchange Commission to its shareholders are allowable deductions in
ascertainment of assessable profits. (CITA Section 24).
Redefinition of the Term, 'Real Estate Investment Company'
The Finance Act amends Section 105 of CITA by redefining real estate investment company
as a company duly approved by the Securities and Exchange Commission to operate a real
estate investment scheme in Nigeria.
Amendments to the 'Commencement Rule'
Prior to the enactment of the Finance Act, assessable profit of first year of assessment is
based on the profit from the date of commencement to 31 December of that year. For the
second year of assessment, assessable profits are based on the profits earned from the date
of commencement to the next 12 months, while assessable profits of the third and
subsequent years are profits earned during the basis period relating to the preceding year.
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However, the tax payer can elect to be assessed on actual year basis for the second and the
third years of assessments, respectively. With the Finance Act 2020 amendments, the
assessable profit for the first year of assessment is based on the profits from the date of
commencement of business to the end of its first accounting period. The assessable profits
for the second year of assessment are based on the profit from the first day after its first
accounting period to the end of its second accounting period while the profits earned
during third and subsequent years of assessment shall be assessed to tax on preceding year
bases.
Amendments to the 'Minimum Tax Rule'
The new basis for computing minimum tax has been changed to 0.5% of gross turnover less
any franked investment income.
Amendments to Companies Income Tax Rates
Prior to the enactment of the Finance Act, all companies are taxed at the rate of 30%.
Small companies (i.e. companies that earn less than ? 25million in any year of assessment)
are not liable to company income taxes. Medium-sized companies (i.e. companies with
gross turnover of more than ? 25million but less than ? 100million) are liable to companies'
income tax at a rate 20%, while large companies (companies with ? 100million and above)
are liable to companies income tax at a rate of 30%.
Taxation Analysis in Nigeria
In parts of the world, legislative powers to impose on its citizens, any form of tax and at
whatever rate it deems appropriate. A perusal of the Nigerian Tax Laws shows that no
attempt has been made to define the term “tax”. However, the Oxford Advanced Learner's
Dictionary defines 'tax' as: “Money that has to be paid to the government so that it can pay
for public services”. Black Law Dictionary defines tax as: “Monetary charge imposed by the
Government on persons, entities or property, levied to yield public revenue”.
Thomas Cooley defines taxes as: “Enforced proportional contributions from persons and
property, levied by the State, by virtue of its sovereignty, for the support of government and
for all public needs”. In simple terms, tax is a compulsory contribution levied by a
sovereign power, on the incomes, profits, goods, services or properties of individuals and
corporate persons, trusts and settlements. Such taxes when collected are used for carrying
out governmental functions, such as maintenance of law and order, provision of
infrastructure, health and education of the citizens, or as a fiscal tool for controlling the
economy.
The most important thing is that it is a pecuniary burden laid upon individuals or persons
or property to support the government and is a payment exacted by legislative authority.
Although, tax under any jurisdiction is discriminatory in that it is assessed on persons or
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property based on profits/income or gain, the benefit conferred on the citizens is without
reference to the contributions of individual taxpayers.
The flip side of the resource allocation dimension of a sound taxation policy is its role in
promoting investment as well as ensuring a healthy economy through the creation of new
wealth. An indirect assessment of this parameter is the level of investment and taxation, 3
which is often used as a driver for savings and as a tool for securing competitive
advantages, to aid economic development in an increasingly interdependent world. The
tone of stock markets around the world, changes, with the movement of fiscal policy and on
the analysts' reading of the strategic consequences, which are of essential consideration, by
the providers of capital. In conclusion, tax is described as a form of levy, imposed on all the
residents living in, as well as non-residents doing business, within a tax jurisdiction.
It is a civic and patriotic responsibility of citizens, to pay taxes imposed, which also come to
the government as income or revenue yielding device to finance the provisions of socioeconomic and infrastructural amenities and also to enhance industrial efficiency.
The process of levying and collection of tax from taxpayers is known as taxation.
Nigerian Tax System
The tax system usually involves a tripartite aspect namely: the tax policy, the tax laws, and
the tax administration.
a. Tax Policy: The tax policies are general statements of intention which guide the thinking
and the action of all concerned towards the realization of the set goals. They usually
include:
i. Movement of emphasis from income tax to consumption tax which is less prone to
tax evasion; Pursuance of a tax law regime with the aim of reducing individual tax
burden, widening the tax net and encouraging savings and investments; and
ii. Introduction of the self-assessment scheme to encourage taxpayers' participation in
the tax assessment process which is considered to be realistic 4 in approach.
CONCLUSION
In Nigeria, the Constitution vests the legislation of income tax, whether personal or
corporate on the Federal Government in order to promote uniformity. However, the
administration of the various taxes is shared by the three tiers of government. Tax laws are
reviewed periodically in line with the changes in social-political and economic conditions
of the country.
The power to impose tax in Nigeria is within the exclusive legislative authority of the
federal government. There are various machineries set up by the government to ensure
strict compliance of these laws; non-compliance attracts penalties and fines.
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Taxation Of Specialized Business In Nigeria
Effective tax administration is possible, if the culture of transparency and efficient
utilization of tax revenue as fulfillment of social contract between the government and the
citizens. Since tax Administration involves practical interpretations and application of the
tax laws.
What special regimes tax exist (e.g., for fund entities, enterprise zones, free trade zones,
investment in particular sectors such as oil and gas or other natural resources, shipping,
insurance, securitization, real estate or intellectual property)?
A good tax system should however create jobs and a tax rise should lead to arrest of
wasteful expenditure. It is important to note that no one pays tax with a smile even though
taxation is a means of making the private sector pay for the services rendered by the public
sector. It helps in shaping and directing economic activities, stimulating economic
activities, redistributing financial resources and using the income generated to finance
social welfare.
Companies engaged in upstream petroleum operations are liable to tax under the
Petroleum Profit Tax Act. Approved enterprises operating in free trade zones are regulated
by the Nigeria Processing Zones Act and are exempt from all taxes.
Also, any company considered as operating in a pioneer industry and providing pioneer
goods and services may be granted an income tax-free period of up to five years from
commencement of business.
REFERENCES
Adesina, W. (2005). Principles of Nigerian taxation, Cedar publication, Ile-Ife,
Ariwodola, J. A. (2000). Companies Taxation in Nigeria, JAA Nigeria Limited, Apapa,
Lagos.
Bassey, O. U. (2013). Company Income Tax in Nigeria, 1st Edition, Lagos, CIBN Press
Limited.
CITN, CITN Tax Guide& Statutes, CIBN, 2002 & 2007.
FIRS (2010) Information circular on Guidelines on the collection procedure for Withholding
Tax.
National Information Technology Development Act, 2007.
Safe Associates – Taxation and Tax Management, Questions and Answers Kits Sagbira
Publications, Ikorodu, Lagos.
Seyi, Ojo (2005); Fundamental of Taxation in Nigeria, 2nd Edition, Sagbira Tax Publication,
Lagos.
th
Sotinwa, G. A. (1994); Sotinwa's Nigeria Tax Handbook, 4 Edition, Mabadeje Publishing
Co. Ltd, Lagos.
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CHAPTER TEN
TAX MANAGEMENT
Igboyi, L. Sunday
Lecturer: Nigerian College of Accountancy, Kwall, near Jos.
Managing Partner: Linigboi and Associates. (Tax Practitioners)
linigboi50@Gmail.Com
ABSTRACT
A tax practitioner or manager is like a referee between the government and the citizens. Its
administration is as dynamic as it evolves the government and the public. Organisations are expected
to be at alert and responsive to the expectations of the government and the risks of non-delivery.
Organisations are always ready to pay for the services of professionals that can assist them meet their
tax obligations to the government. However, due to unemployment in Nigeria and the influx of tax
professionals in commerce, civil service, academics and the tax administrators to create another
source of income has created challenges for those that set-up practice to provide tax advisory and
consultancy services as their business.
Challenges been faced by these tax practitioners include unreasonable price war leading to loss of
clients, increase in receivables due to challenges confronting their clients, and increase in business
risk. It is therefore necessary that tax consulting firms must look for ways to re-evaluate their
operations and take necessary steps to fortify their practices against whatever the future may hold. In
doing this, the dynamics in business environment must be reviewed, adequate preparation made,
workable strategies configured and deployed in other to achieve the set objectives for the company or
firm.
The objective of this paper is to identify issues of contemporary development in business
environment, and formulating capacity to manage the dynamics in the tax practice management
with the hope of enabling practitioners to position their firms to plan and adapt its services and
resources in a changing environment.
Keywords: Emotion, Ethics, Management, Tax.
INTRODUCTION
Tax Practitioners and Tax Practice in Nigeria
In Nigeria, tax practices are usually a division of a law firm or accounting firm. There are
other “practitioners” with little or no training in taxation, setting up “tax practice” as it was
an unregulated vocation that accommodated all and sundry that can solicit for tax
businesses and manipulate figures. As a result of this non-regulation of the practice,
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several atrocities were perpetrated in the name and disguise of tax consultancy. However,
in recent times, a noticeable development involves the spin-off of tax practice as a standalone firm from the accountancy and law practices. The effort of the Chartered Institute of
Taxation of Nigeria (CITN) to restrict the practice of taxation to only certified professionals
is not only apt, but also commendable. However, this is not without protest and institution
of court cases from a number of Chartered Accountants in practice who feel strongly that
this ought not to be so.
Section II, Paragraph of the CITN charter states that “no member of the Institute shall
practice as a Chartered Tax Practitioner unless he/she has applied for and has been granted
a licence by Council and has complied with the provision of rule. According to rule (f),
every member who has been issued a Practicing Licence shall provide evidence of
registration of a firm by the Corporate Affairs Commission (CAC) as “Chartered Tax
Practitioner” ... Consequently, and by projection, it expected that tax services can only be
provided either by qualified individual as sole practitioner or collection of qualified
individuals as partners.
The dynamics of business environment and the uncertainty in decision making in
organizations has made business managers to look for experts like tax professionals to help
them make accurate and timely decisions that will lead to shareholder's expectations of
profit making. The nature of their assignment may come inform of tax advisory, consulting,
management and or planning. Areas of interest include Withholding Tax, Transfer Pricing,
Company Income Tax, Personal Income Tax, Value Added Tax, Tax Audit, International tax
etc.
It is therefore required that a tax practice must know its limit and availability of resources
that can assist. A firm should not delay in declining to act for a client where her capacity and
capability is inadequate. The scope of assignment must be discussed, agreed, documented
and Engagement Letter executed by the Consultant and Client prior to commencement of
such assignment.
It is advisable that instruction from client and any other verbal discussion must be
documented for record purposes. It is also necessary to communicate disengagement or
completion of an assignment to client so as to ensure proper closure which may otherwise
open room for inappropriate expectation.
Professional Ethics, Rules and Practical Guidelines
It is a requirement for tax advisers working in practice, commerce or industry, the CITN aim
to create an educational and ethical framework of the highest standard to produce tax
advisers of the best quality for the general public. These fundamental principles and rules
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Tax Management
together with related guidance are set-up for members to comply with and it helps
members handle challenges encountered in their professional work. The rules have been
designed to protect both the public and members by aiming to preserve public confidence
in the tax profession and assisting members to maintain appropriate professional
standards. Members who fail to comply may be subject to disciplinary action. Areas that are
necessary to have clear understanding include but not limited to:
Fundamental Principles and Members' Obligations
Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional
behaviour, Professional Indemnity Insurance, Completion of Annual Return, Compliance
with Professional Conduct, Compliance with Anti-Money Laundering legislation and
registration, Compliance with Mandatory Professional Training Programme (MPTP)
requirements.
Practice Governance
The professional tax practitioner should understand Business structure, Practice name,
Practice brand, Temporary incapacity of a sole practitioner, Death or permanent incapacity
of a sole practitioner, Business continuity plan, Dissolution or merger of practice, and
Cessation of practice.
New Clients and Engagements
Obtaining clients, Introduction fees and rewards, Client acceptance, Professional enquiry
(also known as professional clearance), Scope and engagement letters, Services Directive,
and Obligations in respect of advice given by the predecessor.
Client Service
Duty of care, continuing assessment of scope of engagement, managing client expectations,
Supervision and training, Use of subcontractors, Consultation and second opinions, Form
and content of advice, Keeping proper professional records, Time limits, due dates and
interest.
Objectivity (Including Conflicts of Interest)
Objectivity, awareness, managing potential conflicts of interest, acting for more than one
party to a transaction, financial involvement with clients or third parties, and ceasing to act.
Other Client Handling Issues
Dealings with Relevant Tax Authority (RTA), Disclosing information to other third parties,
managing client needs, working alongside other professional advisers, working in a
subcontractor relationship with another professional adviser, Clients' money, Tribunals
and Advocacy.
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Professional Fees
Basis of charge, Contingent fees, Commission, Retainer arrangements, Payments on
account and payments in advance, Clients who are slow to pay and Fee disputes.
Complaints
Complaints to a member, complaints to the Taxation Disciplinary Board.
Legal Matters Associated with Documents, Electronic Data and Records
Retention of records and time limits for court action, Requests from other third parties,
Lien, drafting legal documents, Data Protection including General Data Protection
Regulation (GDPR).
Advertising, Publicity and Promotion
General principles, Marketing, Promotion and, Practice designations.
Members in Employment – Professional Practice
Application of Professional Rules and Practice Guidelines, Situations contrary to
professional standards or law/regulations, Employees' legal exposure, and Personal work.
Members in Employment – Commerce and Industry (C&I)
Application of Professional Rules and Practice Guidelines, Situations contrary to
professional standards or law/regulations, and Personal work.
Members in Employment – Other
Application of Professional Rules and Practice Guidelines, Situations contrary to
professional standards or law/regulations and Personal work.
Emotional Intelligence
Psychologies refer to emotional intelligence as someone with high degree of tolerance that
never lets his temper get out of control, no matter what problems he is facing. A manager
that has the complete trust of his staff, listens to his team, easy to approach and discuss with,
and careful, diligent in taking decisions.
Tax Practice management requires ability to maintain one's stability in other to handle even
the most awkward social or professional situations with grace, and ensure that other
stakeholders feel at ease. Experts agree that this type of intelligence plays an important role
in success. Research has suggested that emotional intelligence is linked to everything from
decision-making to academic achievement.
Daniel Goleman has suggested that there are five components critical to emotional
intelligence. These include:
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Self-Awareness
The ability to recognize and understand your own emotion is a critical part of emotional
intelligence. Beyond just recognizing your emotions, however, is being aware of the effect
of your own actions, moods, and emotions of other people. In order to become self-aware,
you must be capable of monitoring your own emotions, recognizing different emotional
reactions, and then correctly identifying each particular emotion. Self-aware individuals
also recognize the relationships between the things they feel and how they behave. These
individuals are also capable of recognizing their own strengths and limitations, are open to
new information and experiences, and learn from their interactions with others.
Self-Regulation
In addition to being aware of one's emotions and the impact on others, emotional
intelligence requires you to be able to regulate and manage your emotions. This does not
mean putting emotions on lock-down and hiding your true feelings; it simply means
waiting for the right time, place, and avenue to express your emotions. Self-regulation is all
about expressing your emotions appropriately. Those who are skilled in self-regulation
tend to be flexible and adapt well to changes. They are also good at managing conflict and
diffusing tense or difficult situations. Goleman also suggests that those with strong selfregulation skills are high in conscientiousness. They are thoughtful of how they influence
others and take responsibility for their own actions.
Social Skills
Being able to interact well with others is another important aspect of emotional intelligence.
True emotional understanding involves more than just understanding your own emotions
and the feelings of others, you also need to be able to put this information to work in your
daily interactions and communications.
In professional settings, managers benefit by being able to build relationships and
connections with employees, while workers can benefit from being able to develop a strong
rapport with leaders and co-workers.
Empathy
The ability to understand how others are feeling is absolutely critical to emotional
intelligence. However, this involves more than just being able to recognise the emotional
states of others. It also involves your responses to people based on this information. When
you sense that someone is feeling sad or hopeless, for example, it will likely influence how
you respond to that individual. You might treat them with extra care and concern or you
might make an effort to buoy their spirits.
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Motivation
Intrinsic motivation also plays a key role in emotional intelligence. People who are
emotionally intelligent are motivated by things beyond mere external rewards like fame,
money, recognition, and acclaim. Instead, they have a passion to fulfill their own inner
needs and goals. They seek things that lead to internal rewards, experience flow from being
totally in tune with an activity, and pursue peak experiences.
Those who are competent in this area tend to be action-oriented. They set goals, have a high
need for achievement, and are always looking for ways to do better. They also tend to be
very committed and are good at taking the initiative when a task is put forth before them.
Marketing Tax Practitioner and Practice
The members of the Institute (CITN) are permitted to seek publicity for their professional
standing, experience and services by means of advertising or other forms of promotion.
This is subject to the general requirement that the medium should not reflect adversely on
the member, the CITN, or other members and fellow professionals. In addition, such
advertisement should not be misleading in any way. Modern ways of internet
advertisement should be undertaken by the practitioners because when clients are looking
for a firm of tax practitioners to consult, their search occurs online.
Attracting new clients to your business is a lot like making friends or even dating. It doesn't
happen in one connection; it can take a couple of meetings before you both trust each other
enough to commit to building a relationship. Here are two steps you'll need to take before
you go looking for new clients:
a. Figure out and narrow down who you are looking for.
This means creating a description of your ideal client. While you could get away
with marketing to everyone ten or fifteen years ago, it doesn't work today. Just like
you won't want to be friends with just anyone, you shouldn't want to take on just
anyone as a client.
Today, smart marketers and business owners stop and learn why someone wants or
needs what they have to offer. They determine the benefits or solutions the prospect
is looking for and use that to create a persona or avatar of a category of clients they
are looking for.
b. Determine how you will attract the attention of the ideal client you are seeking.
The solution to this is to develop content that catches your prospects' eyes. The topic
of the content should be something that helps the client solves a problem they are
having related to the services you offer. This can be a VAT problem, a payroll
problem, or a financial problem. Great content will allow you to get their attention,
demonstrate your expertise, and make an initial connection between you and the
prospect.
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Below are ways you can attract prospects for your tax practice firm.
a. Maintain an effective LinkedIn profile.
b. Optimize your website to rank in Google search results.
c. Get certified in QuickBooks or Xero and optimize your partner profile.
d. Claim your Google for Business listing.
e. Collect email addresses of people who come to your site and stay in touch
with them.
f. Set up your Face book business page.
g. Get listed in Yelp.
h. Create a YouTube channel.
i. Update and distribute your business card.
j. Buy Google Ad-Words.
k. List in Bing.
l. Join Thumbtack.
m. Set up a Twitter account.
n. Promote your website in your email signature.
o. Start or manage a Face book group.
p. Check out Craigslist.
q. Apply for BBB Accreditation.
r. Get listed on Yahoo.
s. Appear on MapQuest.
t. Start a LinkedIn group.
u. Run paid Face book ads.
v. Get listed on Angie's List.
w. Join Pinterest.
x. List your slideshows on Slide Share.
y. Create a LinkedIn company page.
z. Set up an account on Instagram.
Modern Technical Practice Management
Staff Recruitment and Training
There are shortages of talents in financial services sectors as it is becoming increasingly
hard to find or attracting candidates with the right skill set beyond computation and even
more difficult to keep them. It has been observed that trainees of small and medium size
non-banking financial institutions are often targeted by both the big consulting firms and
other financial institutions as financial services is becoming more than just crunching of
number. Advances in technology are changing the accounting and financial job positions
and its requirements. As a result, companies are requiring accounting and financial
candidates who can do more than just crunch numbers. Businesses now require people
with diverse business and technology experience and good people skills in order to have
the ability to change and evolve with the times.
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Today's practice managers must therefore be able to attract and keep millennial employees
– the younger members of the workforce. Achieving this task will require:
a.
Building an attractive employer brand
b.
Leveraging on employee referrals
c.
Applying recruitment marketing tactics
d.
Writing precise job descriptions
e.
Using social media to advertise your openings
Reward Management through Compensation/Remuneration
Reward management aims to create and efficiently operate a reward structure for an
organisation. Reward management deals with processes, policies and strategies which
required guaranteeing that the contribution of employees to the business is recognised by
all means.
Reward system exists in order to motivate employees to work towards achieving strategic
goal which are set by organisations. Reward management is not only concerned with
payment and employee benefits. It is equally concerned with non-financial rewards e.g.
Recognition, training, development and increased job responsibility.
Types of Rewards – Intrinsic vs. Extrinsic Rewards
There are two types of rewards (i) Intrinsic (inside) and Extrinsic (outside) rewards.
Clients Segmentation and Management
Planning for Business Success
When you are running a business such as tax consulting, it is easy to get bogged down in
day-to-day problems and forget the bigger picture. However, successful businesses invest
time to create and manage budgets, prepare and review business plans and regularly
monitor finance and performance.
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Structured planning can make all the difference to the growth of your business. It will
enable you to concentrate resources on improving profits, reducing costs and increasing
returns on investment. In fact, even without a formal process, many businesses carry out
the majority of the activities associated with business planning, such as thinking about
growth areas, competitors, cash flow and profit. Converting this into a cohesive process to
manage your business' development does not have to be difficult or time-consuming. The
most important thing is that plans are made; they are dynamic and are communicated to
everyone involved.
The Benefits
The key benefit of business planning is that it allows you to create a focus for the direction of
your business and provides targets that will help your business grow. It will also give you
the opportunity to stand back and review your performance and the factors affecting your
business. Business planning can give you:
- a greater ability to make continuous improvements and anticipate problems
- sound financial information on which to base decisions
- improved clarity and focus
- a greater confidence in your decision-making
What to include in your Annual Plan
The main aim of your annual business plan is to set out the strategy and action plan for your
business. This should include a clear financial picture of where you stand - and expect to
stand - over the coming year. Your annual business plan should include:
- an outline of changes that you want to make to your business
- potential changes to your market, customers and competition
- your objectives and goals for the year
- your key performance indicators
- any issues or problems
- operational changes
- information about your management and people
- your financial performance and forecasts
- details of investment in the business
Business planning is most effective when it is an ongoing process. This allows you to act
quickly where necessary, rather than simply reacting to events after they've happened.
Budgets and Business Planning
New small business owners may run their businesses in a relaxed way and may not see the
need to budget. However, if you are planning for your business' future, you will need to
fund your plans. Budgeting is the most effective way to control your cash flow, allowing
you to invest in new opportunities at the appropriate time.
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Tax Management
If your business is growing, you may not always be able to be hands-on with every part of it.
You may have to split your budget up between different areas such as sales, production,
marketing etc. You'll find that money starts to move in many different directions through
your organization - budgets are a vital tool in ensuring that you stay in control of
expenditure.
A budget is a plan to:
- control your finances
- ensure you can continue to fund your current commitments
- enable you to make confident financial decisions and meet your objectives
- ensure you have enough money for your future projects
It outlines what you will spend your money on and how that spending will be financed.
However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a
planned outcome of the future - defined by your plan that your business wants to achieve.
Benefits of a Business Budget
a. manage your money effectively
b. allocate appropriate resources to projects
c. monitor performance
d. meet your objectives
e. identify problems before they occur - such as the need to raise finance or cash flow
difficulties
f. plan for the future
g. increase staff motivation
Creating a Budget
Creating, monitoring and managing a budget is key to business success. It should help you
allocate resources where they are needed, so that your business remains profitable and
successful. It need not be complicated. You simply need to work out what you are likely to
earn and spend in the budget period.
Begin by asking these Questions:
- What are the projected sales for the budget period? Be realistic - if you overestimate,
it will cause you problems in the future.
- What are the direct costs of sales – i.e. costs of materials, components or
subcontractors to make the product or supply the service?
- What are the fixed costs or overheads?
CONCLUSION
The dynamics in every environment (legal, technology, business, social, and political) will
keep changing and Nigeria will not be an exception. It is expected that every government
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will strive to meet with the expectation of her people through the running run an effective
system that will engender revenue generation to meet with the financial requirement
required. Therefore, the policies of the government, especially the fiscal policy will
continue to change and survival of organization will depend on their ability to adapt
quickly to such changes. It is the adaptation of each organization that will determine her
failure or success. Their attitude and management of changes in their business
environment, from acquisition of client, staff recruitment, process management, appetite
for risk, technical competencies etc, must continually be plan and review as realities unfold.
REFERENCES
71 Places to find new clients for your accounting firm or bookkeeping business. Retrieved from
https://accountantsaccelerator.com
Cherry, K. (2020).5 Components of emotional intelligence. Retrieved from
https://www.verywellmind.com
CITN. (2013).The charter - Chartered Institute of Taxation of Nigeria
C o t t e r, C . ( 2 0 0 7 ) . R e m u n e r a t i o n s t r a t e g y a n d s a l a r y . R e t r i e v e d f r o m
https://www.slideshare.net
Forester M. & Arnold, C. (2019).Eight steps to establish a firm risk management program.
Retrieved from https://www.ifac.org
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CHAPTER ELEVEN
TAX POLICY: IMPERATIVE FOR NIGERIAN REVENUE GENERATION
1
Oyedokun, Godwin Emmanuel and 2Christopher, Michael
1&2
Department of Management & Accounting
Faculty of Management & Social Sciences
Lead City University Ibadan, Nigeria
1
godwinoye@yahoo.com; +234-8033737184
INTRODUCTION
In the 1960s, the main goal of tax policy was revenue generation via increasing existing tax
rates. Excise duties were introduced on some goods to broaden the revenue base, not tax
base. In the early 1970s, the discovery of oil in commercial quantities made oil tax revenue
the dominant source of tax revenue. Non-oil tax revenue dropped as interest in agriculture
shifted to oil extraction and export. Oil tax fell in 1985 due to the amendment of the
petroleum profit tax law. Criticisms of the Nigerian system have focused on low tax
revenue resulting from high tax rates which encourages connivance, evasion, and
avoidance. The National Tax Policy (NTP) was first published in 2012, as part of the efforts
to entrench a robust and efficient tax system in Nigeria. Four years after, the rapidly
changing commercial environment and persistent low tax to Gross Domestic Product
(GDP) ratio among other developments, demand new strategies to continue to meet
government objectives of creating an enabling environment, simplifying the tax system,
and ensuring ease of compliance. It has become imperative to review and update the
national tax policy (NTP). The tax system in Nigeria is made up of the tax policy, the tax
laws, and the tax administration. All of these are expected to work together to achieve the
economic goal of the nation. According to the Presidential Committee on National tax
policy (2008), the central objective of the Nigerian tax system is to contribute to the
wellbeing of all Nigerians directly through improved policy formulation and indirectly
through appropriate utilization of tax revenue generated for the benefit of the people.
Nigeria needs a tax policy which does not only describe the set of guiding rules and
principles, but also provide a stable point of reference for all the stakeholders in the country
and upon which they can be held accountable.
As the Nigerian economy is currently experiencing one of its worst recession the latest
contraction in Nigeria's GDP indicated the second recession in the country in the past 5
years. Recall that the Nigerian economy entered recession in Q2 2020 when GDP contracted
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Tax Policy: Imperative For Nigerian Revenue Generation
by -2.06% for the second time in the year. There is therefore an urgent need to salvage the
economy from the evil that besets it through tax revenue. There are inconsistencies in our
tax laws which had made it difficult for the tax body to administer and even for the taxpayer
to follow. The federal government had the intension to maintain a uniform tax system, but
the economy condition of each state as given room for divergence system. The most
important thing one should have in mind is that taxation is supposed to be an instrument of
social change which is not answering as much as it should be doing presently in Nigeria.
The impact of tax payment is not felt by payee neither does it produce meaningful social
benefit, and some do not understand some tax laws, and this indeed has put them into
doubt and confusion and has made others to want to avoid and evade tax.
Therefore, the tax system is one of the most powerful levies available to any government to
stimulate and guide its economic and social development. The Federal Inland Revenue
Services (FIRS) which is vested with the power to administer the act and carry out all the act
which may be deemed necessary and expedient for the assessment and collection of tax and
shall for all amount so collected in a manner to be prescribed by the Federal Minister of
Finance. The board has certain reserved power which shall not be delegated to other person
to perform, e.g., power to acquire, hold and dispose properties of any company in
satisfaction to tax or any judgment debt, and to specify the forms of return claim and
notices.
The organs and or agencies in charge of tax policy implementation in Nigeria are referred to
as the administrative organ or agency. Tax administration in Nigeria is the responsibility of
the various tax authorities as established by relevant tax laws. Citing section 100 of the
personal income tax decree, 1993 and amended by decree No.18 Finance (miscellaneous
Taxation provision) Decree 1998, Tax authority entail the federal board of inland Revenue,
the state board of internal revenue and Local government revenue committee together with
the joint tax board (JTB) and joint state revenue committee or local revenue committee. All
these are aimed at ensuring adherence to tax payment and discouraging tax evasion and tax
avoidance.
The whole essence of tax revenue is to generate revenue to advance the welfare of the
people of a nation with focus on promoting economic growth and development of a
country through the provision of basics amenities and improved public services through
proper administrative system and structure. Tax revenue plays a crucial role in promoting
economic activity, growth, and development. Through tax revenue, government ensures
that resources are channeled toward important project in the society, as the function of
government increase, the revenue to finance those functions must necessarily increase.
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Tax Policy: Imperative For Nigerian Revenue Generation
thus, tax is a fact of life which is as old as the institution of government, in tax system,
responsibility is assigned to three key entities such as taxpayer whose civic obligation is
payment of the assessed taxes promptly, tax authorities who ensure collection of imposed
taxes into government coffers and the government whose duty is the imposition of taxes to
finances its activities that ultimately benefit the citizens.
Tax policies are used by Governments to regulate the economy by encouraging or
discouraging certain economic decisions. For example, reduction in taxable personal
income by the amount paid as interest on home mortgage loans results in greater
construction activity and generates more jobs. The Nigerian tax laws have witnessed
significant changes over the period. There has been various tax incentives introduced,
occasioned by tax reforms which have implications for the economy. The united Nation in
2000 submitted that tax revenue contributes substantially to development. Taxation is
utilized by government to finance her expenditure to redistribute wealth which translates
to financing development of the country. Whether the taxes collected are enough to finance
the development of the country will depend on the needs of the country. The purpose of this
study therefore is to investigate the impact of tax policy on revenue generated by Federal
Inland Revenue Services (FIRS) in Nigeria.
The successful implementation and monitoring of tax polices generate sufficient funds for
the government. Eventually, the judicious spending of tax revenue will generate
employment and growth in the country. Thus, the economic and social survival of a country
depends on infrastructure spending and generation of resources through a wellfunctioning tax system. A government spending obligation can be maximized if there is an
efficient tax system in place. This has been the missing factor in the tax system in Nigeria
which eventually narrates to under-utilization of the possible revenue that could be
generated through application of effective tax system. Nigeria in recent years, has
witnessed problems of select application of tax policies, levying of multiple taxes,
misapplication of tax laws. The manufacturing and tax-paying groups have at one time or
the other voiced their concern about the likely negative consequences of the observed
lapses on boosting industrialization and government revenue. Also, it is contradictory to
have various tax incentives and concession provided in our tax laws, while no concrete
efforts are made to implement them. Another challenging problem in the administration of
tax in Nigeria is the location of the assessment and collection functions within the tax
administration, problems also emanate from the frequent changes in the tax laws and
policy, every year the annual budget estimate introduces new measures and procedures,
amends or cancels existing ones.
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Tax Policy: Imperative For Nigerian Revenue Generation
In a study that examine the impact of on tax administration on the revenue generation in
Gombe state, the researchers made efforts to evaluates how tax administration could affect
the overall effectiveness of Gombe state revenue generation. Also, the study will evaluate
the problems that negatively affect tax administration and proffer solutions or feasible
ways to this problem facing tax administration to help the state obtain sufficient revenue to
accomplish its economic goals. From the regression results, efficiency and effectiveness of
tax administration was found to have a significant positive effect on Revenue generation at
0.05 (significance) level of confidence. In a related study on Tax disincentive and business
growth in Nigeria, the researchers examine the relationship between tax disincentives and
business growth, focusing on the issues of multiple taxation, excess dividend tax and
minimum tax legislation. They assess the irony of Nigeria business environment which has
suffered challenging conditions including lack of infrastructure, difficulty in accessing
funds, administrative bottlenecks associated with business registration as well as getting
permits and licenses to operate and so on. As if that is not enough, certain provisions of the
Nigerian Tax Laws also tend to adversely discourage business growth. The study, however,
did not examine the overall impact of tax incentive on the revenue generation in Nigeria
economy space.
To have effective revenue generation in the country some peculiar issues that bedeviled the
economy includes but not limited to; problem of how to properly manage tax
administration through effective tax policy in Nigeria, the extent to which the tax laws are
properly interpreted and implemented and knowing the actual impact of tax on revenue on
economic growth. The problem of whether adequate revenue is generated from various
taxes through proper tax policy and administration machinery which translate into
economic growth. In similar vein, the challenges facing tax policy and administration in
Nigeria which include tax evasion and avoidance, non-compliance, deficiencies in tax
collection system, obsolete tax laws, complex legislation and corrupt practices had posed as
clog in the wheel for revenue generation of the economy. The problem that generated from
taxes over the years, there is the question whether the economic growth of Nigeria in terms
of the various economic indicator is justifiable given the relative revenue that accrue to
government from taxes.
The frequent changes in tax legislature can make the law confusing as well as complicate
the tax structure, after a few years these changes, and amendments become so many that the
taxpayer finds it difficult to know which laws are applicable. Although, the relationship
between tax revenue and economy growth has been well documented in both international
and domestic literature, it is on this basis that this study examines the effect of tax policy
and revenue generation which is a quiet departure from previous studies that focused on
tax revenue and economic growth level.
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Tax Policy: Imperative For Nigerian Revenue Generation
This chapter, therefore, discusses the conceptual and theoretical issues relating to the tax
system in Nigeria and revenue generation. This discussion is aimed at identifying the
relevant issues that spurs the empirical investigation by many scholars.
Concept of Taxation
Tax is compulsory, non-returnable contribution of money used occasionally for goods and
services and flows from private individuals, institutions, or groups to the government. It
may be levied upon wealth or income of a person or body corporate or in form of surcharge
on prices (Agunbiade & Idebi 2020). Taxation is regarded as a Compulsory charge imposed
by the public authority (Federal, State and Local Government) for the general purposes of
Government. It is also defined as the act of laying a tax or imposing taxes about a state by
government or on the members of a Corporation or Company by the proper Authority. It is
levy regularly imposed and regarded as contribution to the general pool from which
government expenditure are made. Tax is a non-punishing but compulsory transfer of
resources from the public sector to the private sector imposed on individual's personal
income, corporations, and institutions without recourse for immediate benefits for the tax
paid (Ofishe, 2015).
Taxation is a compulsory but non-penal levy by the government through its agent on the
profits, income, or consumption of its subjects or citizens. It is also viewed as a compulsory
and obligatory contribution made by individuals and organization towards defraying the
expenditure of government (Ojong & Arikpo 2016). Taxation in summary is the transfer of
income or resources from the private sector to the public sector to enable the public sector to
carry out some, if not all the Nation's economic and social goals. The goals may be in the
form of provision of Government basic services regularly and particularly in the
educational, public health, transportation sectors, amenities, and capital formation. Taxes
may be levied upon wealth or income or in the form of surcharge on prices.
Objectives of Taxation and Economic Policy
Taxes are not just imposed on citizens of the State by Governments not just for the sake of
taxing. Taxation is a tool in the hands of government (federal, state, or local) to achieve
stated economic and social goals. It is a veritable tool to raise enough funds for its numerous
projects even though she is wealthier. The primary purpose of taxation is mainly to generate
revenue for certain governmental expenditure, more so the provision of social amenity as
well as providing for the welfare of her populace.
Taxation is used as an instrument to regulate the economy, by discouraging or encouraging
the consumption of certain social goods and services. The following major objectives form
the tax policy:
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Tax Policy: Imperative For Nigerian Revenue Generation
i.
ii.
iii.
iv.
v.
The revenue function;
Stabilization function;
Regulation function;
Income redistribution function; and
Allocation function, just to mention out a few.
Revenue Function: This is the major reason for imposition of tax i.e., the ability of
government to raise fund to use in carrying out her statutory functions (i.e., provision of
services such as defence, education, health) etc. Without funds it will not be possible for
government(s) to provide the needed services and infrastructural facilities for her citizenry;
especially, goods that may not be provided by the private sector.
Stabilization Function: Taxes are used by government to stabilize the economy.
Stabilization is the use of tax policies to reduce inflation, and to stimulate the economy for
growth. The government uses tax rate by increasing it to reduce inflation. This is so because,
increased tax will reduce disposable income, which will in turn, reduce aggregate demand.
Once, aggregate demand for goods and services falls, all things being equal prices will
follow suite to fall. On the other hand, if the purpose of government is to stimulate
economic growth then, she reduces tax rate thereby increasing the disposable income in the
hands of the consumers who have the propensity to increase aggregate demand. Once
aggregate demand increases, productivity activities will also increase, which will
eventually bring about growth to the economy (Abomaye-Nimenibo, Michael & Friday,
2018)
Regulation Function: Taxes can be used to regulate the economy by regulating the
consumption and production of certain goods in any nation. Where the government wishes
to discourage consumption of certain goods, she could raise the taxes on such goods (e.g.,
cigarette). On the other hand, if government want to encourage the production of certain
goods in the economy, she will lower taxes on these goods especially in terms of excise
duties, hence reducing the cost of production and consequently, makes the selling price to
fall. As prices fall demand will increase and the subsequent increase in the consumption of
that good will increase, which will stimulate aggregate consumption and production of
that good will call forth increase in aggregate supply. It could be reversed if the opposite is
the desired goal of the economy.
Income Re-Distribution Function: To correct inequality or imbalance in the economy,
taxation is a tool commonly used by monetary authorities to cause income redistribution.
This is the major reason for imposition of tax i.e., the ability of government to raise fund to
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Tax Policy: Imperative For Nigerian Revenue Generation
use in carrying out her statutory functions (i.e., provision of services such as defense,
education, health) etc. Without funds it will not be possible for government(s) to provide
the needed services and infrastructural facilities for her citizenry; especially, goods that
may not be provided by the private sector authorities to cause income redistribution. This
income redistribution function by taxes creates equality and unbiased administration of
taxation upon the rich or wealthy class.
Allocation Function: Abomaye-Nimenibo, Williams, Michael and Friday (2018) suggest
that taxation is a device used by Government to improve Gross Domestic Product (GDP) by
means of encouraging some sectors of the economy that are not doing well through
granting of tax reliefs and incentives to the citizenry.
Stabilization Inducing
Taxation as a tool of fiscal policy play a major role for achieving economic stability by
boosting, the economy during periods of unemployment and reducing economic activity
during periods of inflation. A tax is good and desirable when it can play this role well. For
example, during periods of unemployment, taxes that have minimum restrictive effects on
aggregate spending (consumption and investment) would be the ideal ones to use while on
the other hand during periods of inflation, taxes need to maximize anti-inflationary effect.
In total agreement with Adam Smith's cannon of taxation, Egbunike, Emudainohwo and
Gunardi (2018) elaborated on these cannons to include:
a. Incentives and Economic Efficiency: This demonstrates how tax system can have
important effects on incentives and opportunity to work, to save, to invest in capital
development, to use resources efficiently and to allocate them to uses which best
serve the needs of the community.
b. Distributional Effects: In a good tax system there should be no discrimination at the
same level of income within the same system. It must also be capable of being use for
vertical re-distribution that is, redistribution from those who are better off to those
who are worse off in such a way as not to discourage those who are well off.
c. Simplicity, Cost of Administration and Compliance: For a tax system to be
embraced willingly by the public, it must be simple. But simplicity for tax system
must be balanced with its objective. A tax system designed to deal with a complex or
complicated situation will inevitably be complicated. Ease of understanding of tax
details and simplicity of administration will help in reducing the cost of
administration. Compliance cost must not be too high otherwise there will be high
incidence of tax evasion and avoidance.
d. Flexibility and Stability: In a democratic setting where changes in government are
part of in-built mechanism for governance, tax system must be flexible enough for
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any political party in power to pursue the fulfilment of its campaign promises.
However, flexibility objective must balance with the need to have a stable tax
system. This balancing can only be achieved through virile, versatile, efficient, and
effective well-trained administrative machinery for assessing and collection as well
as general administration of the tax system irrespective of the government in power.
e. Economic Growth and Efficiency: The Nigerian tax system should not be an
impediment on the productive capacity of the economy, at any given time. To
minimize the negative impact of taxes on economic efficiency, the tax system must
be aligned to the National Socio-economic developmental goals, through ensuring
that the marginal tax rates do not distort the marginal propensity to save and
investment, and not pose competitive disadvantage to local firms.
f. Transparency and Accountability: Tax administration in Nigeria should be seen to
be transparent and accountable to all the taxpayers irrespective of class and gender.
Taxpayers should be aware of existing taxes or new taxes imposed on them, and the
proper utilization of the tax revenue.
Characteristics of a Good Tax System
A good tax system in modern day governance is said to be very crucial. Taxation is one of the
easiest and most convenient means of meeting the ever-increasing public expenditures is
the derived revenue from tax. Revenue from taxation is an easy and commonest means of
generating fund or revenue for the governments of the three tiers we have in Nigeria. It is a
common experience that several persons detest payment of tax and government by such act
loses revenue and she is bent on its implementation. It is a common phenomenon existing in
the literature about the detestation of tax payments everywhere since a reasonable number
or percentages of the people are not willing to pay taxes. For instance, the introduction of
taxes had led to riots and loss of lives in so many places. A good number of persons
numbering about 85 lost their lives when VAT was first introduced in Ghana.
Also, the "Ijemo" massacre of 1914 was because of revolt against Egba United Government
over her planned imposition of taxation. The Aba Women riot of 1929 is also an offshoot of
tax detestation. All these are just to mention but a few. We need to sensitize the populace to
see reasons and dividends of tax payments as revenue to the government to provide certain
projects for the people as well as run the government expenditures. It is, therefore,
imperative that every government should put in place an efficient, effective, equitable and
just tax system, so as have a good taxation system. Adam smith (1776) has postulated the
following characteristics, often called cannons of taxation which a good tax system should
have.
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The Foundation or Cannons of Taxation
The cannons of taxation simply mean the foundational structure upon which taxation is
built upon. It also connotes the fundamental principles upon which taxation is hinged on.
Therefore, a good tax system should meet the cannons of taxation. The cannons of taxation
are as follows:
a. Cannon of equity: This cannon state that taxes should be equitable to every person
who should be taxed according to his/her ability. The rich and poor should not be
taxed equally but that the rich should pay more while the poor to pay less meaning
progressive tax be adopted. It also means that as the income of an individual
increases, his taxation should also increase proportionately. Equity in the terms of
taxation means "fairness" in tax burden distribution to all persons concerned. The
statement saying that equals should be treated equally is referred to as horizontal
equity, and on the other hand, the unequal should be treated unequally is referred to
as vertical equity. These equity conceptions hold that individuals with the same
taxpaying ability should bear the same tax burden, and those with different taxpaying abilities should also bear different tax burdens.
b. Cannon of certainty: A good tax system should be based on the cannon of certainty
whereby the time of tax payment, the way tax is to be paid, the amount to be paid
should of a surety be certain and clear to the taxpayer and to every other person. The
taxpayer should not be arbitrarily left to the whims and caprices of tax officials to
use their sledgehammer on him/her. The tax which an individual pays must be
certain and not arbitrarily imposed. The time of payment, the manner of payment
and the amount to be paid should be clear and plain to the taxpayer. This quality is
meant to protect the taxpayers from harassment by the Tax officials.
c. Cannon of convenience: A good tax system should be based on cannon of certainty
i.e., payment of tax should be convenient to the taxpayer. Social, political, and
economic standing of the taxpayer must be taken into consideration when imposing
tax on him/her. Secondly, the time of payment, and the mode of payment should not
inconvenience the taxpayer in any way and that the tax should not be a heavy
burden to the payer.
d. Administrative Efficiency: This entails the cost of collecting tax should not be more
than the revenue to be generated from the tax itself. It is the process of levying and
collecting taxes in an administratively efficient, transparent manner and must not
cause economic distortion. Collection should be done in such way that the system
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brings in sufficient revenue to the government at less cost. Economy of
administration is an important quality of a good Tax, whereby assessment and
collection of taxes require personnel and equipment at minimal cost.
e. Neutrality: Tax is said to be good and desirable if it is neutral in its effects meaning
that the imposition of a tax for whatever purpose (revenue stabilization) must be
unbiased and does not result in any change in either consumer or producer
economic behaviour, in the private sector of the economy. This also mean that,
neutrality in taxation holds that a tax, when imposed, should neither offer the
utility-maximization behaviour of consumers nor the profit-maximization
behaviour of producers in the private sector of the economy. Tax must favour both
sides of imposer and payer.
Concept of Tax Policy
According to the report of the presidential committee on National Tax policy (2008), “The
National tax policy provides a set of rules, modus operandi and guidance to which all
stakeholders in the tax system must subscribe”.Tax policy formulation in Nigeria is the
responsibility of the Federal inland Revenue Services (FIRS), Customs, Nigerian National
Petroleum Corporation (NNPC), National Population Commission (NPC), and other
agencies but under the guidance of the National Assembly i.e., the lawmaking body in
Nigeria. Suffice it to say that if there must be any effective implementation of the Nigerian
tax system or attainment of its goal, the use of the national tax policy document remains
essential. According to the Presidential Committee on tax policy (2008), “Nigeria needs a
tax policy which does not only describe the set of guiding rules and principles, but also
provide a stable point of reference for all the stakeholders in the country and upon which
they can be held accountable. James and Nobes (2009), observe that the inability of tax
policy to meet up with efficiency and equity criteria against which it is being judged. It was
further noted that tax policy is continually subjected to pressure and changes which most
time does not guarantee outcome that are in line with the overall goal. Unfortunately, most
policy changes in Nigeria are without adequate consideration of the taxpayers,
administrative arrangement, and cost plus the existing taxes. This has in no small measure
hindered the effective implementation and goal congruence of the nation's tax system.
Citing (Bird & Oldman 1990), “the best approach to reforming taxes is one that takes into
account taxation theory, empirical evidence and political and administrative realities and
blend them with good dose of local knowledge and a sound appraisal of the current
macroeconomics and international situation to produce a feasible set of proposals
sufficiently attractive to be implemented and sufficiently robust to withstand changing
times, with reason and still produce beneficial results”.
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Tax Laws
According to James, (2012) Tax laws refer to the embodiment of rules and regulations
relating to tax revenue and the various kind of tax in Nigeria. They are made by the
legislative arms of the government. These laws are constantly subjected to amendment.
There is no doubt that the frequency of amendment is a manifestation of inconsistencies
and consequently hinders the achievement of the setup goals. However, to meet up with the
three years policy review as earlier stated and or adjust to the economic dynamism of the
country, amendment could equally be made. The following are some of the prevailing tax
laws in Nigeria (Kiabel & Nwokah 2009, Oyedokun, 2020):
i. Personal Income Tax Act (PITA) CAP P8 Law of Federations of Nigeria (LFN) 2004
ii. Company Income Tax Act (CITA) CAP.60. LFN 1990
iii. Petroleum Profit Tax Act (PPTA) 2007
iv. Value Added Tax (VAT) Act No 102 LFN 1993
v. Capital gain tax Act CAP 42 LFN 1990
vi. Stamp Duties Act CAP 411 LFN 1990
vii. Education Tax Act No 7 LFN 1993
viii. Information technology Development Act 2007
Tax Administration
It is one thing to make policies, rules, and regulation to attain a desired goal or objective and
it is another thing to implement these policies, rules, and regulation. The organs and or
agencies in charge of tax policy implementation in Nigeria are referred to as the
administrative organ or agency in this research work. Efficiency and effectiveness should
be the watch word in designing a tax administration structure that will give the desired
result (McPherson 2004). Put differently, tax administration in Nigeria is the responsibility
of the various tax authorities as established by the relevant tax laws (Kiabel & Nwokah
2009). Citing Section 100 of the personal income tax Decree, 1993 and amended by Decree
No 18-Finance (Miscellaneous Taxation Provisions) Decree 1998, “Tax authority “to mean
Federal Board of Inland Revenue, the State board of internal revenue and the local
government revenue committee. Together with the Joint tax board (JTB) and Joint state
revenue committee or Local Revenue Committee, Nigerian tax authority administers taxes
in Nigeria. The fiscal autonomy granted the three tiers of government had led to
multiplicity of tax. Taxpayers and corporate bodies had been subjected to multiple levies or
charges of tax of same name in different form. This had increased evasion and avoidance as
such payment either eat deep into the profit of business or affect negatively, the
distributable income of the individual.
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Tax System in Nigeria
James (2019) explains that the tax system in Nigeria is made up of the tax policy, the tax
laws, and the tax administration. All of these are expected to work together to achieve the
economic goal of the nation. According to the Presidential Committee on National tax
policy (2008), the central objective of the Nigerian tax system is to contribute to the wellbeing of all Nigerians directly through improved policy formulation and indirectly though
appropriate utilization of tax revenue generated for the benefit of the people. In generating
revenue to achieve this goal, the tax system is expected to minimise distortion in the
economy. Other expectations of the Nigerian tax system according to the Presidential
Committee on National tax policy (2008) include:
1. Encourage economic growth and development;
2. Generate stable revenue or resources needed by government to accomplish
loadable projects and or investment for the benefit of the people;
3. Provide economic stabilization;
4. To pursue fairness and distributive equity; and
5. Correction of market failure and imperfection.
To fulfil the above expectation, the national tax policy is expected to follow the principle of
taxation, the lubricant to effective tax system. The Nigerian tax system has been flawed by
what is termed multiplicity of tax and collecting entities at the three (3) tiers of government
levels – Federal, State and Local government (Ahunwan 2009).
Odusola (2006) suggest that tax administration in Nigeria does not measure up to
appropriate standards because tax is inequitable. Many of the supposed taxpayers know
nothing of the rules under which they are to pay tax or the range of deductible expenses and
the allowance available to them; and that they cannot be at ease to disclose their taxable
income. The assurance of tax convenience in Nigeria is the ability of a taxpayer to go to the
tax office, say what he is ready to pay, be assessed accordingly, and he pays and obtains a tax
clearance certificate.
From the above we can deduce that this has led to administrative inefficiency. This is
because of the low literacy level in Nigeria and poor record-keeping culture. Also, there are
not enough tax officials to cover the field as most of them are not well trained, ill-equipped,
badly remunerated, and corrupt (Ogbonna, 2016). He added that the failure of tax
administration to recognize the importance of communication and dialogue between
government and the citizen in matters relating to tax revenue is a key problem; and that
there is a wide gap in tax administration in Nigeria when compared to countries like USA,
United Kingdom, and Canada where tax system is computerized and every taxpayer i.e..,
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organizations are well captured at source through integrated computer system. This to a
large extend is being put in place by the Nigerian Federal Inland Revenue Service (FIRS)
and until the system is well computerized, there is bound to be problem.
Taxes, therefore, constitute the principal source of government revenue and the beauty of
any government is for its citizenry to voluntarily execute their tax obligations without
much coercion and harassment. The menace of tax leakages in the form of tax evasion and
tax avoidance is the major problem facing the Nigerian tax system. Similarly, tax evasion
being the willful and deliberate violation of the tax laws with the intent to escape tax
obligation (Cornelius, Ogar & Oka 2016). The twin monster is tax avoidance, whereby
taxpayers seek to reduce, or remove altogether their tax liability within the provision of the
tax laws as also observed (Ola, 2001).
The National Tax Policy 2017
The National Tax Policy (NTP) was first published in 2012, as part of the efforts to entrench a
robust and efficient tax system in Nigeria. Four years after, the rapidly changing
commercial environment and persistent low tax to Gross Domestic Product (GDP) ratio
among other developments, demand new strategies to continue to meet government
objectives of creating an enabling environment, simplifying the tax system, and ensuring
ease of compliance. It therefore becomes imperative to review and update the NTP. Tax
Policy provides a framework for a sustainable system that would ensure reliable sources of
revenue to government and support the economic development of the nation.
The Focus on Indirect Taxation
The tax system should focus more on indirect taxes which are easier to collect and
administer and more difficult to evade. Customs duty as a system of indirect tax is a major
source of revenue for the Federal Government which is payable by importers of specified
goods (Abomaye-Nimednibo, Michael & Friday, 2018). In their study of the Customs and
Excise Duties Contribution towards the development and growth of the Nigerian economy
stated that there is a strong relationship betweencustoms and excise duties and economic
development of Nigeria; meaning that this is a source of income that Nigeria should rely on
and develop. The study further shows that fraud and financial malpractices have a negative
impact on the contribution of customs and excise duties to Nigerian economic
development. Custom and excise duty is an important component of the non-oil revenue
and has remained an important source of revenue before and after the discovery of oil in
Nigeria and have over the years, contributed significantly to national development. The
Nigeria Custom Services is saddled with the responsibility of collecting custom duties,
excise, fees, tariffs, and other levies so imposed by the Federal Government on imports,
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exports, and statutory rates. However, the institution is much criticized for corruption and
inefficiency, where its upper echelon is often driven with intrigue and in-fighting. All these
need to change if the dream of economic development in Nigeria is to be achieved.
Therefore, Custom Duties is the totality of Import and Export duties collected by the
Customs and Excise Department. Excise Taxes are charges imposed by government on
specific commodities produced in a country at differing rates. These charges are being
imposed on domestic products produced locally as distinct from imported goods and are
mainly impose for revenue generating purposes. Commodities such as tobacco, alcohol,
petrol, and manufactures are subject are subject to excise taxes in some countries while in
others the components for taxation differ. Excise taxes are either selective or general
according to the tax base. They are selective or general depending on whether the tax is
restricted to a certain class of transaction, and specific or ad valorem depending on whether
the tax rate is a specific amount of money. No less than N1.341 trillion was generated by the
Nigeria Customs Service (NCS) as revenue for the year 2019. This means that the service
exceeded its target of N937 billion by N404 billion. The amount generated, which has been
attributed largely to the land border closure policy of the Federal Government, is also
N139.24 billion more than the N1.20 trillion generated in 2018 (Nwagbara, 2019).
Convergence of Tax Rates
The documents on National Tax Policy 2017 stress the importance of tax rates to be
progressive and should be designed to promote equality. It therefore seeks to create a
robust tax system where there will be a convergence of personal income tax and capital gain
tax rates with corporate income tax rates to reduce opportunities for tax avoidance.
Special Arrangements and Other Incentives
Tax incentives (also referred to as tax policy incentives) is also defined as any special tax
provisions that are granted to qualified investments or investors and which affords such
investors a favorable deviation from the general tax code (Ndajiwo, 2019). In other words,
tax incentives grant some tax exceptions, deductions, or exclusions to the beneficiaries.
In the document on National Tax Policy (2017), it was disclosed that special arrangements
should be sector based and not directed at entities or persons. Also, special arrangements
such as free zones and other tax incentives or waivers should not be arbitrarily terminated
except as provided in the enabling legal framework or treaties at the time of creation. There
are various tax incentives set up by the government (Oyewo, 2013),some of which are
explained below:
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The Industrial Sector:
i.
Fiscal measures have been provided to serve as deductions in the determination of
taxable income of manufacturing companies including adequate allowances.
ii.
Granting of Pioneer status in communities that are poor, with a tax holiday period
of five to seven years and additional 5% Capital allowance can be claimed over and
above the initial capital depreciation.
iii.
Companies that are involved in local raw materials development; local value-added
labour-intensive processing; export-oriented activities are also qualified for
additional concessions.
iv.
Up to 120% of expenses on research and development are tax deductible provided
that such activities are carried out in Nigeria and relate to business to which
allowances are granted. The result of such research could be patented and protected
in accordance with internationally accepted industrial property and copyright
laws.
v.
Companies utilizing local raw materials can claim tax concession for five years, if
the raw material utilization is up to minimum thresholds such as agro 80%, agro
allied 70%, engineering 65%, chemical 60% and Petro-chemical 70%
vi.
Companies utilizing labour intensive production method can claim 15% tax
concession for five years. The rate is graduated in such a way that an industry
employing one thousand persons or more will enjoy 15% tax concession while an
industry employing one hundred people will enjoy only 6%, while those
employing two hundred will enjoy 7%.
vii.
Engineering industries, where some finished imported product s serve as inputs
have a 10% tax concession. This is aimed at encouraging local fabrication rather
than the mere assembly of completely knocked down parts. In plant training
attracts a 2% tax concession for five years, of the cost of the facilities for training.
Export-oriented industries enjoy a 10% tax concession for five years. This
concession will apply to industries that export not less than 6% of their products.
Infrastructure attracts 20% of the cost of providing basic infrastructure such as
roads, water, electricity etc. Where they do not exist, it is tax-deductible once and for
all.
viii. Excise duty has been abolished effective January 1999 to encourage economic
development and a 25% import duty rebate introduced in 1995 to ameliorate the
adverse effect of inflation and to ensure an increase in capacity utilization in the
manufacturing sector.
ix.
Re-investment allowance incentive is given to manufacturing companies that incur
capital expenditure for purposes of enhancement of production capacity and
investment in modern production facilities.
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x.
xi.
xii.
xiii.
xiv.
xv.
Investment tax allowance allows a company would enjoy generous tax allowance in
respect of qualifying capital expenditure incurred within five years from the date of
the approval of the project.
Dividends derived from manufacturing companies in Petro-chemical and liquefied
natural gas sub-sector is tax-exempt.
Companies with turnover of less than N1 million are taxed at a low rate of 20% for
the first five years of operation if they are into manufacturing.
Dividend from companies in manufacturing sector with turnover of less than N100
million is tax-free for the first five years of their operation.
Investment guarantees/effective protection: Transferability of funds under Section
24 of NIPC Act provides that a foreign investor in an enterprise shall be guaranteed
unconditional transferability of funds through an authorized dealer in freely
convertible currency of, Dividends or profit (net of taxes) attributable to the
investment; Payments in respect of loan servicing where a foreign loan has been
obtained; Remittance of proceeds (net of all taxes) and other obligations in the event
of a sale or liquidation of the enterprise or Any interest attributable to the
investment.
Guarantees against expropriation; By the provision of Section 25 of the same NIPC
Act, no enterprise shall be nationalized or expropriated by any government of the
federation, unless the acquisition is in the national interest or for public purpose;
and no person who owns either wholly or in part, the capital of any enterprise shall
be compelled by law to surrender his interest in the capital to any other person.
The Oil & Gas Sector:
a. Gas Production Phase
i. Tax rate under petroleum profit tax (PPT) act to be at the same rate as the company
income tax which is currently at 30%
ii. Capital allowance at the rate of 20% per annum in the first 4 years, 19% in the 5th
year and the remaining 1% in the books.
iii. Investment tax credit at the current rate of 5%
iv. Royalty at the rate of 7% on shore and 5% offshore.
b. Gas transmission and Distribution
i. Capital allowance as in production phase.
ii. Tax rate as in production phase
iii. Tax holiday under pioneer status.
c. Liquefied Natural Gas (LNG) projects
i. Applicable tax rate under PPT is 45%
ii. Capital allowance is 33% per annum under-straight-line basis in the first three years
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Tax Policy: Imperative For Nigerian Revenue Generation
with I% remaining in the books,
iii. Investment tax credit of 10%,
iv. Royalty of 7% on shore, 5% offshore tax deductible.
d. Gas Exploitation (upstream operations)
i. All investments necessary to separate oil from gas out of the reserves into suitable
products are considered part of the oil field development,
ii. Capital investment facilities to deliver associated gas in usable form at utilisation or
transfer points will be treated for fiscal purposes as part of the capital investment for
oil development,
iii. 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).
e. Gas Utilization (downstream operations)
Incentives for encouragement of exploitation and utilization of associated gas for
commercial purpose include:
i. An initial tax-free period of three years renewable for an additional two years,
ii. 15% investment capital allowance which shall not reduce the value of the asset,
iii. All fiscal incentives under the gas utilisation down-stream operations in 1997 are to
be extended to industrial projects that uses gas in power plants, gas to liquid plants,
fertiliser plants and gas distribution/transmission plants,
iv. The initial tax holiday is to extend from three to five years,
v. Gas is transferred at 0% PPT and 0% royalty,
vi. Investment capital allowance is increased from 5% to 15%.
The Agriculture Sector
i. Companies in the agro-allied business do not have their capital allowance restricted
to 60% but graduated in full - 100%,
ii. Agro-allied plant and equipment enjoy enhanced capital allowances of up to 50%.
The Energy Sector
All the area of investment in this sector is pioneer product or industry. As a result, there is a
tax holiday of 5 to 7 years for investments in the sector. There has been a deregulation of this
sector in recent times resulting in the emergence of independent power producers that have
started to operate in Nigeria.
The Telecommunications Sector
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,
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Tax Policy: Imperative For Nigerian Revenue Generation
bearing in mind the need for differential tariffs between urban and rural areas. Rebate and
tax relief are provided for the local manufacture of telecommunications equipment and
provision of telecommunication services. The telecommunication sector is rapidly being
deregulated and privatized. This has led to the emergence of many operators of mobile
phone service providers in Nigeria.
Export Incentives for Non-oil Sector
i. Export proceeds can be retained in foreign currency in a domiciliary account with
any authorized bank in Nigeria,
ii. A special export development fund has been set up by the government to provide
financial assistance to private sector exporting companies to cover a part of their
initial expenses in some export promotion activities, including training courses,
symposia, seminars and workshops, export market research, advertising and
publicity campaigns in foreign markets, trade missions, etc.,
iii. There is also an export adjustment fund scheme which serves as supplementary
export subsidy to compensate exporters for the high cost of local production arising
mainly from infrastructural deficiencies and other negative factors beyond the
control of the exporter
iv. The Nigerian government established in 1991, an export processing zone (EPZ),
which allows interested parties to set up industries and businesses within
demarcated zones, with the objective of exporting the goods and services
manufactured or produced within the zones. Calabar in Cross River State has been
designated as the primary EPZ territory in Nigeria. Incentives within the territory
include tax holiday relief; unrestricted remittance of profits and dividends earned
by foreign investors; no import or export licenses are required; up to 100% foreign
ownership of enterprises; sale of up to 25% of production is permitted in domestic
market; etc.,
v. All exports under the Nigerian value added tax (VAT) system are zero-rated and
dividends received from investment in export-oriented businesses are to be free of
tax.
Tax Incentives for other Sectors in the Economy
a. Companies profits in respect of goods exported from Nigeria are exempt from tax
provided the proceeds are repatriated to Nigeria and used exclusively for the
purchase of raw materials, plants equipment and spare parts.
b. Profits of companies, whose supplies are exclusive inputs to the manufacturing of
products for exports, are excluded from tax.
c. All new industrial undertakings including foreign companies and individuals
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operating in an export processing zone (EPZ), are allowed full tax holidays for three
consecutive years.
d. As a means of encouraging industrial technology, companies and other
organizations that engage in research and development activities for
commercialization are to enjoy 20% investment tax credit on their qualifying
expenditure.
e. All companies engaged wholly in the fabrication of tools, spare parts and simple
machinery for local consumption and export are to enjoy 25% investment tax credit
on their qualifying capital expenditure while any taxpayer who purchases locally
manufactured plants and machinery are similarly entitled to 15% investment tax
credit on such fixed assets bought for use.
Tax Revenue in Nigeria
Tax and tax administration are fundamental components of any attempt to nation building,
and this is particularly the case of any developing or transitional nation like Nigeria. (Kiabel
& Nwokah, 2009), observe that taxes underwrite the capacity of states to carry out their
goals; forms an integral area for the conduct of state-society relations, and they shape the
balance between accumulation and redistribution of wealth that gives states their social
characteristics. Taxes build capacity, legitimacy, and consent. Nigeria which was colonized
by the British gained her independence by an act of the British Parliament on 1st October
1960 and became a republic within the commonwealth in 1963 (Odusola 2006). She
therefore, qualified to impose tax and collect revenue thereby. However, the tax system of
Nigeria dates to 1904 when the personal income tax Ordinance was introduced in the
northern part of the country before the unification of the country by the colonial masters. It
was later implemented through the Native Revenue Ordinance in the western and eastern
regions in 1917 and 1928 respectively. Coupled with other amendment in the 1930s, it was
later incorporated into Direct Tax Revenue Ordinance No.4 of 1940. Since then, different
governments have continued the improvement of the tax system in Nigeria (AbomayeNimenibo, Michael & Friday, 2018).
Although the Nigerian tax system has undergone several reforms geared toward
enhancing tax collection and administration with minimal enforcement cost, there is still
non-voluntary compliance of the taxpayers due to the act of lethargy on the part of the
system leading to an extensive practice of tax evasion and avoidance, which is a major
impediment to economic growth, where tax evasion and avoidance are now prevalent
(Ogbonna & Abbah 2016). One of the major tax reforms put in place by the government in
addressing the problems of tax administration in Nigeria is the introduction of Taxpayers
Identification Number (TIN) which became effective in February 2008.
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Tax Policy: Imperative For Nigerian Revenue Generation
Role of Tax Revenue in Economic Growth and Development
One of the major determinants of its macroeconomic indexes it has also been argued that
the level of one of the driving force of a nation macroeconomic indexes is its tax system. The
essence of tax is to raise revenue to meet government expenditure and to redistribute
wealth and manage the economy is the main purpose of government (Abomaye-Nimenibo,
Michael & Friday 2018). Taxes as an important tool for economic growth of a country are
outlined in the following methods:
i.
Optimum Allocation of Available Resources: Taxation is the most important means
and source of public revenue to finance government expenditures. The imposition
of tax leads to diversion of resources from the taxed to the non-taxed sector. The
revenue got is then allocated to various productive sectors of the economy of a
nation with a view to increasing the overall growth of the country. Tax revenues
may be used in developmental activities in the less developed areas of the country
where real investors are not willing to invest.
In our contemporary society, public finance is not simply to raise sufficient financial
resources for meeting administrative expense, for maintenance of law and order
only but to also protect the country from foreign aggression. Now the main object is
to ensure the social welfare of the economy. The increase in the collection of tax
increases government revenue. It is safer for the government to avoid borrowings
from any other source and concentrate on increasing tax revenue.
ii.
Encouraging Savings and Investment: Since developing countries operate mixed
economy, care must be taken to promote capital formation and investment both in
the private and public sectors. Tax revenue policy is to be directed to raising the ratio
of savings to national income.
iii.
Reduction of Inequalities in Income and Wealth: Through reducing inequalities in
income and wealth redistribution, governments use an effective and efficient tax
system, to encourage people to save and invest in productive sectors of the
economy.
iv.
Acceleration of Economic Growth and Price Stability: Tax policy may be used to
handle critical economic situations like depression and inflation. In times of
depression, taxation is minimized to increase consumption and reduce savings
thereby increasing aggregate demand and vice versa. Tax policy could be used to
strengthen incentives to in savings and investments. Tax policy is further used in
developing countries, to maintain price stability and growth of the economy.
v.
Control Mechanism: Tax policy is also a tool widely used as a control mechanism in
checkmating inflation, consumption of certain goods such as liquor and luxury
goods as well as to protect the local industries from the uneven rivalry and
competition. Therefore, tax revenue is the only effective weapon by which private
187
Tax Policy: Imperative For Nigerian Revenue Generation
consumption can be curbed and thus excess resources transferred to the state
leading to sustainable economic development and eventual growth. Appah (2010),
economic growth is largely linked to labour and capital as factors of production and
that, tax revenue is considered as an instrument of fiscal policy being an important
variable which may determine changes in national income in developing countries
like Nigeria. Increased tax revenue on imported goods and services have affected
the level of such goods and services that industrialist within our country is
encouraged to produce such goods and services locally. This curb high import duty
on dairy products, textiles, materials, food, beverages, drinks etc.
Nigeria's economic potential are encouraged through industrial investment locally
and the multiplier effect on employment and national growth. Tax policy does
affect economic growth. To them there is enough evidence linking tax revenue and
output to growth. Countries that can mobilize tax resources through broad based
tax structures with efficient administration and enforcement will likely be able to
enjoy faster growth rates than countries with lower overall tax collections assessed
inefficiently (Bonu & Pedro 2019). Through tax revenue, government ensures that
resources are channelled towards important projects in the society, while giving
succour to the weak. However, the role of tax revenue in promoting economic
activity and growth is not felt primarily because of its poor administration. Tax
revenue is very important to the growth and development of any country as tax
proceeds helps in rural and urban development as well as the provision of
infrastructural development in the form of road constructions, provision of power
supply, and portable drinking water, the building of hospitals, schools, and
provision of other social amenities.
Challenges of Tax Administration in Nigeria
There are challenges associated with the tax system across the world which may be peculiar
to border and political system of countries. Every System or nation opts for an efficient and
effective system of tax Administration, free from all encumbrances, yet challenges
militating against the creation and maintenance of such an efficient system cannot be ruled
out. Tax administration challenges could be found in the Nigeria system of tax
administration which cuts across the three tiers of government. These issues will be
discussed hereunder (Edewusi & Ajayi 2019):
a. Lack of proper orientation to the citizenry of Nigeria which greater population is
Secondary School Certificate and below. Hence, low understanding of the role of
taxation in Nigerian National development.
188
Tax Policy: Imperative For Nigerian Revenue Generation
b. Insufficient political support for tax Administration as officials is susceptive to
incessant attacks.
c. Over dependence of the economy on oil revenue with some good level of neglect of
taxation as a source of revenue.
d. Low level of business activity leading to low level of revenue.
e. Poor attitude to taxation, and lack of tax culture leading to tax avoidance and
evasion amongst taxpayers.
f. Low level of voluntary tax compliance
g. Multiple taxation leading to litigations and evasions.
h. Corruption on the part of officials during assessments leads to loss of tax revenues.
i. Diversion of tax revenues from government bank account into personal bank
accounts by tax officials.
j. Lack of accountability of tax revenue on the part of Directors.
k. Lack of inter-governmental co-operation and coordination between three tiers and
agencies of government.
l. Lack of human resources development and training of tax officials.
m. Employment of unqualified personnel in the administration of taxation.
n. Tax authorities are not equipped with modern technology and software packages.
o. Existence of manual system of tax administration in her operations.
p. Lack of proper record keeping.
q. The authorities are not funded adequately.
Profile of Tax and Non-Tax Revenues in Nigeria
Ayodele (2006) observed that from the time of independence to date, there has not been
much change in the country's tax structure because the demarcation between oil and nonoil revenue is thin. But the type of primary commodity involved has changed: prior to the
mid-1970s, it was agricultural commodity but crude oil thereafter. Even the advent of VAT
in 1994 did not make a significant difference, and the revenue base of the country has been
oscillating from one primary commodity to another. In the 1960s, the Nigerian economy
was characterized by the dominance of agricultural tax, which served as a proxy for
personal income tax because of the difficulty in correctly determining tax liability and
accessing individual farmers. During this period, various marketing boards were
responsible for collecting the tax. Non-oil revenue declined from 73.0 per cent in 1970 to 18.9
per cent in 1980 and continued to oscillate between 16.5 and 31.7 per cent during 1980-2001.
In contrast, oil receipts rose from 26.9 per cent in 1970 to 81.1 per cent in 1980, reflecting the
oil boom of 1973/4 and 1979/80. Thereafter, it has gyrated between 68.3 and 83.5 per cent. As
such, oil-oriented taxes have become a veritable source of revenue for the government. Due
to increased oil-income flows, total revenue rose from N 0.63 billion in 1970 to N 2,231.53
189
Tax Policy: Imperative For Nigerian Revenue Generation
billion by 2001. A major problem of the heavy reliance on oil revenue is that the economy is
tied to the vagaries of the international oil market. In the absence of a fiscal policy, the
Nigerian economy has become highly exposed to external shocks, with the associated
negative effects.
The Nigerian tax system favours the federal government, which controls the buoyant tax
components while the lower tiers have jurisdiction over the less profitable ones. In most
instances, the federal government taxes the corporate bodies, while the state and local
governments tax individuals. In areas of concurrent taxation such as the personal income
tax, capital gains tax and stamp duties, the federal government retains legislative power,
while sharing administrative capacity with the states. The federal government has always
assumed jurisdiction for such taxes as VAT introduced in 1993, and education tax
implemented in 1994. In addition, state and local governments have had no freedom to
introduce new taxes, a fact that affects the tax capability of the lower arms of government.
REFERENCES
Abomaye-Nimenibo, W. A. S., Michael, J. E, M. & Friday, H. C. (2018) “An Emperical
Analysis of Tax Revenue and Economic Growth in Nigeria from 1980 to 2015”,
Global Journal of Human-Social Science, Political Science Volume 18 Issue 3Version 1.0:
pp 22-26
Aderibigbe, A., Oke, M. A. & Oyedokun, G. E. (2017). “Tax Base Broadening Through
Improved Business Environment in Nigeria”, Tax Academy Research Journal (TARJ)
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Agunbiade, O. & Idebi, A. A (2020). Tax Revenue and Economic Growth Nexus: Empirical
Evidence from the Nigerian Economy. European Journal of Economic and Financial
Research Vol. 4 Issue 2: 2501-9430.
Ahunwan, B. (2009). “New National Tax Policy Approval in Late December '08 – Nigeria.
H G . O r g Wo r l d w i d e L e g a l D i r e c t o r i e s : Ava i l a b l e a t
http://www.hg.org/article.asp?id=5944.
Akhor, S. & Ekundayo, O. (2016). “Impact of indirect tax revenue on economic growth: The
Nigeria experience”. Igbinidion University Journal of Accounting, 2(2): 62-87.
Akwe, J. (2015). Impact of non-oil tax revenue on economic growth: The Nigerian
perspective, International Journal of Finance and Accounting. 3(5): 300-309.
Appah, E. (2010). “The problems of tax planning and administration in Nigeria: The federal
and state governments experience”. Asian Journal of Research in Banking and Finance,
4(12), 1-14.
Ayodele, O. (2006). “Tax Policy Reforms in Nigeria.” United Nation University Research
Paper: Pg 66-69
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Bamidele, A. (2020). “Nigerian economy slips into recession as GDP contracts by 3.62% in
Q3 2020”, Nairametrics, accessed at, www.nairametrics.com
Bonu, N. & Pedro, M. (2019). “The impact of income tax rates (ITR) on the economic
development of Botswana” Article Number - EFB0C77667, Vol.1(1) pp. 008-022
Chidinma N. (2019): “Nigerian customs records N1.3trillion revenue in 2019, exceeds target
by N404billion”, Nairametrics. Accessed on January 10, 2020.
https://nairametrics.com/2020/01/10/nigerian-customs-records-n1-3trillionrevenue-in-2019-exceeds-target-by-n404billion/
Cornelius, O., Ogar, A.& Oka, F. (2016). “The Impact of Tax Revenue onEconomic Growth:
Evidence from Nigeria, Journal of Economics and Finance. Vol. 7, Issue 1. Ver.I PP 32-38.
Edewusi, D. & Ajayi, I. (2019). “The Nexus between Tax Revenue and Economic Growth in
Nigeria. International Journal of Applied Economics, Finance and Accounting, Vol. 4: pp.
45 – 55.
Edewusi, D. & Ajayi, I. (2019). “The Nexus between Tax Revenue and Economic Growth in
Nigeria. International Journal of Applied Economics, Finance and Accounting, Vol. 4: pp.
45 – 55.
Egbunike, F., Emudainohwo, G.& Gunardi, A. (2018) “Tax revenue and economic growth: A
study of Nigeria and Ghana”. Journal of Economics, 7(2): 213-220.
Festus, F., Appolos N. N. & Olalekan, O. (2020). Non-Oil Tax Revenue on Economic Growth
and Development in Nigeria EJBMR, European Journal of Business and Management
Research, Vol. 5, No. 3: pp 21-33
James, A. (2012) “Impact of Tax Administration on Government Revenue in a Developing
Economy – A Case Study of Nigeria Leicester Business School De Montfort
University Department of Accounting and Finance Leicester, UK,International
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James, S. & Nobes, C. (2009). Economics for Taxation. 9th ed. Birmingham, Fiscal publications.
Jones, S. & Rhoades, C. (2011). Principles of Taxation for Business and Investment Planning,
14th Edition. Amazon, Tryprime. pp 15- 33
Kiabel, D. B. & Nwokah, G. N.(2009). “Boosting Revenue Generation by State Governments
in Nigeria: The Tax Consultant Option Revisited”. European journal of sciences, vol. 8,
no 4. : Available from: http://www.eurojournals.com/ejss_8_4_02.pdf.
Komal, O. (2013). An analysis of the impact of Value Added Tax in Delhi. Global Journal of
Management and Business Studies, 3(8): 277-286.
Lawrence, E. (2015). The effect of Value Added Tax on economic growth in Kenya.
International Academic Journal of Economics and Finance, 1(15), pp10-30.
Ndajiwo, M. (2019). “Are tax incentives in Nigeria attracting investment or giving away
revenue?” Available from: https://www.taxjustice.net/
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Odusola, F. (2006). “Tax policy reforms in Nigeria. A Research work of United Nations
University-World Institute for Development Economies Research, Research Paper, pp. 145.
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): 34-46.
Ogbonna, A. (2016). “Nigeria Tax System Has Not Come of Age – Kunle Quadri, CITN
P r e s i d e n t . D a i l y S u n , F r i d a y A u g u s t , 1 3 : Av a i l a b l e f r o m ,
http://www.sunnewsonline.com/webpages/features/ceomagazine/index.htm.
Ogbonna, N. & Appah E. (2016) “Effect of Tax Administration and Revenue on Economic
Growth in Nigeria”, Research Journal on Finance and Accounting, Vol.7, No.13: 22221697
Ojong, C. M., Anthony, O.& Arikpo, O. F. (2016). “The impact of tax revenue on economic
growth: Evidence from Nigeria”. Journal of Economics and Finance, 7(1): 32-38.
Ola, C. S. (2001).Income Tax Law and Practice in Nigeria, 5th edition, Ibadan, Dalag prints and
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Syndelle, S. (2009). “Taxes – Accountability & Revenue in Nigeria.” Nigeria Curiosity.com.
Available from: http://www.nigeriancuriosity.com/2009/11/taxes-accountabilityrevenue-in-nigeria.html.
192
CHAPTER TWELVE
ADDRESSING FISCAL CHALLENGES THROUGH BUDGET
TRANSPARENCY: THE CASE OF KWARA STATE
Yaru, Mohammed Aminu
Department of Economics
University of Ilorin, Ilorin.
yaru@unilorin.edu,ng; yaruaminu@yahoo.com
+234-8038706624; +234-8052664651
Abstract
Kwara State government like many other state governments in Nigeria is heavily dependent on
federal transfers for revenue. Efforts to diversify the revenue base were made by various
administrations including reforms of revenue administration system in 2015. Substantial progress
has been recorded so far, and the efforts have begun to yield positive results. The State's internally
generated revenue (IGR) has been on steady rise since 2016. Despite this achievement, the State still
faces some fiscal challenges, particularly low share of tax in the total revenue due largely to
taxpayers' resistance/non-compliance, rising recurrent expenditure and limited fiscal space for
important capital projects. The outbreak of global Covid-19 pandemic in 2020, and its ruinous effects
on both global and State's economy worsened the situation. Aggressive tax enforcement cannot
longer be a feasible option for the State to raise revenue. This paper explains how transparency,
particularly citizens engagements at various stages of the budget process can help the government in
coming up with the right policies and strategic public investments that could improve domestic
revenue, through voluntary tax compliance.
Keywords: Budget Transparency, Kwara State, Tax Compliance, Nigeria.
1. Introduction
The outbreak of Covid-19 pandemic in Nigeria and measures to tame its spread including
lockdowns in the first half of 2020 have affected the flows of both statutory allocations to
state governments and internal revenues. Kwara state was not spared from the fiscal
challenges posed by the pandemic. The ability of the State's Internal Revenue Service to
administer domestic taxes and citizen's capacity to pay taxes (tax base) has both been
adversely affected. These have worsened the fiscal challenges of the State. The State could
not use aggressive tax enforcement measures to fill the imminent revenue gap given the
economic effects of the pandemic. Thus, other measures to encourage voluntary tax
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
compliance have to be considered in the short to medium term, while efforts at stimulating
a post-Covid-19 economic recovery are being made. Budget transparency can be a means to
enhance voluntary tax compliance and ensure that the limited public resources are
strategically allocated to stimulate economic recovery.
The annual budget summarises government's policies, project choices, and sources of
funding for a fiscal year. The political and economic processes that produce the budget are
inherently vulnerable to abuses--principal-agency problems and the so-called “tragedy of
commons”. Multi-ethnic societies, like Nigeria in which the budget process is shrouded in
secrecy, are particularly prone to budget abuses. And these adversely affect fiscal
discipline, allocative efficiency, delivery of essential services to citizens, and citizens'
willingness to pay taxes. International Financial Institutions, Donor Agencies and Civil
Society Organisation (CSOs) have been advocating for greater budget transparency in
order to check budget abuses and ensure that budgets reflect citizens' priorities and
translate to higher standards of living (Adelami, 2018).
Budget transparency is the extent to which government makes key budget information
available to the public in a timely, comprehensible and accessible manner, as well as
provides opportunities for public participation in the budget process (Adelami, 2018).
Open and participatory budget process enhances the achievement of social and economic
goals of government, such as poverty reduction, human capital development and job
creation. It could also stimulate private investment, and boost domestic revenue through
improved tax compliance.
Recent surveys by the International Budget Partnership (IBP) and Civil Resources
Development and Documentation Centre (CIRDDOC) at the national and state levels
respectively show that budget transparency has been generally very low in Nigeria
(CIRDDOC, 2015 & 2019 and IBP, 2016). This suggests that citizens are not adequately
informed and/or involved in the budget process. When the citizens are carried along in the
budget process and key budget documents are made available to the public, government
benefits. One area where such benefits are derivable is taxation and generation of other
domestic revenues.
Several states including Kwara state had to turn to taxation (Yaru, 2016), for instance, in
2014 through 2016 when the shock in oil price led to drastic fall of statutory allocation. The
current crash of oil price largely attributable to fall in demand caused by the coronavirus
(Covid-19) pandemic has brought a resurgence of the 2014-2016 episode in 2020 which will
likely extend to 2021. The State government had in response revised oil price benchmark for
the 2020 fiscal year. The initial price benchmark of $US57/barrel and production target of
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
2.18 million barrels/day were reviewed downward to $U25/barrel and daily production
target to 1.9 million barrels/day (Kwara State Government, 2020). The State government
also revise its annual budget for the year from N162.4 billion to N114 billion naira (Kwara
State Government, 2020); since she cannot use aggressive tax enforcement measures to fill
the imminent revenue gap.
This paper provides insights on how a transparent budget process could be used to
encourage voluntary tax compliance and address other fiscal issues facing the state
governments in Nigeria using Kwara as a case study. The paper is structured into seven
sections. The current section is the introduction. Section two presents the legal framework
for budget transparency in Kwara State. Section three presents measurement and trend of
budget transparency based on CIRDDOC reports in 2015 and 2018. Section four analyses
the public finances of Kwara State since 1999, while five examines issues with Kwara state's
public finances. Section six offers suggestions on how the State could address the issues
raised in section five through budget transparency. Section seven concludes the paper.
2. Legal Framework for Budget Transparency in Kwara State
The foundation for the various components of budget transparency is the existence of legal
and institutional framework e.g., laws mandating government to make budget documents
available to the public, involvement of the public at various stages of budget process, and
open and transparent public procurements. The laws specify what budget document to be
made available to the public and when. And to serve the end-user purpose, the laws may
also encapsulate desirable standard for the contents, and procedure for producing such
documents. Such laws for budget transparency in Nigeria are contained in the 1999
Constitution of Federal Republic of Nigeria (FRN) as amended, and the Fiscal
Responsibility Act (FRA), 2007 and the Public Procurement Act (PPA), 2007. Relevant
sections of the Constitution and of the two Acts provide the rules and regulations according
to which each activity in the budget process should be carried out (See Table 1): the
principal actors, documents and when the latter should be published at various stages of
the budget process (Adelami, 2018). Figure 1 presents an illustration of public availability of
key budget documents.
Kwara State follows the precedents of the Federal Government of Nigeria (FGN), by
domesticating the two Acts engendering budget transparency. Kwara State enacted Kwara
State Fiscal Responsibility Act (KWFRA) in 2008 and Public Procurement Act, 2018. The
KWFRA Act, 2008 provides for the establishment of Kwara State Fiscal Responsibility
Commission with a primary mandate of ensuring prudence, transparency and
accountability in the management of public finances of the State government. Sections 3840 of the KWFRA, 2008 clearly mandate the State government to conduct its fiscal and
195
Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
financial affairs in a transparent manner, including full and timely disclosure of related
information.
Table 1 presents the key budget documents and the dates they ought to be produced or
published as provided in KWFRA, 2008 and other relevant legislations. Figure 1 illustrates
the concept of public availability of budget documents in practice. Timely release of these
documents in public domain is important to equip all interested people with information to
participate effectively at preparation, approval, and implementation and audit stages of the
budget process. It is also for this reason that key budget documents (particularly those in
Table 1) must be presented in clear, consistent and comprehensible formats. A timely
released budget documents but presented in an ambiguous or opaque manner could
undermine effective public participation.
Public Availability of
Key Budget Documents
Existence of legal
& institutional
framework for
making budget
document
avaialble to the
public
Making key budget
documents available
in public domains
e.g., state's official
website, public
libraries, budget
office and among
others, so that the
citizens can have
access to them on
time and at ease.
Organising the
contents of the
document in a
simple, cohenre
nt and
comprehensible
manner
Processing and
producing copies
of key and
relevant budget
documents at
different stages
for both public
and internal use.
Figure 1: An illustration of public availability of budget documents
Relevant laws on public participation are also necessary. Such laws define participants to be
invited at different stages and their roles in the process. For instance, Section 16 of the
KWFRA, 2008 provides that the Commissioner of Finance may hold public consultations
196
Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
during the preparation of the Medium-Term Expenditure Framework (MTEF) and that the
general public, press and representatives of organisations should be invited during such
consultations (Kwara State Fiscal Responsibility Act, 2008).
At the procurement stage, the State Public Procurement Law, 2018 clearly defines the
participants to be invited from the public at different stages of the procurement process.
The law also provides the legal and institutional framework for open, transparent and
competitive procurement process in the State (Kwara State Public Procurement Law, 2018).
Additional insights about operational guidelines to the Public Financial Management
(PFM) of the State could be drawn from the Kwara State Government Financial Regulation,
2009.
Table 1: Key Budget Documents, Publication and Public Participation
Publication deadline
Stage of
Public Participation
(legal & Institutional
Key Budget Documents
Budgeting
source)
Budget call circular
Formulation
Pre-budget Statements
such as Medium-Term
Expenditure Framework
(MTEF), Fiscal Strategy
Paper (FSP), and
Medium- Term Sector
Strategy (MTEF)
Executive Budget
Proposal
Appropriation Bill
Approval
Appropriation Act
Approved Budget
Last day of September
of the financial year
preceding the budget
year (Section 16 (1) of
KWFRA, 2008)
Before the last day in
the month of December
of year preceding the
budget year (Sections
80 and 121 (1) of the
1999 Constitution)
Before the last day in
the month of December
of year preceding the
budget year (Section
121 (1) of the 1999
Constitution)
No clearly defined
timeline, but should be
published immediately
after Legislative
approval
197
Town hall meetings with
stakeholders, community
leaders and public hearing,
engagements with CSOs,
vulnerable groups and
formal feedback
mechanisms.
Public hearing organised
by MDAs, and later by the
Legislature, public
participation during
ministerial budget defence
and meeting with
constituent members.
Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
Not Later than 3
Citizens budget
months into the Budget
Year
Not later than 30 days
Public involvement in the
after the end of the
Quarterly budget
procurement process,
quarter (Section 28 (2)
implementation Reports
oversight of projects being
and 40 of KWFRA,
executed, budget review
Implementa2008)
and preparation of
tion
Not later than the last
supplementary budgets,
day in the month of
and public feedback on
Mid-Year Budget Report
September of the
budget implementation.
Budget Year
No clearly defined
Report of Legislative
timeline, but should be
Oversight
published.
Not later than 6
Year-end Budget Report
months after the end of
(Accountant General’s
the fiscal year (Section
Report)
40 of KWFRA, 2008)
Not later than 6
months after the end of
Auditor-General’s Report the fiscal year (Section
CSOs and public tracking
39 (1) and 40 of
of reported cases of fraud
KWFRA, 2008)
and indictments in Auditor
Audit
General’s Report and
No clearly defined
public hearings of trials of
timeline in the
Report of House Public
indicted public officials
KWFRA, 2008, but
Account Committee
should be published
timely.
Source: KWFRA, 2008, Kwara State Public Procurement Act, 2018, FRA, 2007,
PPA, 2007 and the 1999 Constitution.
3. Measurement and Trend of Budget Transparency in Kwara State
Budget transparency is a technical term used to define the extent and timeliness at which
government makes budget documents available to the public for effective participation in
the budget process (IBP, 2017). Cross country attempt at measuring the degree of budget
transparency using an index, called Budget Transparency Index (BTI) began in 2006 by IBP,
while CIRDDOC replicated similar exercise for the 36 Nigerian States in 2015. The index
aggregated three components of budget transparency: They are public availability of key
budget documents, public participation and transparency in public procurement process.
The three are aggregated to derive an index that gauges the level of budget transparency at
national and subnational level as applicable.
198
Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
Despite the availability of extant legal and institutional framework, the level of budget
transparency of Kwara state government in practice has been adjudged to be low
(CRIDDOC, 2015 & 2019). Of the 36 States in the country, Kwara ranked 34th in the 2015
survey and 32nd in 2018 with scores of 8 and 10 respectively out of 100 (CRIDDOC, 2015 &
2019). The low scores are largely due to unavailability of key budgets documents on the
official website of the State during the period of the survey.
Recently, some key budget documents like the State's approved budgets and Accountant
General's Reports are now available on the State's Website. But sustainability is the issue as
making budget documents available online and on time is a primary condition the State
must fulfil to access World Bank State Fiscal Transparency, Accountability and
Sustainability Program-for Result (SFTAS) grants and also be a member of the Open
Government partnership (OGP). But what happens after SFTAS ran its full course or when
the budget actors change? Findings of SNBTS surveys in Nigeria show that the budget
transparency at individual state level could be sensitive to changes in budget actors,
political regime, and external funded programmes subscribed by states (CIRDDOC, 2015 &
2019). For instance, top performers in the 2015 survey like Ekiti, with 79, Cross River, 73 and
Lagos, 60 got their score slumped to 23, 25 and 57 respectively in the 2018 survey.
Meanwhile, Kaduna state which performed poorly in 2015 excelled in 2018, ranking second
to Jigawa state (CIRDDOC, 2019). Unfortunately, a state would not be able to harness the
benefit of fiscal transparency sustainably unless it makes it an intrinsic part of its PFMs at all
times. The fiscal managers have to look beyond meeting loan conditions, and adopt budget
transparency as a culture to address salient fiscal challenges such as low tax
revenue/voluntary compliance and rising recurrent expenditures.
4. Analysis of Kwara State Public Finances, 1999-2018
This section looks at the public finances of the State for 1999-2018 periods. Table 2 shows the
composition of Kwara State Government revenue as of the period. The share of federal
transfers of the State's revenue stood at about 70.99 percent, while IGR accounted for 26.09
percent in 2018. The balance was raised from internal and external loans. Recurrent
expenditure dominated the State's budgets and actual spending profile over time, and also
grew at faster rate. Recurrent expenditure accounted for about 72.07 percent of the total
expenditure in 2018, while the balance of 27.03 was spent on capital investment. During the
period (as shown in Figure 2), capital expenditure oscillated between N15 and N 34 billion
or 19 and 33 percent of total expenditure. Figure 2 also shows trends of revenue and
recurrent and capital expenditure of the State government between 1999 and 2018. The
pattern shows that the flow of federal transfer has been unstable, largely due to crude oil
price fluctuations in international markets. The instability of federal revenue flows largely
defines the trend of the State's public expenditure, especially overhead and capital
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
expenditure. As shown in Figure 2, whenever there is rise in federal transfers, government's
overhead and capital spendings increase. And when the opposite occurred it is the
overhead and capital expenditure that are worst hit.
80,000.00
60,000.00
40,000.00
20,000.00
-
External & Internal Loans
Federal Transfers
Capital Expenditure
Internally Generated Revenue
Recurrent Expenditure
Figure 2: Kwara State Public Finances, 1999-2018
Source: Compiled from Annual Reports of Accountant General of Kwara State
(1999-2018).
The trend of annual borrowings of the State in Figure 2 largely correlates, albeit negatively,
with federal transfers, reflecting absence of fiscal buffers. Whenever there is decline in the
flow of federal transfers, there is concomitant rise in State borrowing. This also leads to rise
in cost of debt servicing in subsequent years. For instance, following sharp increase in
borrowing from about N2 billion in 2008 to N17.9 billion in 2009, there was astronomical
rise in recurrent expenditure in subsequent years up to 2015. That year about N30.4 billion
was used for repayment of loans—representing about 33 percent of the total expenditure.
State annual borrowing during the same year stood at about N30.5 billion, while total sum
of N24 billion was spent on capital expenditure. By implication, nearly over N6 billion or 20
percent of the loan was used to finance recurrent expenditure. The cumulative effects of this
on the State's fiscal stance has been recurrent spending outstripping the total federal
transfers since 2011 partly due to increasing share of debt service.
200
Item
Internally Generated Revenue
Taxes (Including PAYE)
Non-Tax Revenue
Federal Transfers
Statutory Allocation
VAT
Grants & Re-embursement
External & Internal Loans
Other Incomes
TOTAL REVENUE
4.11%
2000
12.85%
3.57%
3.02%
82.92%
71.59%
6.80%
4.54%
0.12%
0.39%
2001
17.76%
11.40%
7.64%
69.35%
46.84%
6.66%
15.85%
12.49%
0.52%
2002
12.40%
3.80%
2.55%
74.87%
55.54%
7.27%
12.05%
12.21%
0.59%
2003
11.72%
4.01%
2.69%
83.36%
70.43%
9.34%
3.59%
4.34%
0.26%
2004
10.44%
4.01%
3.40%
83.95%
73.21%
8.18%
2.55%
5.35%
0.82%
2005
10.13%
3.86%
2.58%
72.75%
56.79%
6.63%
9.33%
16.30%
0.81%
2006
10.85%
4.12%
2.76%
82.87%
57.94%
7.57%
17.35%
5.47%
0.58%
2007
9.17%
3.41%
2.28%
65.37%
46.41%
7.09%
11.87%
24.87%
0.99%
2008
28.26%
4.60%
2.20%
67.34%
44.40%
6.65%
16.28%
3.42%
2009
2010
10.39% 16.25%
4.69%
7.57%
3.14%
8.68%
59.62% 80.13%
36.96% 57.23%
7.52%
11.98%
15.14% 10.92%
29.99%
3.62%
0.00%
0.00%
100.00% 100.00%
2011
13.19%
6.10%
7.09%
70.30%
50.55%
9.20%
10.55%
12.21%
4.29%
100.00%
2012
14.79%
7.63%
7.16%
66.57%
49.92%
8.78%
7.88%
18.63%
0.00%
100.00%
2013
17.99%
7.09%
10.90%
69.30%
50.33%
9.80%
9.17%
9.57%
3.15%
100.00%
2014
18.00%
6.47%
11.53%
58.92%
43.74%
9.36%
5.82%
17.37%
5.71%
100.00%
2015
9.03%
4.53%
4.51%
55.47%
27.33%
7.94%
20.21%
33.11%
2.38%
100.00%
2016
22.38%
8.28%
14.10%
66.65%
35.62%
9.58%
21.46%
1.64%
9.32%
100.00%
2017
2018
18.85% 26.09%
5.86%
8.11%
13.00% 17.98%
58.80% 70.99%
33.00% 42.95%
8.66%
11.56%
17.13% 16.48%
5.03%
1.85%
17.31%
1.07%
100.00% 100.00%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
4.96%
Other Incomes
TOTAL REVENUE
1999
9.80%
2.30%
1.41%
69.58%
53.10%
9.11%
7.36%
15.66%
Item
Internally Generated Revenue
Taxes (Including PAYE)
Non-Tax Revenue
Federal Transfers
Statutory Allocation
VAT
Grants & Re-embursement
External & Internal Loans
Table 2: Composition of Revenue Profile of Kwara State, 1999 -2018
Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
Debt repayment like personnel emolument is a primary expenditure item. The larger the
share debt service takes, the lesser the capacity of the State to undertake important
secondary expenditures, like capital projects. This may have been responsible for low
performance of capital budget over the years. For instance, while the recurrent budget
performances averaged about 90 percent between 2014 and 2016 fiscal years, the capital
budget performance averaged about 31 percent (Ahmad, 2018). And with pressure from the
citizens on government for developmental projects and urge to make dividends of
democracy available to electorates, the propensity to incur more debts increases (Alade,
2018), thereby leading to rise in future debt repayment figures. This is evident in 2015, when
the sum for debt repayment is almost equal to the debt incurred for the year (See Figure 1).
This situation does not only portends long run fiscal sustainability risk to the State but also
shrinks fiscal space for public capital investment.
The IGR which has been steadily growing in absolute and relative terms in recent time as
shown in Figure 1 and Table 2 respectively portends a sigh of hope. In 2018 for instance, the
IGR stood at over N23.1 billion and accounted for about 26.07 percent of the total revenue as
against N 8.3 billion and 9.03 percent in 2015 representing an increment by about 178
percent (see Figure 2 and Table 2). However, while taxes are the most sustainable source of
government revenue (Yaru, 2016); that the contribution of taxes to total revenue of the State
still stood as low as 8.11 percent in 2018 call for concern (Table 2). No country has developed
without developing its tax system. More so government's reliance on taxation strengthens
the social contract theory, promotes accountability and good government.
5. Issues in Kwara State Government Finances and Fiscal Options
Salient issues emerged from the analysis of public finances in section four. This section
examines these issues and the available fiscal options to address them. The most obvious of
the issues include fast growing recurrent expenditure commitments amidst insufficient
and volatile current revenue (i.e., the federal transfers and low tax revenue). These thus
result to lack of fiscal buffers for the State as suggested by the concomitant borrowing to
augment revenue shortfalls (as shown in Figure 2). The State's capacity to fund the muchneeded public physical infrastructural development is also affected.
This scenario leaves the State with four, but not mutually exclusive fiscal options: cutting
cost of governance, borrowing, increasing the internally generated revenue and improving
efficiency in management of public financial resources. Of the four, cutting operational cost
could be done immediately. Experience shows that cutting cost of government has to be
done with thorough cost-benefit analysis. If not, it could hurt the functioning of MDAs,
public service delivery and revenue in the short and medium run. In 2018 and 2019 for
instance, many MDAs and parastatals in the State could not achieve set revenue targets due
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
to poor funding of their overhead budgets (Yaru, Godfrey, Subayo, Fajimi and Oguntoye,
2019). Borrowing which is the second option, is the easiest and most tenable to electorates
during a period of pandemic such as the Covid-19 or economic recession. But borrowed
funds have to be efficiently utilised to execute carefully selected strategic capital projects
that will yield huge productivity benefits with spill-over effects to the future generation.
Such projects funded with the borrowed funds must increase the tax base of the future
generation, who will be taxed to defray the debt, or else it will result to “generational theft”
and medium to long term fiscal sustainability crises.
The third option which is the most sustainable of the four is increasing IGR through
expanding tax net. Though this could prove extremely difficult when taxpayers do not
trust government or are aggrieved due to lack of visible impact of the taxes paid in previous
years on their immediate environment (Yaru, 2019); and much difficult when an economy
faces recession or battling a pandemic as in the case of
The fourth option is improving efficiency in the management of the state's public financial
resources. This involves reforms of PFM systems. PFM reforms and efficient management
of public resources required strong resolve of stakeholders and political will to succeed.
However, like other options, improving the public financial management systems has some
political risks that politicians find difficult to take. PFM reforms are often sabotaged by
powerful groups within the system who might be the losers. More so, the success of PFM
reforms could also be affected by skill and technical capacity gaps of staff.
6. Addressing the issues through budget transparency
Budget transparency could be used beyond satisfying the conditions such as the World
Bank SFTAS programme-for-result. It could be used to address fiscal challenges like those
faced by Kwara State highlighted in section five. The challenges include inadequate and
unstable revenue, low tax compliance, fast growing recurrent expenditure, sagged tax base
caused by Covid-19 pandemic and a very limited fiscal space for public capital investments
.
Addressing these challenges should begin with getting the challenges and priorities of the
people right; followed by raising revenue from domestic sources particularly, taxation by
promoting voluntary tax compliance through budget transparency. Government's reliance
on taxation promotes accountability and good governance. But this option as stated earlier
could prove difficult when taxpayers do not trust government or when they are aggrieved
due to lack of government presence in their immediate environment. Taxes are also difficult
to enforce when an economy faces recession or battling a pandemic such as the Covid-19. A
transparent and participatory budget process would enable government identify and get
the priorities of the people right and address them accordingly.
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
Through a participatory budget process, the government interact with the citizens to
discern the peculiar needs and priorities of the people, communities, and the economic
challenges they face and why they are resisting tax payments. For instance, a survey
conducted on staff of staff of KW-IRS in 2019 revealed that taxpayers are largely unwilling
to pay taxes because of government's failure to provide social amenities (Yaru and Awodun,
2019). This implies that to boost citizens' morale to pay taxes voluntarily, especially those in
the informal sector, the state government has to be transparent in its public financial
management, and adopt participatory budget process.
The government should involve the public; let citizens see their inputs in the budget; and
provide the citizens with necessary feedbacks. Through these, government's financial
constraints, medium and long-term risks of alternative fiscal measures, particularly
borrowing will be known. The people will be more supportive and willing to cooperate
with government in raising funds through taxation. And also help government cut cost of
governance in a way that delivery of essential services and IGR generation are not adversely
affected.
Interestingly, the current administration has begun citizens' engagements at the
preparation stage of the budget process in the 2020 budget. Meanwhile, for such public
participation to translate to productive outcomes, the participants have to be of enlightened
minds with some level of fiscal literacy, comprising of all classes of citizens such as
community leaders, technocrats, academics and professionals at various stages of budget
process, i.e., the preparation, approval, implementation and monitoring stages.
More so, the interaction has to be guided by clearly articulated terms of engagements to
discern the peculiar needs of communities, and economic challenges they face. This is
because even where citizens' problems are the same, the causes, magnitudes or effects may
differ. Thus, citizens' involvement in the budget process in this manner helps the
government identify and harmonize these differences. The one-cap-fit-all approach and the
traditional line-item of budgeting, where the citizens are almost alienated from the budget
process, do not provide the necessary connect between what the people want and what the
government approves in the budget vis-à-vis what the government does during the
implementation and monitoring stages of the budget process. Poor citizens' participation in
the budget process affects the value the people attach to taxation, and, to a large extent, the
government.
Social media and web-based platforms should be adopted and encouraged for wider and
more inclusive public participation. Individuals, communities, wards and Local
Government Areas will share their thoughts and help government monitor projects.
Government will also use the online platforms to promote its projects and policies and
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
intimate the citizens on the need and benefits of voluntary tax compliance.
The State may also conduct staff training needs assessments as background to identify
relevant skills and training gaps among front line budget staff. The state should build staff
capacity based on the identified training gaps to help them deal with increased pressure
that would result from public participation, and technically, in handling the preparation of
budget documents. So that documents made available to the public will be error free and
follow international best practices.
7. Concluding Remark
Budget transparency should be a defining culture of public financial management systems
of Kwara State. It should be seen beyond mere requirement or conditions for the World
Bank SFTAS programme-for-result or other grants. This is important given the peculiarities
of the State. The economic activities have been badly affected by the Covid-19 pandemic.
Taxpayers who were largely unwilling to pay taxes blaming lack of social amenities now
have additional and tenable reason to hold on. On the other hand, government is facing
insufficient and unstable revenue and huge stock-piled public debt. The situation is
particularly worrisome as the State heads towards a new fiscal year and with lingering
economic crunch occasioned by the Covid-19 pandemic. Thus, State has to show
commitment to a transparent budget process to encourage citizens to respond positively
and support government policies and grow the economy. It is in this way that government
will find it much easier to make the citizens pay taxes to expand the required fiscal space for
physical infrastructural development.
ACKNOWLEDGMENTS
The initial draft of this paper was presented as a Keynote Paper titled “Budget
Transparency: Looking Beyond World Bank Conditions” at the Dissemination
Meeting/Workshop on Budget Transparency and Presentation of the 2018 Sub-National
Budget Transparency Survey Report for Kwara State, organised by Olive Community
Development Initiatives (OCDI) in Collaboration with Kwara State Ministry of Finance and
Planning, held on the 20th August, 2020 at the Conference Hall, Kwara State Ministry of
Finance and Planning, Ilorin.
I wish to thank the Kwara State Government, CIRDDOC, Enugu and Olive Community
Development Initiatives (OCDI) for organising the meeting/workshop. I am also grateful to
the individual participants for their comments and interest in the paper. The
meeting/workshop would not have happened without the efforts of the management and
stafff of Kwara State Ministry of Finance and Planning. Among the staff that deserve special
appreciation are: Mrs. Oyeyemi Olasumbo (Honourable Commissioner), Alhaji
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Addressing Fiscal Challenges Through Budget Transparency: The Case Of Kwara State
Abdulrazak Folurunsho (Permanent Secretary), Mr. Victor Olawepo (Director Budget) and
Mr. Matthew Ajayi (Deputy Director Budget).
REFERENCES
Adelami, O. O. (2018). Budgeting in Nigeria: Issues and Prospects. Federal Government of
Nigeria, the National Assembly, Abuja.
Ahmad, A. (2018). Kwara at fifty and the legislature: Achievements, challenges and
prospects. In Musa A. (Ed.) Kwara at 50: Achievement & Aspirations (pp 211-222).
Fiftyfifty Institute LTD.
Alade, S. O. (2018). Economic development and modernisation in a half century Kwara
State: Policy, process and progress. In Musa A. (Ed.) Kwara at 50: Achievement &
Aspirations (pp 71-98). Fifty fifty Institute LTD.
Civil resources development and documentation centre (CIRDDOC). (2015). Nigerian
States budget transparency survey: 2015 Report Nigeria: 36 State. CIDDOC Nigeria.
Civil resources development and documentation centre (CIRDDOC). (2019). 2018 Report:
Nigerian States budget transparency survey. CIDDOC Nigeria.
Federal Government Fiscal Responsibility Law, 2007.
International budget partnership (IBP) (2016). Annual Report. A publication of the
international budget partnership.
International budget partnership (IBP) (2017). Annual Report. A publication of the
international budget partnership.
Kwara State Accountant-General's reports and annual financial statements for various
years.
Kwara State fiscal responsibility Law, 2008. Kwara State of Nigeria official Gazette.
extraordinary No: 22nd January, 2009.
Kwara State government (2020). Kwara State government of Nigeria: Revised annual
e s t i m a t e s , 2 0 2 0 . Av a i l a b l e a t , h t t p s : / / k w a r a s t a t e . g o v. n g / w p content/uploads/2020/07/KWARA-STATE-2020-APPROVED-REVISEDBUDGET.pdf
Kwara State Public Procurement Law, 2018.
The 1999 Constitution of the Federal Republic of Nigeria.
World Bank (2013). Global Stock-take of social accountability initiatives for budget transparency
and monitoring: key challenges and monitoring. Budget Transparency Initiatives. 81543.
World Bank.
Yaru, M. A. (2016). Sustaining the unprecedented growth in internally generated revenue of
Kwara State. The Herald Newspaper, December 18.
Yaru, M. A. (2019). Report on sub-national budget transparency survey Kwara State,
Nigeria. A report submitted to the civil resources development and documentation
centre (CIRDDOC), Enugu-Nigeria. www.cirddoc.org.
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Yaru, M. A., & Awodun, M. (2019). Tax administration in informal sector: KW-IRS Staff's
perspective. Ilorin Journal of Economic Policy, 6(1); 1-12. Available at,
https://www.ijep.org/index.php/volume-6-issue-1-2019.
Yaru, M. A., Godfrey, O., Subayo, O., Fajimi, A., & Oguntoye, F. (2019). Analysis of revenue
potentials of MDAs of Kwara State: Performance, Challenges and
Recommendations. A study conducted by staff of research and data gathering
department, KW-IRS.
207
CHAPTER THIRTEEN
PARENTS SOCIO-ECONOMIC STATUS AND CHILDREN ACADEMIC
PERFORMANCE
Oluyombo, Onafowokan O.
Department of Accounting
Pan Atlantic University
Km. 52, Lekki-Epe Expressway, Ibeju – Lekki, Lagos, Nigeria
ooluyombo@pau.edu.ng; oluyomboo@gmail.com
ABSTRACT
The study uses cultural capital theory to investigate the parents educational level, employment
condition and type of residential housing contribute to academic performance of their children.
Questionnaire and examination scores in English Language and Mathematics subjects were used
data source from 235 students from 12 randomly selected government owned secondary school in
Ogun State, Nigeria. The data is analysed through Pearson correlation, coefficient of determination
and ANOVA. The result shows an insignificant weak positive correlation between mothers
educational level; a weak negative correlation between fathers educational level and children
academic performance. A weak negative correlation was found between mothers employment
condition; fathers employment level and children academic. An insignificant weak negative
correlation between parent residential housing and academic performance of their children was
found. The proxies for cultural capital are statistically insignificant while the findings are contrary to
cultural capital theory. Parents socio-economic position does not contribute meaningfully to children
academic performance.
Keywords: Academic, Children, Parent, Socio-economic
INTRODUCTION
Education is important to skill acquisition for individual to makes a person ready (Dahie,
Mohamed & Moalim, 2016) to face the future. The purported decline in the quality of
education in Nigeria has been a major issue of concern to the government and other
stakeholders over the past few years with different opinion for the causes and remedies.
However, one of the few areas that have been neglected in the discourse is the implication of
parents' socio-economic status - education, employment and types of residential housing on the educational performance of their children at different levels. Socio-economic status
of parents affect their children academic performance (Hill, Castelino, Lansford, Nowlin,
Dodge, Bates & Pettit, 2004; Melchior, Moffitt, Milne, Poulton & Caspi, 2007; Oluyombo,
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Parents Socio-economic Status And Children Academic Performance
2014; Dahie et al., 2016) while the attainment of higher parental socio-economic status is
both a national and individual phenomenon which requires different input from the
parent, society and the government. Where a higher socio-economic status is achieved,
does it translate to better educational performance for the children of those is such higher
class? This pose a problem that need to be resolved, hence this study investigates if parents
socio-economic status affect students performance in their academic at the secondary
school level. The training of a child is basically the responsibility of the parent but it can be
influenced by the socio-economic conditions of the parent (Oluyombo, 2014). Likewise, the
educational achievement of children may also be traced to parents' socio-economic position
at a given time. Parents training form part of the economic condition of the parent that could
have some relationship on the children performance at examination in their schools
(Sullivan, 2001; Chen, 2012) because the most important goal of education is academic
development of children (Dahie et al., 2016) which is measure according to their
performance in examinations. It can be hypothetically stated that the higher a student's
parents socio–economic status, the greater his or her academic performance in secondary
education is likely to be. Factors affecting children such as socio–economic condition,
family size, income level, education and occupation of the parents play a crucial role in the
academic achievements of the students (Majoribanks, 1996). It can be assumed that the
children from parents with high socio-economic conditions are likely to have better result
in their school examination than those from low income family. However, this is subject to
different argument and can only be substantiated with relevant data.
This study assesses the effects of parents socio-economic status explain through cultural
capital theory on academic performance of students in selected government owned
secondary school in Ogun State, Nigeria. Sullivan (2001) recognises the use of parents
education and occupation as proxies for cultural capital while Dahie et al. (2016) used
parental education, income and occupation as proxies for parents socio-economic
background. The proxies for cultural capital are not limited to two. The proxies for cultural
capital to explain parents socio-economic status in this study are parent educational level,
parent employment condition and parent type of residential housing. To accomplish this,
the study investigates if parents' educational attainment contributes to the academic
performance of their children; determine the relationship between parents' employment
condition and academic performance of their children; and establish the relationship
between parents' type of residential housing and children academic performance. To
accomplish the research objectives above, the study tested the hypotheses that there is no
significant relationship between parents educational level and academic performance of
their children; there is no significant relationship between parents employment condition
and academic performance of their children; and there is no significant relationship
between parents type of residential housing and academic performance of their children
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Parents Socio-economic Status And Children Academic Performance
LITERATURE REVIEW
Education is a process of living through continuous reconstruction of experience. It is the
development of all those capacities in the individuals which enable him to control his
environment and fulfil his desire (Dewey, 1938). In education, disadvantaged children are
unable to achieve their academic potential and are more likely to enter adulthood lacking
the skills to compete in the labour market (Melchior et al., 2007). Achievement test and
examinations are prepared according to stated standard to measure proficiency in school
subjects (Dahie et al., 2016). The term academic achievements for students have been
equated with obtaining of pass marks in examination. The family factor is significant when
student achievement is been considered (Sullivan, 2001; Fan, 2014; McGinnity, Darmody &
Murray, 2015; Tan, 2017) because many of the living standard indicators for children are
related to the family, such as parents employment and economic situation (Harayama,
2008; Oluyombo, 2014). Parent with higher status often have more opportunities in
preparing their children for school examination because they typically have access to a
wide range of resources in contrast to parents with lack of financial and social status. Socioeconomic status can be measured in different ways, and it hinges on the quality of life which
can be measured using social and economic factors (Harayama, 2008). This include parents'
education, occupation and income and the responsible factor is father, but sometimes
mother's education or occupation, family income resources or household possession are
used (Bond, 1981). The variables used for socio-economic well-being are number of
children in school and educational attainment of children (Oluyombo, 2014) while parents
socio-economic background is evaluated through parental education, occupation and
income (Dahie et al., 2016). Income is critical in determining parent influence on children
educational attainment, for majority, it may implies economic security through income
earning and access to financial resources. Parents employment is expected to have
considerable effects on the welfare of their children. Having a source of income is essential
for meeting children educational needs, as well as for participating in social activities.
Parents exclusion from the labour market can lead to an absence of knowledge while
having job reduces the time available for the parents to spend with their children and to
involve themselves in their life at school. According to Hill et al. (2004), socio-economic
status of parents does not only affect the academic performance of their children, but also
makes it possible for children from low background to compete well with their
counterparts from high socio-economic background under the same academic
environment. It is not out of place to state that parents socio-economic background can have
possible effects on the academic achievement of children in school. Whatsoever affect the
development of children would possibly affect their education or disposition to it
(Oluyombo, 2014).
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Parents Socio-economic Status And Children Academic Performance
In a rural community where nutritional status is relatively low and health problems are
prevalent, children academic performance is greatly hindered (Adewale, 2002). The
foregoing establishes that socio–economic status relating to home environment of student,
such as educational background of parents, health status of students, parents occupation
and family size could have effect on children academic achievement. One hundred and
eighty students from three secondary schools were used by Ogunshola and Adewale (2012)
to investigate the effect of parents' socio-economic status on students academic
performance. Four factors examined and statistically analysed were: parents' socioeconomic background, parents educational background, parents educational qualification
and students health statuses. But the study does not provide clarity on the parameters for
socio-economic status, while the objective does not include the effect of student's health,
but this was included in the hypotheses. They reported that parents socio-economic status
might still be a factor that can influence student academic performance while parents
educational background still play minimal role in students ability to perform academically.
The health status of students has significant effect on academic performance of the
students. Academic performance of students in relation to the parents socio-economic and
educational background was not statistically significant. Hassan (2009) used the theory of
cultural capital to explore the association between parents education level and their
children academic performance with marks obtained in three subjects as the response
variable while data analysis was based on bivariate and multivariate methods. The sample
consists of 499 pupils undergoing lower secondary education. The result indicates that
students whose parents have basic education only do not differ significantly from those
whose parents' education is unregistered, but the coefficient values increase with
increasing educational level. This confirms that parents with low education levels make a
small contribution to their children's homework. The study found that girls on average get
better grades than boys. The association between parents education level and children
academic performance is moderate and positive, and there is a positive association between
the children school grades and their parents labour market status.
Effect of social, economic and cultural capital of Chinese families on their children
education was analysed (Fan, 2014). The three capital contribute significantly to children
education but the highest effect was from family cultural capital. Fathers registered
permanent residence; fathers educational degree and mothers educational qualification
enhance their childrens education. The influence of fathers background is more on children
education than the mothers while high level education is available to families with high
social or economic status. It may be safe to conclude from above findings that parent social
and economic status influence educational performance of their children. Ahmad & Khan
(2012) examine the relationship between socio-economic conditions of parents and
academic achievements of students at government schools for boys. Questionnaire was
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Parents Socio-economic Status And Children Academic Performance
administered on students who appeared in the annual examination in the board of
intermediate and secondary education of eight government secondary schools for boys.
The results were tabulated and the findings were presented in percentages. Relationship
was found between fathers level of education and academic achievements of the children.
Significant relationship between parents social status and academic achievements of the
children was documented. A significant relationship was found between parents income
and academic performance of students, while students whose parents income was higher
performed better in examination than students from low income parents. The study
reported that the student who lived in posh areas performed better in examination in
comparison with those students who lived in underdeveloped areas. It can be concluded
from their findings that parents socio-economic condition has great impact on the
educational achievements of their children. Dahie et al. (2016) collected data via
questionnaire from convenient sample of 80 teachers from eight secondary schools in
Mogadishu-Somalia to measure impact of parents' education, occupation, and income on
academic achievement of their children. The correlation result shows positive relationship
between parents education (r=.693 and p<0.01), parents' occupation (r=.682 and p<0.01),
parents income (r=.690 and p<0.01) and academic achievement of the children. A study by
Udida, Ukwaym and Ogodo (2012) examine the influence of parents socio-economic
background on the academic performance of students in selected secondary schools. The
stratified sampling technique was used to select 114 students from five public schools,
while random sample was used to administer questionnaire for scores in four selected
subjects namely English Language, Mathematics, Economics and Biology examinations of
first term academic session. Charts, independent samples test and multiple regression
analysis were used to analyse their data. The study reported that 4.4% of the fathers had no
formal education, while 95.6% had formal education. 4.4% of the respondents performed
badly; 32.55 had good performance, while 10.5% performed excellently in their
examinations. 55.6% of students from families whose parents have primary education
performed poorly, 11.1% had average performance, while 33.3% performed excellently in
their examination. This indicates that parents education do not exert substantial influence
on children academic performance. Academic performance of students between sexes of
respondents indicates that 73.7% perform poorly, out of this, 33.3% are male while 40.4%
are female. Respondents with average performance make up 63.1% out of which 36.8% are
male while 26.3% are female. Children with good performance constitute 42.1%, out of
which 17.5% and 24.6% are male and female respectively. Respondents with excellent
performance constitute 21.1%, out of which 12.3% and 8.8% are male and female
respectively.
The relationships between cultural capital and student achievement using meta-analytic of
articles published in education journals between 1981 and 2015 by Tan (2017) shows larger
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Parents Socio-economic Status And Children Academic Performance
effect of parental education and parental expectations compared to parent-child cultural
participation. Parental education identified as institutionalized cultural capital might be
more closely associated with student achievement. The results agree to the role of cultural
capital in explaining student achievement. Chen (2012) investigates the relationship
between parents socio-economic status, perceived parents pressure, and test anxiety
among 294 students attending seven high schools of which four are in urban centre and
three in suburban area through questionnaire. Linear regression, multivariate analysis of
variance and sobel test were used to analyse data. Fathers occupation, mother occupation,
mother education, and parents income have significant impact on both test anxiety and
perceived parents pressure (p<.05). Fathers education, the interaction of fathers occupation
and mothers occupation, and the interaction of fathers education and mothers education do
not have significant effect on either test anxiety or perceived parents pressure. The study
concluded that the factor which has the greatest contribution to test anxiety is fathers
occupation, while the factor with greatest contribution to perceived parents pressure is
parents income. High positive correlation between test anxiety and perceived parents
pressure was documented with a linear relationship between perceived parents pressure
and test anxiety. Sullivan (2001) reported that cultural capital is strongly transmitted from
parents to children as a result of the Pearson correlation between parents' cultural capital
and pupils' cultural activities of 0.617 (p
0.000) but the connection between parental
cultural capital and children knowledge and language scores is weak. Data of multiple
students from three countries (Canada, Germany, and Sweden) were used by Andersen and
Jaeger (2015) to establish if cultural capital produces higher returns on academic
achievement in some schooling environments than others. They found that mean and
variance in academic achievement within a schooling environment shapes the rate of return
to cultural capital because cultural capital may be higher in a high-achieving environment
than in a low-achieving one. The study established that variance in achievement within a
schooling environment is due to level of competition among students when attempting to
display their cultural capital to teachers. Cultural capital tends to have a stronger effect on
academic achievement in low-achieving schooling environments than in high-achieving
ones. Udida et al. (2012) conclude that male perform slightly better than their female
counterpart with a high association (0.63) between parents socio-economic background
(income of parents, fathers education, father occupation, mothers education and mother
occupation) and students academic performance. The coefficient of multiple
determinations (r2) indicates that 40 per cent of students academic performance is
accounted for by the combination of the above set of parents socio-economic variables.
Their result reveals that students academic performance is significantly influenced by
socio-economic background of their parents (F=2.313, p<0.05). They reported that fathers
occupation directly influences students' performance in school, while an increase in fathers
213
Parents Socio-economic Status And Children Academic Performance
occupational level in term of position would have a corresponding effect on children
academic outcome and attainment. The study found that fathers occupation has the
greatest contribution to students academic performance, followed by parents income,
fathers education and mothers education. This suggests that when parents are educated
they are poised to making sure their children equally follow same.
The relationship between background factors and the involvement of parents in the
education of their children with a focus on parents' involvement in the quantitative method,
using self-reporting questionnaire pointed to a clear correlation between the educational
level and socio–economic status of the parents (Zedan, 2011). The findings show a negative
correlation between the number of children in the family and parents involvement.
Significant and positive correlation was found between education level of the parents and
the factors of monitoring, support, encouragement and involvement when a problem
arises. It was found that the coefficient between these factors and the education level of the
parents was higher among boys than girls except for general involvement. There was also a
significant and positive correlation between the factor of participation in group activities
and contact with teachers among girls only. A negative correlation was found between
education level of parents and the factor of indifference to achievements among girls only.
Cultural Capital Theory
Culture is view as resources that provide access to scarce rewards due to concept of capital
(Lareau & Weininger, 2003). People grow up within one or more culture which has some
form of relationship in their behaviour and desire. As a culture, a parent who is educated
would want the children to be likewise. Capital is a financial possession of an entrepreneur,
and the introduction of capital to culture leads to cultural capital. Cultural capital is
transferred within the family (Sullivan, 2001; Hansen & Mastekaasa, 2006) and it is available to
generality of the people which can be exchanged into economic and social capital (Sullivan,
2001; Andersen & Jaeger, 2015). Cultural capital can be turned to social capital within the
family as McGinnity et al. (2015) put it as through the network among students at school
which is beneficial in the future. Business owners may deliberately transfer their business
skills to their children to ensure continuity of family tradition in business. This becomes a
culture within the family which translates to cultural capital that such family is known for.
Families who possess cultural capital have a comparative advantage which helps them to
reproduce their privileged socio-economic position (Andersen & Jaeger, 2015).
Individual's access to educational resources can be influenced by family background
(Sullivan, 2001 & Fan, 2014) while variation in academic performance at different education
levels is affected by level of cultural capital of the parent on their children (Hansen &
Mastekaasa, 2006). The cultural capital theory rest on the assumption that culture plays
214
Parents Socio-economic Status And Children Academic Performance
critical role in individual upbringing, hence cultural capital is transmitted within a family
culture as it emanates from older generation to younger generation. From the household
perspective, cultural capital is pass from parent to their children which make the family
plays critical role in transfer of cultural capital and is done at the home front where children
learn from their parents directly and from their siblings. Behaviour, skill and knowledge
are transmitted as form of cultural capital from parent to their children. Children inherit
cultural capital from their parents as part of their endowments and dispositions (Andersen
& Jaeger, 2015) while the expected return from cultural capital is educational and
occupational success (Sullivan, 2001). Cultural capital may be transferred from one
generation to another under certain conditions (Lareau & Weininger, 2003) at national,
state, village, community and family levels while enrolment at school may not be easily
divulged from parental socio-economic condition. Family is the avenue for transmitting
cultural capital and has significant impact on academic performance in examinations
(Sullivan, 2001). Cultural capital is a possession owns by individuals and family is not in
doubt, but channel through which its transfer differs. It can be through social class
(Sullivan, 2001; Andersen & Jaeger, 2015), and family (Sullivan, 2001; Fan, 2014; Andersen &
Jaeger, 2015; McGinnity et al., 2015). Transfer of cultural capital though membership of a
family justifies the conversion of cultural capital to social capital and economic capital.
Cultural capital can be a result of conversion of family economic capital especially in
education (McGinnity et al., 2015). The economic capital include access to good
accommodation, well paid employment, and high educational qualification or attainment
of parent. All these can be converted to positive benefits to enhance children academic
performance which can become a culture capital in a family. Cultural capital is also
converted into educational success because it materializes through better academic
performance (Andersen & Jaeger, 2015) such that parents can replicate their higher
academic success in their children if such parents have it.
METHODOLOGY
The study population are all Ogun state of Nigeria government owned senior secondary
school students. The sample consists of twelve schools randomly selected in all the three
senatorial districts of the state. 235 male and female students from day school without
boarding facility randomly selected from the twelve schools participate in the study. The
students respond to questions on parents' socio-economic data via questionnaire while the
teachers provide examination scores in Mathematics and English language. The two
subjects were used because they are compulsory for the students irrespective of their
inclination such as commercial, art and science classes. Scores in both examinations were
divided into five groups (0-20; 21-40; 41-60; 61-80; and 81-100). Data collected were
subjected to statistical analyses with Pearson correlation (r) to show the relationship
215
Parents Socio-economic Status And Children Academic Performance
between variables in terms of strength of the relationship and the direction, coefficient of
determination (r2) to generate the variance between variables, and one way analysis of
variance (ANOVA) to determine significant difference in mean score of the students based
on component of the independent variables to determine which of the criteria contribute
more to academic performance of the children.
RESULTS
The participants demographic reveals that male students are 130 in number, which is 55.3%
of the total sample while female, are 105 (44.7%). This shows that there are more male
students than female in the study sample. Majority of the students fall within the ages of 10
to 15 years (N=184; 78.3%). 21.7% of the students fall within 16-20 year of age (N=51). 80% of
the students are from monogamous family (N=188) while the remaining 47 or 20% are from
polygamous family. The students in science class are 77 or 32.8% of the entire sample. Those
in commercial class are 80 or 34% while the remaining 78 students or 33.2% are in the art
class. Students scores are classify as poor (0-40%), average (41-60%), good (61-80%) and
excellent (81-100%). The students scores in table I show that 14.7% and 20.4% perform
poorly in Mathematics and English respectively. 75.7% have average performance in
Mathematics while it is 66.4% for English; 9.8% and 8.5% have good performance in English
and Mathematics respectively. Those with excellent result in English are 3.4% and 1.3% in
Mathematics.
Sullivan (2001) recognises the use of parents education and occupation as proxies for
cultural capital. The proxies for cultural capital which also serves as independent variables
to explain parents socio-economic status in this study are parent education, employment
condition and type of residential housing.
i. Parents Education
Parents academic qualifications were grouped separately into six namely, none, primary
certificate, secondary certificate, OND/NCE, HND/B.Sc, MBA/M.Sc/MA and PhD/DBA.
The students choose one option each for individual parent since both parents may not have
the same academic qualifications. Fathers education is 17.9% for those with doctorate
degree, master degree is 3.8% and first degree 19.1%. Those without formal education are
0.9%, primary school certificate is 4.7%, and secondary school certificate is 44.7% while
those with OND/NCE qualification are 8.9%. Udida et al., (2012) reported that 4.4% of the
fathers had no formal education but 95.6% had formal education. However, fathers with
formal education of 91.1% and 0.9% without formal education are found in this study.
Majority of the parents have secondary school education which is the national minimum
education in Nigeria for which basic education is provided by some state for free. Mothers'
without formal education are 1.7%, primary school certificate is 9.4%, secondary school
216
Parents Socio-economic Status And Children Academic Performance
education in Nigeria for which basic education is provided by some state for free. Mothers'
without formal education are 1.7%, primary school certificate is 9.4%, secondary school
certificate is 42.6% while those with OND/NCE qualification are 16.6%. First degree is
15.7%, masters degree is 3.8% and 10.2% for doctorate degree holders. Hypothesis 1. There
is no significant relationship between parent educational level and academic performance
of their children.
Table 1: Students scores in Mathematics and English language
MATHEMATICS
ENGLISH LANGUAGE
Scores
No
Percentage
No
Percentage
0-20%
10
4.3
12
5.1
21-40%
24
10.2
36
15.3
41-60%
178
75.7
156
66.4
61-80%
20
8.5
23
9.8
81-100%
3
1.3
8
3.4
235
100
235
100
Total
No source for table
There is an insignificant weak positive correlation (r=0.097, p=0.139) between fathers'
educational and academic performance of their children in Mathematics (see table 2).
Fathers qualification does not have direct relationship on student scores in Mathematics.
Students can't claim lack of fathers' education as a setback for success in Mathematics. From
coefficient result, fathers education helps to explain 0.94% of the variance in children scores
in Mathematics. Fathers education has weak effect on their children academic performance
in Mathematics. Fathers are likely to devote less time for their children in Mathematics
subject. The mean difference from the ANOVA (appendix 1) for all the scores in
Mathematics and fathers qualification are not significant (F=0.859, P=0.526) from each
other. None of the fathers qualifications contribute more than others to children scores in
Mathematics. Although, those with OND/NCE have highest mean (M) of 3.10 with
standard deviation (SD) of 0.625 but it is not statistically different from other qualifications
and students scores in Mathematics.
217
Parents Socio-economic Status And Children Academic Performance
Table 2: Parent educational and children academic performance
Tailed (p)
Coefficient
of
determination
(r2)
0.097
0.139
0.0094
Fathers educational level and children score
in English language.
0.072
0.269
0.0052
iii.
Mothers educational level and children
score in Mathematics.
0.127
0.053
0.0161
iv.
Mothers educational level and children
score in English language.
0.081
0.216
0.0066
v.
Fathers educational level and children score
in Mathematics and English.
-0.010
0.879
0.0001
vi.
Mothers educational level and children
score in Mathematics and English language.
0.017
0.793
0.000289
Pearson
correlation
(r)
S/N
Hypothesis 1
i.
Fathers educational level and children score
in Mathematics.
ii.
Sig. 2
Table II.I: Fathers education and s tudent score in Mathematic
Sum of
Squares
Between Groups
Mean
Square
Df
F
2.092
6
.349
Within Groups
92.529
228
.406
Total
94.621
234
Sig.
.859
.526
Table II.II: Fathers education and student score in English language
Sum of
Squares
Between Groups
Mean
Square
Df
F
2.307
6
.384
Within Groups
134.817
228
.591
Total
137.123
234
218
Sig.
.650
.690
Parents Socio-economic Status And Children Academic Performance
Table II.III: Mothers education and student score in Mathematics
Sum of
Squares
Between Groups
Mean
Square
Df
F
5.938
6
.990
Within Groups
88.684
228
.389
Total
94.621
234
Sig.
2.544
.021
Table II.IV: Mothers education and s tudent score in English language
Sum of
Squares
Between Groups
Mean
Square
Df
F
3.263
6
.544
Within Groups
133.861
228
.587
Total
137.123
234
Sig.
.926
.477
Table II.V: Fathers education and student score in Mathematics and English
Sum of
Squares
Between Groups
Mean
Square
Df
F
4.062
6
.677
Within Groups
1000.108
228
4.386
Total
1004.170
234
Sig.
.154
.988
Table II.VI: Mothers education and student score in Mathematics and English
Sum of
Squares
Between Groups
Within Groups
Total
Mean
Square
Df
F
8.402
6
1.400
995.768
228
4.367
1004.170
234
Source: Appendix 1 ANOVA on parents education
219
Sig.
.321
.926
Parents Socio-economic Status And Children Academic Performance
There is an insignificant weak positive correlation (p=0.269, r=0.072) between fathers
education and children performance in English language. Fathers education helps to
explain 0.52% of the variance in children scores in English language. Fathers may not be
able to boast of their educational attainment as impetus for their children performance in
English language. The mean scores in English based on fathers education (F=0.650, P=0.690)
are not significant from others. The highest score from parents with OND/NCE (M=3.10,
SD=0.995) is not statistically different from other qualifications. Differences in father
education do not contribute more than others to children scores in English. A weak
insignificant positive correlation (r=0.127, p=0.053) was found between mothers education
and children scores in Mathematics. Mothers seem to devote less period of time for their
children in Mathematics subject as their educational attainment improves. It may be due to
higher responsibility at work or more time invested in their education. The variance in
means of mothers education and students scores in Mathematics is significant (F=2.544,
P=0.021). The mean score recorded among students whose mothers have primary (M=2.50,
SD=0.802) and OND/NCE (M=3.03, SD=0.668) qualifications on one hand, and those with
primary (M=2.50, SD=0.802) and PhD/DBA (M=3.13, SD=0.338) education on the other hand
are different from others. Children whose mothers have primary, OND/NCE and PhD/DBA
qualifications perform significantly higher in Mathematics than other students. It is a
paradox that students whose mothers have primary education perform better in
mathematics examination that those with secondary, B.Sc/HND and MBA/M.Sc
qualifications. The performance may be as result of social interaction among parents which
according to Oluyombo (2014) lead to indirect socio economic benefits to the children as
they relate with themselves in school and the neighbourhood. McGinnity et al. (2015) refers
to this as transfer of cultural capital to social capital through the network among students at
school which is beneficial to them.
There is an insignificant weak positive correlation between mothers educational and
children performance in English language (p=0.216, r=0.081). Mothers' education explains
about 0.7% of the variance in children scores in English language. Mothers are likely to have
devoted less period of time for their children in English language subject. None of the
mothers educational qualifications contribute more than others to children scores in
English (F=0.926, P=0.477). Although, those with OND/NCE have highest mean (M=2.84,
SD=0.727) but it is not statistically different from others qualifications (see ANOVA in
appendix 1). An insignificant weak positive correlation between mothers educational level
and children academic performance (r=0.017, p=0.793, r2=0.029%) and a weak negative
correlation between fathers education and children academic performance (r= -0.010,
p=0.879, r2=0.01%) were found. There was no difference at p<0.05 level between parents
education and children academic performance in Mathematics and English Language.
Social culture as a result of integration and communion among students since they relate
220
Parents Socio-economic Status And Children Academic Performance
closely together for about seven hours during school period every day which is greater than
the hours used with their parents during school days may influence the study result.
Significant relationship was found between fathers level of education and academic
achievements of the children by Ahmad and Khan (2012) though the study was for boys
school. The combination of fathers and mothers education from this study does not lead to
better academic performance for their children. Parents are likely to have devoted less time
for their children academic pursuit due to other commitment at family, business and carrier
levels. Insignificant result between fathers education (F=0.154, P=0.988), mothers
qualification (F=0.321, P=0.926) and mean scores in Mathematics and English was found
from the ANOVA test. Difference in parents educational qualifications does not contribute
more than others to children scores in both subjects. The highest mean in examination
scores in both subject is from fathers and mothers with OND/NCE (M=3.00, SD=0.775) and
PhD/MBA (M=3.08, SD=0.282) qualifications respectively. Hypothesis 1 that there is no
significant relationship between educational level of the parents and academic
performance of their children is not rejected. The finding is in consonance with Hassan
(2009) that used cultural capital theory that students' performance does not differ
significantly based on parents' education. This is supported in Ogunshola and Adewale
(2012) that academic performance of students in relation to the parents educational
background was not statistically significant, and Udida et al., (2012) that parents education
does not exert substantial influence on children academic performance. This study
contradict Fan (2014) findings that family cultural capital contribute significantly to
children education because fathers and mothers educational qualification enhance their
children education and contribute to cultural capital. Positive relationship exists between
parent education and children academic achievement (Dahie et al., 2016). Tan (2017) results
agree to the role of cultural capital in explaining student achievement but finding from this
present study does not support the transfer of family cultural capital to educational
achievement of their children.
ii. Parents Employment
Parents employment was grouped into three namely, business/trade, office/civil servant
and none – which represent house wife and others without any source of livelihood.
Students choose one option each for individual parent since both parents may not have
same employment conditions. 140 of the fathers (59.6%) are into business/trade, 90 (38.3%)
are civil servant/office workers while 5 (2.1%) are without any means of livelihood. 11.1% of
the mothers are office workers/civil servants, 88.5% are into trade/business while 0.4% are
without any employment. Hypothesis 2 There is no significant relationship between parent
employment condition and academic performance of their children.
221
Parents Socio-economic Status And Children Academic Performance
An insignificant weak positive correlation was found between fathers employment and
children scores in Mathematics (r=0.058, p=0.377). From coefficient result, fathers'
employment explains about 0.34% of the variance in children scores in Mathematics (see
table 3). Insignificant result (F=1.759, P=0.175) between fathers employment and mean
scores in mathematics was found from the ANOVA (see appendix 2). Differences in father
employment do not contribute more than others to children scores in mathematics. The
highest mean score is from children whose parents are Civil servant/office workers
(M=2.94, SD=0.606) but it is not statistically different from others who does not work and
those in trade/business. An insignificant weak negative correlation (r=-0.004, p=0.948) was
found between fathers employment and children scores in English language. Fathers
employment explain 0.002% variance in students scores in English language which is
contrary to Udida et al. (2012) that fathers occupation directly influences students
'performance in school. From the ANOVA results (appendix 2), there is no significant
difference in mean scores and fathers employment (F=1.385, P=0.252). Fathers employment
as salary earners/civil servant or business owner/trader has no direct relationship to their
children scores in English language. Although, those in business or trade have highest
mean (M=2.95, SD=0.780) but it is not significantly different from others. Father occupation
has the greatest contribution to students academic performance (Udida et al., 2012), when
parents are educated they are poised to make sure their children equally follow same, but
this is contrary to this study finding.
Table 3: Parent employment and children academic performance
S/N
Hypothesis 2
Pearson
Sig. 2
correlation
tailed
(r)
(p)
Coefficient of
determination
(r2)
i.
Father employment and children
score in Mathematics.
0.058
0.377
0.0034
ii.
Father employment and children
score in English language.
-0.004
0.948
0.000016
iii.
Mothers’ employment and children
score in Mathematics.
0.019
0.771
0.00036
iv.
Mothers employment and children
score in English language.
-0.048
0.465
0.0023
222
Parents Socio-economic Status And Children Academic Performance
Table III.I: Fathers employment and student score in Mathematics
Sum
Squares
Between Groups
of
Mean
Square
Df
F
1.413
2
.707
Within Groups
93.208
232
.402
Total
94.621
234
Sig.
1.759
.175
Table III.II: Fathers employment and student score in English language
Sum
Squares
Between Groups
of
Mean
Sq uare
Df
F
1.618
2
.809
Within Groups
135.506
232
.584
Total
137.123
234
Sig.
1.385
.252
Table III.III: Mothers employment and student score in Mathematics
Sum
Squares
Between Groups
of
Mean
Square
Df
F
.049
2
.025
Within Groups
94.572
232
.408
Total
94.621
234
223
Sig.
.060
.941
Parents Socio-economic Status And Children Academic Performance
Table III.IV: Mothers employment and student score in English language
Sum
Squares
Between Groups
of
Df
Mean Square F
.316
2
.158
Within Groups
136.808
232
.590
Total
137.123
234
Sig.
.268
.765
Table III.V: Fathers employment and student score for Mathematics and
English
Sum
Squares
Between Groups
of
Mean
Square
Df
F
4.072
2
2.036
Within Groups
1000.098
232
4.311
Total
1004.170
234
Sig.
.472
.624
Table III.VI: Mothers employment and student score for Mathematics and
English
Sum
Squares
Between Groups
Within Groups
Total
of
Mean
Square
Df
F
1.406
2
.703
1002.764
232
4.322
.170
234
1004
Source: Appendix 2 ANOVA on parents employment
224
Sig.
.163
.850
Parents Socio-economic Status And Children Academic Performance
Insignificant weak positive correlation was found between mothers employment and
children scores in Mathematics (r=0.019, p=0.771). Mother employment explains 0.04% of
the variance in children scores in Mathematics. There is no significant difference in the
mean scores and mothers employment (F=0.060, P=0.941). The nature of mothers
employment does not affect their children scores in Mathematics. Mother income from
their employment has no direct relationship with their children performance in
Mathematics. The nature of work done by mothers does not serve as an impetus for their
children to display academic excellence in Mathematics. There is an insignificant weak
negative correlation between mothers employment and children scores in English
language (r=-0.048, p=0.465). There is no significant difference in the mean scores in English
among students and mothers qualification (F=0.268, P=0.765). Mother employment does
not lead to better academic performance in English language for their children. The period
of time mothers devote for their children in English is not based on mother employment
condition. An insignificant weak negative correlation was found between mothers
employment (r=-0.037, r2=0.14%, p=0.571), fathers employment (r=-0.020, r2=0.04%, p=0.757)
and children academic performance in both English and Mathematics. Insignificant result
between fathers (F=0.472, P=0.624), mothers (F=0.163, P=0.850) employment and mean
scores in Mathematics and English was found from the ANOVA test (appendix 2). The
combination of fathers and mothers employment does not lead to better academic
performance in Mathematics and English language for their children in government owned
senior secondary schools. Parents are likely not to have used their employment status for
their children academic pursuit especially as it relates to the two subjects. The study does
not reject hypothesis 2 that there is no significant relationship between parent employment
condition and academic performance of their children. The insignificant result between
parent employment and children academic performance in this study contradict Bond
(1981) that students from family of high socio–economic condition have effective academic
achievements than students that belong to poor family. Positive association between
childrens school grades and their parent labour market status was found by Hassan (2009)
as a form of cultural capital. Likewise, Dahie et al. (2016) recorded positive relationship
between parents' occupation (r=.682 and p<0.01) and children academic achievement
although data was collected only from teachers.
While the use of cultural capital theory is relevant for this study, the finding does not
provide direct pointer to the influence of parent employment on children academic
performance. This raises concern in the assertion of transfer of family cultural capital from
parents to children as postulated in cultural capital theory by Sullivan (2001), Fan (2014)
and McGinnity et al., (2015) which is expected to lead to their academic attainment.
Findings from this study show that cultural capital may not be transferred through parents
225
Parents Socio-economic Status And Children Academic Performance
to their children in academic pursuit. Other factors beyond the family cultural capital are
responsible for children academic performance which may be unknown to their parents.
iii. Parents Residential Housing
Parents residential housing is the house the students reside with their parent while school is
in session since only day schools were used for the study. Residential housing was grouped
into three types that are commonly found in Ogun State, Nigeria. Those in single room are
21 (8.9%), room and parlour are 80 (34%), and flat are 134 (57%). Impact of parents
residential housing on children scores in Mathematics was investigated and shows an
insignificant weak positive correlation (r=0.068, p=0.298, r2=0.46%). Parents residential
housing explains less than 1% of the variance in children scores in Mathematics. The
relationship between parents residential housing and children scores in English language is
not significant (p=0.887) with an insignificant weak positive correlation (r=0.009, n=235) as
reveal in table 4. Parent residential housing does not lead to better student as academic
performance in English language. From the ANOVA results (appendix 3), there is no
significant difference in the mean scores in Mathematics (F=0.903, P=0.407), English
(F=0.142, P=0.868) and parent residential housing. Although, those who reside in flat
(M=2.97, SD=0.612) and single room (M=2.95, SD=0.865) have highest mean score in
Mathematics and English respectively but it's not significant from others. Type of parents
residential housing does not lead to improvement in children academic performance in
Mathematics and English separately. Where the students reside with their parents either
single room, a room and parlour or a flat does not contribute to their academic attainment in
Mathematics and English language.
Table 4: Parent residential housing and children academic performance
S/N Hypothesis 3
Pearson
Sig. 2 tailed Coefficient of
correlation
determination
(p)
(r)
(r2)
i.
Parent residential housing and
children score in Mathematics.
0.068
0.298
0.0046
ii.
Parent residential housing and
0.009
children score in English language.
0.887
0.000081
iii.
Parent residential housing and
children score in Mathematics and
-0.024
English language.
0.716
0.0000576
226
Parents Socio-economic Status And Children Academic Performance
Table IV.I: Parents residential housing and student score in Mathematics
Sum of
Squares
Df
Mean
Square
F
Sig.
Between Groups .731
2
.366
.903
.407
Within Groups
93.890
232
.405
Total
94.621
234
Table IV.II: Parents residential housing and student score in English
language
Sum of
Squares
Df
Mean
Square
F
Sig.
Between Groups .167
2
.084
.142
.868
Within Groups
136.956
232
.590
Total
137.123
234
Table IV.III: Parents residential housing and student score for
Mathematics and English
Sum of
Squares
Df
Mean
Square
F
Sig.
Between Groups 3.935
2
1.968
.456
.634
Within Groups
1000.235
232
4.311
Total
1004.170
234
Source: Appendix 3 ANOVA on parents residential housing
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Parents Socio-economic Status And Children Academic Performance
There is an insignificant weak negative correlation between parents residential housing
and academic performance of their children in combine scores for both Mathematics and
English language (r=-0.024, p=0.716). About 0.058% variance in students scores can only be
traced to the type of house they reside. There is no significant difference in the mean scores
in both Mathematics and English and parents residential housing (F=0.456, P=0.643) but
those in room and parlour have highest mean score (M=3.05, SD=3.442) in combine result
which is not significant. Parents type of residential housing does not lead to better academic
performance in Mathematics and English language for their children in government owned
senior secondary schools. The expected benefit of convenience inherent in living in a flat for
students is not utilised because there is no significant different in the performance of the
students especially as it relates to Mathematics and English language subjects. The study
upholds hypothesis 3 that there is no significant relationship between parents type of
residential housing and academic performance of their children. The insignificant result
documented between parents types of residential housing and children academic
performance in this study could not be directly compare with other studies because the
three types of residential housing for this study was not included in variables used in
previous studies. However, Ahmad & Khan (2012) that consider parent location but not
residential housing found in boys school that students who lived in posh areas performed
better in examination than those students who lived in underdeveloped areas. Fan (2014)
reported that father's registered permanent residence enhances their children's education.
The major disparity in rent paid for the three types of residential housing in this study
ordinarily should reveal the class created by parents in residing in flats which ought to lead
to better academic performance because of facilities and conveniences available in flats.
This findings show that social class imbedded in cultural capital theory (Sullivan, 2001;
Andersen & Jaeger, 2015) may not be attainable as students relate with each other in school
despite where they reside.
The complexity of vehicular mobility from one location to other within the state is a social
issue that may affect the result because it is not possible for all the students survey to reside
within the school environment that does not require commuting by transport mobility. This
study reveals some factors other than parents' educational level; employment condition
and type of residential housing might be responsible for academic performance of students
in government owned secondary school. This is useful in developing national policy for the
improvement of basic minimum educational requirement. The outcome of the study
provides insight into the developmental and regulatory input require from the government
to enhance better educational improvement and development at the secondary school level
using the family background as the raw material.
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Parents Socio-economic Status And Children Academic Performance
CONCLUSION
The relationship between parents level of education and students academic performance is
not statistically significant. Students academic performance is not influenced by the
educational attainment of their parents. Improvement in parents level of education does
not lead to better academic performance of their children. As parents level of education
improves, students academic performance does not improve such that students whose
parents are educated do not perform better than students whose parents are illiterate
and/or semi illiterates. This finding does not support the cultural capital theory since
parents were unable to transfer their educational attainments to higher score in their
children performance in both subjects considered. Parents employment condition which
invariably determines their income does not have direct relationship with their children
academic performance in school. The statistical analysis of the hypothesis reveals that
students whose parents earn better or higher income by reason of their employment do not
perform better than those whose parents income level is low or small. Financial affluence
available to parents is not transformed to educational attainment in their children. Lack of
entrance examination into government senior secondary school in addition to the junior
secondary school result as done in private schools may have influence the result.
Types of parents residential housing condition do not bring improvement on their children
academic performance. Students academic performance is not influenced by the type of
residential housing they reside in. This implies that as parents residential housing status
improves students academic performance does not improve. Although the socio-economic
condition of parent is important, but this does not have any effect on their children
performance at school which agrees with Hill et al. (2004) that socio-economic status of
parents makes it possible for children from low background to compete well with their
counterparts, from high socio-economic background under the same academic
environment, and Ogunshola and Adewale (2012) that academic performance of students
in relation to the parents' socio–economic background was not statistically significant. This
study does not support Ahmad and Khan (2012) significant relationship between parents
social status and academic achievements of the children, and Udida et al. (2012) record of
high association (0.63) between parents socio-economic background and students
academic performance.
Parents are encouraged to create and invest more time for their children educational life by
getting involve with their study through guidance and support in doing their assignments
and providing necessary tutorials. Since parents employment condition does not affect
children education performance, the government is encouraged to continue the provision
of free education policy such that children from parents with low income can still enjoy and
participate in secondary school education.
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Parents Socio-economic Status And Children Academic Performance
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Ahmad, I. & Khan, N. (2012). Relationship between parents socio-economic conditions and
students academic achievements: A case of district dir, Timergar, Parkistan. Global
Advanced Research Journal of Educational Research and Review, 1(7), 137-142.
Andersen, I. G. & Jaeger, M. M. (2015). Cultural capital in context: Heterogeneous
returns to cultural capital across schooling environments. Social Science Research,
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Bond, G. C. (1981). Social economic status and educational achievement: American. A
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Dewey (1938). Educational reforms to close the white and black achievement gap. Economic
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Fan, J. B. (2014). The impact of economic capital, social capital and cultural capital: Chinese
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McGinnity, F., Darmody, M. & Murray, A. (2015). Academic achievement among immigrant
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Melchior, M., Moffitt, T. E., Milne, B. J., Poulton, R., &Caspi, A. (2007). Why do children from
socio economically disadvantaged families suffer from poor health when they reach
adulthood? A life course study. American Journal of Epideminology, 166(8), 966-974.
Ogunshola, F. & Adewale, A. M. (2012). The effects of parents socio-economic status on
academic performance of students in selected schools in Edu LGA of Kwara State,
Nigeria. International Journal of Academic Research in Business and Social Sciences, 2(7),
230-239.
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participants' children. Journal of Banking. 8(1), 77-92.
Sullivan, A. (2001). Cultural capital and educational attainment. Sociology, 35(4), 893-912.
Tan, C. Y. (2017). Examining cultural capital and student achievement: results of a metaanalytic review. Alberta Journal of Educational Research, 63(2), 139-159.
Udida, L. A., Ukwaym, J. K. & Ogodo, F. A. (2012). Parents socio-economic background as a
determinant of students academic performance in selected public secondary
schools in Calabar municipal local government area, Cross River, Nigeria. Journal of
Education and Practice, 3(16), 129-136.
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situation, and number of family members. Journal of Educational Enquiry, 11(1), 1328.
231
CHAPTER FOURTEEN
PROSPECT AND CHALLENGES OF DIGITAL SERVICES TAX
IN A 21ST CENTURY SOCIETY
Oyedokun Godwin Emmanuel
Professor of Management & Accounting
Faculty of Management & Social Sciences
Lead City University Ibadan, Nigeria
godwinoye@yahoo.com; +2348033737184
&
Oni Olaosebikan Simeon
Lecturer Faculty of Law
Lead City University Ibadan, Nigeria
simeonolaoni@yahoo.co.uk; +2348074559030
INTRODUCTION
The twenty first century society birthed technology which today is transforming many
aspects of how business activities are conducted, as well as the way tax authorities and
governments administer various taxes imposed on business activities globally. The huge
transformation and vast change brought about by technology is the manner business
transactions are conducted these days. This brings about both opportunities as well as
challenges for governments of developing economies. One positive effect of the
introduction of digital business is that it has created, an opportunity for governments to
raise additional revenue for development. However, the revenue generating opportunities
presented by digital business demands a change in the tax system and nature of taxation
policies, through the development of a universal new range of tax systems to support the
development and implementation of taxation policies (Richard & Subhajit, 2002).
The digitalization of the economy has been a key focus of tax debates in recent years.
Political debates have focused on the differences between taxing physical business
operations and virtual operations. These debates have intersected with multiple layers of
tax policy including consumption and corporate tax policies. Novel policies have also been
developed including equalization levies and digital services taxes alongside more common
use of gross-based withholding taxes targeted at digital services. However, in some cases
political expediency has outpaced consistent policy designs in line with sound principles of
tax policy. As policymakers continue to evaluate the options to tax digital businesses it will
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
be necessary to avoid creating new distortive tax policies driven by political agendas. To
this end, this paper critically analyses the prospect and challenges of and effective digital
taxation.
CONCEPT OF DIGITAL SERVICES
The term Digital Services refers to the electronic delivery of information including data and
content across multiple platforms and devices like web or mobile. Information is presented
in a way that is easy to use and understand and typically involves transactional services
such as submitting forms for processing and receiving benefits. Think of applying for a job,
renewing a passport or a driver's license, paying parking tickets, making hotel room
reservations, etc…
The term is more widely used in government circles in terms of making the overall
interaction of citizens with the public sector a more pleasant and efficient experience.
However, this is equally important in the private sector in terms of improving the customer
experience while boosting productivity.
Making the transition to digital services by replacing the reliance on paper forms and
improving the overall user experience has benefits to both organizations/agencies as well as
customers/end users. These include: reduced costs, reduced time to market, improved
efficiency, higher transparency, and full auditability along with high levels of customer
service.
Dimensions of Digital Services
Digital services are offerings combining several characteristics that have been attributed to
either goods or services. They are centered on four key dimensions:
Intangibility: Digital services do not involve physical evidence of the unit of exchange.
Now, there are several implications arising from this notion. First, although no concrete
material evidence is present, environmental cues do play a role in customer quality
perception even in the digital environment, similar to “tangibles” in the service quality
concept. These can be called “digital tangibles” or “tangibilizers” (Edvardsson, 2005)
since they help the customer in formulating initial perception, attitude and intent
towards the digital service.
Invariance: Digital services can be standardized by both quality and content, and the
standardization is easier than for services that require a high human touch/effort to
be provided. This is in direct contradiction with the traditional view of the service that
asserts: “unlike tangible goods, 100 per cent quality cannot be engineered into a
service, especially when even the definition of the service is in the eyes of the beholder.
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
High Tech (Low Touch): The customer interaction within digital services takes place with
the application interface; human touch has mainly a supportive role. This “human
distance” leads to anonym exchange between the service provider and the customer. As
oppose to “high touch” services, the distant and anonym nature of the digital service
commands consideration to increasing trust, and perhaps include more human interaction
through the digital medium.
Scalability: This implies that the economies of digital services are considerably different
from traditional services, for which scaling (defined as increasing supply to match
increased demand) is typically more expensive, considerably slower and requires
greater focus on human issues, such as recruitment and management. Digital services
are characterized by “unlimited seats”, meaning that they scale perfectly according to true
demand.
Characteristics of the Digital Services
The digital business models present key characteristics which are increasingly relevant
from a tax perspective.
i. They possess a high level of mobility, reliance on intangibles, data and network
effects, a tendency towards monopoly or oligopoly and volatility.
ii. The highly digitalized business models contain several varieties of e-commerce,
app-stores, online advertisement, cloud services, networks platforms, and high
speed trading and online payment services.
These emerging digital business models give access to new markets as well as new
opportunities for innovation and employment. However, what makes the ongoing
digitalization a major accelerator of cross-border trade and a facilitator of worldwide
incorporated value-chains also exacerbates broader international tax challenges.
Digital Taxes
Digital taxes include policies that specifically target businesses which provide products or
services through digital means using a special tax rate or tax base. These include policies
that extend existing rules to ensure a neutral tax policy toward all businesses, such as when
a country extends its Value-added Tax to include digital services. They also include special
corporate tax rules designed to identify when a digital company has a permanent
establishment even without a physical presence.
On the other hand, Digital services taxes are gross revenue taxes with a tax base that
includes revenues derived from a specific set of digital goods or services or based on the
number of digital users within a country.
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
History of Digital Tax
In 1997, the United States federal government decided to limit taxation of Internet activity
for a period of time. The Internet Tax Freedom Act (ITFA) prohibits taxes on Internet access,
which is defined as a service that allows users access to content, information, email or other
services offered over the Internet and may include access to proprietary content,
information, and other services as part of a package offered to customers. The Act has
exceptions for taxes levied before the statute was written and for sales taxes on online
purchases of physical goods.
The statute has been amended three times since its enactment to extend this prohibition.
The first amendment solely extended the Act's duration. The second extended it again and
clarified the definition of Internet access as including certain telecommunication services,
as well as reorganizing sections within the Act. The third amendment again extended the
prohibition but narrowed the definition of Internet access to "not include voice, audio or
video programming, or other products and services- that utilize Internet protocol- and for
which there is a charge" except those related to a homepage, email, instant messaging,
video clips, and personal storage capacity. In 2009, Anna Eshoo, Congresswoman from
California's 14th District (which includes most of Silicon Valley), introduced a bill to make
the Act permanent in its most recent permutation. However, this bill died in committee.
States levying a tax on digital goods may be violating the ITFA. The states using their
original tax code may fall within the grandfather clause of the ITFA, but there has been no
litigation to clarify this or other aspects of the Act. One of the few cases brought under the
ITFA involved Community Tele cable of Seattle suing the city of Seattle in Washington state
court, where Tele cable claimed it should not have to pay a telephone utility tax because it
was an Internet access provider under the ITFA. The Washington State Supreme Court held
that Tele cable could not be taxed as a telephone provider when it was providing Internet
access under the ITFA.
Every digital-specific tax created by a state has been enacted after the ITFA became law.
These laws may be pre-empted because the ITFA bars taxes on Internet access, and multiple
or discriminatory taxes on electronic commerce. Courts have yet to clarify whether the
existing laws compound taxes or are discriminatory. Although, it is likely that these laws
can survive scrutiny under the ITFA because they can be interpreted to only tax services that
fit within the exception to Internet access described in the statute and to be the only taxes on
these digital products. On the other hand, there may be problems with these taxes because
they may cover products and services dealing with homepages, email, personal storage, or
video clips.
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
Without litigation, it may be difficult to distinguish the difference between the definitions
of content given by the ITFA, such as between a video clip and video programming. iTunes,
for example, could be designated as video programming for the videos it sells based on the
definition found in the federal statute regulating cable companies, and as video clips for its
previews. These laws may also run into trouble if they tax a download that is already taxed
by another state, because multiple taxes are defined as taxing property that has been taxed
once before by another state or political subdivision.
Another possible federal limitation on Internet taxation is the United States Supreme Court
case, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that under the dormant
commerce clause, goods purchased through mail order cannot be subject to a state's sales
tax unless the vendor has a substantial nexus with the state levying the tax. The dormant
commerce clause could also apply to any efforts to tax downloads. Since most downloads
are from companies that are centralized in a small number of states, it is likely that there will
not be many states with a substantial nexus to download providers. At present, no litigation
has arisen to determine what will be defined as a proper nexus for a distributor of digital
content within a state. It is possible that a state would argue that servers are enough of a
nexus to tax the content passing through, although the Supreme Court has already ruled
that communication by common carrier is not enough to form a substantial nexus.
Analysis of Digital Tax
Digital taxes can be analyzed using the following categories:
1. Consumption taxes: Consumption taxes are Value-added Taxes (VAT) and other
taxes on the sale of final goods or services. Countries have been expanding their
consumption taxes to include digital goods and services.
2. Digital services taxes: Digital services taxes are gross revenue taxes with a tax base
that includes revenues derived from a specific set of digital goods or services or
based on the number of digital users within a country.
3. Tax preferences for digital businesses: Tax preferences are policies such as
research and development (R&D) credits and patent boxes that reduce the tax
burden on digital businesses. Though most preferences are available for any
business, some specifically lend themselves to digital business models.
4. Digital permanent establishment rules: These policies include redefining what
constitutes a permanent establishment to include digital companies that have no
physical presence within a jurisdiction. These virtual or digital permanent
establishments are usually defined using specific criteria including engagement
with the local market.
5. Gross-based withholding taxes on digital services: Gross-based withholding
taxes are used by some countries instead of corporate taxes or consumption taxes to
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
tax revenue of digital firms in connection to transactions within a jurisdiction. As
gross income taxes, these policies do not substitute for income or consumption
taxation.
Principles of Digital Taxation
Just as with other areas of tax policy, it is important to evaluate digital taxes using principles
of sound tax policy: simplicity, transparency, neutrality, and stability. Many digital tax
policies fail to adhere to these principles by design.
1. Simplicity: Tax codes should be easy for taxpayers to comply with and for
governments to administer and enforce. Digital tax policies fail the simplicity test
when they leave important definitions unclear or add unnecessary compliance
challenges for businesses that are trying to understand how much tax they owe.
This arises in unclear standards for identifying in-scope business elements for
virtual permanent establishments and digital services taxes. Though the broad
designs of some digital taxes are conceptually simple, the complexity arises in the
practical details of identifying relevant users and revenues, sometimes without
clear guidance on how to do so. Governments will also face challenges evaluating
whether a digital company has paid the correct amount of tax, especially for digital
tax policies that rely on the location of users.
2. Transparency: Digital taxes are sometimes designed as thinly veiled proxies for
other taxes (either consumption or corporate taxes) rather than pure extensions of
those existing policies. Additionally, digital services taxes and gross-based
withholding taxes usually have low statutory rates, but because they apply to
revenues rather than income the tax burden is effectively much higher than the rate
implies.
3. Neutrality: The purpose of taxes is to raise needed revenue, not to favor or punish
specific industries, activities, and products. Some digital taxes work to create
neutrality between digital business models and other businesses. Extending
consumption taxes to include digital products and services can result in neutral
treatment of consumption. Expanding permanent establishment rules to create
equivalent virtual permanent establishments in line with clear market connections
can also improve neutrality. However, targeted digital services taxes and
preferences for hi-tech firms create unequal tax treatment based on a business's
industry or sector.
4. Stability: Taxpayers deserve consistency and predictability in the tax code.
Governments should avoid enacting temporary tax laws, including tax holidays,
amnesties, and retroactive changes. Many digital tax policies are designed to be
temporary, with some timelines tied to international agreements on changes.
Temporary tax policy creates uncertainty and challenges for both administration
and compliance. Additionally, digital taxes often target specific business activities
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
that are constantly evolving as the digitalization of the economy continues. Policies
should not be designed to rely on definitions of business activities that are subject to
change in a dynamic economy.
Principles of Effective Digital Service Tax
For an effective and efficient taxation of the digital economy, it is therefore time to be
pragmatic and focus on key principles
Avoid Unnecessary Increases In Compliance Costs: Complex definitions of taxable
revenues and complicated parameters for apportioning global revenues or profits are likely
to generate tax uncertainty as well as significant compliance costs for taxpayers. Digital
companies may need to adapt their accounting systems, customer management systems
and user management systems to provide data requested by national tax authorities. In
addition, they will virtually have to pay taxes in any country where their services are
accessible, thus multiplying costs to adapt to different tax systems. Tax rules should be
simple to abide by and simple to enforce.
Adopt Proportionate Rules To Avoid Harming SMEs: Any tax on revenues may generate
negative effects on start-ups and SMEs, insofar as these companies tend to be more fragile
from a financial standpoint, have less room to pass on tax costs downstream and are often
less profitable or operate at a loss. An increase in their effective tax rate may drive such
companies out of the market and ultimately stifle entrepreneurship and innovation. Setting
revenue and time thresholds is a sensible way of curbing this effect.
Promote Legal And Regulatory Certainty: Any change to national corporate tax systems
should minimize the room for both double taxation and double non-taxation. This requires
some coordination within the EU and beyond. In the same vein, tax certainty is key to
keeping costs of doing business low. Finally, any new tax should still consider impacts on
the effective tax rate paid by digital companies on a global scale to avoid discouraging
economic activity, investment and innovation.
Mitigate the Impact on Small Countries: Finally, as the logic of taxing rights seems to be
moving towards jurisdictions where users are based, small economies could end up on the
losing end. Any revenue thresholds or other indicators to determine taxing rights as part of
an international solution should account for such effects.
International Developments Concerning Taxation of Digital Services
Following the finalization of the OECD's Base Erosion and Profit-Shifting (BEPS) reports in
2015, the G20 tasked the OECD in 2016 with undertaking further work on the tax challenges
arising from digitalization. In March 2018 the OECD's Interim Report noted the need for
consensus-based longer term tax reform.
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
The OECD also recognized that some countries wanted to take more immediate action and
issued a framework to guide the introduction of an interim DST, broadly based on India's
Equalization Levy (2016) and a similar European Commission (2018) proposal.
However, the OECD noted it is important that countries follow the framework, as it
recognizes complexities like double taxation, compliance with international trade rules and
the risk that the tax may ultimately be borne by consumers. The OECD noted that it
expected countries would remove any DST's once a longer term solution was reached.
Prospects of Digital Service Tax
The rising statistics of the digital services globally which is majorly due to its immense
potential, it has become expedient for the global tax authorities to explore a more creative
approach to ensure effective taxation in a means to generate revenue.
Although some developed and developing nations have ensured an effective taxation of the
digital services, countries like Nigeria will however need to borrow a leaf from such nation
that have taken bold steps to tackle tax leakages in the digital economy through innovative
tax legislation. Just like India, the government should expand the scope of "fixed base"
under Section 13 of the CITA to ensure that the digital economy is effectively captured for
income tax purposes. The introduction of a digital fixed base in Nigeria will certainly
increase the tax base, thereby ensuring an increase in government revenue.
A major drawback, however, relates to enforcement of taxation of digital transactions,
given that most digital transactions are concluded with non-resident companies, which
makes efficient tracking of such transactions difficult. However, with proper legislation on
taxation of digital transactions, the tax authorities can work with banks to identify
payments relating to digital transactions with non-resident companies that should be
subject to tax. Furthermore, tax authorities should leverage the automatic exchange of
information between jurisdictions and employ innovative technology to secure a proper
database of the various online suppliers of goods and services. This will go a long way in
providing the tax authorities with sufficient data to go after tax defaulters directly.
Challenges of Digital Services Tax
The digitalization enables multinational enterprises to establish highly digitalized business
models in various jurisdictions with minor or nonexistent physical presence in the Market
State. These multinational active and highly digitalized business models are shifting profits
to low-tax jurisdictions in order to artificially reduce their tax burden by exploiting
loopholes in the interaction of different domestic tax systems. These loopholes are
especially created by the key characteristics of the digital business models. These new
characteristics are undermining the current international tax system by decreasing the
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
relevance of the concept of physical presence, increasing the importance of intangible assets
and introducing value creation due to data usage, leading to value-creation chains within
several jurisdictions. These circumstances raise the fundamental questions of how to define
and characterize the terms of income, value creation and permanent establishment (PE)
within the digital economy. The business model of social-media-platforms such as
Facebook, Instagram or Twitter are especially challenging for the international tax regime.
Challenges of Digital Service Tax in Nigeria
The applicable rules for corporate taxation in Nigeria do not effectively capture the realities
of a modern economy in our world of fast-paced digital transactions. Given that nonresident companies are taxed in Nigeria based on profits derived from Nigeria, the question
as to whether a foreign company is liable to income tax in Nigeria is usually controversial.
Section 13 of Companies Income Tax Act (CITA) implies that a non-resident company must
have physically performed activities in Nigeria, directly or indirectly, before such a
company can be liable to income tax in Nigeria. Thus, where a software company provides
online data to users in Nigeria without being physically present in Nigeria in any form, it
may be difficult to conclude that such a company is liable to CIT in Nigeria, although the
company could have derived income from Nigeria. A major challenge is therefore
determining at what point such non-resident would be deemed to have carried on business
in Nigeria and thus liable to income tax in Nigeria. This is because the absence of the
required fixed base or physical operations in Nigeria under Section 13 of CITA has made it
difficult for the FIRS to establish liability of such foreign companies to Nigerian tax.
To ensure that digital companies do not escape tax in Nigeria, the FIRS has often required
Nigerian companies to withhold tax on all payments made to non-resident persons
regardless of the non-establishment of the tax presence specified under Section 13 of CITA.
This requirement has encountered resistance from taxpayers given that such non-resident
persons may not be liable to tax under Nigerian laws. However, the FIRS seem to have
succeeded in ensuring that VAT is deducted and accounted for on cross border payments
for transactions between foreign companies and Nigerian companies such as in the case
between Vodacom Business Nigeria Limited v FIRS. In that case, the Federal High Court
ruled in favour of the FIRS and held that the Nigerian company was required to account for
the VAT on such transactions regardless of the fact that the supplier/foreign company did
not perform the services and had no physical presence in Nigeria.
Thus, the absence of relevant provisions in the Nigerian tax laws covering taxation of digital
activities is a major challenge that has resulted in loss of revenue to the government.
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
Effective Digital Taxation Insight from Other Jurisdictions
It is important to note that the challenges arising from taxation of digital transactions are
not peculiar to Nigeria. Due to the resultant revenue loss arising from these challenges,
various jurisdictions and international associations have sought means to ensure that taxes
are paid in the jurisdictions where income is derived. Below are some of the measures taken
by other jurisdictions on the taxation of the digital economy:
India
India introduced new digital permanent establishment rules effective April 2019 to address
the challenges that arise from the taxation of the digital economy. These rules, which are
contained in the 2018 Indian Finance Act, seek to subject businesses that have a "significant
economic presence" in India to Indian tax notwithstanding that such businesses may not
have any physical presence in India. The Act defined "significant economic presence" to
mean, amongst others, transactions where the aggregate payments exceed such amounts as
may be prescribed.
In addition, India currently imposes a surcharge tax of 6% on payments to foreign
companies for online advertising services when such companies do not hold a permanent
establishment in India. Ultimately, these rules aim at capturing companies that do
significant business in India through digital channels but who would not have been
captured by preexisting permanent establishment rules.
European Union
In March 2018, the European Commission (the Commission) proposed new rules to ensure
that digital business activities are taxed in a fair and growth-friendly manner in the EU. The
Commission has made two legislative proposals.
One proposal recommends that member states apply an interim tax on companies that
generate annual total revenue of over £750 million and annual total revenue of over
£50million from digital activities in the EU. This interim tax is to cover the main digital
activities that currently escape tax in the EU and is to be levied at 3% on the gross revenue of
businesses derived from online advertising, sale of collected user data and other digital
services etc. The other proposal seeks to introduce the concept of a "taxable digital
presence" or a Virtual Permanent Establishment (VPE). A VPE is designed to introduce a
taxable nexus for digital businesses operating within the EU with little or no physical
presence.
CONCLUSION AND RECOMMENDATION
It is crystal clear that the digital tax debate is far from over, and policymakers should seek to
follow sound principles in developing, refining, and (in some cases) removing digital tax
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Prospect And Challenges Of Digital Services Tax In A 21st Century Society
policies.
In some country policy, consumption and corporate income taxes (and associated
permanent establishment rules), countries are working to extend their existing rules to
digital businesses. This presents an opportunity to move toward equal treatment of
physical and digital business models, but also real challenges to align standards and
implement policies on a multilateral basis. Policies in these areas should meet a high bar for
alignment with other jurisdictions, minimize complexity and compliance costs, and avoid
differential treatment of targeted business sectors.
In some other countries, the country digital services taxes and gross-based withholding
taxes are relying on novel, but distortive and discriminatory, approaches to taxing digital
businesses. These policies have the potential to lead to an economically harmful tax and
trade war and should be avoided.
RECOMMENDATIONS
In this twenty first century, it is therefore recommended that countries should:
i. Create Policies that clearly allow for relief from double taxation.
ii. Avoid adopting digital services taxes to prevent the distortions that such revenuebased taxes create.
iii. Preferences for digitalized businesses should be focused on innovation rather than
creating tax windfalls.
iv. Research & development tax credits can be improved to avoid compliance
challenges that limit the benefits to businesses that can afford to comply.
REFERENCE
A n d r e w M . ( 2 0 1 9 ) . h t t p : / / w w w. a p h . g o v. a u / A b o u t _ A b o u t
Parliament/Parliamentry_Departments/Parliamentary_Library/Flagpost/2019/Au
gust/Digital_Services_Taxation
Daniel Bunn, ElkeAsen, Cristina Enache, (2020), Digital Taxation Around the world.
Digital Services Taxes (DSTs): Policy and Economic Analysis, (2019).
https://fas.org/sgp/crs/misc/R45532.pdf
https://en.wikipedia.org/wiki/Taxation_of_digital_goods#History
https://taxfoundation.org/digital-tax/
Nina Sparmann. (2019). Tax challenges of the digital eeconomy: Does a withholding tax on
certain digital transactions solve the problem of missing taxation rights, while being
in line with EU-Law and the OECD model convention? Lund University, School of
Economics and Management Department of Business Law.
OECD/G20 Base Erosion and Profit Shifting Project (2014), Addressing the Tax Challenges
of the Digital Economy
Wei Cui, (2018).The Digital Services Tax: A Conceptual Defense
242
CHAPTER FIFTEEN
TAX PLANNING AND MANAGEMENT: IMPERATIVES OF TAXPAYERS'
INCENTIVES
Kennedy, Iwundu1 and Aruwa, Suleiman A. Salihu2
1
Managing Partner, Accounting Tools Consulting, FCT, Abuja, Nigeria and
President, FCT Tax Practitioner Association;
kend4real2000@yahoo.com; +234-803 7866 998
2
Professor of Accounting & Finance in the Department of Accounting,
Faculty of Administration, Nasarawa State University, Keffi, Nigeria;
aruwasas@gmail.com; +234 803 451 1107
INTRODUCTION
Understanding what is tax planning is one of the most important aspects of financial
planning. It is a practice where one analyzes his financial situation based on tax efficiency
point of view so as to invest and utilize their sources optimally. Tax planning means
reduction of tax liability by the way of exemptions, deductions and benefits.
Tax planning is the process of analyzing a financial plan or a situation from a tax
perspective. The objective of tax planning is to make sure there is tax efficiency. With the
help of tax planning, one can ensure that all elements of a financial plan can function
together with maximum tax-efficiency. Tax planning is a significant component of a
financial plan. Reducing tax liability and increasing the ability to make contributions
towards retirement plans are critical for success.
Tax planning comprises various considerations. Considerations such as size, the timing of
income, timing of purchases, and planning are concerned with other kinds of expenditures.
Also, the chosen investments and the various retirement plans should go hand-in-hand
with the tax filing status as well as the deductions in order to create the best possible
outcome.
Taxes can eat into your annual earnings. To counter this, tax planning is a legitimate way of
reducing your tax liabilities in any given financial year. It helps you utilize the tax
exemptions, deductions, and benefits offered by the authorities in the best possible way to
minimize your liability.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
The definition of tax planning is quite simple. It is the analysis of one's financial situation
from the tax efficiency
Tax Planning
Tax planning is a pivotal part of financial planning. Through effective tax planning all
elements of the financial plan falls in place in the most efficient manner. This results in
channelization of taxable income to different investment avenues thus relieving the
individual of tax liability. The investment amount post lock-in can be utilized for fulfilling
needs and act as the retirement corpus in most cases. All in all, the objective of tax planning
is to reduce tax liability and attain economic stability.
Tax planning is a focal part of financial planning. It ensures savings on taxes while
simultaneously conforming to the legal obligations and requirements of the Income Tax
Act, 1961. The primary concept of tax planning is to save money and mitigate one's tax
burden. However, this is not its sole objective.
Tax planning plays an important role in the financial growth story of every individual as tax
payments are compulsory for all individuals who fall under the IT bracket. With tax
planning, one will be able to streamline his/her tax payments such that he or she will receive
considerable returns over a specific period of time involving minimum risk. Also, effective
tax planning will help in reducing a person's tax liability.
Benefits of Tax Planning
i.
To Minimise Litigation: To litigate is to resolve tax disputes with local, federal,
state, or foreign tax authorities. There is often friction between tax collectors and taxpayers
as the former attempts to extract the maximum amount possible while the latter desires to
keep their tax liability to a minimum. Minimising litigation saves the taxpayer from legal
liabilities.
ii.
To Reduce Tax Liabilities: Every taxpayer wishes to reduce their tax burden and
save money for their future. You can reduce your payable tax by arranging your
investments within the various benefits offered under the Income Tax Act, 1961. The Act
offers many tax planning investment schemes that can significantly reduce your tax
liability.
iii.
To Ensure Economic Stability: Taxpayers' money is devoted to the betterment of
the country. Effective tax planning and management provide a healthy inflow of white
money that result in the sound progress of the economy. This benefits both the citizens and
the economy.
iv.
To Leverage Productivity: One of the core tax planning objectives is channelising
funds from taxable sources to different income-generating plans. This ensures optimal
utilisation of funds for productive causes.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
Types of Tax Planning
Most people merely perceive tax planning as a process that helps them reduce their tax
liabilities. However, it is also about investing in the right securities at the right time to
achieve your financial goals.
Following are some of the various methods of tax planning:
a.
Short-range Tax Planning
Under this method, tax planning is thought of and executed at the end of the fiscal year.
Investors resort to this planning in an attempt to search for ways to limit their tax liability
legally when the financial year comes to an end. This method does not include long-term
commitments. However, it can still promote substantial tax savings.
b.
Long-term Tax Planning
This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan
throughout the year. Unlike short-range tax planning, you might not be offered with
immediate tax benefits but it can prove useful in the long run.
c.
Permissive Tax Planning
This method involves planning under various provisions of the Indian taxation laws. Tax
planning in India offers several provisions such as deductions, exemptions, contributions,
and incentives. For instance, Section 80C of the Income Tax Act, 1961, offers several types of
deductions on various tax-saving instruments.
d.
Purposive Tax Planning
Purposive tax planning involves using tax-saver instruments with a specific purpose in
mind. This ensures that you obtain optimal benefits from your investments. This includes
accurately selecting the appropriate investments, creating an apt agenda to replace assets
(if required), and diversification of business and income assets based on your residential
status.
The Concept of Tax Management
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer
by a governmental organization in order to fund various public expenditures. Tax
management means, the management of finances, for the purpose of paying tax. Tax
Management deals with filing of Return in time, getting the accounts audited, deducting
tax at source etc. Tax Management helps in avoiding payment of interest, penalty and
prosecution.
Elements of the tax management are:
A.
Filing return.
B.
Auditing.
C.
Source deduction.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
A.
Filing Return:
A tax return is the tax form or forms used to report income and file income taxes with tax
authorities such as the Federal Internal Revenue Service (FIRS) in a manner prescribed by
law and in accordance with the laid down administrative rules. Tax returns allow taxpayers
to calculate their tax liability and remit payments or request refunds, as the case may be.
Filing of tax returns for various taxes with the Tax Authority is a legal obligation which
must be fulfilled by every taxpayer and contain information on relevant tax affairs for a
given period for the purpose of complying with the tax laws.
Companies Income Tax (CIT) Returns
Every company is required to file a return with Federal Internal Revenue Service (FIRS)
even if the company is exempted by the law from paying tax.
Requirements for Filing Company Income Tax
i.
Duly completed Self-Assessment form.
ii.
Audited Financial Statement.
iii.
Tax computations.
iv.
Capital allowances computation.
v.
Schedule of Fixed Assets.
vi.
Evidence of Payment of the taxes due.
The Audited Financial Statement should be signed by two Directors. The accounts should
be audited and signed by External Auditors who must be members of recognized
professional bodies.
Due Date for Filing Companies Income Tax Returns
For New Companies, CIT returns should be filed within eighteen (18) months from the date
from the date of incorporation or six (6) months after accounting year end whichever is first.
Personal Income Tax (PIT) Returns
i.
Self-employed Individuals (PIT) Returns
Every self-employed person is required to file a return with the Tax Authority nearest to his
place of residence. Self-employed individual include an individual (sole trader), profession
or vocation; or joint partnership. The income is based on preceding year basis.
ii.
Employees Personal Income Tax (PIT) Returns
Personal Income Tax is paid by individuals in employment through the Pay-As-You-Earn
(PAYE) system, the income is taxed on actual basis.
The taxpayer is required to declare income other than employment income earned from all
sources in the preceding year and income earned from employment in the current year.
iii.
Employers Pay as you Earn (PAYE) Tax Returns
Employers are required to deduct and account for personal income tax deducted from the
employment income of their employees under the PAYE system by way of a return filed
with the Tax Authority on monthly basis.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
PAYE returns must be submitted for each month on or before the 10th day of the month
following the month to which the tax deductions relate using the appropriate schedule.
Annual Returns by Employers
Employers are required to file PAYE deductions made from income in the past year.
Annual Returns in respect of their respective employees’
Requirements for Filing Annual Returns by Employers
Completed form A (Income Tax Form for Returns of Income and claim for allowances and
relief).
i.
A schedule of tax deduction from the employer containing the following
information:
ii.
Evidence of payment of tax
iii.
Form H1 (Annual Income declaration)
Due Date for Filing Annual Returns by Employers
Every employer is required to file a return not later than 31st January of every year.
Value Added Tax (VAT) Returns
Every taxable person is required to file VAT returns every month with FIRS.
Due Date for Filing VAT Returns
The VAT returns must be filed on or before the 21st day of the month following that in which
the transaction was made.
Withholding Tax (WHT) Returns
Withholding tax returns must be filed with the relevant Tax Authority by persons and
bodies required to deduct and remit withholding Tax.
i.
For withholding tax deducted from payments due to all limited liability companies, the
relevant Tax Authority is Federal Inland Revenue Service (FIRS).
ii. For individuals and unincorporated entities operating in the Federal Capital Territory
(FCT) Abuja, the relevant Tax Authority is FIRS.
iii. For non-resident individuals and companies, the relevant Tax Authority is FIRS.
iv. For withholding tax deducted from payments due to individuals and unincorporated
entities outside the FCT, there turns should be filed with Tax Authority of the relevant
State, where the individual who suffers the withholding tax is resident.
Due date for Filing WHT Return
Companies other than Petroleum Companies withholding tax returns should be filed
within twenty-one (21) days from the date the amount was deducted or the time the duty to
deduct arose.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
Other companies including Petroleum Companies, withholding tax returns should be filed
within thirty (30) days from the date the amount was deducted or the time the duty to
deduct arose.
B.
Auditing:
An Audit is an independent and objectives of inspection of financial information of any
entity or organization with a view to express an opinion thereon.
C.
Source Deduction:
This refers to the portion of pay you are legally required to withhold from employees
contractors, subcontractors, landlords, agents etc and subsequently remit to the relevant
revenue authority. Failure to deduct and remit to relevant revenue authority attracts
penalties interest and other suctions.
The Difference between ‘Tax Planning’ and ‘Tax Management’
S/N
Tax Planning
Tax Management
i
Tax Planning is optional.
ii
Tax Planning helps in minimizing Tax Tax Management helps in avoiding payment of
Liability in Short-Term and in Long interest, penalty, prosecution etc.
Term.
iii
Tax Planning relates to future.
Tax Management relates to Past, Present & Future.
Past – Assessment Proceedings, Appeals,
Revisions etc.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
iv
Tax Planning also includes Tax
Management
Tax Management deals with filing of Return in time,
getting the accounts audited, deducting tax at source
etc.
v
The Objective of Tax Planning is to The objective of Tax Management is to comply with
minimize the tax liability
the provisions of Income Tax Law and its allied rules.
Tax Management is essential for every
assessee.
Relieves and Incentives Available to Taxpayers (Individual and Cooperate)
Past Incentives Schemes
A.
Nigeria's Voluntary Assets and Income Declaration Scheme
The Voluntary Assets and Income Declaration Scheme in Nigeria was intended to provide a
“time-limited opportunity for taxpayers to regularize their tax status relating to previous
tax periods” (i.e., the preceding six years of assessment).
Taxpayers were required to fully and honestly declare previously undisclosed assets and
income, and would obtain the following benefits in exchange:
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
i.
ii.
iii.
Waiver of interest and penalty charges;
Exemption from facing prosecution for tax offenses; immunity from tax audit; and
Option of spreading payment of outstanding liabilities over a period of three years,
as may be agreed with the relevant tax authority.
Taxpayers who failed to take advantage of the Voluntary Assets and Income Declaration
Scheme (“VAIDS” or “the Scheme”) would, inter alia, be liable to settle the principal sum
due (including the interest and penalty charges), liable to prosecution for tax offenses, and
subject to a comprehensive tax audit by the relevant tax authority.
The Scheme ended on June 30, 2018, devoid of the fanfare that heralded its introduction one
year earlier (via the Executive Order No 004 of 2017, the “EO”): originally intended to run
from June 1, 2017 to March 31, 2018, the Scheme was extended by a further three months
based on recommendation and request by stakeholders.
B.
Nigeria's Voluntary Off shore Assets Regularization Scheme
Nigeria's Voluntary Off shore Assets Regularization Scheme requires taxpayers
(individuals and corporate bodies), with off shore assets and income which they have failed
to declare for tax purposes in respect of the preceding 30 years of assessment, to regularize
their tax position. Tax payers are required to declare these assets within a year from the
commencement date of the Executive Order.
The Nigerian President, Muhammadu Buhari, signed the Voluntary Offshore Assets
Regularization Scheme Executive Order (Order No8) into law on October 8, 2018. The
Order authorizes the Attorney-General of the Federation and Minister of Justice to set up a
Voluntary Offshore Assets Regularization Scheme in Switzerland (“VOARS'' or “the
Scheme”).
I n t h e 2 0 1 8 N a t i o n a l b u d g e t , t h e g o ve r n m e n t r e s o l ve d t o i n c r e a s e t h e t a x - t o GDPratiofrom6percentto15percent.TheVOARS appears to be one of the initiatives
designed to achieve this objective.
Requirements for Taxpayers
Any defaulting taxpayer that intends to participate in the Scheme must voluntarily make
full, honest, complete and verifiable disclosures of their offshore assets and income through
the proposed Voluntary Offshore Assets Regularization Facility in Switzerland
(“VOARFS”). Such taxpayers will pay a one-time levy of 35 percent of their offshore assets
in lieu of all outstanding taxes, penalties and interest.
The Order also requires such taxpayers to pay a 2 percent facility access fee and submit
to the compliance procedures that the Swiss authorities may prescribe.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
Benefits of the Scheme
The participants in the Scheme will been titled to certain benefits, which include permanent
immunity from criminal prosecution for tax offenses and offenses related to the declared
and regularized offshore assets, waiver of interest and penalties and exemption from tax
audit.
However, any defaulting tax payer who fails to take advantage of the opportunity provided
by the Scheme will be subject to audit and investigation and liable to pay the principal tax
liability, inclusive of interest and penalties, at the end of the one-year grace period.
This article will focus on the gray and contentious issues that the VOARS has triggered
since its announcement.
On Going and Current Incentives
A.
Company Income Tax Incentives
A company that files its self-assessment within six months after the accounting year-end
can apply to the FIRS in writing to pay its income tax in installments.
The maximum number of installments the FIRS may approve is three. Such application
must go with a portion of the tax liability. It is due on or before the due date for filing.
Large companies are granted a bonus of 1% against income tax of future tax years (2% for
medium companies) where the income tax is paid 90 days before the due date for filing.
B.
Interest Incentives
Interest accruing on deposit accounts of a non-resident company is tax-exempt, provided
the deposits are made by transfer off undsto Nigeria on or after 1 January 1990 and the
depositor does not become non-resident after making the deposit while in Nigeria.
Interest on foreign-currency domiciliary accounts is also tax-exempt.
Interest on any foreign loans, and interest on any loan granted by a bank for the purpose of
manufacturing goods for export, is exempt from tax as follows:
Repayment period
Moratorium
Exemption(%)
Over 7 years
Not less than 2 years
70
5 to 7 years
Not less than 1.5 years
40
2 to 4 years
Not less than 1 year
10
Interest on any loan granted by a bank to a company engaged in agricultural trade,
fabrication of local plant and machinery, or as working capital to any cottage industry is
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
100% tax free if the loan has a moratorium of not less than 18 months and the rate of interest
is not more than the base lending rate.
C.
Foreign Tax Credit
Nigeria does not grant automatic tax credits to Nigerian companies for foreign tax on
income derived from other countries. The Nigerian tax laws already provide for tax
exemption for dividends, interest, and royalties.
Foreign tax credits are only granted based on the provisions of existing DTTs and partial
credits as applicable to Commonwealth countries. In this regard, full tax credits are usually
provided for in the DTTs. Tax credits for members of Commonwealth countries are granted
at up to half the Nigerian CIT rate.
D. Road Infrastructure Development and Refurbishment Investment Tax Credit
Scheme
Participants in the Road Infrastructure Development and Refurbishment Investment Tax
Scheme are entitled to recover the cost incurred by them in the construction or
refurbishment of eligible roads as credit against CIT payable. Participants are also entitled
to a single uplift, equivalent to the Central Bank of Nigeria (CBN) Monetary Policy Rate
plus 2% of the project cost. This uplift will not be taxable in the hand of the participant.
The tax credit can be carried forward to subsequent years until it is fully utilised. A
participant may sell or transfer its tax credit to other companies, as a form of security or
otherwise.
E.
Tax Holidays
Pioneer companies investing in specified industrial activities may, on application, be
granted a tax holiday for three years initially, which may be extended for up to two years
upon satisfaction of specified conditions. Examples of economic activities that may be
granted a tax holiday include glass and glassware manufacturing, manufacturing of
fertilisers, and steel manufacturing. A new company that engages in the mining of solid
minerals is exempt from tax for the first three years of its operation.
F.
Export Incentives
Export processing zones (EPZs) and free trade zones (FTZs) are locations within Nigeria
designated by the government as free areas where export trade activities can be carried on
free of tax and foreign exchange restrictions.
A company that is engaged in an approved manufacturing activity in an EPZ and incurs
expenditures in its qualifying building and plant equipment is entitled to 100% capital
allowance in that year of assessment.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
In addition, a company that is 100% export oriented but located outside an EPZ will enjoy a
three year tax holiday, provided the company is not formed by splitting up or
reconstruction of an already existing business and the export proceeds form at least 75% of
its turnover.
Profits of companies whose supplies are exclusively inputs to the manufacture of products
for export are exempt from tax. Such companies are expected to obtain a certificate of
purchase of the input from the exporter in order to claim tax exemption.
Where plant and machinery are transferred to a new company, the tax written down value
of the asset transferred must not exceed 25% of the total value of plant and machinery in the
new company. The company should also repatriate at least 75% of the export earnings to
Nigeria and place it in a Nigerian domiciliary account in order to qualify for a tax holiday.
Profits of any Nigerian company in respect of goods exported from Nigeria are exempt
from tax, provided that the proceeds from such exports are repatriated to Nigeria and are
used exclusively for the purchase of raw materials, plant, equipment, and spare parts.
In order to streamline the administration of permissible taxes within the tax free zones, the
Oil and Gas Free Zone Authority (OGFZA) has established the Free Zones Tax
Administration (FZTA) Unit with effect from January 2015. Going forward, all tax matters
relating to the free zones will be coordinated by the FZTA.
G. Export Expansion Grant (EEG) Scheme
The EEG Scheme grants the Export Credit Certificate (ECC) as an incentive that can be used
to settle all federal government taxes, such as VAT, WHT, CIT, etc. It can also be used to
purchase government bonds and repay government credit facilities and debts due to the
Assets Management Company of Nigeria (AMCON).
To encourage export of value added and processed/manufactured products, exporters are
divided into four categories with maximum applicable EEG rates as indicated below:
i.
Fully manufactured products: 15%.
ii.
Semi-manufactured products: 10%.
iii. Processed/intermediate products: 7.5%.
iv. Merchants/primary agricultural commodities: 5%.
H. Rural Location Incentives
Certain incentives are available to companies located in rural areas. The incentive stake the
form of tax reduction sat graduated rates for enterprises located at least 20 kilometers from
available electricity, water, and tarred roads.
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Tax Planning And Management: Imperatives Of Taxpayers' Incentives
I.
Gas Utilisation Incentives
Companies engaged in gas utilisation are entitled to: A tax-free period for up to five years.
Accelerated capital allowance after the tax-free period. Tax-free dividends during the taxfree period.
J.
Agricultural Production Income Tax Exemption
Companies carrying out agricultural production are exempt from income tax for a period of
five years. Upon satisfactory performance, the exemption can be extended for an additional
three years.
K. Tourism Incentives
25% of the income derived from tourism by hotels inconvertible currencies is exempt from
tax if such income is put in are serve fund to be utilised within five years for expansion or
construction of new hotels and other facilities for tourism development.
L.
Investment Allowances
An investment allowance of 10% on the cost of qualifying expenditures in respect of plant
and machinery is available as a deduction from assessable profits in the year of purchase.
There is no restriction to the full claim of capital allowance in any year of assessment for
companies in the mining, manufacturing, and agricultural sectors.
CONCLUSION
Tax planning is an honest and legal method of availing the full advantages of taxation laws.
It is a way of effectively managing the income and taxes so that the tax liability arising on the
assessee is minimal. As against, Tax Management is an art of handling the financial affairs,
while complying with the tax provisions, so as to avoid the payment of interest and
penalties. To efficiently plan and manage their tax affairs, taxpayers must consider business
exigencies (including possible future changes in applicable law) and seek professional
advice. Taxpayers, more than ever before, now require the advice and guidance of skilled
tax planning and management experts; to enable them exercise their rights to efficiently
plan and manage their tax affairs, without breaching the law.
REFERENCES
Ayo, L. S. & Isah, Y. A. (2018). Nigeria's Voluntary Assets and Income Declaration Scheme.
Adewale, A. (2018). Nigeria's Voluntary Offshore Assets Regularization Scheme
Federal Inland Revenue Service (2019).
FIRS Information Circular Bhavana (2021). Tax Planning.
Pwc Publications (2021). Nigeria Corporate – Tax credits and incentives.
Oyedokun, G. E. (2019). Taxation as a tool for stimulating revenue generation in public sector.
Oyedokun, G. E. (2020). Imperatives of Tax Incentive in Nigeria.
253
CHAPTER SIXTEEN
REVIEW OF CHAPTER: NEXUS BETWEEN TAXATION AND SUSTAINABLE
BUSINESS DEVELOPMENT
Mustapha, Aikins Suleiman
Department of Management and Accounting
Faculty of Management and Social sciences
Lead City University, Ibadan, Nigeria
Editors:
Muhammed, Akaro Mainoma
Oyedokun, Godwin Emmanuel
Kabiru, Isa Dandogo
Muhammed, Taofeeq Abdurazak
Ishola, Rufus Akintoye
Famous, Izedonmi Prince
Rafiu, Oyesola Salawu
Topic:
Author:
Publisher:
Cover:
ISBN:
Nexus between Taxation and Sustainable Business Development
Prof. M. A. Mainoma
OGE Business School 2020, 609 pages
Paperback
978-978-978-734-0
SUMMARY
The chapter (chapter two) of the book is a product of years of teaching experience by
Professor Mainoma M. Akaro at the Nasarawa State University, Keffi, Nigeria. The chapter
establishes a connection between taxation and sustainable business development.
The introduction of the chapter presents an understanding of tax to the reader and the
connection between tax and sustainability of businesses within the economy. Tax is a
mandatory levy, imposed by the government on the income generated by an entity via the
entity's economic activities within the economy. There exists an inverse relationship
between taxation and the sustainability of a business, a high and complex tax threatens
business sustainability and further discourages investment and economic growth. To
encourage investment and economic growth therefore, tax policies within the state should
be friendly.
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Review Of Chapter: Nexus Between Taxation And Sustainable Business Development
Paragraph 6 presents the concept of taxation. In this regard, Professor Mainoma proposes
taxation as a “complete process” which involves the “imposition and administration of
tax.” He further expresses that tax, which is the amount payable by the taxpayer, is different
from taxation. According to the author, an effective taxation is dependent on a sound tax
system, the objective which a tax system is required to achieve was further presented by the
author in line with the Nigeria National Tax Policy, these objectives include promoting
fiscal responsibility and accountability, facilitating economic growth and development,
provision of stable resources to the government which the government use to provide
public goods and services, income redistribution, economic stabilization, fairness and
equity among tax payers.
In paragraph 8, the author introduces his readers to the concept of sustainable business
development and the importance of business sustainability considering the role played by
businesses in generating employment and catalysing economic activities in an economy.
He presents the definition of business development as rendered by the Economic
Development Services (2003). In line with this definition, according to Mainoma, business
development generally refers to “improvement of profit, production, services and
investment of business enterprise with a view of expanding the wealth and growth of the
enterprise.”
The tenth paragraph set forth the main component of the chapter. Here Professor Mainoma
presents taxation and sustainable business development. The author points that “optimal
tax policies” should give adequate consideration to the impact of tax policies on business
activities which are a decider of economic development. The author advocates for the
consideration of the fundamental principle of taxation (i.e., simplicity, efficiency/economy,
neutrality and equity), to ensure taxation does not hinder sustainable business
development.
In paragraph 17 of the chapter, the author introduces to the reader the economic theory's
stand on taxation – a reduction in taxes means more income to businesses, which business
could deploy towards more production, investment, employment and pay wages.
Paragraphs 18 and 19 introduce the reader to ways in which business sustainability can be
improved with respect to taxation. Here the author advocate for a shift in the bases for
taxation from income to consumption as well as the use of tax incentives.
All in all, the chapter provides the reader with a good understanding of the relationship
between taxation and sustainability of business development. Furthermore, the author
provides the reader with a simple understanding of the concept of taxation and sustainable
development and how the two interlink to address the topic.
255
CHAPTER SEVENTEEN
REVIEW OF CHAPTER: RELEVANCE OF CULTURE IN ENSURING
SUSTAINABLE TAX COMPLIANCE AMONG NIGERIANS
Amafa, Etupu Olufunmilayo
Department of Management and Accounting
Faculty of Management and Social sciences
Lead City University, Ibadan, Nigeria
Editors:
Muhammed, Akaro Mainoma
Oyedokun, Godwin Emmanuel
Kabiru, Isa Dandogo
Muhammed, Taofeeq Abdurazak
Ishola, Rufus Akintoye
Famous, Izedonmi Prince
Rafiu, Oyesola Salawu
Topic:
Author:
Publisher:
Cover:
ISBN:
Relevance of Culture in Ensuring Sustainable Tax Compliance among
Nigerians
Agbetunde Lateef Ayodele
OGE Business School 2020, 609 pages
Paperback
978-978-978-734-0
INTRODUCTION
Despite several measures put by the government to generate adequate revenue through
payment of taxes, researchers still find non-compliance to be prevalent especially in
developing economies. To this end, this study examined culture and tax compliance among
taxpayers in developing economy focusing on Nigeria, Specific objectives are to:
1) Assess level of tax compliance among individual taxpayers in Nigeria
2) Measure how each of the tax compliance factors affect individual taxpayers'
compliance in Nigeria
3) Measure each of the Hofstedes' cultural dimensions along three major culture/
tribes in Nigeria
4) Assess effect of culture generally on tax compliance of individual tax payers across
Nigeria and
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Review Of Chapter: Relevance Of Culture In Ensuring Sustainable Tax Compliance Among Nigerians
5) Assess relative influence on each of the Hofstede's culture dimensions on tax
compliance of individual tax payers across Nigeria.
The study reviewed the concept of tax compliance, culture, Hofstede Cultural Framework
Tax compliance determinants and so on. Various groupings for tax compliance models
were looked into. According to Philips 2011, extensive research on reasons 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 benefit by evading taxes when the benefits of evasion outweigh
its costs without having concerns for ethics.
Modern studies now incorporate psychological and sociological factors into the tax
compliance model by bringing other actors into the compliance process.
Incorporating Culture into Tax Compliance Model
The authors reviewed extant literature on Fishers' tax compliance model to suggest
expansions to the model by introducing culture. Agbetunde (2004) and Somorin (2015)
observed that colonists in Nigeria noticed existence of cultural diversities among the major
tribes in Nigeria. They also surveyed ethical reasons for tax evasion across Nigerian major
cultures and found that 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. From the 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 various factors influencing tax compliance namely economic/deterrence,
sociological, psychological and cultural factors. Individualism, uncertainty avoidance and
power difference were proxies for tax culture.
TC= f (IND,MAS,PD,UA)
TC= â0+ â1IND+ â1MAS + â3PD+ â4UA +åi
Where TC= Tax Compliance
IND= Individualism
MAS= Masculinity
PD= Power Difference
UA= Uncertainty Avoidance
â0 = Intercept of the model
â1-4 = Coefficient of the independent Variables
METHODOLOGY
The study focused on developing economy particularly Nigeria. The study adopted
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Review Of Chapter: Relevance Of Culture In Ensuring Sustainable Tax Compliance Among Nigerians
descriptive and expo-facto designs using survey method to collect qualitative and
quantitative data.
Primary data was sourced mainly through structured questionnaire which ensured orderly
and proper wording to ensure that data was collected without influencing the respondents.
To confirm the validity of this construct, draft of the instrument was peer reviewed and
necessary adjustments were made.
A pilot test was carried out in the month of February 2018 before the actual survey in June,
July and August 2018. Reliability test gave Cronchbatch Alpha of 0.787 showing 79%
reliance can be placed on the data. Analysis of Level of Tax Compliance indicates that
compliance level across the three cultures were similar.
Hofstede`s Cultural Dimensions along Nigerian Cultures
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.
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 of 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.
Tax Compliance Factors and Cultural Dimension
Result of the Correlation presented 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 differences
and individualism dimensions would perceive economic factors as critical determinant of
tax compliance.
Furthermore, a society high on uncertainty avoidance dimension will be tax compliant
when government ensures tax payers are getting fair value from the state on which they pay
their tax. Specifically, each of power difference, masculinity and uncertainty avoidance is
found to have positive influence on tax compliance suggesting that the higher a society is on
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Review Of Chapter: Relevance Of Culture In Ensuring Sustainable Tax Compliance Among Nigerians
any of the three dimensions, the more tax compliant individuals therein. However,
individualism dimension showed a negative influence on tax compliance.
RECOMMENDATION
An appropriate strategy should be adopted for each tribe based on the cultural dimension.
Therefore, 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 results.
259
CHAPTER EIGHTEEN
RECOVERY ENGAGEMENT: STAMP DUTY, EXCESS BANK CHARGES
AND GENERAL TAX AUDIT
1
Oyedokun, Godwin Emmanuel and 2Dopemu, Olawale Samson
1
Professor of Management & Accounting
Faculty of Management & Social Sciences
Lead City University Ibadan, Nigeria
+234-803 3737 184
2
Federal Inland Revenue Services, Lagos, Nigeria
dopson775@yahoo.com; +234 803 940 2136
INTRODUCTION
Today, the average company spends anywhere from 20% to 70% of its revenues on thirdparty services, but struggles to keep pace with the thousands or even millions of invoices it
processes each year. According to a leading analyst's most recent Fraud Survey, companies
lose as much as 1% of their revenues to duplicate or otherwise erroneous payments.
Traditional recovery audits fail to address the root cause which leads to improper
payments. More and more companies are now looking for ways to move beyond recovering
funds by stopping the leakages instead of chasing the drops. Traditional recovery audits
combine accounting and recovery to help organizations recover improper payments from
suppliers. However, it is clear that the root cause which leads to improper payments
remains unresolved.
The Finance Act 2019 (“the FA 2019”), particularly section 52, expanded the scope of the
SDA to capture electronic transactions. The FA 2019 (in section 54 which amended section
89 of the SDA) also expressly introduced stamp duties on bank deposits and transfers. This
has been replaced by an Electronic Money Transfer Levy ('EMTL”) now contained in a new
section 89A of the SDA (amended by section 48 of the Finance Act, 2020 (FA 2020”).
Recovery engagement has aided several audit processes including tax audit in unremitted
Stamp Duty and excess bank charges whereby government and corporate/individual has
been able to retrieve unaccounted duties and bank charges. This paper therefore presents
the subject matter of recovery engagement process in stamp duty, excess bank charges and
general tax audit; legal implications, objectives, administration, types and various fund
recovery processes.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Recovery Engagements
A recovery engagement technique is commonly referred to as payment recovery, profit
recovery, or accounts payable audit - is the process of reviewing an enterprises' financial
transactions, as well as the related data and operations to identify and recover various
forms of erroneous payments, over deductions, and under deductions to suppliers or
financial institutions as the case may be. Keeping track of spending has always been a big
challenge for businesses, and more so in the new era of global supply chain and outsourced
services. While there are myriad reasons why many organizations are susceptible to
making unwarranted payments, the following factors are identified:
A Lack of Quality Data: For companies with a large supplier base and huge transaction
volumes, having inconsistent and partially missing data leads to lengthy and difficult
Limited Internal Resources: Internal audit teams are often unable to invest enough time to
resolve any systemic issues with processes that result in recurring errors in payments.
Late Audits: The traditional audits that many organizations rely on can run as long as 24
months following the transactions. This increases the likelihood of the documentation
getting lost, which reduces the odds of a recovery.
Limited Incentives to Improve Processes: The traditional recovery audit involves external
vendors who have little incentive to help organizations improve their processes and
prevent future errors.
Unaddressed Root Causes: Companies are unable to address the root causes leading to
repeated faulty payments to their suppliers.
Process of Recovery Engagement
The steps of a recovery audit process can be broken down into five phases:
Development: This phase is to develop the recovery objectives / scope of work.
Planning: This phase is to define the scope to set the expectations of work and align the
team. Preparation and the gathering of all information such as documents and other
necessary resources are completed as well.
Execution: Throughout this phase, the auditor will conduct regular update meetings with
the client to discuss recommendations based on their discoveries. The goal is to have an
understanding of what's going on and what's next.
Reporting: In this phase, auditors will present a summary report of final audit discoveries,
conclusions, and recommendations.
Follow-Up/Post-Audit Process: After the initial recovery audit has taken place, auditors
will follow-up with the client for ongoing support throughout the engagement.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Reasons of Recovery Engagement
The major reasons for recovery engagement are highlighted as follows:
i. To ensure payment accuracy and eliminate financial leakage.
ii. To identify areas of opportunity to elevate operational efficacy and efficiency within
the company or enterprise.
Benefits of Recovery Engagement
Improvement of Company Bottom-line: The most important benefit of recovery audits is
that it increases cash flow and pure profits through the identification revenue leakage.
It Contributes to Operational Efficiency: By identifying operational gaps and areas of
financial leakage, recovery audits offer a unique opportunity to remedy these issues and
make a company's internal processes more efficient and proactive.
It Identifies and Addresses Issues with Third-parties and Suppliers: By acting as a check
that ensures accuracy on all parties, recovery audits engagement offer a route for a
company to address issues or disconnects with suppliers and ensure contract compliance.
This proactive approach to third-party communication prevents issues that could
potentially harm the working relationship down the road.
Recovery Audits can mitigate the Risk of Fraud: By investigating deep into a business's
financials, the recovery audit engagement process uncovers mistakes, performs a root
cause analysis, corrects the error, and prevents the issue from happening again. As a result
of this enhanced oversight, recovery audits effectively close the window of opportunity for
financial fraud.
Prevent Future Leakage and Errors: Recovery engagement Identifies internal mistakes
such as payment issues, contract noncompliance, or incorrect information, can help
businesses correct the mistakes and take action to prevent future mistakes.
Stamp Duty
Stamp duty is a tax on instruments (written or electronic documents). The Stamp Duties Act
Cap. S8 LFN 2004 (“SDA” or the Act”) can be traced to the 1893 Stamp Duties and Stamp
Duties Management Acts passed by the British Parliament. It was enacted and came into
force on 1 April 1939. The Act, amongst other things, imposes stamp duties on written or
electronic instruments (agreements, contracts, receipts etc.).
Under the Act, stamp duties may be levied either at an ad valorem or ? at rate depending on
the type or nature of the instrument. Ad valorem means “according to value” so an ad
valorem rate is based on the value of the transaction while ? xed rate, as the name implies,
means a transaction.
In June 2020, an Inter- Ministerial Committee for the Audit and Recovery of Back-Years
Stamp Duties (the committee) was inaugurated and the Federal Inland Revenue Service
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
(FIRS) Adhesive Stamp was launched. The committee is comprised of representatives from
the FIRS, the Central Bank of Nigeria, the Federal Ministry of Justice and the Federal
Ministry of Finance, Budget & National Planning. The committee is tasked primarily with
enforcing Sections 110, 112 and 114 of the Stamp Duties Act (SDA) which empowers the
Federal Government to recover stamp duty as well as accompanying fines and penalties for
up to 5 years (Oyedele, et al 2020).
As a result, deposit money banks and other ? nancial institutions receiving cash deposits of
NGN 10,000 and above are required to charge a one-off NGN50 levy. The levy is to be
accounted for by the person to whom the transfer or deposit is made.
Subject to the approval of the National Assembly, the Minister of Finance may issue
regulations on the administration of the EMTL. There may be some contention whether the
stamp duty exemption applicable to receipts given for bank deposits as contained in the
Schedule to the Stamp Duties Act should also apply to this levy (since it is technically a
stamp duty on electronic receipts).
The revenue accruing by virtue of this levy will be distributed as follows:
i. 1.15% to the Federal Government and the Federal Capital Territory, Abuja; and
ii. 2.85% to the State Governments.
Legal Framework
Stamp Duties are primarily governed by the SDA. While the main body of the Act deals
with administration, transactions, de? nition of instruments and penalties, the stamp duty
rates are generally contained in the Schedule to the Act.
There are Subsidiary Legislations to the Act including Stamp Duties (Mortgage and
Marketable Security Duties) Regulations and the Stamp Duties (Approval for One Unit Die
of One Million Naira). Notice which deal with compounding duties in certain transactions
and approval of a speci? c die respectively.
Administration and Imposition
In line with Section 4 of the SDA (as amended), the Federal Inland Revenue Service (FIRS) is
the only competent authority to impose, charge and collect duties on instruments involving
a company or a body of individuals. Section 4(2) provides that the relevant state tax
authority in a State shall collect duties at rates imposed by the State as agreed with the
Federal Government on instruments executed between individuals.
Rules for Stamping of Instruments
Different rules apply depending on the type of stamp to be used, type of rate and where the
document is ? rst executed. Speci? c rules also apply to speci? c instruments. The rules are
summarized as follows:
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
a.
Instruments ? rst executed in Nigeria which, by law should be stamped by adhesive
stamps, are to be stamped on or before ? rst execution.
b. Unstamped or insufficiently stamped instruments maybe stamped with impressed
stamps, except reduced or extended, within forty days from date of ? rst execution.
Where such instruments are,
c. Subject to ad valorem duty, they are required to be stamped within 30days from ? rst
execution or ? rst receipt in Nigeria If executed outside Nigeria.
d. Charter-parties ? rst executed outside Nigeria without being duly stamped may be
stamped with an adhesive stamp within 10 days after it is ? rst received in Nigeria and
before it has been executed in Nigeria.
e. Charter-parties executed in Nigeria may be stamped with an impressed stamp as
follows:
i. Within seven days after the ? rst execution thereof;
ii. On payment of the duty and a penalty of 45 kobo;
iii. After seven days but within one month after the ? rst execution thereof;
iv. On payment of the duty and a penalty of twenty naira in any other case;
v. Shall not be stamped with an impressed stamp.
Party Responsible for Stamping
The SDA does not expressly state the party that is obliged to ensure that a dutiable
instrument is stamped in all cases. However, for certain types of documents (shown in Table
1 below), the SDA expressly mentions the party that is liable to penalty for not stamping. It
can therefore be deduced that these parties would be responsible for stamping the
instruments.
In situations where the law is silent, the practice is that the party paying the consideration
usually pays the duty, and where this party does not pay, the duty is borne by whoever
seeks to rely on the instrument/agreement in judicial proceedings.
Type of Document
Bond, Covenant or Instrument of any kind
whatsoever
Conveyance on Sale
Conveyances or transfers operating as
voluntary dispositions inter-vivos
Lease
Mortgage bond, debenture, covenant and
warrant of attorney to confess and enter up
judgment
Settlement
Obligation to Stamp
The Obligee, Covenantee or the person taking
the security
Vendee or Transferee
Grantor or transferor
Lessee
The mortgagee or obligee in the case of a
transfer or re-conveyance, the transferee,
assignee or disponee or the person redeeming
the security.
Settlor
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Penalty for Late Stamping
Failure to pay stamp duties to the appropriate authority within the time stipulated in the
SDA is an offence that could attract penalty and interest. For instruments executed by
companies, there is a risk that the FIRS may apply the penalty provision in the Federal
Inland Revenue Service Establishment Act, which is a 10% penalty and interest at the
prevailing CBN minimum rediscount rate plus a spread as announced by the Finance
Minister (currently 5%).
Anti-avoidance Provisions Under the SDA
Section 8 of the Act provides that where an instrument relates to several distinct matters,
stamp duties will be charged as though the matters are contained in separate instruments.
The Section further states that where an agreement is made for a consideration which is
chargeable with ad valorem duty and also for any other consideration, the instrument will
be charged as though each consideration is contained in a separate instrument.
Exemptions and Reliefs
Exemptions
The SDA provides certain exemptions. The exemptions are primarily contained in the
Schedule. Some examples include:
An unstamped bill of exchange in a set used to prove the contents of another part of the set
(duly stamped) which is lost or destroyed.
Certain documents in a conveyance on sale such as where ad valorem duty has been paid on
a decree or order conveying interest in property to a purchaser or any other person acting
on his behalf or by his direction, any conveyance based on such a decree or order shall be
exempt from ad valorem duty.
Certain documents in respect of a lease such as documents providing for penal rent or
increased rent in the nature of a penal rent.
For the duty payable on a loan capital by a Company, Corporation or body of persons, the
SDA provides that before the issue of such a loan capital, a statement of the amount to be
secured is to be submitted to the CAC and where it is shown to the satisfaction of the CAC
that stamp duty has been paid in respect of a mortgage or marketable security on any trust
deed or other document securing a loan capital, such a loan capital shall be exempt from
stamp duty.
Reliefs
The SDA provides duty relief on certain documents in reconstructions and amalgamations
such as a conveyance or transfer of sale assigning debts whether secured or unsecured of
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
the existing company or documents vesting or relating to the vesting of the undertaking or
shares in the transferee Company. However this relief does not apply to debts (apart from
debts due to banks or trade creditors) incurred less than two years before the proper time
for making a claim of exemption. Furthermore, an instrument made for the purpose of
transfer as stated above must be executed within 12 months of the date of the incorporation
of the transferee company. In addition, the document made for effecting the conveyance or
transfer consequent to an agreement, must be made within the same twelve months of the
? ling of the same agreement or particulars of it with the CAC.
Section 105 of the SDA provides duty relief in the case of transfer of property between
associated companies. For the purpose of the Act, a company is deemed to be associated
with the other essentially if it is the bene? cial owner of at least 90 per cent direct or indirect
interest in the other.
The SDA provides a reduction in stamp duty by 5 kobo on every twenty naira for a shortterm marketable security with a term not exceeding 3 years. However, where such a
marketable security is assigned, transferred or negotiated after the date on which the
amount to be secured is to be paid off, stamp duty will be charged at full rate.
The SDA also provides for an incentive for Companies in the form of reimbursement of
duty paid on a loan capital wholly or partially applied for the conversion or consolidation
of existing loan capital.
Objections/Appeal Procedures
A person who is dissatis? ed with the assessment of stamp duties may, within 21 days after
the date of the assessment, and on payment of duty, appeal against the assessment to the
High Court of the State in which the assessment was made.
This position is not consistent with the Federal Inland Revenue Service (Establishment) Act
which requires appeals to be ? led at the Tax Appeal Tribunal. In view of this, appeals may
be ? led at the relevant zone of the Tax Appeal Tribunal. This is based on section 68(2) of the
FIRSEA which requires that the FIRSEA would prevail in case of inconsistency in other tax
laws.
Some Speci? c Agreements inthe SDA
Assignment: An assignment is used to transfer intangible rights or incorporeal property
such as debts, shares and other interest in intangible property. Interest in land and
conveyance of intangibles are transferred by an assignment of rights over the property or
intangibles. The stamp duty rates for a conveyance and an assignment of the same type of
property are the same under the SDA. The terms could be used interchangeably depending
on the nature of property being transferred.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Assignment by way of Security: An assignment by way of security is an assignment for the
purpose of securing a loan. It is not an absolute assignment and the assign or retains the
right to a re-assignment of the property after the loan has been repaid. The assignment by
way of security is different from a mortgage although for the same purpose –to secure a
loan. An assignment is used to transfer intangibles or a chose-in-action. A chose-in-action is
a personal right to a property that can only be claimed or enforced by legal action as against
one that can be claimed by taking physical possession. A property right in an intangible is a
chose in action. An assignment by way of security can be used to create a security over any
intangible or chose-in action.
Security created over shares, insurance policies, intellectual property rights etc. are created
using an assignment by way of security.
Appraisements: This refers to the document that sets out the valuation of a property or an
estate. It is prepared by a person referred to as an appraiser as stated under sections 31 and
32 of the SDA.
Bill of Lading: A bill of lading is a document issued by the carrier or shippers agent
acknowledging that speci? ed goods have been received on board. The document indicates
the receipt of goods for shipment and evidences a valid contract of carriage between the
carrier and consignor.
Bill of Sale: A bill of sale is a legal document made by a vendor to a buyer. The document
shows the speci? c date, locality, and the sum of money or other consideration received by
the vendor from the buyer for the sale of a particular item or personal property which the
vendor lawfully had in his possession.
Charter Party: A charter party is de? ned by Section 46 of the SDA to include any agreement
or contract for the charter of any ship or vessel or any memorandum, letter, or other writing
between the captain, master or owner of any ship or vessel, and any other person for or
relating to the freight or conveyance of any money, goods, or effects on board of a ship or
vessel.
Contract Notes: Section 49 of the SDA de? nes a contract note as a note by an agent to his
principal who deals in stock or marketable securities and which advises the principal, a
vendor or purchaser of the sale or purchase of any stock or marketable security. Where a
contract note is in respect of a transaction of sale and purchase of stock or marketable
security, the contract note will be charged with the duty applicable to the purchase/sale of
the relevant marketable security.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Conveyance on Sale: Section 52 de? nes a conveyance on sale as an instrument or order of
the court whereby a property or interest in property is transferred to or vested in a
purchaser or any other person on behalf of the purchaser. The instrument that transfers
landed property is usually referred to as a conveyance or an assignment. In Nigeria, the
assignment or transfer of the entire interest that a person has in a property is described as a
conveyance or an assignment.
Conveyance of Property other than a Sale or Mortgage: In accordance with section 65 of
the SDA, an instrument, decree or order of the court by which property is transferred or
vested in any person not being a sale or mortgage will be charged with duty as a conveyance
or transfer of property. This could arise where property is transferred under a Will.
Property transferred under a trust to a new trustee or as a result of the retirement of an
existing trustee would fall within this category.
Conveyance or Transfer by way of Security: This is also a mortgage in satisfaction of a
debt, debenture or loan obligation. A Mortgage of property or land is a transfer or
conveyance by way of security. Note that where the property can only be transferred by an
assignment such as insurance policies or shares, the provisions on assignment by way of
security would apply. A document transferring land as security for a debt is referred to as an
assignment.
According to section 54 of the SDA, where there is a conveyance on sale, and the
consideration of the agreement is payable periodically for a de? nite period of not more than
20 years, stamp duty will be charged at an ad valorem rate on the total amount of the
consideration. However, if the consideration is payable periodically for a de? nite period of
more than 20 years or for an inde? nite period not terminable with life, an ad valorem stamp
duty rate will be charged on the amount of consideration which is payable within the ? rst 20
years after the date of the instrument. Furthermore, where the consideration is payable
periodically within an inde? nite period terminable with life, the stamp duty charge will be
on the consideration payable during the period of 12 years following the date of the
instrument.
Conveyance in Consideration of a Debt: Section 56 of the SDA states that where a property
is conveyed in full or part settlement of a debt, the value of the property will be considered
as the total or partial debt amount as the case may be. Therefore, Stamp duty will be charged
at an ad valorem rate on the value of the property irrespective of any charge or
encumbrance on it. This conveyance is stamped as an assignment or conveyance by way of
security. The provisions dealing with mortgage would also apply depending on the nature
of the property.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Debenture for Securing Repayment of Money or Transfer of Stock: A debenture is a term
used to describe the medium to long-term debt instrument used by companies to borrow
money. Thus, a debenture is like a certi? cate of loan or a loan bond evidencing the fact that
the company is liable to pay a speci? ed amount with interest. The money raised by the
debentures becomes a part of the company's capital structure, but it does not become share
capital. A secured debenture is one that is a loan secured by a charge (? xed or ? oating) over
the company's assets.
For stamp duty purposes, a debenture instrument is given the same treatment as a transfer
by way of security i.e. a mortgage or conveyance of marketable security. The consideration
for stamp duties is the security created to secure the loan.
Hire Purchase Agreement: Section 30 of the SDA de? nes a hire purchase agreement as one
in which goods are supplied on hire in consideration for periodical payments whereby the
goods become the property of the person to whom the supply is made. Hire purchase
agreement shall be charged with duty as an Agreement and if under seal as a deed, as the
case requires.
Leases: A lease is a contract by which the rightful possessor of real property conveys the
right to use and occupy the property in exchange for consideration.
However, an agreement for a lease denotes a contract between a lessor and a lessee to enter
into a lease agreement. While a lease agreement sets out the terms (such as duration and
consideration) of the lease entered into between the parties. According to section 68 of the
Act, an agreement for a lease will be charged as if it were an actual lease made for a term and
consideration.
Loan Capital: Loan capital is de? ned as any debenture stock, other stock or funded debt or
any capital raised by any company or corporation in Nigeria. This refers to borrowed
money but does not include an overdraft raised for a period not exceeding 12 months. Loan
capital is charged at the rate of 25k for every N200. Loan capital would be similar to a
shareholder loan that is granted for a long or an inde? nite period. A debenture issued to a
company would not fall under this category but rather as a transfer by way of security.
Marketable Security: The Act de? nes a marketable security as a security that is capable of
being sold in any stock market. Under section 76, marketable securities include marketable
security made or issued by or on behalf of any Nigerian company or individual, foreign
government or corporation and o? ered for subscription in Nigeria. This includes shares or
bonds issued by a private or public company. A marketable security also includes bonds
issued by the Federal Government. Shares and bonds are marketable securities.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Mortgage: A mortgage is a security interest created over property by a debtor in favour of a
creditor as security for a debt, on the condition that it shall be returned on payment of the
debt within a certain period. Mortgage of land and other real property is provided for
under section 80 of the SDA. The SDA de? nes a mortgage as follows:
i.
A security by way of mortgage for the payment of any de? nite and certain sum due
or owed or for the payment of money to be lent advanced or paid subsequently;
ii. A conveyance of property in trust to be sold and intended as security which is
redeemable before sale or disposal;
iii. A defeasance, letter of reversion, declaration or other deed or writing intended as a
security and which quali? es a conveyance or makes a conveyance, disposition of
land, estate or property redeemable.
Any Deed Operating as a Mortgage: The mortgage of stocks such as shares is dealt with
under section 29 and states that any instrument under hand only (other than a promissory
note or bill of exchange) accompanied by a deposit of share warrant or share certi? cate to
bearer or foreign share certi? cate or any security for money transferable by delivery, by way
of security for any loan would be charged with duty. In practice, security over shares of a
listed company is secured by placing a lien on the shares because the shares are domiciled at
the Central Securities Clearing System (CSCS). Security over shares of a private company
can be created by way of assignment of security.
A mortgage of intangibles is always done by an assignment even though it may be referred
to as a mortgage. The duties that apply to a mortgage would also apply to an assignment by
way of security.
Share Capital: Section 100 of the Act provides that the statement of nominal share capital of
a limited liability company will be charged with ad valorem duty. The statement of increase
in the registered capital is required to be stamped within 15 days of passing the resolution
for an increase.
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Interpretation of the Stamp Duty Act in 2020 Finance Act
Below is the translation of the changes in the 2020 Finance Act as amended:
S/N
AMENDMENT
TRANSLATION
1
Removal of stamp Finance Act, 2019 introduced a stamp duty of N50 on
duties on electronic electronic receipts or electronic money transfer valued at N10,
receipts
000 or above which is deposited into a bank. Finance Act, 2020
deleted this provision and replaced it with the Electronic
Money Transfer (EMT) Levy. The EMT levy replaces the
stamp duties on electronic transfers and its administration is
subject to the regulations made by the HMoFBNP as approved
by the National Assembly.
2
Recognition
of
Adhesive
stamps
printed by the Nigerian
Postal Service
Finance Act, 2020 has amended the definition of “stamp” in
Section 2 of the SDA to include adhesive stamps produced by
the Nigerian Postal Service. This effectively resolves the longstanding dispute between the Nigerian Postal Service and
FIRS on the competent authority to print adhesive stamps
used for stamping of dutiable instruments.
3
Duty upon receipt
The Act has further deleted the phrases “electronic
inscription” and “or any acknowledgment of duty charged on
an electronic transaction” in Sections 89(1) and 89(2) of the
SDA, respectively, and also deleted Section 89(3). The intent of
this amendment is to make clear that duty on electronic
receipts has now been replaced with the EMT Levy.
Excess Bank Charges
Excess bank charges can be described as illegal charges which financial banks fraudulently
deduct from customers' deposits. In 2018, the CBN claimed to have recovered over N65
billion from banks caught in the act.
Excess bank charges are charges imposed on customer's account that have the following
character:
i. Charges not supported by CBN Guide to Bank Charges (even if disclosed on the
offer letter).
ii. Interest Charges above CBN regulated interest rate (even if disclosed on the offer
letter).
iii. Charges not disclosed on the offer letter.
iv. Charges that are above what was agreed on the Offer Letter. (Any interest rate
reviewed upwards and was not agreed by the customer is invalid).
Meanwhile, the CBN in most of its annual economic reports had claimed that most of the
complaints received by various customers across the country were “excess bank charges”
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
related. This actually implies that financial banks indulge in excess bank charges in Nigeria
to generate revenues but which is illegal as far as financial regulation is concerned.
The CBN released a statement on its Tweeter handle educating Nigerians on how to deal
with excess bank charges in the country.
It was noted that bank customers can reach the CBN for petitioning any money deposit
bank that defies its financial regulations.
According to the statement, customers have the privilege to report to the CBN what is
happening between them and their banks but most didn't know how to go about this. There
are procedures for reporting a financial bank to the apex bank. Meanwhile, no complaint
would be treated without following the due process.
Ways by which Bank Overcharges Customers
It is no longer news that Banks rips-off their customers, but the rate at which they do it these
days is becoming alarming. Banks capitalize on the ignorance of their customers as regards
banking rules and regulation to rob them of their money. This situation is very dangerous
when the bank account of the holder is running on steady overdraft or loan facility.
Below are some common ways at which Banks rip-off their customers:
a. COT is expected to be charged only on valid withdrawals. Bank overcharge COT by
inclusion of transactions exempted from COT charges like returned cheques, loan
liquidation and other transaction that has to do with liquidation, inclusion of COT
Shortfall in the loan agreement signed by their customers-the implication of this is
that when a customer is projected to make a particular turnover per month and does
not, COT shall be applied on the shortfall. This charge is illegal because COT is
chargeable on withdrawals only.
b. Outrageous ATM Charges.
c. Loan and overdraft interest above the interest margin allowed above the Minimum
Rediscount Rate (MRR) or Monetary Policy Rate (MPR) - This is popularly called
wide Interest Rate Spread. Most banks violate this regulation.
d. Backdating value dates of Debit transactions so as to make withdrawals to have
value earlier than the transaction date, the effect is to make account holder suffer
overdraft interest on backdated days.
e. Excess overdraft interest by applying dual rates for overdraft charges. One the
agreed rate while the second who is higher applied to Excess overdraft (amount
overdrawn in excess of overdraft limit). Note: withdrawing beyond overdraft limit
does not give bank the right to apply higher rates in form of dual rates. To
compound issues, some banks apply the excess overdraft rate on both the actual
overdraft amount and the excess overdraft.
f. Charging VAT on interest. VAT is accepted on interest.
g. Hidden loan charges by calculating interest with rate outside monetary regulations
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
and agreed rates.
h. Using unauthorized rates for miscellaneous fees. That is, charges outside CBN's
guide (Bankers Tarrifs issued by the Bankers Committee from time to time).
i. Charges for SMS notifications are supposed to be free when compare to world class
best practice.
The solution to the above rip-off is regular scrutiny of the bank statement and obtains proof
of legality of bank charges. Customers should also question miscellaneous charges of
Returned cheques, Renegotiation fee, Above-the-limit charges, Facility approval, and
Management fee, Commission on cheques, Maintenance fee, COT Shortfall fee and
Transfer fee
Excess Bank Charges and its Recovery Services
The Apex bank disclosed that a customer can lodge a complaint on excess bank charges in
Nigeria, the bank has maximum of 30 days to resolve the problem. But if nothing
satisfactory is done within that period, the customer can take the next step which is
reporting the bank to the CBN. With this approach, the CBN wanted the customers to
believe that excess bank charges in Nigeria would be reduced. But technically, this can only
help the customer to recover their money. It wasn't the approach to stop or reduce the
menace as the CBN wanted the customers to believe in its intervention.
Steps to take in Recovery Process
Know the Period within which to make your Claim: Our present laws give 6 years as the
maximum length of time to bring a claim on an alleged tort. Specifically, Section 7(4) of the
Limitation Act 1966 declares that an action founded on tort shall not be brought after the
expiration of six years from the date on which the cause of action accrued. The provision of
the limitation law is stringent. Indeed, a limitation law is strict liability law. This means that
Court Action when they become necessary to recover debts, arrears of interests, excess or
illegal bank charges, spurious charges, tortuous malfeasance, damages for negligence or
breach of a duty of care, account wrongly stated must be started within a period of six(6)
years of the occurrence of the injury, loss, damage that may have occurred.
Communicate with your Bank, Write a Complaint: Start to hold conversation with your
bank, write to the bank requesting for the refund. State what you were charged with
analysis and what the Bank should have charged, include any agreements, offer letter, CBN
Guide to Bank Charges, Circular etc to buttress your claims. Hopefully the banks internal
audit or internal control unit will review your claims and confirm it. The Banks may
immediately do a refund.
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Forward Your Complaint to Central Bank of Nigeria: Should your bank fail to satisfy you
with a resolution of the issues regarding the excess bank charges, write to the Central Bank
of Nigeria's Consumer Protection Department. The department will mediate between you
and the Bank, in most cases, settlement are reached. However, an amicable resolution fail,
complaints can be made to Nigeria's Consumer Protection Council, The Lagos Multi-Door
Court House and other Arbitration entities in Nigeria. Should all attempt to settle fail, you
can proceed to the High Court to compel your bank to remedy the loss to your finances.
General Tax Audit
The development of any nation depends on the amount of revenue generated and applied
by the government on public infrastructure for the benefits of members of that society. No
economy can grow without adequate resources for infrastructural development and
provision of power and public utilities and services. Taxes, and tax systems, are
fundamental components of any attempts to build nations, and this is particularly the case
in developing or transitional nations (McKerchar & Evans, 2009).
As Brautigam (2008) stated that taxes underwrite the capacity of states to carry out their
goals; they form one of the central arenas for the conduct of state-society relations, and they
shape the balance between accumulation and redistribution that gives states their social
character. In line with this, taxes build capacity (to provide security, meet basic needs or
foster economic development) and they build legitimacy and consent (helping to create
consensual, accountable and representative government) (McKerchar et.al, 2009). Azubike
(2009) noted that a tax system is an opportunity for the government to collect additional
revenue needed in discharging its present obligations. Okezie (2003) states that a tax is a
burden which every citizens must bear in order to sustain his or her government thus
enabling that government perform certain basic functions to the benefit of those its'
governance. Thus, it is evident that a good tax structure plays a multiple role in the process
of economic development of any nation.
Tax Audit
It has been affirmed that tax audit is always triggered by suspicion of fraud, evasion and
related offences. According to Adam (2001), tax audit is a level of enquiry aimed at
determining what level of fraud or willful default or neglect a tax payer perpetrated and to
obtain evidence for possible prosecution of the culprit. This implies that tax audit centers on
determining some unrevealed sources of revenue, pointing to gross non-compliance, or it
may be about proof of underpayment and fraud. (Ojo, 2016) supported the view by
defining tax audit and investigation as an inspection of taxpayers' business records so as to
ensure that law and regulation were maintained in the amount of tax reported. This reflects
that the sole aim of tax audit is to ensure that laws and regulations regarding tax revenue are
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maintained by taxpayers with the aim of increasing the revenue pool of the government.
Bassey (2013), observed that tax audit is an essential compliance tool in most tax jurisdiction
all over the word as it maximizes the expected tax revenue to the government both in
developed and in developing countries.
(Okonkwo, 2014) cited in (Ojo, 2016) revealed that tax audit revolves examination of an
individual or organization's tax report by the relevant tax authorities in order to ascertain
compliance with applicable tax laws and regulations of state. Tax audit is necessary because
it help the government to collect taxes paramount in financing budget and maintaining
economic and financial order and stability. Similarly, Kircher, 2008 submitted that tax audit
ensure that satisfactory returns are submitted by the tax payers, to organize the degree of
tax avoidance and tax evasion, to ensure strict compliance with tax laws by tax payers, to
improve the degree of voluntary compliance by tax payers and to ensure that the amount
due is collected and remitted to government. (Onoja & Iwarere (2015) and (Onuoha & Dada,
2016), revealed that the following types of tax audit are relevant in ensuring tax compliance.
Types of Tax Audit
Desk or Office Audit: This type of audit takes place within the premises of the tax officials.
Requests of relevant documents are made by the tax authority and the auditor does all the
review in the confines of his own office. Onoja and Iwarere 2015 noted that no prior notice is
given to the tax payer and that he only gets know when letters are written to him requesting
for certain documents or explanations. Office audit is cost effective affords auditors to
independently determine the accurate tax liability of the tax payers (Bassey, 2013;
Adediran, Alade, & Oshode, 2013).
Field Audit: Olaoye and Ogundipe (2018) opined that desk audit often times lead to field
audit when additional documents are needed to complete the inspection of a tax payer. This
implies that field audit is more elaborate and broader than office audit because it transcends
the office of the auditor. Explaining further, Onoja and Iwarere (2015), noted that field audit
requires the taxpayers are well-informed before the commencement of the audit. This type
of audit allows physical verification of tax payers claims so as to confirm the facts and figure
of the returns. [Olaoye & Ogundipe, (2018); Onoja & Iwarere, (2015)] affirmed that field
audit would improve the level of compliance by the tax payers
Back Duty Audit: Back duty audit is introduced when there is doubtful claim of capital
allowance related to previous or current year, a situation where lesser tax is charged as a
result of falsification of document submitted by the tax payers, a reduction of profit in the
returns files in tax office and failure to disclose or include in full any income or earning in
the return made available to the tax office [Onuoha & Dada, (2016); Onoja & Iwarere,
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(2015)]. It is an exercise by the relevant tax authority to ensure that the amount due to the
government is duly collected. This goes to confirm the relevant tax authority as key player
in ensuring that government revenues are completely and accurately collected.
Registration Audit: This type of audit is used to cage individuals and companies in the tax
net. It entails documentation of the tax payers' identities and other business information
obtained from the Corporate Affairs Commission (CAC) and the Nigeria Custom Service
(NCS). This exercise will enable the tax authority to ascertain organizations and other
chargeable persons outside the tax laws so as to get them registered and charged them
accordingly (Onuoha & Dada, 2016).
Objectives of Tax Audit
The purpose of tax audit is to determine a true and fair view of the business records for tax
purposes. The tax audit officer is responsible to ensure that the reported amount is correct
and that the amount of tax paid is correct accordance with tax laws and regulations. The
other purpose of tax audit is to achieve the voluntary compliance with the tax laws and
regulations and to ensure that a higher tax compliance rate is achieved under the SelfAssessment System (eeVonn, 2009).
According to Bitrus (2014), the objectives of tax audit are to enable the tax auditors to
determine whether or not:
1. Adequate accounting books and records exist for the purpose of determining the
taxable profits or loss of the taxpayer and consequently the tax payable;
2. The tax computations submitted to the authority by the taxpayer agree with the
underlying records;
3. All applicable tax legislation have been complied with;
4. Provision of an avenue to educate taxpayers on various provisions of the tax laws;
5. Discourage tax evasion;
6. Detect and correct accounting and/or arithmetic errors in tax returns;
7. Provide feedback to the (tax administrators) on various provisions of the law and
recommend possible changes;
8. Identify cases involving tax fraud and recommend them for investigation;
9. Forestall a taxable person's failure to render tax returns; and
10. Forestall a taxable person rendering incomplete or inaccurate returns in support of
the self-assessment scheme.
According to Adeniyi Adeniji, (2016), the purpose of executing a tax audit is to enable the
tax auditors determine whether or not:
1. Adequate accounting books and records exist for the purpose of determining the
taxable profit or loss of the taxpayer and the consequently the tax payable;
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2. The tax computation submitted to the tax authority by the authority by the taxpayer
agree with the underlying records, and
3. All applicable tax legislations have been complied with
4. Provision of an avenue to educate taxpayers on various provisions of the law and
recommend possible changes;
5. Discourage tax evasion
6. Detect and correct accounting and / or arithmetical errors in tax returns;
7. Provide feedback to the management on various provisions of the law and
recommend possible changes;
8. Identify cases involving tax fraud and recommend them for investigation;
9. Forestall payable persons' failure to render tax returns;
10. Forestall payable persons' rendering incomplete or inaccurate returns; and
11. To encourage voluntary compliance; which is one of the main reasons for the
support of the self-assessment scheme.
Characteristics of Tax Audit
According to OECD (2016) Compliance regimes operate within the unique legal, cultural
and administrative background of individual member countries. Nevertheless, there are a
number of common pre-requisite features and requirements that need to be taken into
consideration to ensure a high level of effectiveness and efficiency from tax audit activities
and to support -continuous improvement.
They are:
1. A comprehensive legal framework, including an appropriate regime of sanctions.
2. Well-defined organizational and management processes, including a
comprehensive performance measurement framework.
3. Well-defined audit techniques and adequate support arrangements; and
4. Adequate human resource management and development programs.
Advantages of Tax Audit
The following are the advantages of tax audit as espoused by Noun (2012):
1. Tax Audit gives confirmation of the actual financial position of the organization
being audited;
2. It gives credibility to the financial statements;
3. Tax Audit makes it easy to negotiate for insurance claims;
4. Tax Audit also brings up-to-date the financial records of an organization;
5. Tax Audit reveals some of the internal control weaknesses;
6. Tax Audit gives assurance to shareholders and users of financial statements that the
accounts are true and fair;
7. Tax Audit ensures that accounts are produced according to the best practices;
8. Tax Audit helps to improve the system of internal control;
9. Tax Audit applications for loans are greatly enhanced if supported by audited
accounts;
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10. Tax Audit facilitates the admission of new partners into a business.
Condition for a Good Tax Audit
For an auditor to carry out a good tax audit exercise, the following conditions must be
considered and fulfilled:
1. The tax auditor must be familiar with the environment in which he works. It is a
condition which is highly critical that the tax inspector must be properly schooled in
the political, economic, social, cultural and religious environment of the taxpayer. A
good knowledge of his environment will affect the decision made by him.
2. The tax audit should be properly supervised by professionals and when new tax
inspectors are sent to carry out the audit, they should be monitored by older ones so
as to make sure that the right thing is done.
3. The tax officials should be inspired to carry out tax audit, he should be properly
trained and have experience in his area. The tax inspector should not be carried
away by corrupt practices that render the aim of the tax audit inadequate.
4. Specialization should be encouraged. The cases should be grouped. This will allow
the tax audit staff to become specialist in specific field.
5. The manner in which the audit is being carried out should be changed. The use of
computer should replace the manual process as this will go a long way in facilitating
the job and helping to preserve information for a long time. This will improve the
efficiency of the exercise (Ogundele, 1999).
Idebi (2001), in his own view, highlighted conditions for a good tax audit exercise:
Staff motivation: For a good examination, the staff should not only be properly trained but
also well remunerated.
Knowledge of the environment: A good knowledge of the environment in which the
company operates is of paramount importance to a good tax audit exercises. E.g. political,
economic, social, religion and cultural environment. A good knowledge of the impact of the
environment will enable the inspector to be flexible in taking decisions.
Effective Supervision: More experienced staff must try as much as possible to supervise the
new ones.
Computerization: This is also necessary for efficiency and effectiveness.
Independent Management: The audit staff should be allowed to do their work without any
fear of being overruled on their conclusion.
Proper staff compliment: There must be a good mix of staff to enable work be done well. In
other words there must be proper complement of clerical/executive cadre, inspectorate
cadre and other supportive staff.
Functional appeal process: An efficient and effective appeal process that will serve as a
check on the Tax audit staff should also be in place. This will serve as a deterrent to high
handed-ness on the part of such staff and reduce the excesses of the taxpayers.
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Principles of Tax Audit
There are a number of key principles that apply to quality audits which are visible in the
audit programmes, regardless of jurisdiction or revenue type. Following these principles is
not intended to take away or limit the authorities granted through legal or procedural
guidelines. Rather they are descriptive of the manner in which an audit should be
conducted and they are espoused by OECD (2016) below;
Accurate: They identify non-compliance, entail a correct interpretation of the law, and lead
to a correct assessment of liability.
Efficient: They minimize the compliance burden on the taxpayer and minimize the use of
the revenue body's resources in terms of the outcome delivered.
Objective: All decisions made are based on facts.
Transparent: As issues are developed and fully documented in the work papers, these
developments are generally discussed with the taxpayer during the course of the audit.
Fair: Technically accurate and procedurally correct in accordance with domestic laws and
policies.
Complete: The audit has a defined start and end point and the taxpayer knows when the
audit process is complete.
Defensible: The decisions made in the audit and the actual audit process can stand up to
external scrutiny.
Consistent: The same taxpayer circumstances should produce the same result regardless of
which auditor undertakes the audit.
Approach to Conducting a Tax Audit
While conducting a tax audit, the auditor should apply the generally accepted practice and
procedures of auditing, as he would apply in case of other audits. The auditor should get
the financial statements as well as the statement of particulars authenticated by the assesse
before verification.
The auditor can apply the technique of test checking or statistical sampling. It totally
depends upon evaluation of internal control system prevalent in the entity and the
materiality of the relevant transactions. While conducting a tax audit, auditor should keep
in mind that the primary object behind the tax audit is to assist the authorities in assessing
the correct income of the assesse. For conducting an effective tax audit, auditor needs to
develop an approach, which is a synthesis of taxation laws and auditing principles.
The auditor has to maintain proper detailed working papers and it is necessary that
auditors should keep detailed notes about evidence on which has relied upon while
conducting the audit and also maintain all his working papers, such working papers should
include his notes on the following amongst other matters (Ravinder Kumar, 2012):
1. Work done while conducting the audit and by whom.
2. Explanations and information given to him during the course of the audit and by
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whom.
3. Decision taken on the various points affecting tax audit.
4. The judicial pronouncements relied upon by him while making the audit report:
and
5. Certificate issued by the client/management.
The tax auditor should also consider the following while submitting his report:
1. Accounting standards.
2. All significant accounting policies shall be disclosed.
3. Any change in accounting policy, which has material effect in the previous year or
subsequent to the previous year, shall be disclosed.
4. Prior period item shall be separately disclosed.
5. Extraordinary items of the enterprise should be disclosed.
6. Change in method of valuation of inventory.
The Tax Audit Process
The tax audit process takes two forms which are:
1. Pre self-assessment scheme; and
2. Self-assessment scheme
Pre Self-assessment Scheme
The tax audit branch carries out audit exercise only on companies that have been referred to
it by the management. The ultimate authority for referral of cases for audit lies with the
Chairman through the Director of Assessment. The usual channel for recommending cases
for audit includes:
The Management: The technical committee, the chairman and the directors could refer
cases directly to the branch.
Zonal Coordinator: The Zonal Coordinator may also recommend cases for tax audit
through the Director of Assessment.
Area Tax Controllers: Desk officers through their area tax controllers (ATC), recommend
cases for tax audit. The Area tax controllers would then pass such recommendations to the
Director of Assessment.
Tax Audit Inspectors: Sometimes, in the course of the Audit of a company, it might become
imperative to conduct multiple audits that it widening the tax audit exercise of a company
to cover others within the same group or those with substantial transactions with the
company undergoing audit. In cases like this, the tax auditor may recommend that ongoing
audit be extended to cover related companies.
Self-Assessment Scheme
The stages in this tax audit process are as follows:
1. Selection of taxpayer to be audited
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2.
3.
4.
5.
6.
7.
8.
9.
Preliminary review of taxpayer's file
Notification of Taxpayer
Pre-audit meeting followed immediately by field audit.
Post audit meeting
Interim Audit Report
Post audit review by regional/Headquarters Audit
Reconciliation meetings
Final Audit Report.
Selection of Taxpayer to be Audited: The guidelines and criteria for selection of files for
audit are to be determined by the Audit Headquarters. The selection of cases for audit is a
management function. The criteria which would vary from one type of business to the other
include, but are not limited to, the following:
a. Self-assessment taxpayers: at least two years since the last audit of the taxpayer.
b. Taxpayers with refund claims: especially arising from excess withholding tax
credits and, or other named reasons.
c. Taxpayers with nil returns or continuous loss situation.
d. Taxpayers with very low adequacy ratios.
e. Based on routine industry checks or sartorial audit (project audit).
f. Based on lead information received from intelligence or other FIRS departments or
external sources.
g. Transfer pricing/thin capitalization arrangements.
h. Tax planning schemes.
i. Claims under Double Taxation Agreement (DTA).
j. Secondary Files: relationship with another taxpayer by way of holding, subsidiary,
a associated or related companies could be criteria for selecting companies for audit.
k. Industrial group's compliance evaluation and profitability comparison.
l. Verification of poor or extraordinary performance.
m. Referrals resulting from desk examinations.
n. Random sampling.
o. Firms making unusual requests or taking extra ordinary decisions such as
centralizing and while decentralized operation.
Stages of Tax Audit
Tax audits generally have four stages:
1. Pre-audit research
2. Investigation/fieldwork
3. Work paper documentation (write-up)
4. Review.
Pre-Audit Research
The purpose of pre-audit research and audit planning is to decide if the audit assignment
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meets the initial criteria for selection and to make a preliminary determination of the best
audit approach. Pre-audit research will vary according to tax program, but will include a
review of Department records, initial contact with the taxpayer, and discussion with the
audit supervisor. The auditor should use the results of such research to develop the audit
approach and to budget time for the audit. Thorough research in the office should reduce
fieldwork time and should assist the auditor by disclosing any irregularities which need to
be investigated.
Investigation/Fieldwork
Investigation often commences with an initial interview at the taxpayer's place of business,
includes fieldwork, and ends with an exit interview. However, investigation may also be
done by the auditor in the office. The initial interview should be viewed as an opportunity
to gain knowledge useful in making the audit more effective and efficient.
The auditor should discuss the audit procedures with the taxpayer to assure that the
information obtained is accurate. However, the auditor should use discretion if the
taxpayer is evasive. Auditors may ask taxpayers to provide specific records containing the
information necessary, but should also work with the taxpayer in obtaining the records and
information requested. The auditor should use the exit interview to explain the results of
the audit, provide draft work papers, inform the taxpayer of any additional documentation
needed, explain available remedies, and educate the taxpayer to correctly self-assess.
Audit Documentation (Write Up)
Documenting the audit goes on throughout the entire process. Throughout the interviews
and investigative procedures auditors record (or document) their findings and conclusions
in order to accurately determine audit exceptions. The write up stage includes organizing
and editing the draft work papers and narratives into a final report.
This process creates the permanent work paper file which becomes the documentation that
supports an assessment.
It is neither prudent nor possible to document every aspect of the audit procedures
performed. The auditor must use his or her judgment to determine what information is
necessary to support exceptions noted and what is not. Audit policy may require certain
minimum information. Supervisors may expand on that requirement.
Review
The review process assures that the audits meet the Division's quality standards and that
audit procedures are consistent throughout the Districts. There are three main reviews all
audits must go through;
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Self/Peer Review
Supervisor review to the extent necessary to determine that quality standards are met, and
Audit Technical Support System Review (ATSS Review).
The auditor/peer review ensures that the auditor/peer has reviewed the work thoroughly
as documented on the Quality Assurance Evaluation Form (QAEF). The supervisor reviews
the audit throughout all phases to the extent necessary to determine that correct procedures
are applied, work papers are properly documented, correct statutes are used, and
narratives are well documented. ATSS review focuses on adherence to tax law and audit
policy.
This review also confirms that the audit contains all information necessary to defend the
audit in case of protest. Finally, the ATSS review serves to determine if the auditor, peer, and
supervisor's review procedures are sufficient.
Challenges Facing Tax Audit
The following are some of the challenges facing tax audit exercise among others as
espoused by Okonkwo (2014):
1. Lack of record keeping by taxpayers;
2. Lack of co-operation by taxpayers and agents;
3. Partial submission of books and records for inspection;
4. Deliberate introduction of delays;
5. Aggression;
6. Reconciliation meetings not taken seriously;
7. Lack of audit skills by some Tax Auditors leading to prolonged reconciliation
meetings;
8. Influence peddling; and
9. Inducement of tax auditors.
Solution to Challenges Facing Tax Audit
Afuberoh and Okoye (2014) suggest that Well Equipped Data Base (WEDB) on all tax
payers should be established by the following government tiers: Federal; State; and Local
Governments. Establishing this helps to achieve the aim of identifying all possible sources
of income of tax payers for tax purpose.
CONCLUSION AND RECOMMENDATIONS
The economic situation in Nigeria has forced Banks and most businesses to adopt survival
strategies. For some of the Deposit Money Banks in Nigeria, all is fair in war. They have no
morals in passing not only unauthorized charges, excess charges, illegal charges, spurious
charges into their customers account all in a bid to boost their revenue making profile. Since
excess bank charges are still prevalent and threaten consumer and general publics'
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
confidence in the banking system and the economy, it has become imperative that roles and
responsibilities be developed and implemented by stakeholders to fast-track an end to the
decease. However, the FIRS disclosed a 1,000% increase in stamp duties collection of N66
billion in the first five months of 2020 compared only to N6 billion naira collected from
January to May 2019.
The Federal Government has demonstrated a special focus on stamp duty as a huge
revenue earner to help plug budget deficit and shore up government revenue. While
section 114 of the Stamp Duty Act provides that enforcement at institutions such as Deposit
Money Banks (DMB), Nigeria Inter-Bank Settlement System (NIBSS), Central Securities
Clearing System (CSCS), Corporate Affairs Commission (CAC) etc in respect of stamp
duties and a practical challenge be initiated in conducting back-duty assessment beyond
the recovery of stamp duties already collected and yet to be remitted. In addition, penalties
under the Stamp Duty Act are generally based on conviction rather than merely
administrative.
It is expected that the recovery exercise which may be extended to companies and other
persons to assess compliance with the provisions of the SDA as several banks have started
to debit their customers for the arrears of stamp duties not previously charged. The
Introduction of the FIRS Adhesive Stamp will, among other things, plug the revenue gap;
enable proper accountability and transparency; simplify administration of Stamp Duties;
and reduce disputes.
Comprehensive reform of the SDA is necessary to ensure that the law is simple to
understand and administer, and fit for purpose while also limiting the coverage to fewer
items that are high revenue yielding. Also, the redesign of the SDA should align with other
economic and social objectives of the country, in particular to avoid taxing investments or
production and not to discourage financial inclusion.
The Federal Government should make a law that declares Excess Bank Charges as Fraud
against the people and businesses; Provide serious penalties against banks and their
identified staff that perpetrate excess bank charges; and ensure quick resolution, by the
Judiciary, of cases involving Excess Bank Charges.
REFERENCES
Adams, C. (2001). For Good and Evil the Impact of Taxes on the Course of Civilization. Hacienda
Publishing, Madison, USA.
Adediran, S. A., Alade, S. O. & Oshode, A. A. (2013). The impact of tax audit and
investigation on revenue generation in Nigeria. European Journal of Business and
Management, 5, 171-175.
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Recovery Engagement: Stamp Duty, Excess Bank Charges And General Tax Audit
Azubike, J. B. U. (2009). Challenges of tax authorities, tax payers in the management of tax reform
processes. The Nigerian Accountant, 42(2), 36-42.
Bassey, O. U. (2013). Companies Income Taxation in Nigeria. CIBN Press Ltd., Lagos.
Brautigam, D. (2008). Introduction: Taxation and State-Building in Developing Countries', in
Developing Countries: Capacity and Consent, Cambridge University Press,
Cambridge, 1-33, 1.3.
Kircher, E. E. (2008). Enforced versus voluntary tax compliance: The slippery framework.
Journal of Economic Psychology, 29, 210-225. https://doi.org/10.1016/j.joep.2007.05.004
Mittone, L. (2002). Dynamic behaviours in tax evasion. An experimental approach. University
of Trento.
Mittone, L. (2006). Dynamic behaviour in tax evasion: An experimental approach. The
Journal of Socio-Economics, 35(5), 813-835.
Mittone, L., Panebianco, F., & Santoro, A. (2017). The bomb-crater effect of tax audits:
Beyond the misperception of chance. Journal of Economic Psychology, 61, 225- 243.
Ojo, O. D. (2016). The impact of tax audit on the compliance level of taxpayers in Kwara
State. Unpublished Master's Thesis, University of Ilorin, Ilorin.
Okezie, S. A. (2003). Tax Administration in Nigeria: Accountability/Fairness. The Institute of
Chartered Accountants of Nigeria, MCPE Programme, Lagos.
Okonkwo, A. I. (2014). Critical Evaluation of Tax Audit and Investigation Processes in Enhancing
Tax Compliance. Being a paper presented at the CITN MPTP in Uyo.
Olaoye, C. O., Adebayo, A. I. & dada, R. A. (2014). Harnessing internally generated revenue:
A panacea to tax evasion and avoidance in Nigeria: A study of Ekiti State; economics
and identity. The Quarterly Journal of Economics, 115, 715-753.
Onoja, M. L. & Iwarere, T. H. (2015). Effects of tax audit on revenue generation: Federal
Inland Revenue Service, Abuja Experience. Journal of Good Governance and
Sustainable Development in Africa, 2, 67-80.
Onuoha, L. N. & Dada, S. O. (2016). Tax audit and investigation as imperatives for efficient
tax administration in Nigeria. Journal of Business Administration and Management
Sciences Research, 5, 66-76.
Oyedele, T., Ekirume, K., Ajayi, S., Akinla, F. & Adeyoyin. T. (2020). A guide to stamp duties
in Nigeria. Publication of Price water house Coopers Limited.
Oyedokun, G. E. (2016). Relevance of tax audit and tax investigation in Nigeria. Available
on https://www.researchgate.net/publication/317994395.
Oyedokun, G. E. (2019). Imperative of Tax Audit and Investigation. Aaron and Hur Publishing,
Lagos, Nigeria.
Von der Heyde, A., Brandhorst, S. & Kluge, A. (2015). The impact of the accuracy of
information about audit probabilities on safety-related rule violations and the
bomb crater effect. Safety science, 74, 160-171.
285
CHAPTER NINETEEN
REVIEW OF CHAPTER: IMPACT OF VALUE ADDED ECONOMIC
GROWTH IN NIGERIA
Olawale, Mathew Kunle
Department of Management and Accounting
Faculty of Management and Social sciences
Lead City University, Ibadan, Nigeria
Editors:
Muhammed, Akaro Mainoma
Oyedokun, Godwin Emmanuel
Kabiru, Isa Dandogo
Muhammed, Taofeeq Abdurazak
Ishola, Rufus Akintoye
Famous, Izedonmi Prince
Rafiu, Oyesola Salawu
Topic:
Author:
Publisher:
Cover:
ISBN:
Impact of Value Added Economic Growth in Nigeria
Muhibudeen Latifat and Abdulkadir Abba Hafiz
OGE Business School 2020, 609 pages
Paperback
978-978-978-734-0
SUMMARY
Chapter eight of the book is a product of research carried out by Muhibudeen Latifat and
Abdulkadir Abba Hafiz of Department of Accounting, Yusuf Maitama Sule University,
Kano, Nigeria. The study assessed the impact of value added tax on economic growth in
Nigeria using secondary data obtained from Central Bank of Nigeria Statistical bulletins,
Nigeria Bureau of Statistics Publications and World Bank.
The study has five sections: Introduction, Literature Review, Methodology, Data Analysis
and Result Discussion and lastly Conclusion and Recommendation. Literature review was
further divided into Conceptual framework, review of related studies and theoretical
framework.
The introduction of the work presented an understanding of tax and historical background
of Value Added Tax in Nigeria. In his word, Value added tax was introduced in Nigeria on
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Review Of Chapter: Impact Of Value Added Economic Growth In Nigeria
st
the 1 of January 1994 under Decree 102 of 1993. According to the researchers, an efficient
and effective tax system is capable of ensuring the basic necessities and services in the
country. It was emphasized that Taxes are used to achieve economic growth, equity in
income, wealth distribution and maintain equilibrium in the economy. He cited view
researchers like (Nasiru, Haruna & Abdullahi, 2016); Appah (2010); Ajakaiye (2000) and
Omokhuale (2016) to explain the meaning of tax, classification of taxes (direct and indirect)
and importance of value added tax to government revenue in all countries where it has been
introduced. The introductory paragraphs were rounded up by putting forward research
question (what is the relationship between VAT and Gross domestic product?) and aim of
the study (to analyze value added tax (VAT) and its impact on the Nigeria Economy.
Conceptual review
The concept of economic growth, value added tax (VAT) and traces the background
Administration of VAT in Nigeria. The researchers referenced (Kamruddin-parvez, 2012
and Bird (2016) in defining Value Added Tax as a type of consumption tax that is placed on a
product whenever value is added at a stage of production & at final sale. VAT is borne by the
final consumer of the product or service at a flat rate of 5% on all invoiced amounts. Though
some goods and services are exempted from paying VAT.
On administration of VAT in Nigeria, VAT Act of 1993 section 7 (2) states that VAT shall be
administered and managed by the Federal Board of Inland Revenue but share by the
Federal Government (15%), State Government (50%) and Local Governments (35%). To
ensure VAT 's effectiveness, certain amendments were made on the existing tax structures
in Nigeria, such as reduction of Petroleum Income Tax burden, monetization of fringe
benefits, and extension of tax- free status to companies in rural areas and granting of
incentives based on the infrastructures available in the areas and reduction of company
income tax rate from 40% to 35% and 30%. He highlighted Taxable goods and services and
Exempted Goods and services.
He borrowed ideas of researchers like (Jibir & Babayo, 2015; Jhingan (2003); Zhattau (2013,
Ojoye (2015); etc. to define economic Growth as 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.
On Empirical Review, eight related research works on relationship between value added
tax and economic growth in Nigeria were reviewed. Different data analysis methods such
as multiple regression analysis, stepwise regression analysis, least square techniques and
Johansen (1988) co-integration test were used by referred researchers. According to the
author, all the studies even though similar in approach vary in their outcome, and require
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Review Of Chapter: Impact Of Value Added Economic Growth In Nigeria
further study to validate or debug the existing research.
Various theories of taxation were reviewed and adopted such as the expediency theory,
benefit Received Theory, theory of Economic Growth. The researcher, in his explanation of
Meade's Neo classical model of economic growth, said that the net output produced
depends upon four factors: the net stock of capital available in the form of machines; the
amount of available labour force; the availability of land and natural resources and the state
of technological knowledge which continues to improve through time.
METHODOLOGY
This deals with the methods used in collecting, analyzing and interpreting the data for the
study. The researcher used serial data analysis research design. Population of study was
government tax revenue from VAT and gross domestic product as published in
government financial reporting bulletin from 2001 – 2018. The Sample Size covers the
period of 2001 – 2018 and purposive sampling Technique adopted.
Data Analysis Techniques
Descriptive statistics was employed to organised and summarized the data to make it
meaningful. It also used Pearson Correlation coefficient to determine the degree of
relationship between Value Added Tax and Nigeria Economy. And evidently, Regression
(least square technique) technique was used to analyse the value added tax and its impact
on the Nigeria Economy.
Data Analysis and Result Discussion
The study presented data in tabular forms and analyzed the results using descriptive
statistics, correlation analysis and regression analysis. The first table presented descriptive
statistics result. The dependent variable GDP has a mean of 6.2607 at a maximum point of
3.9408 and minimum point of 74176 with standard deviation of 1.2308 which show that
there is much variation between the variables.
The second table shows the correlation results of dependent variables GDP and the
independent variables VAT and Total Government Revenue (TGR). The relationship
between the dependent variable VAT is positive with a value of 0.7911 which shows that the
higher the VAT the higher the GDP. The relationship between GDP and TGR is also positive
with value of 0.7642.
The third table depicts the regression results of the model. The impact of independent
variable VAT on dependent variable GDP is positive with coefficient value of .0109787,
explaining that an increase in VAT will lead to a rise in GDP by 100%. Likewise the impact of
TGR on GDP is positive with coefficient value of 108.8792, meaning that an increase in TGR
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Review Of Chapter: Impact Of Value Added Economic Growth In Nigeria
will lead to a rise in GDP by over 100%. The multiple coefficient of R-square is 0.6511 means
that 65.11% of change in GDP was due to changes in independent variables VAT and GDP.
On Hypothesis Testing
The researcher indicated that the two hypotheses were supported by the findings of the
study. That is, VAT and TGR has positive and significant effect on GDP. The findings of his
research work study were in line with findings of Omokhuale, (2016), Haruna and
Abdullahi, (2016).
Arising from the research findings, it is concluded that there is positive and significant
relationship between Value Added Tax and Total Tax Revenue. Likewise there is positive
and significant relationship between gross domestic product and value added tax.
The researcher recommends that Nigeria Tax authority should improve tax revenue
collection to improve GDP Vis a Vis the Nigeria Economy.
289
CHAPTER TWENTY
REVIEW OF CHAPTER: TAX COMPLIANCE AND ITS CHALLENGES
IN NIGERIA: THE PRACTICAL PERSPECTIVE
Adejuwon, Oluwakemi Adefisayo
Department of Management and Accounting
Faculty of Management and Social sciences
Lead City University, Ibadan, Nigeria
adejuwonoluwakemi218@gmail.com; +234 706 369 3491
Editors:
Muhammed, Akaro Mainoma
Oyedokun, Godwin Emmanuel
Kabiru, Isa Dandogo
Muhammed, Taofeeq Abdurazak
Ishola, Rufus Akintoye
Famous, Izedonmi Prince
Rafiu, Oyesola Salawu
Topic:
Author:
Publisher:
Cover:
ISBN:
Tax compliance and it's challenges in Nigeria: The Practical perspective
Ogbonna Udochukwu Godfrey
OGE Business School 2020, 609 pages
Paperback
978-978-978-734-0
Title of Chapter: Tax Compliance and Its Challenges in Nigeria: The Practical Perspective
by Ogbonna Udochukwu Godfrey
Tax compliance and its challenges in Nigeria: The practical perspective is a topic inside tax
management and compliance in Nigeria edited by erudite professors from different
universities including Professor Oyedokun and Professor Akintoye. Tax compliance
according to Ogbonna can be defined as a process whereby a tax payer voluntarily calls for
tax assessment and pays the total amount of tax assessed without objection or hesitation
within the period allowed by law. Ogbonna in this chapter looked at the challenges of tax
compliance using a practical approach. He gave fifteen (15) challenges faced by the
Nigerian government in ensuring that Nigerians pay their taxes as and when due. Part of
the challenges considered by Ogbonna includes: lack of tax culture (the citizens are yet to
imbibe the culture of paying taxes since little or no conscious effort is being made by
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Review Of Chapter: Tax Compliance And Its Challenges In Nigeria: The Practical Perspective
government to persuade Nigerians to be tax-compliant, but things are changing especially
with the recent moves of government to shore up revenues through taxes in the face of the
dwindling price of crude oil in the international market), and corruption (Ogbonna
highlighted different ways individuals and companies have tried to reduce the tax payable
using different measures even as it appears that the culture of doing the right thing is no
longer in vogue, and due to the seeming lack of transparency and accountability on the part
of government, majority of the citizens no longer have trust in the government to
judiciously utilize the revenues that are being generated from taxpayers). To buttress the
point of Ogbonna, Taiwo Oyedele (in PWC tax watch) quoted the Former Minister of
finance Kemi Adeosun stating that Corruption is the most debilitating factor in the
Nigerian economy, next to that is wastage, whatever didn't get stolen got wasted leaving
very little for development. Ogbonna also acknowledged the fact that contentions among
the different revenue collection agencies of government do sometimes result in double
taxation as taxpayers are being charged more than once and this has made the taxpayers to
take advantage of any loophole available in the tax laws in order to reduce their tax
liabilities. Other challenges mentioned by Ogbonna include: ill-advice by tax consultants;
lack of patriotism; ignorance of officials of organisations; engagement of non-professionals
as tax officers; non-monitoring of compliance by tax authorities; obsolete tax laws; archaic
ways of collection/assessment; lack of political will on the part of government; and
advocacy and communication gap. In addition to the challenges given by Ogbonna, other
factors that can contributes to low level of tax compliance include lack of transparency
regarding the utilisation of tax revenue for social services and visible development. Of all
the challenges state above, at a recent tax stakeholder forum organised by PwC, a survey
conducted to find out the reason many Nigerians do not pay tax. 70% said it is because
people cannot see taxpayer money at work, 22.5% said it was due to the tax rules that are
unclear and compliance process being too complex while 7.5% said it is due to poor
enforcement by tax authorities making these three to be the main challenges of tax
compliance in Nigeria.
Reviewer's Opinion
The reviewer submit that all the challenges highlighted by Ogbonna and other authors are
being addressed in bits by the government as they are coming up with new laws to replace
the old ones such as the Finance act 2020 which took effect on the 1st of Jan 2021. This tax law
made over 80 adjustments to 14 different laws and this included expansion of excise duties
to the telecommunication sector, reduction of import duties on tractors, truck, cars and
mass transit vehicles, making non-resident persons that makes a taxable supply to Nigeria
register for tax and obtain TIN, include VAT on its invoice, and also appoint a representative
in Nigeria for the purpose of its tax obligations. It also addressed the challenge of double
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Review Of Chapter: Tax Compliance And Its Challenges In Nigeria: The Practical Perspective
taxation in the country.
In addition, some of the state governments like Lagos are already monitoring the
compliance to tax laws and remittances in their states while also widening the tax net by
providing incentives to other citizens who have not been paying taxes in order to get them
into the tax net. In conclusion, capacities of tax officers are being built through training in
order to ensure that they are up to date with the tax laws and their interpretations. Also the
used of technology to ease the filing of returns has also been adopted by the Federal Inland
Revenue service and some State Inland Revenue Services.
Finally, giving that the price of oil has generally declined, the Nigerian government will
have to fall back on the revenue from tax and for this to be effective and encouraging for tax
payer, it has to be judiciously used by the government and it has to take advantage of
technology and social media to enlighten tax payers.
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CHAPTER TWENTY ONE
FINANCE ACT 2020: FACTS AND POLICY IMPLICATION
1
Oyedokun Godwin Emmanuel and 2Mainoma, Akaro Muhammad
1
Professor of Management & Accounting
Faculty of Management & Social Sciences
Lead City University Ibadan, Nigeria
godwinoye@yahoo.com; +2348033737184
2
Professor of Accounting
Department of Accounting
Nasarawa State University, Keffi, Nigeria
mainoma@yahoo.com
INTRODUCTION
The Finance Act 2020 became effective from 1 January 2021. It amended the provisions of
Capital Gains Tax Act, Companies Income Tax Act, Industrial Development (Income Tax
Relief) Act, Personal Income Tax Act, Tertiary Education Trust Fund (Establishment etc.)
Act, Customs and Excise Tariff Etc. (Consolidation) Act, Value Added Tax Act, Stamp
Duties Act, Federal Inland Revenue Service (Establishment) Act, Nigeria Export Processing
Zones Act, Oil and Gas Export Free Zone Act, Companies and Allied Matters Act, Fiscal
Responsibility Act and Public Procurement Act. It also established the Crisis Intervention
Fund and Unclaimed Funds Trust Fund.
The covid-19 pandemic threw up unique challenges for tax payers as well as the economy in
2020 and one of the objectives of the Finance Act aside from funding the 2021 budget was to
ameliorate the hardship occasioned by the pandemic. It is in line with this objective that the
Act exempts compensation for loss of office of up to N10,000,000 (ten million Naira) from
the payment of capital gains tax. Similarly, the Act introduced an income tax exemption for
employees whose gross income equals the minimum wage or below as defined in the
National Minimum Wage Act.
Furthermore, section 33 of the CITA was amended by reducing the minimum tax rate from
0.5% to 0.25% of gross turnover less franked investment income of companies for tax
returns prepared and filed for any year of assessment falling between 1 January 2020 and 31
December 2021 (both dates inclusive). This is in response to the impact of the COVID-19
pandemic on companies.
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Finance Act 2020: Facts And Policy Implication
In the same vein, donations made to funds set up by the government or government-backed
ministry, department or agency have been made tax deductible under the Act. Also, capital
expenditure on the development and acquisition of software or other such capital outlays
on electronic applications is now a qualifying capital expenditure for capital allowance
purposes.
The Act also contains provisions aimed at increasing government revenues and removing
loopholes that will prevent the achievement of this purpose. It contrasts revenue from core
shipping/freight operations and air activities that should be subject to tax under section 9 of
the CITA from revenue from other incidental activities that should be subject to the general
companies' income tax rate of 30%.
In like manner, the Act limits the use of the duty exception on bank advance revenue to
advances allowed for primary agricultural production. This change is aimed at promoting
core agricultural production in Nigeria. Equally of note is the reduction of the minimum
moratorium period from 18 months to 12 months, with regards to the tax exemption on
bank loans for companies involved in primary agricultural production and other local
businesses. The tax holiday granted to agricultural companies for a period of up to eight
years has been removed by the Act. This addresses the duplication of income tax incentives
granted to agricultural businesses in Nigeria.
Likewise, penalties or fines pursuant to laws made by States Houses of Assembly are nondeductible for income tax purposes alongside those pursuant to legislation enacted by the
National Assembly.
The Act further provides that companies engaging in a trade or business of gas utilization in
downstream operations cannot claim the tax-free period incentive provided under section
39 of the CITA, where such companies have already claimed any other incentives under any
law in Nigeria, with respect to the trade or business of gas utilization in the downstream
sector. This amendment provides a limitation as to incentives that may be claimed by
companies engaging in gas utilization businesses, downstream operation.
Non-resident companies that derive profit from or are taxable in Nigeria are to file annual
tax returns along with full audited financial statements and the financial statements of its
Nigerian operations, tax computation schedules, true statement of its profits and
completed companies income tax self-assessment form; however, these do not apply to an
NRC whose income is that for which withholding tax is its final tax.
In a much-welcomed amendment, the Act removed the burden to file audited accounts for
small and medium companies. The FIRS is to specify a different form of account to be
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Finance Act 2020: Facts And Policy Implication
included in tax returns of small and medium companies.
In line with international best practices, and in response to restrictions on physical
interactions imposed by the COVID-19 pandemic, the FIRS may now correspond with
companies and taxpayers via courier services, email or other electronic means for
corresponding with taxpayers in respect of provisions of the CITA.
Meanwhile, an incorporeal right has been included as a taxable supply of service for the
purpose of payment of Value Added Tax (VAT) under the Finance Act 2020 while nonresident companies that supply taxable goods and services to Nigeria are mandated to
register for VAT purposes.
The Act expressly exempts land and buildings from the payment of VAT. The list of VATexempt goods and services was expanded to include the following:
i. Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts
ii. Airline transportation tickets issued and sold by commercial airlines registered in
Nigeria; and
iii. Hire, rental or lease of tractors, ploughs and other agricultural equipment for
agricultural purposes.
The Act amended section 6 of the Personal Income Tax Act (PITA) to provide that nonresident individuals, executors or trustees providing technical/management /consultancy/
professional services are subject to tax in Nigeria to the extent that such individual, executor
or trustee has a significant economic presence in Nigeria. This amendment corrects the
oversight of the Finance Act 2019 and aligns the relevant SEP provision of the CITA with the
P I TA . A s s u c h , j u s t l i k e c o m p a n i e s , i n d i v i d u a l s p r o v i d i n g
technical/management/consultancy/professional services would also be subject to WHT at
5% as the final tax.
Under the FA 2020, contributions to a pension, provident or other retirement benefit fund,
society or scheme recognized under the Pension Reform Act are allowable reliefs for
personal income tax purposes. It also provides that commencement and cessation rules for
computing income tax payable by a new and liquidating business respectively should
reflect the business's actual accounting period and date of cessation.
It grants a tax incentive to small or medium sized companies engaged in primary
agricultural production, under the list of pioneer industry. The tax incentive is for an initial
tax-free period of four years and an extension, subject to a satisfactory performance by the
business of a maximum of two years. It however restricts such companies from claiming
any similar tax holiday or incentive in Nigeria thereby curbing possible duplication of tax
incentives claim.
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Finance Act 2020: Facts And Policy Implication
The Act establishes the Unclaimed Funds Trust Fund into which dividends of a public
company quoted on the Nigeria Stock Exchange which remain unclaimed for a period of six
years or more as well as monies in dormant bank accounts are to be transferred. They are to
remain a debt owed by the Federal Government to the shareholders and be available for a
claim by the shareholder(s) at any time. The Funds are to be used by the Government in
financing its budget.
Pursuant to the amendment, unclaimed dividends of a public company quoted on the
Nigerian Stock Exchange and the unutilized amount in a dormant bank account
maintained by a deposit money bank, which has remained unclaimed for not less than six
years from the date of declaration or deposit should be transferred to the unclaimed funds
trust fund.
Policy Implementation
The period of 2 years commencing from 1 January 2020 to 31 December 2021 provided to
enjoy the reduced minimum tax payable presupposes that companies can file amended
returns for the period already past to claim a refund or at the least establish a credit to be
utilized for future tax obligations in respect of minimum tax already paid for the year.
The Act stipulates penalties for deliberately filing incorrect returns. This brings up the
question of how to differentiate a deliberate act of filing incorrect returns from an
unintentional act. In practice, making this distinction may be quite difficult; therefore,
corporate entities are advised to ensure that utmost diligence is put into ensuring that the
tax returns filed are correct.
Companies are to note the reduction of the timeline for payment of tax liabilities that are not
subject of appeal from 60 days to 30 days in order to avoid the imposition of penalties and
interest on the principal amount.
Under section 23 (1) (c) of the CITA, the profits of any company engaged in ecclesiastical or
educational activities of a public character are exempt from profit, subject to fulfilment of
other conditions. However, the CITA did not define what constitutes a “public character.”
This has resulted in controversies and public debates and even disputes in courts in the
past. Thus, by virtue of this amendment, clarity has now been provided as to what
constitutes public character and thus companies and taxpayers that should qualify for the
tax exemption under the provisions of section 23 (1) (c) of the CITA.
It should be noted that the timeline for remitting capital gains tax deducted from
compensation for loss of office above N10,000,000 has been tied to the provisions of the PayAs-You-Earn (PAYE) Regulations and now have to be filed on the 10th day of the month
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Finance Act 2020: Facts And Policy Implication
following the month of deduction. The existing CGT Act was silent on whose obligation it is
to deduct and remit CGT on compensation for the loss of office. However, companies had
acted as self-appointed collection agents on behalf of tax authorities for the purpose of
proper remittance despite the fact that they were not statutorily obligated to do so before
the amendment by the FA 2020. Thus, the Finance Act has clarified that the responsibility to
deduct and remit capital gains tax on taxable gains for compensation for loss of office lies
with the paying party and remittance is in line with the PAYE Regulation.
CONCLUSION AND RECOMMENDATIONS
The Chartered Institute of Taxation of Nigeria (CITN) assembled a team of erudite scholars
and practitioners who shed detail light into the Finance Act 2020 with the goal of
establishing the Policy Implications of Finance Act 2020 towards Tax Policy Reforms and
Economic Recovery.
The Institute in her continued efforts to chart the course of tax development and growth has
put together these changes introduced by the amendments in the Act into Monograph
which was presented to members and our general stakeholders. Though the suggestions
are not conclusive, it is envisaged to provide a guide to every tax practitioner in dealing
with the changes in applicable tax laws as amended.
In spite of the laudable provisions of the Finance Act 2020, the following are
recommendations for improvement:
1. Provisions should be made to stipulate the process for withdrawal of dividends by
shareholders from the Unclaimed Funds Trust Fund.
2. The Act empowers the Minister of Finance to make an order defining activities that
constitute significant economic presence under the amended PITA. This order is
awaited to provide much-needed guidance with respect to the taxation of nonresident individuals that earn income in Nigeria.
REFERENCES
Finance Act 2020
297
CHAPTER TWENTY TWO
FRAUD IDENTIFICATION IN FORENSIC TAX INVESTIGATION
AND RULE OF EVIDENCE
Oyedokun, Godwin Emmanuel1, and Asaolu, Taiwo Olufemi2
1
Department of Management & Accounting,
Faculty of Management & Social Sciences,
Lead City University Ibadan, Nigeria; +2348033737184;
2
Department of Management & Accounting,
Obafemi Awolowo University, Ile-Ife, Nigeria;
+234 803 721 6060
INTRODUCTION
The unceasing and interminable tax related fraud resulting to corporate collapse and the
failure of the statutory audit to detect and prevent fraudulent activities which had led to the
impoverishment of investors had given rise to the need for forensic audit and
investigations.
In Nigeria, the recent worldwide economy downturn through COVID-19 pandemic and
decrease in price of crude oil and sales quantity in the global market has contributed to
difficulties in the implementation of annual budget. This resulted to a shift to tax revenues
but the major challenge is the high rate of tax fraud and tax evasion.
Fraud is the deliberate action, false depiction or suppression of material facts for the
purpose of deceiving another to act upon it in order to be cheated. Tax fraud on the other
hand, is the deliberate deception and tricks to minimize tax payment or refusal in tax
payment through falsification of tax returns or evasion. Tax fraud is an intentional
deception by taxpayer that results in an injury (tax loss) to the government. It involves both
underpayment of tax and fraudulent intent. This can be committed against the government
and tax authorities that collect taxes in the federal, state and local government. Tax fraud
have both domestic and international dimension. The domestic dimension is in the form of
tax evasion, especially as a result of high number of informal sector or shadow economy.
Tax fraud is not only associated with reputational damages of corporations and negative
values for investors, it also implies negative consequences for public budgets and economic
growth. Therefore, numerous governments have declared the fight against (offshore) tax
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evasion. Tax authorities as well as accounting research, however, face a huge challenge in
identifying tax fraud.
All frauds are violation of trust. The essence of tax fraud is the individuals or firms ability to
evade tax through false representation, fraudulent practices or concealment of tax material
facts, in order to deceive government and reduce the tax liabilities and payments. A
taxpayer, who is accused of tax fraud or tax evasion, commits an act of fraudulent
behaviour against the tax law. The increasing complexity of tax fraud requires urgent
attention and the service of forensic accountant to investigate and prosecute tax evaders
and other related fraudulent activities. Therefore, one way of reducing this menace, and to
instill tax compliance on individual or firm by complying with actual tax assessment and
payment, is the application of forensic accounting techniques.
Concept of forensic accounting
The word forensic is derived from the Latin adjective “forensics”, meaning "of or before the
forum." Forensic means, "belonging to, used in or suitable to courts of judicature or public
discussion and debate" (Webster's Dictionary). Forensic Accounting on the other hand
gives an accounting analysis that is suitable to the court which gives the basis for
discussion, debate, and ultimately dispute resolution (Zysman, 2004; Oyedokun, 2017).
Forensic accounting focuses on both financial proof of transactions and reporting which is
contained within an accounting system and the legal framework which allows such proof
to be suitable for establishing accountability and valuation (Dada, 2013; Oyedokun, 2018).
Forensic accounting is a model of investigative procedures for ascertainment of assurance,
evidentiary nature of accounting data, and for purpose of legal evidence. It utilises highly
technical skills to uncover hidden facts as evidence for tax payment against the victim, it is
also useful in court without compromising the integrity of the evidence in a legal
proceeding. According to Dhar and Sarkar (2010) it is a tool for forensic auditing, detection
of financial misrepresentation or fraud, tax evasion and violation of accounting rules and
regulations. Al-Sharairi (2018) opined that forensic accounting evolved in accounting
profession as a way of investigating fraud related cases, inclusive of tax fraud and tax
evasion. Forensic is a branch of accounting which adopts basic accounting, auditing and
investigating knowledge and skills in resolving fraudulent activities in a legal matter.
Aduwo (2016) stated that it is a skill to assist in legal matters. Forensic accounting is to aid
reduction in tax fraudulent activities, tax loss and tax corruption which reduces tax
revenues collection that impaired on social, economic and infrastructural development at
all level of government. On daily basis, different form of tax frauds, corruption and sharp
practices occurred on tax matters without being noticed, detected or investigated by
government, this had hampered the growth and development of a nation. This activity has
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become endemic, systemic and maladies affecting tax administration in Nigeria with much
loss of revenues by government, with serious negative impact on social and economic
development.
Tax Audit
It has been affirmed that tax audit is always triggered by suspicion of fraud, evasion and
related offences. According to Adam (2001), tax audit is a level of enquiry aimed at
determining what level of fraud or willful default or neglect a tax payer perpetrated and to
obtain evidence for possible prosecution of the culprit. This implies that tax audit centers on
determining some unrevealed sources of revenue, pointing to gross non-compliance, or it
may be about proof of underpayment and fraud. (Ojo, 2016) supported the view by
defining tax audit and investigation as an inspection of taxpayers' business records so as to
ensure that law and regulation were maintained in the amount of tax reported. This reflects
that the sole aim of tax audit is to ensure that laws and regulations regarding tax revenue are
maintained by taxpayers with the aim of increasing the revenue pool of the government.
Bassey (2013), observed that tax audit is an essential compliance tool in most tax jurisdiction
all over the word as it maximizes the expected tax revenue to the government both in
developed and in developing countries.
(Okonkwo, 2014) cited in (Ojo, 2016) revealed that tax audit revolves examination of an
individual or organization's tax report by the relevant tax authorities in order to ascertain
compliance with applicable tax laws and regulations of state. Tax audit is necessary because
it help the government to collect taxes paramount in financing budget and maintaining
economic and financial order and stability. Similarly, Kircher, 2008 submitted that tax audit
ensure that satisfactory returns are submitted by the tax payers, to organize the degree of
tax avoidance and tax evasion, to ensure strict compliance with tax laws by tax payers, to
improve the degree of voluntary compliance by tax payers and to ensure that the amount
due is collected and remitted to government. (Onoja & Iwarere (2015) and (Onuoha & Dada,
2016), revealed that the following types of tax audit are relevant in ensuring tax compliance.
Types of Tax Audit
Desk or Office Audit: This type of audit takes place within the premises of the tax officials.
Requests of relevant documents are made by the tax authority and the auditor does all the
review in the confines of his own office. Onoja and Iwarere 2015 noted that no prior notice is
given to the tax payer and that he only gets know when letters are written to him requesting
for certain documents or explanations. Office audit is cost effective affords auditors to
independently determine the accurate tax liability of the tax payers (Bassey, 2013;
Adediran, Alade, & Oshode, 2013).
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Field Audit: Olaoye and Ogundipe (2018) opined that desk audit often times lead to field
audit when additional documents are needed to complete the inspection of a tax payer. This
implies that field audit is more elaborate and broader than office audit because it transcends
the office of the auditor. Explaining further, Onoja and Iwarere (2015), noted that field audit
requires the taxpayers are well-informed before the commencement of the audit. This type
of audit allows physical verification of tax payers claims so as to confirm the facts and figure
of the returns. [Olaoye & Ogundipe, (2018); Onoja & Iwarere, (2015)] affirmed that field
audit would improve the level of compliance by the tax payers.
Back Duty Audit: Back duty audit is introduced when there is doubtful claim of capital
allowance related to previous or current year, a situation where lesser tax is charged as a
result of falsification of document submitted by the tax payers, a reduction of profit in the
returns files in tax office and failure to disclose or include in full any income or earning in
the return made available to the tax office [Onuoha & Dada, (2016); Onoja & Iwarere,
(2015)]. It is an exercise by the relevant tax authority to ensure that the amount due to the
government is duly collected. This goes to confirm the relevant tax authority as key player
in ensuring that government revenues are completely and accurately collected.
Registration Audit: This type of audit is used to cage individuals and companies in the tax
net. It entails documentation of the tax payers' identities and other business information
obtained from the Corporate Affairs Commission (CAC) and the Nigeria Custom Service
(NCS). This exercise will enable the tax authority to ascertain organizations and other
chargeable persons outside the tax laws so as to get them registered and charged them
accordingly (Onuoha & Dada, 2016).
Objectives of Tax Audit
The purpose of tax audit is to determine a true and fair view of the business records for tax
purposes. The tax audit officer is responsible to ensure that the reported amount is correct
and that the amount of tax paid is correct accordance with tax laws and regulations. The
other purpose of tax audit is to achieve the voluntary compliance with the tax laws and
regulations and to ensure that a higher tax compliance rate is achieved under the SelfAssessment System (eeVonn, 2009).
According to Bitrus (2014), the objectives of tax audit are to enable the tax auditors to
determine whether or not:
1. Adequate accounting books and records exist for the purpose of determining the
taxable profits or loss of the taxpayer and consequently the tax payable;
2. The tax computations submitted to the authority by the taxpayer agree with the
underlying records;
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3.
4.
5.
6.
7.
All applicable tax legislation have been complied with;
Provision of an avenue to educate taxpayers on various provisions of the tax laws;
Discourage tax evasion;
Detect and correct accounting and/or arithmetic errors in tax returns;
Provide feedback to the (tax administrators) on various provisions of the law and
recommend possible changes;
8. Identify cases involving tax fraud and recommend them for investigation;
9. Forestall a taxable person's failure to render tax returns; and
10. Forestall a taxable person rendering incomplete or inaccurate returns in support of
the self-assessment scheme.
Forensic Investigation
Forensic Investigation is another branch of forensic accounting that involves the utilization
of specialized investigative skills in carrying out an inquiry conducted in such a manner
that the outcome will have an application to a court of law. A forensic investigation may be
grounded in accounting, medicine, engineering, or some other discipline (Oyedokun,
2020).
It is an aspect of forensic accounting that refers to the practical steps Certified Fraud
Examiners or Forensic Accountants take to gather evidence relevant to alleged fraudulent
activities. A forensic investigator is often retained to analyze, interpret, summarize and
present complex financial and business-related issues in a manner that is both
understandable and properly supported (Oyedokun, 2020).
A forensic investigator can be engaged in public practice or employed by insurance
companies, banks, police forces, and government agencies like EFCC, ICPC, NDLEA, and
other organizations for any of the following functions (Mainoma and Oyedokun, 2019):
i. Investigating and analyzing financial evidence;
ii. Developing computerized applications to assist in the analysis and presentation of
financial evidence;
iii. Communicating their findings in the form of reports, exhibits, and collections of
documents; and
iv. Assisting in legal proceedings, including testifying in court as an expert witness and
preparing visual aids to support trial evidence.
Determination of Tax Fraud
The IRS defines tax fraud as "the willful and material submission of false statements or
false documents in connection with an application and/or return." To make this
determination, investigators will look for any indicators of fraud such as, but not limited
to:
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i. Underreporting income
ii. Using a false Social Security number
iii. Falsifying documents
iv. Intentionally failing to pay taxes
If these common indicators are absent, the tax authority typically assumes that an
unintentional mistake has occurred due to negligence. Though this typically does not lead
to criminal charges for tax fraud, mistakes with your taxes can lead to an accuracy-related
penalty that equates to 20 percent of the underpayment.
Anyone could be caught off guard when they are assessed this penalty, which is why it is
important to make sure all tax information is accurate and truthful before submitting it to
the tax authority. It is also important to remember your right to an attorney as well,
especially if you believe a tax fraud charge has been levied against you in error.
Elements of Tax Fraud
Four general elements must be present for a tax fraud to exist, these are:
1. A material false statement.
2. Knowledge that the statement was false when it was altered.
3. Reliance on the false statement by the victim (Government).
4. Damages (revenue loss) resulting from the victim (government) reliance on the false
statement.
How to Minimise Tax Fraud
Eliminating tax fraud opportunities can be achieved through:
1. Having good internal control on tax revenues generation.
2. Proper monitoring of taxpayers.
3. Discourage all forms of collusion between the tax officials and taxpayers.
4. Creating an expectation of punishment as deterrence.
5. Minimisation of avenue for corruption on tax revenues by tax officials.
6. Creation of conducive working environment for tax officials with modern working
tools and adequate training and skill transfer on new forensic technology.
7. Proactive tax fraud auditing.
8. Creation of culture of honesty, openness and fairness in the tax system, and on
application of tax revenues.
To prevent tax fraud is cheap and more effective than investigation and detection. Tax fraud
prevention is much better because in a fraud case, the possibility of full recovery of the
amount involved is very slim; besides, it consumes time and money to investigate
fraudulent activities. Therefore, having necessary machinery in place to prevent the
occurrence of tax fraud will save time, money and much effort required to track down fraud
perpetuators and eventual recovery of funds. Ruankaew (2013) stated that to reduce fraud
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and manage risks associated with it, it is necessary to understand and identify the factors
leading to fraudulent activities and unethical behaviour. This will show the basic reason for
committing fraud and who are fraudsters.
Roles of Forensic Accountant in Tax Disputes
Forensic accountants play three important roles in tax disputes, these are fact witness,
consulting expert and testifying expert. As a fact witness, forensic accountants are expected
to offer only factual information on legal case without rendering any form of opinion. As a
consulting expert, he is expected to offer consultancy service on attorney's work by
formulating strategy, review of documents and provision of additional facts in a legal
matter. The consulting experts owed allegiance to the client and advocate on client's behalf.
Forensic accountants as an expert testifying in a law case, is to appears before a judge or jury
to provide professional advice and opinion on matters, either by disposition or by
testimony. In recent time, according to Eliezer and Emmanuel (2015) forensic accountant
has been used to deal with financial accounting manipulation and tax rules infringements
that lead to tax fraud. The weakness of statutory audit to detect fraudulent activities as it
relates to tax matters calls for adoption of powerful fraud and manipulation detection tools.
These tools will be used to detect incomes not disclosed or under reported and expenses
over reported or invoices manipulated.
Elements of the Offense
In tax evasion cases, the Government has the burden of proving the crime charged beyond a
reasonable doubt. Thus, it must prove a willful attempt in any manner to evade or defeat the
tax or its payment.
It should be noted at the outset the offense is complete when the return is filed and there is
no turning back, such as by the filing of an amended return, which, rather than ameliorating
the situation, may constitute an admission. This is because a fraudulent return is regarded
as an attempt to evade. So too, is uttering a false statement to a Treasury representative in
the course of an investigation or willfully failing to pay the tax shown to be due on a return
that is filed.
Underpayment of Tax
The Government must establish that there was a deficiency in taxes for each of the
prosecution years involved. In tax evasion cases, underpayment is the corpus which must be
established, and there are several ways in which the Government may meet this burden.
The easiest is to show an omission of specific items of income. However, there are other
methods of proof available in the absence of specific items which, while more burdensome
of investigation, are nevertheless effective.
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Currently, the best known and most used of these indirect methods of establishing tax
deficiencies is the "net worth" method. The use of this device involves establishing the total
net value of a taxpayer's assets at the beginning of a given year, proving an increase at the
end of the year, adding to the difference the non-deductible expenditures of the taxpayer,
and comparing the result with reported income. When non-income items are eliminated,
the difference is unreported income.
Still another indirect approach is to add claimed deductions to non-deductible
expenditures, compare the total with reported income, and thus show either unreported
income or falsified deductions. Variations on this approach are the "living expense"
method, by which total living expenses plus savings are compared with reported income,
or a method by which total expenditures are added to decreases in net worth and equated
with reported income. Lastly, "the percentage of mark-up" method applies a standard
percentage of mark-up to the sale of inventory items and compares it to the mark-up
reported, to prove that the difference is unreported income.
Willfulness
Having established the deficiency, the Government must further prove that it was willfully
incurred. The simplest way to achieve this is by extrajudicial admissions or confessions
which best serve to indicate the taxpayer's mental state. These, of course, are admissible,
subject to their being corroborated by direct substantiation of the facts admitted or by
independent evidence, such as net worth or bank deposit computations, tending to show
understatement of income for the prosecution years.
Absent such admissions, however, the Government is not helpless. If it proves an
understatement of income by one of the methods described above, with other
corroborating facts as to the source of that income, it has established its case, and it is up to
the taxpayer defendant to offer a reasonable explanation or remain silent at his peril.
Co-operation
The most difficult decision to be made in handling a criminal income tax case during the
investigative period is the extent to which the taxpayer should be permitted to co-operate
with the investigating agents. Quite obviously, nothing is to be gained by refusing to
furnish information which can be obtained elsewhere, such as bank and broker's
statements, and matters which are of public record. Not only does the furnishing of this
information make the task of the special agent somewhat less arduous (with perhaps some
psychological value) but it also may be a method of keeping the facts of the investigation
from becoming public knowledge. It would seem that only most unusual circumstances
would dictate non-co-operation in this respect.
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However, it is quite a different situation when the requested co-operation requires
divulging information not otherwise obtainable. This would include net worth statements,
and various types of affidavits and question and answer statements which reveal facts
peculiarly within the knowledge of the tax taxpayer may be hanging himself. If this is not
true and its falsity is discovered, this, of course, upon the assumption that the taxpayer's
representative believes it to be true, the penalties for issuing false statements to the
Government may perhaps be more severe than for the original crime investigated.
Unfortunately, the decisions do not help much in this regard. They indicate that failure to
produce records for inspection by an agent is a circumstance which may be pointed to by
the court as bearing upon willfulness, one of such cases indicating that this is not a violation
of the law. On the other hand, the cases seem to be fairly clear that the assertion of the
privilege against self-incrimination would preclude the court from drawing unfavorable
inferences. Perhaps the distinction lies between the taxpayer's insistence on keeping silent
and his refusal to produce books and records, for it is at least argumentative that the latter
may be covered by the "required records" doctrine and not a proper subject of the privilege.
It would seem the better part of wisdom to refuse to disclose any information not otherwise
obtainable, which would incriminate the taxpayer and assist the Government in its case.
While it is unlikely that the treasury at this point would care to test the applicability of the
"required records" doctrine to the taxpayer's situation, it might be better to put it to this test
rather than submit. This is an area, of course, in which each case must be resolved upon its
own facts and there is little help in generalities.
Evidence and Admissibility of Evidence in Court
Concept of Evidence
Evidence, broadly construed, is anything presented in support of an assertion, because
evident things are undoubted. There are two kinds of evidence: intellectual evidence (the
obvious, the evident) and empirical evidence (proofs). In fraud investigation process, it
begins with a prediction, circumstances under which a reasonable, professionally trained
expert could believe that fraud is taking place. Once there are such indications of fraud, the
investigator develops a hypothesis and looks for evidence to prove the hypothesis. Such
evidence can come from documents, interviews, observation, and other physical clues like
fingerprints. Based on the evidence acquired, the initial hypothesis can be proved or
revised. The evidence, therefore, is the means whereby a fact in question may be proved or
disproved. This includes Testimony; Documents; and Objects (Oyedokun, 2018).
For an evidence to be admissible, it must be relevant to the fact in issue. In pursuant to the
provision of Sec 1 of the Evidence Act 2011 as amended, which state thus:
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“Evidence maybe given in any suit or proceeding of the existence or non-existence of every
fact in issue and such other facts as here after declare to be relevant, and of no others:
Sub-sec.1. The court may exclude evidence of facts, though relevant or deemed to be
relevant to the issue, appears to be too remote to be material in the circumstances of the case:
and Sub-sec. 2. This section shall not enable any person to give evidence of a fact which he is
disentitled prove by any provision of the law for the time being in force.
Evidence is deemed relevant if it has “any tendency to make the existence of any fact that is
of consequence to the determination of the action more probable, or less probable, that it
would be without the evidence.” Best evidence rule (original writing rule) – the originals
must be presented to prove the contents of writings, recordings, and photographs. Hearsay
evidence is not generally admissible, but there are many exceptions. Business records are a
major exception, and a good lawyer can get most business records into a trial (Moloi and
Oyedokun, 2021). The provision of the Evidence Act makes it applicable that evidence
maybe given of the existence or non-existence of a fact but relevancy is the key word. Such
relevancy may-be based on reasoned or logic. See OGU .V. M. T. & M. C. S. LTD (2011) 8
NWLR (PT. 1249)345 CA, the court held that “ordinarily, the admissibility of evidence is
governed by the provision of section 6 of the evidence Act (now Sec 1 of the Evidence Act
2011) once a piece of evidence is relevant it is admissible in evidence irrespective of how it
was obtained. An evidence would be considered if it is relevant to the fact in issue before the
Court. The major role of evidence in Court is to make sure that justice is attained, so any
rejection by the Court in a proceeding should be followed by proper explanation on the
reason/reasons why it was rejected to avoid the breach of natural justice of fair hearing. Sec
4 of Evidence Act provides for relevance of facts; the fact may not be in issue, but are so
connected with the fact in issue, the Act makes them relevant. In Jolayomi V Olaoye (1999)
10 NWLR (PT. 624) 600 CA, the Court in interpreting Section 7 of the old Evidence Act now
Section 4 stated that the trial Court was right when it went beyond the 1931 settlement to
know the essential situation before them. It is in the discretion of the court to consider the
probative value, the importance, relevancy and gravity of each evidence.
“Evidence forms the building blocks of the investigative process and for the final product to
be built properly, evidence must be recognized, collected, documented, protected, validated, analyzed,
disclosed, and presented in a manner which is acceptable to the court.”
The evidence consists of anything that can be used to prove something. In a legal sense,
evidence means an assertion of fact, opinion, belief, or knowledge whether material or not
and whether admissible. Evidence is simply anything that relates to the proving or
disapproving of a fact. Evidence is anything perceptible by the five senses, which is invoked
in the process of arguing a case. The document, Spoken recollection, Data of various sorts,
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and Physical objects are all potential evidence. There are three basic forms, as distinguished
from types of evidence:
i. Testimony
This refers to the oral statements made by witnesses under oath. In general, the two types of
testimonial witnesses are:
a. Lay witnesses: A lay witness is an ordinary person who testifies based on their
knowledge and life experiences.
b. Expert witnesses: An expert witness is someone whose level of specialized
knowledge or skill in a particular field qualifies them to present their opinion about
the facts of a case during legal proceedings.
ii. Real Evidence
It describes physical objects that played a part in the issue being litigated. The term includes
documentary evidence such as canceled checks, invoices, ledgers, and letters as well as
other types of physical evidence. Therefore, a typewriter or printer in a case involving
questioned documents is real evidence, as is a tape recording, since members of the court
can experience the sound firsthand.
iii. Demonstrative Evidence
This is a tangible item that illustrates some material proposition (e.g., a map, a chart, a
summary). It differs from real evidence in the demonstrative evidence was not part of the
underlying event: it was created specifically for the trial. Its purpose is to provide a visual
aid for the jury. Nonetheless, it is evident and can be considered by the jury in reaching a
verdict.
There are two types of admissible evidence:
a. Direct and Circumstantial Evidence
Direct evidence, as the name implies, is evidence that tends to prove a fact directly – for
example, a statement from an eyewitness or the canceled check used for a bribe payment or
a confession by the subject. Direct evidence is usually considered to be the strongest
method of proof, but circumstantial evidence – evidence that tends to prove a fact
indirectly, or by inference from other facts – also can be quite persuasive if presented
correctly.
To be convincing (and admissible in court), circumstantial evidence must:
a. Be relevant, of course, that is, tend to prove or disprove a fact in issue;
b. Be cumulative, that is, not limited to one, isolated piece of evidence, but of several
interconnected parts; for example, a husband not only comes home late, without an
excuse but has lipstick on his collar, liquor on his breath, and a matchbox in his
pocket from the Stagger Inn Lounge;
c. Be tightly organized and presented: many circumstantial cases fail not because the
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evidence is weak, but because it is presented in a disorganized and confusing
manner which the fact finder cannot understand;
d. And finally, to be persuasive (and admissible in court) circumstantial evidence must
exclude all plausible innocent explanations.
In most corruption and fraud cases, the combination of direct and circumstantial evidence
usually is the most persuasive. For example, in a case in which a witness admits paying a
cash bribe to a government official, for which there is no other direct evidence, the steps of
proof might include circumstantial evidence to corroborate the direct evidence. For
example, the investigator could:
a. Record in detail (when, where, how, why, etc.) the statement of the witness that he
paid the government official in cash (this is the direct evidence);
b. Prove that the government official spent or deposited a significant amount of cash
shortly after he allegedly received the cash bribe;
c. Eliminate all other potential sources of income for the official's cash expenditures or
deposits, to the extent possible;
d. Interview the subject officially, and show that the official cannot explain the source
of the cash expenses or deposits, or lied about it (the last three points are the
circumstantial evidence).
Such evidence, if believed by the jury, would be legally sufficient to convict a defendant in
most courts.
In collusive bidding cases, the investigation often begins with the identification of unusual
bid patterns, such as bids being too close or exact percentages apart. This can be considered
circumstantial evidence of collusion and might be admissible to help prove the offense in
some cases. A more effective approach, however, would be to use the circumstantial
evidence of bid patterns as leads to direct evidence, such as communications between the
bidders or admissions by a subject. The combination of both types of evidence would be the
most persuasive.
b. Circumstantial proof of “knowledge and intent”
Proof of knowledge and intent – proof, for example, that the subject knew that a document
was forged and submitted it with the intent to defraud another party – is an essential
element in all fraud and corruption cases: there are no unintentional bribes or accidental
frauds.
Because knowledge and intent are states of mind of the subject, courts permit these
elements to be “inferred from all of the facts and circumstances,” in other words, to be
proven by circumstantial evidence.
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Characteristics of Evidence
There are two main characteristics of evidence:
1. Relevance: This relationship between evidence and the fact under scrutiny. If a piece of
evidence increases or decreases the probability of the fact being proved then it is relevant,
otherwise irrelevant. The law does not define a way to tag relevance to a piece of evidence,
this is done by logic, common sense, and general knowledge about the world around. The
party who produces a shred of evidence, to prove a fact, is obliged to show its relevance. The
challenging party is thus not responsible for demonstrating its irrelevance (Routledge
2004). This phenomenon is called the “burden of proof”.
2. Weight: the extent or the degree of relevance is the weight of evidence. It can also be
defined as the degree to which evidence makes a proposition more or less probable. The
form of generalization adopted to show the relevance of evidence will affect its weight. For
example the bolder the generalization, the heavier the weight of the evidence (Routledge
2004).
Qualities of Legal Evidence
Legal evidence should portray the following qualities to be admissible in a law court:
i.
Relevant evidence
ii.
Material evidence
iii.
Probative Value
iv.
Safe chain of custody
v.
Complete
vi.
Authentic
vii.
Admissible
viii.
Reliable
ix.
Believable
Standards of Proof:
i.
Beyond a reasonable doubt
ii.
Preponderance of evidence
iii.
Clear and convincing evidence
iv.
Probable cause
v.
Suspicious situation
To Be Admissible Evidence must be both:
i.
Relevant
ii.
Material and
iii.
Competent
Admissibility of Evidence in Law Court
The admissibility of evidence is connected with its relevance and weight. The type of the
dispute and the presentation of evidence govern its relativity to the fact being proved
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(Gladyshev, 2004). Generally, a relevant piece of evidence is admissible, but sometimes
even relevant and weighty evidence might be deemed inadmissible because it violated
some formal law (Routledge 2004). For example, if a conversation has been recorded
without the consent of the other party then it might be difficult to admit the recording in the
court of law.
Integrity of Evidence
The following were how to preserve the integrity of evidence gathered in a forensic
investigation:
i. A piece of evidence is weightless and thus inadmissible if its origin is equally likely
to be from a tampered or an original fact being proved. Hence preserving the
integrity of evidence is essential for its admissibility.
ii. Evidential integrity is preserved by employing investigative methods that do not
modify the evidence. The handling of evidence during the entire process must be
performed or witnessed by people who are trustworthy, objective, and competent,
however, this requires further investigation in the digital domain and will be
discussed later.
iii. Another factor that can help in preserving the integrity of evidence is called the
“chain of custody” which is the history of the evidence from the time of seizure to the
time of presentation. It involves all the information, including where, how, and who
interacted with the evidence.
Hearsay Evidence (The Evidence that is not admissible in the Court of law)
The Evidence Act of Nigeria, Sec 37 (2011) and Sec 39 of English Evidence Act, statutorily
provides for the definition of Hearsay Evidence as a statement, oral or written made
otherwise than by a witness in proceeding or contained or recorded in a book, document or
any record whatsoever, proof of which is not admissible under any provision of this act,
which is tendered in evidence for the purpose of proving the truth of the matter stated in it.
See exceptions in Sec 38-45. In England and Nigeria, hearsay is codified in Evidence Act.
Also, in the case of Orji v. Ugochukwu, the court held in a bid to determine the principle of
hearsay evidence thus:
Hearsay evidence is devoid of probative value. The consequence thereby is to
discountenance it and where it has been made use of by the court; it should be
regarded as inadmissible evidence and expunged.
Judicial Committee of the Privy Council in the case of Subramanian v. Public Prosecutor
(1956) 1 WLR 965, carefully highlighted the actual basis of hearsay evidence in the
following expression:
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Evidence of a statement made to a witness by a person who I not himself called a
witness may or may not be hearsay. It is hearsay and inadmissible when the object of
the evidence is to establish the truth of what is contained in the statement. It is not
hearsay and is admissible when it is proposed to establish by the evidence, not the
truth of the statement, but the fact that it was made.
Generally, Hearsay Evidence is inadmissible in court. For instance, “A” is not allowed to
give evidence in court to the effect that “B” told him that he saw “X” stealing a Goat.
According to Wigmore, the hearsay rule has been over enforced and abused, the spoiled
child of the family. That is has become a nuisance and obstruction to speedy and efficient
trials.
Primary and secondary evidence
Primary evidence is often used in respect to documents. Primary evidence as it relates to
documents is the document itself. That is, the original document. Section 86 of the Evidence
Act of Nigeria provides that, primary evidence means the document itself produced for the
inspection of the court.
On the other hand, secondary evidence includes copies made from the original evidence. A
secondary evidence is inferior to primary evidence and becomes admissible when the
primary or best evidence is lost or inaccessible.
Fraud Investigator and Evidence presentation in Court
In court, the fraud investigator can be an expert witness, a consultant, or play other roles
such as trier of fact, special master, court-appointed expert, referee, arbitrator, or mediator.
A key piece of evidence the report of the fraud investigator. The fraud report should not be
accusatory or conclusive as to guilt. It is critical to ensure that the tone of the report is not
inflammatory or prejudicial. The fraud trial can be a civil or a criminal trial. In either case,
the role of the fraud investigator is to study relevant materials documents, and the
authoritative literature relating to the case on hand. Direct and cross-examination
questions will be asked, and the fraud investigator has the responsibility to answer these
questions clearly and concisely (Yakubu & Oyedokun (2021).
Attacks against Evidence on Cross-Examination
Albert (1926) in Moloi and Oyedokun (2021) described possible attacks against an
accountant's (investigators) evidence on cross-examination which were summarized by
Max Lourieviz:
I.
Insufficient preparation and experience to qualify as an expert witness.
ii.
Inadequate examination of the issues presented.
iii.
Improper presentation of the issues to the witness.
iv.
Suspicion upon the testimony, based upon the witness's record and
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Fraud Identification In Forensic Tax Investigation And Rule Of Evidence
v.
vi.
vii.
viii.
ix.
x.
xi.
character.
Use of misleading illustrations, selection of unfair examples, drawing of
inferences not justified by facts, and improper emphasis or exaggeration.
Impossibility of reaching a conclusion meriting serious consideration on an
issue not permitting adequate inquiry.
Expression was of an opinion unjustified by the reasons given.
Basing the opinion upon vague and trivial facts insufficient to sustain any
opinion, and concluding by guesswork.
A biased and unfair attitude of the witness in the examination of the facts.
The possibility that the problem is so difficult or unusual even a competent
and careful witness may be mistaken.
Influence of other things rather than technical findings on the opinion of the
witness and basing conclusions on reasons other than those given.
Information Gathering Techniques
In forensics, investigators use a big variety of techniques and tools to get this precious
information about their targets, as well as locations and data collection software they'll be
using towards the information gathering goal.
The following are the top methods used to gather information about any target:
(i) Social engineering: This includes in-person chat, phone conversations, and email
spoofing attacks. What all these methods have in common is the psychology of
human weakness, needed to get maximum data about the target.
(ii) Search engines: Web crawlers can be used to fetch information about anything, and
this includes companies, persons, services, and even real hacks
(iii)Social networks: Facebook, Twitter, LinkedIn, and other social networks are great
sources of information to build a profile, especially when targeting individuals.
(iv) Domain names: These are registered by organizations, governments, public and
private agencies, and people. Therefore, they're a great starting point when you
want to investigate someone. Personal information, associated domains, projects,
services, and technologies can be found by inspecting domain name information.
(v) Internet servers: authoritative DNS servers are a great source of information, as they
often include every single surface point exposed to the Internet—which means a
direct link to related services such as HTTP, email, etc.
Preserving Evidence Gathered for Court Admissibility
The handling of evidence is the most important aspect of digital forensics. This is known as
preservation: the isolation and protection of digital evidence exactly as found without
alteration so that it can later be analyzed. Information obtained during a forensic
investigation must be handled and preserved in such a manner that it's physical and legal
integrity is maintained to ensure that the evidence is sought lawfully and that it is
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admissible (Mudaly, 2011; Oyedokun, 2017).
Most of the criminals behind fraud use sophisticated technology and accounting tricks to
commit complex frauds. This means that forensic accountants need state-of-the-art
facilities to uncover fraud. Computers are common tools used by the culprits behind whitecollar crimes. To find “the smoking gun,” the forensic accountant will need to be able to dig
deep into the company's computer system. However, without the proper equipment, that
process can prove to be very difficult. To facilitate the preservation, collection, analysis, and
documentation of evidence, forensic accountants can use specialized software and
computer hardware. Many new technologies allow the investigators to recover deleted
files, crack encryptions or codes, extract and sort data (Bigler, 2001).
How to Preserve Evidence for Court Admissibility
i. Document management is critical in any fraud investigation. Larger cases mean
more documents, so the process of managing them is even more important (and
maybe more complicated). Part of the document management process is preserving
original evidence so that it may someday be used in court. While an investigator
often never knows if a case will ultimately end up in front of a judge, the most
prudent way to handle evidence is to assume that you will be in court one day and to
handle the evidence carefully.
ii. Digital evidence is relatively easy to preserve if you use the help of a knowledgeable
professional. Your best bet is to bring in someone who is an expert in computer
forensics, preferably someone who has testified in court several times. That person
is most likely to properly preserve digital evidence for later presentation in court.
iii. At all costs, do not allow anyone to do anything to the computers used by a fraud
suspect(s). The mere act of looking through computer files can destroy important
data and can compromise the integrity of the digital evidence. Even turning a
computer on or off makes changes to its hard drive, which could later call into
question the evidence. Allow only a qualified computer forensics expert to touch
the computers in question.
iv. Documentary evidence will need to be preserved too, and the investigator will have
to demonstrate a proper chain of custody of the evidence if the matter ends up in
court. Chain of custody is a fancy way of saying that it is important to secure
evidence and demonstrate that it was not tampered with or altered. You will have to
show who had access to the evidence, how it was secured, and how its integrity was
preserved.
v. If you are put in charge of a piece of evidence, you should lock it in a cabinet and/or
office that has very limited access. You should know exactly who has keys to the
room or storage device. If you need to move the evidence or give it to someone, you
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should have documentation prepared relative to that transfer of evidence, and the
person receiving it should be prepared to keep it secure and document its
whereabouts as well.
vi. Investigators should not write on originals in any way or otherwise destroy or mark
them. Make copies of the originals, and use the copies as your working documents
for the investigation if you need to write on them or otherwise mark them. Do your
best to keep the original evidence in the same condition in which it was received. If
you receive only copies of evidence, you do not have to worry about preserving it
carefully. After all, it is not the actual evidence.
vii. The process of preserving evidence is especially important in cases in which the
suspect is alleging that evidence has been altered, signatures are not authentic, or
documents are forged or fabricated. As a general rule of thumb, make sure originals
of all documents are secured and their chain of custody is documented.
Analysis of Information collected for Admissibility as Evidence in Law Court
Forensic accounting involves analysis of accounting records, interviewing related parties,
and acting as an expert witness. Although these factors are some of the main aspects of
forensic accounting, the profession is much wider than only this and it is considerably
behind the scenes work that contributes to the profession. This statement is shared by
Singleton and Singleton (2010) as they state that forensic accounting does not only pertain
to financial information but also non-financial information and includes the writing of a
report to management or the court.
CONCLUSION AND RECOMMENDATIONS
The high rate of tax fraud, tax evasion and other form of non-compliance in Nigeria is
alarming, while the traditional auditing techniques has failed, based on its inefficiency and
ineffectiveness in curbing tax fraud and other forms of fraudulent practices. In Nigeria, our
value system is weak with less emphasis on individual honesty, integrity and exhibition of
good characters. The society recognises wealthy individuals without the appropriate
question on their sources of income or wealth, even not minding whether taxes are paid or
not. These are the people in the corridor of power who are hailed, honoured and recognized
in the society. These high wealthy individuals dodge tax payment or underreport income
for tax assessment. Most people in the informal sectors follow suit using them as basis of
rationalisation for tax fraud and tax evasion. Collusion and corruption on tax revenues is
also alarming, rationalising it on wastages and infrastructural decays. Much premium is
placed on materials than integrity which to a large extent encourage fraudulent practices
and tax fraud. This necessitate the calls for an alternative means of addressing this tax
problems, therefore, forensic accounting is to control and deter fraudulent practices on tax
revenues in order to enhance and increase tax revenue generation by the government.
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Fraud Identification In Forensic Tax Investigation And Rule Of Evidence
Forensic accounting application to tax fraud and tax evasion is very important to the
enhancement of revenues generation especially in a developing countries with high rate of
informal sectors, corruption and persistent increase in the level of tax loss. The major
benefit is to increase government revenues required for provision of public goods and
services; enhancement of social, economic and infrastructural development; and reduction
in the country's annual budget deficit. Also, the application of forensic accounting
techniques for tax revenues drive will shape tax morale wish will lead to increase in the
level of tax compliance. It will also bring about tax fairness and justice as number of tax
complaint individual and firms will increase while it bridged the gap between tax
compliant and tax evaders, as those that voluntary complied to tax payment will not feel
aggrieved and cheated by tax evaders. It will enhance the compilation of taxpayers' data
base as many taxpayers will be brought to books which will aid good revenues generation
planning and budgeting. For the future, as the level of compliance increases, time and cost
associated with investigation and recovery will be minimised and eradicated. Lastly,
evidence gathering and its rules must not be carelessly noted, it is important to collect
relevant evidence that can be admissible in the court of law because that is only the
substantial tools of winning or losing a case.
It is from the above that the following recommendations are put forward:
1.
Government should develop interest in forensic accountant for monitoring and
investigation of tax fraud and other related fraudulent activities.
2.
Specialisation of forensic accounting as a field of study in tertiary education and as a
unit in organisation set-up.
3.
Accountant should specialise in forensic accounting practices.
4.
Creation of law and regulations on the use of forensic accounting in combating
financial and tax related fraudulent activities and crimes.
5.
Enforcement of tax laws.
6.
Appropriate punishing and stiffer sanctions for the defaulter of tax laws, to serve as
deterrence.
7.
Presence of forensic accountant at tax offices to pursue tax revenues.
8.
Adoption of advanced technology to curb tax fraud and evasion
9.
Transparency and accountability around tax matters
10. Tax fairness and justice with good taxpayers' data base.
REFERENCE
ACFE (Association of Certified Fraud Examiners). (2011). Fraud examiners manual.
International ed. Austin, TX.
ACFE (Association of Certified Fraud Examiners). (2012a). CFE Skill Set.
http://www.acfe.com/cfe-skill-set.aspx Date of access: 10 Jun. 2012.
ACFE (Association of Certified Fraud Examiners). (2012b). CFE Qualifications.
http://www.acfe.com/cfe-qualifications.aspx Date of access: 23 Apr. 2012.
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ACFE Conference (Association of Certified Fraud Examiners. Conference). (2011). Ponzi
schemes: a detailed analysis of the challenges of the Krion scheme.
http://www.acfesa.co.za/event_files/Ponzi_Schemes.pdf Date of access: 9 Oct.
(2012).
Adekoya, A. A., Oyebamiji, T. A & Lawal, A.B (2020). Forensic Accounting, Tax Fraud and
Tax Evasion in Nigeria – Review of Literatures and Matter for Policy Consideration.
International Journal of Emerging Trends in Social SciencesISSN: 2521-3539 Vol. 9, No. 1,
pp. 21-28, 2020 DOI: 10.20448/2001.91.21.28
Aduwo, O. O. (2016). The role of forensic accounting in combating the menace of corporate
failure. International Journal of Economics, Commerce and Management, 4(1), 640-649.
Al-Sharairi, M. E. (2018). The role of forensic accounting in limiting tax evasion in the
Jordanian public industrial shareholding companies through the perspective of
Jordanian auditors. International Journal of Economics and Finance, 10(1), 233-243.
Available at: https://doi.org/10.5539/ijef.v10n1p233.
Dhar, P., & Sarkar, A. (2010). Forensic accounting: An accountant's vision. Vidyasagar
University J. Commerce, 15(3), 93-104.
Eliezer, O., & Emmanuel, B. (2015). Relevance of forensic accounting in the detection and
prevention of fraud in Nigeria. Historical Research Letter, 23(1), 17-25.
Oyedokun, G. E. (2014). Approach to forensic accounting and forensic audit. SSRN
Electronic Journal. Accessed at DOI: 10.2139/ssrn.2575168
Oyedokun, G. E. (2014). Integrity of financial statements and forensic accounting
techniques in internal control of business Organisations; being a pre-field
presentation, Submitted to the department accounting of Babcock University, Ilisan
– Remo, Ogun State, in partial fulfillment for the award of Master of Science Degree
in Accounting
Oyedokun, G.E. (2018). Ethical Justification for Creative Accounting: Fraud and forensic
Accountants' Perspectives. Aaron & Hur Publishing, Ogba, Lagos.
Oyedokun, G.E. (2020). Imperative of Nigerian external reserve: Matters arising. The
Nigerian Accountants. 51(7), 58-63. A publication of the Institute of Chartered
Accountant of Nigeria. Available at www.ican.
Oyedokun, G.E. (2021). Growing our digital world in Nigeria: forensic and tax accounting
perspective. Being an Inaugural Lecture delivered at Lead City University, Ibadan,
Nigeria.
Oyedokun, G.E. (2021). Growing our digital world in Nigeria: forensic and tax accounting
perspective. Being an Inaugural Lecture delivered at Lead City University, Ibadan,
Nigeria.
Oyedokun, G.E.(2017). Compendium of writings in forensic accounting and fraud examination.
Lagos, Nigeria. ASCO Publishers. ISBN: 978-978-55513-7-2
Ruankaew, T. (2013). The fraud factors. International Journal of Management and
Administrative Sciences, 2(2), 1-5.
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CHAPTER TWENTY THREE
EXAMINATION OF ETHICAL ISSUES FOR TAX PRACTITIONERS
IN NIGERIA
Kennedy, Iwundu and Adeolu-Akande, Modupeola Atoke
kend4real2000@yahoo.com: +234-803 7866 998
INTRODUCTION
There has been a substantial amount of coverage in the international media in recent years
alleging that tax practitioners behave unethically. Of particular note are the interrogations
of senior members of large accounting and tax firms by the UK government's public
accounts committee about the type of advice they provided, in the wake of allegations of
aggressive and unethical tax avoidance practices employed by multinational companies
such as Amazon, Facebook, Google and Starbucks However, this scrutiny and the level of
public interest do not appear to have led to any examination of the ethics underlying the
conduct of tax practitioners, or how ethics might be operationalized in the practice of tax
work or tax consulting services.
In Nigeria, the move towards a full self-assessment tax regime has brought with it a greater
representation of and expanded role for tax practitioners. Given that the resolution of many
tax issues present significant ethical dilemmas for tax practitioners in their role as the moral
consultant of their clients, and the close relationship of ethics and tax compliance, an
evaluation of the nature and extent of ethical concerns as identified by tax practitioners
themselves has important implications both for the tax consulting and tax administration.
The Objective of Study
This paper examines Nigerian tax consultants' perceptions of the ethical environment in
which they practice, within the context of an income tax system based on self-assessment
principles. The paper identifies and ranks an inventory of ethical issues in terms of
perceived frequency of occurrence and importance to Nigerian tax Consultant. In addition,
the extent and influence of ethical concerns in the profession are evaluated. The study has
determined that the most frequently cited ethical issue is the failure to make reasonable
enquiries where information or documentations provided by a client appears to be
inaccurate or incomplete.
The most important ethical problem is a failure to ensure confidentiality with regards to
privileged client information. When the frequency of occurrence and importance means are
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compared, inadequate technical competence, failure to make reasonable enquiries, conduct
research, continuing to act for a client where there is incorrect information, and conflicts in
distinguishing between tax planning and tax avoidance emerge as the "high
frequency/high importance" issues. Although acknowledging the potentials for unethical
actions in tax practice, Nigerian tax Consultants should consider that they carry out their
professional activities within an ethical environment.
The Concept and Principles of Ethics (Theoretical Review)
The Concept of Ethics
Oxford Dictionary defined ethics as moral principles that govern people's behaviors or the
conducting of activities. Ethics is the branch of knowledge that deals with moral principles.
Ethics also called moral philosophy, which is the discipline concerned with what is morally
good and bad or morally right or wrong. The term is also applied to any system or theory of
moral values or principles.
Four Fundamental Ethical Principles
Beauchamp and Childress (2012) identified four principles of ethics. These are as follow:
1. The Principle of Respect for autonomy
Autonomy is Latin for "self-rule" We have an obligation to respect the autonomy of
other persons, which is to respect the decisions made by other people concerning
their own lives. This is also called the principle of human dignity. It gives us a
negative duty not to interfere with the decisions of competent adults, and a positive
duty to empower others for whom we're responsible.
Corollary principles: honesty in our dealings with others & obligation to keep
promises.
2. The Principle of Beneficence
We have an obligation to bring about good in all our actions.
What is Corollary Principle? We must take positive steps to prevent harm.
However, adopting this corollary principle frequently places us in direct conflict
with respecting the autonomy of other persons.
3. The Principle of Non-maleficence
(It is not "non-malfeasance," which is a technical legal term, & it is not
"nonmalevolence," which means that one did not intend to harm).
We have an obligation not to harm others: "First, do no harm."
Corollary Principle: Where harm cannot be avoided, we are obligated to minimize
the harm we do.
Corollary Principle: Don't increase the risk of harm to others.
Corollary Principle: It is wrong to waste resources that could be used for good.
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Combining Beneficence and Non-maleficence: Each action must produce more
good than harm.
4. The Principle of justice
We have an obligation to provide others with whatever they are owed or deserve. In
public life, we have an obligation to treat all people equally, fairly, and impartially.
Corollary principle: Impose no unfair burdens.
Combining Beneficence and Justice: We are obligated to work for the benefit of
those who are unfairly treated.
Professional Ethics
According to Wikipedia, Professional Ethics encompasses of personal and corporate
standards of behavior expected by Professionals. Professional Ethics is also called business
ethics or applied ethics.
According to Lumen Learning (2012) Professionals Ethics is made up of four approaches
namely:
i. Impartiality: Weighting interests equally.
ii. Rationality: Backed my reasons a rational person would accept.
iii. Consistency: Standards applied similarly to similar cases.
iv. Reversibility: Standards that apply no matter who “makes” the rules.
Professional ethics is guidance for people working in a particular professional that tells
them what they are supposed to do and not to do.
The Qualifications and Roles of Tax Practitioners
The Qualification of Tax Practitioners
In Nigeria, a tax practitioner must be a member of the Chartered Institute of Taxation of
Nigeria (CITN) and also must have obtained Tax Practicing License from CITN. Other
qualification of tax practitioners includes belonging as a member of the Institute of
Chartered Accountants of Nigeria ICAN or Association of National Accountants of Nigeria
(ANAN).
A tax practitioner is expected to have a profound knowledge in accounting and auditing
because taxation starts when accounting and auditing ends.
The Roles of Tax Practitioners
Much of the criticism leveled at tax practitioners has been in relation to their advice to
clients on tax avoidance, but this is only one aspect of their work. However, differences in
types of work will result in different thinking, decision processes and ethical implications.
Frecknall-Hughes and Moizer (2015) divided the service provided by tax practitioners into
two kinds:
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1. Tax Management
2. Tax Planning/Avoidance Advice.
Tax management work typically involves the preparation of tax computations for
submission on the taxpayer's behalf to the relevant tax authority, and dealing with and
resolving any subsequent queries and uncertainties. It involves reporting the economic
events that have taken place, with the tax practitioner aiming to ensure that the reporting
complies with tax statute. While tax legislation may contain 'grey' areas of unclear law,
sometimes it is the situation to which the legislation is applied that is ambiguous. For
example, tax statute is clear on the different treatment of repairs from capital expenditure,
but in practice the distinction may not be wholly clear. For instance, is a new chimney on a
building a new capital item or a repair? The answer will depend on circumstances and on an
opinion about what was actually done, so the tax professional may have to make a
judgment about how to present information. Moreover, there will inevitably be areas where
the figures to be entered in the tax returns are inherently uncertain and need to be
negotiated with the tax authorities, as a normal and legitimate part of the process (e.g.
determining the value of private company shares or real estate).
Tax planning/avoidance (or mitigation) work occurs when the tax practitioner attempts to
devise ways of reducing the taxpayer's liability. In some cases, this is non-contentious and is
in accordance with both the letter and spirit of the law. It is also possible, however, for tax
practitioners to go further and deliberately test or stretch a tax statute which is unclear or
ambiguously written, such that one or more interpretations may be attempted, or where
issues arise which are not the subject of specific statute or case law precedent. Such testing
or stretching is at the outer extremes of tax planning, and commonly involves the
establishment of complex or artificial schemes specifically framed with no other aim than to
avoid tax. Such 'financial' engineering schemes have come not infrequently to the Courts
for a decision as to their legitimacy, as indicated by a large number of well-known cases.
Post-Tax Planning and Management Roles of Tax Practitioners
i. Tax Audit and Investigation
Tax consultants are expected to be part of tax audit and investigation of their clients
so as to ensure that their clients (taxpayers) are not short changed by there venue
authority. Tax practitioners can also be engaged to carry out tax audit and
investigation by private and public institutions.
ii. Tax Dispute, Litigation and Arbitration
Where a tax dispute has been taken to a tax tribunal or court, tax consultants are
expected to be with their clients to help defend issues and provide relevant
information for the court.
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Ethical Issues in Tax Practice
This paper has identified ethical issues in tax practice which tax practitioners should be
mindful of as to maintain decorum and uphold professionalism in the course of the job.
i. Multi-task function
A tax consultant to a company who has the duty to set up books and records as well
as being appointed as the auditor of the company has engaged in multi-task
function. A multi task function is where the tax consultant produces management
accounts, audited accounts, produces tax computations and filling of tax returns. In
this case the tax consultant has compromised with the principle of independency
checks and balances in his professional assignment.
ii. Relationship with clients/taxpayers
Where the tax consultant undertakes the job of relatives (father, mother, sister,
brother, in-laws e.t.c) the concept of integrity or independence is undermined. Also
where a tax consultant takes a job from a company where he is a
shareholder/investor, or a contractor, he has gotten his independence undermined.
iii. Following Due process in engagement or appointment of tax consultant
Before a tax consultant accepts a job from a taxpayer, he has to make sure that the
previous tax consultant was properly disengaged by communicating the previous
tax consultant. He also should call for the tax file of the new client to understand the
nature of tax issues involved before taking up the job.
iv. Ethical issues involving in filling of returns to revenue authorities
Tax practitioners have duty to educate their clients on the need to file returns early
before it becomes late. They also have a duty to ensure that returns filed are devoid
of misstatements, miscalculations and misrepresentations.
v. Money laundry involvement
Tax practitioners are not expected to be part of money laundry activities especially
when dealing with both private and public clients. There have been cases where tax
practitioners were used or involved in money laundry activities with their private
and public clients.
vi. Ethical Issues on government use of tax consultants in revenue generation
Section 12(4) of FIRS establishment act 2007 provides that FIRS may appoint tax
consultants provided that tax consultants shall not carry out the duties of
assessment and collection of tax. Similar provisions are seen in States Internal
Revenue Services (SIRS) and other government agencies.
Also other federal and
state government agencies and local governments can
engage tax consultants for the purpose of providing data for revenue generation. In the
process of data collection, some tax consultants collude or conspire with taxpayers to
shortchange the government, thereby reducing government generated revenue. So many
states and local governments in Nigeria have stop using tax consultants for data collection
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and revenue drive due to dishonesty of some tax consultants. Some tax consultants in the
course of their assignment do intentionally provide inaccurate data for their government
clients which leads to loss of revenue.
Unethical Practice by Tax Practitioners during Computation and Filling Returns
i. Granting and computing capital allowances to reduce tax liabilities on assets that
are not existing, or not being used for the business.
ii. Conniving with revenue authorities to cheat tax payers where tax payers pay more
tax liabilities than they should.
iii. Strategic reduction of taxable income by building huge unsubstantiated costs and
expenses.
iv. Collusion with taxpayers to falsify documents (invoices, receipts etc) in order to
reduce tax liabilities.
v. Colluding with taxpayers in non-disclosing of income or transactions that attract
taxes to revenue authorities.
vi. Valuation of Assets: Some tax practitioners now value their clients' assets and use
such values for capital allowance advantage. It is not the duty of tax practitioners to
value assets. Assets values are derived from the following:
a. Verification of invoices/receipts of purchases of such assets.
b. Certificate of acceptance of fixed assets from ministry of industry, trade and
investment.
c. Certificate of Valuation of assets from registered or certified property
valuer.
vii. Failuretomakeinquiriesorcarryoutinvestigationwhereataxpayersrecords appears
to be, inaccurate, incomplete and inconsistent.
Ethical Qualities of Tax Practitioners
A. Integrity
A tax practitioner must have integrity. He must be honest and straightforward in his
professional and business dealings.
B. Objectivity
A tax man must not allow his professional or business judgment to be affected by
bias (personal prejudice), conflicts of interest and undue influence from others. For
tax practitioners in business, this includes undue pressure from the employer
(Senior Management).
C. Professional Competence and Due Care
A tax practitioner has a duty to maintain his professional knowledge and skills at a
level that enables him/her to provide competent professional service to clients or
employer. This includes a requirement to be up to date with developments in areas
of taxation, tax laws, etc, that are relevant to the work that he does. They should also
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D.
E.
F.
G.
act in accordance with relevant technical and professional standards when doing
their work for clients or employer.
Confidentiality
Tax practitioners must respect the confidentiality of information obtained in the
course of their work. This applies to the confidentiality of information within the
firm or employer's organization as well as to confidentiality of information about
clients.
Technical Standard
A professional tax practitioner should perform his professional tasks in accordance
with the relevant technical and professional standards. They include: standards
issued by CITN (i.e. Statement of Taxation Standard STS), International financial
reporting standard (IFRS), etc.
Good Judgmental Skills
He is expected to apply professional judgment in the discharge of his duties.
AbilitytoUnderstandTaxLawsandbeUpdatedwithChangesinTaxLegislations
Consequent upon the ritual of government annual finance act, a tax practitioner is
expected to know the pros and cons of every year finance act and is also expected to
communicate and educate his clients based on the amendments arising from the
finance and appropriation act.
Liabilities against Tax Practitioners who engage on Unethical Practices
i. Criminal Liability: Tax consultants can be charged for criminal activities especially
on issues bothering on fraud and criminal breach of trust. This may lead to
imprisonment, fine or both. A tax practitioner can also be charged of financial
statement fraud: Financial Statement Fraud is the deliberate misrepresentation of
the financial condition of an enterprise accomplished through the intentional
misstatement or omission of amounts or disclosures in the financial statements to
deceive financial statement users.
ii. Civil Liability: A consultant can be sued by his clients who has suffer loss due to
wrong advise or negligence. Tax practitioners are expected to get professional
indemnity insurance cover which covers civil liabilities costs.
iii. Professional Liability: If found guilty of professional misconduct the Chartered
Institute of Taxation of Nigeria (CITN) may suspend members involved in
professional misconduct. Also CITN, ICAN or ANAN may also suspend or
withdraw practicing licenses of tax practitioners who have be found cupable of
gross professional misconduct. Financial Reporting Council (FRC) can also sanction
practitioners who are found wanting of misconduct in financial reporting.
iv. Corporate Liability: There is no Companies and Allied matters Act (CAMA)
provision for the termination of appointment of a tax practitioner who is found
negligent or wanting in the course of discharging his duties. However, a company
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Examination Of Ethical Issues For Tax Practitioners In Nigeria
can rely on section 362 of CAMA where the same firm or individuals who were
appointed as auditor(s) were also appointed as tax consultants. Section 362 of
CAMA 1990, a company may by ordinary resolution remove an auditor before the
expiration of his terms of office not withstanding anything in any agreement
between the company and the auditor. Section 362 (2) When the resolution is passed
for his removal the company shall within 14 days give notice of that fact in
prescribed form to (CAC) and if a company fails to give notice required by this
subsection, the company and every officer of it who is in default shall be guilty of an
offense and liable to a daily default fine.
Section 362 (3) nothing in this section shall be taking as depriving a person removed
under it of compensation or damages payable to him in respect of the termination of
his appointment as auditor or of any appointment terminating with that as auditor:
(a) Incompetence sec 357 (2) b. (b) Misconduct
v. Moral Liability: A tax consultant is expected to resign from an assignment if he
discovered that he has been involved in unethical practices or any professional
misconduct relating to the assignment given to him. A tax consultant is not expected
to continue to work for a client who falsify tax information or who has refused to
comply with the provisions of tax laws and policies of the country. Section 365 of
CAMA makes provision for resignation of auditors especially where auditors are
same as tax consultants of a company.
Challenges for Tax Practitioners in a Changing Tax System
i. Tax practitioners have challenges of adding value by interpreting tax legislations
and offering advice.
ii. Many tax practitioners discuss tax only after client has undertaken transactions
instead of discussion before transactions.
iii. There are tax practitioners inabilities to close tax gap comprises of reliefs and
exemptions that are unclaimed by taxpayers.
iv. Tax practitioners integrating ICT skills and tax software in improving tax education
and consulting services has become challenging.
v. Touting in tax practice: Touting in tax practice is increasing every day. This has led to
unfair professional fee discrimination and poor quality of tax consulting services.
vi. Security of taxpayer information: Tax practitioners hold some of the most sensitive
personal information of taxpayers — their name, date of birth, and sometimes date
of death, their spouse and children's names where their home is financed, property
they own, where they work, where they have savings or own stock, and where they
bank. The ability to protect taxpayer information is challenging.
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Examination Of Ethical Issues For Tax Practitioners In Nigeria
vii. Challenges of complying with CITN, ICAN and ANAN scale of professional fees.
Many tax practitioner have lost their clients while trying to comply with the scale of
fees.
viii. Practice promotion: Many tax practitioners are faced with the need to generate
additional income to makeup for a decline in their
practices, due to tax
simplification and "do it yourselfers," as well as dying clients, closure of businesses,
liquidation and relocation of companies.
ix. Unfair tax administration: Tax practitioners are faced with unfair tax
administration in the country. These include:
a. Tax administrators not willing to carry credit notes forward for taxpayers.
b. Carrying out audit and review beyond six years status of limitation.
c. Applying deem profit assessment on fixed assets/properties.
d. Application of deem profit on turn over without asking forevidence of
transactions.
e. Demand of primary documents during reviews when primary documents
as supposed to be demanded during audit and investigation.
f. Delays in issuing tax clearance certificates (tcc)
g. Challenges in filling returns using FIRS online filling platforms.
h. Failure of tax administrators to obey management policies, circulars and tax
laws.
CONCLUSION AND RECOMMENDATIONS
A tax practitioner should use common sense and strive to make the most ethical decision in
every scenario that might be presented in tax practice. But the difficulty lies within the
details, namely the overlap, or lack of continuity, between the different regulatory
frameworks that might apply to the practitioner's conduct. One should take utmost care
to analyze first what regulatory standard applies to the practitioner's conduct before
making a decision.
The practitioner should then determine what conduct is required or prohibited by the
regulatory standard and what conduct is merely advised
or recommended. Only then
can a tax practitioner make an informed decision that is ethical, lawful, and ultimately in the
best interests of the public and his or her client.
REFERENCES
Aranya, N.&K. R. Ferris (2004).'A Re-examination of Accountants 'OrganizationalProfessional Conflict', The Accounting Review (January), Vol IX, No.1, 1-15.
Brady, F. N. & M. J. Hatch (2002). 'General Causal Models in Business Ethics: An Essay on
Colliding Research Traditions', Journal of Business Ethics 11, 307-315.
326
Examination Of Ethical Issues For Tax Practitioners In Nigeria
Clarke, P., N. T. Hill & K. Stevens (1996), 'Ethical Reasoning Abilities: Accountancy
Practitioners in Ireland', Irish Business and Administrative Research, Vol.17, 94-109.
Collins, J. H., V. C. Milliron & D. R. Toy (2006). 'Factors Associated with Household Demand
for Tax Preparers', Journal of the American Taxation Association (Fall), 9-25.
DeAngelo, L. E. (2001). 'Auditor Size and Auditor Quality', Journal of Accounting and
Economics, (December), 183-199.
Erard, B. (1993). 'Taxation with Representation: An Analysis of the Role of Tax Practitioners
in Tax Compliance', Journal of Public Economics, 52, 163-197.
Finn, D.W., L.B. Chonko and S.D. Hunt: (2008), `Ethical Problems in Public Accounting: The
View from the Top', Journal of Business Ethics 7, 605-615.
Flory, S. M., T. J. Phillips, R. E. Reidenbach & D. P. Robin (1992). `A Multidimensional
Analysis of Selected Ethical Issues in Accounting', The Accounting Review 67 (April),
284-302.
Frecknail, Hughes & Moizer (2015). The Contemporary Roles of TAX Practitioners.
Keene, D. (2008). 'An Investigation into the Ethical Decision Making of Accountants in
Different Areas of Employment', Discussion Paper Series, 184 (August), Massey
University.
Leung, P. & B. J. Cooper (1995). 'Ethical Dilemmas in Accountancy Practice', Australian
Accountant, 65(4), 28-33.
Marshall, R. L., R. W. Armstrong & M. Smith (2009). 'The Ethical Environment of Tax
Practitioners: Western Australian Evidence', Journal of Business Ethics, 17, 1265-1279.
Marvel & Paula, M. junghans (1997). Ethical Problems in Tax Practice.
Michael, O. Bonahoom (1993). Moral and Ethical Considerations in Tax Practice.
Rex, L. M., Robert, A. & Malcolnm, S. (2000). Ethical Environment of Tax Practitioner.
Rex, M., Malcolm, S. & Robert, A. (2010). Ethical Issues Facing Tax Professionals.
Russell, D. (2004). 'Professional Conduct': The Client's Interest Always Takes Priority',
Taxation in Australia (March), 431-432.
Yetmar, S. A., Cooper, R. W. & G. L. Frank (2012). 'Ethical Issues Facing CPA Tax
Practitioners', The CPA Journal, New York, (Oct.), 28-3.
327
CHAPTER TWENTY FOUR
INTERNATIONAL FINANCIAL REPORTING STANDARDS' (IFRS)
ADOPTION AND TAXATION IN SOUTH WESTERN NIGERIA
1
Akingbehin, K. O., and 2Adegbenro, S. A.
1&2
Department of Management and Accounting
Lead City University, Ibadan, Nigeria
1
+234-8033660287
2
gbenro247@yahoo.co.uk
+234-8064648303
ABSTRACT
Following the adoption and adaption of IFRS, lots of research has been carried out to investigate the
influence of IFRS on financial reporting quality. However, very few of these studies have been able to
empirically validate the nexus between IFRS adoption and taxation. It is on this basis that this study
examined the effect of IFRS adoption on taxation in Southwestern, Nigeria. Agency, descriptive and
ability-to-pay tax theories provided the framework, while the survey design of descriptive type was
adopted. Judgmental sampling technique was employed with 150 samples drawn from 3 states and
local government boards of internal revenue. Self-structured questionnaire (r=.84) was the
instrument used. Data collected were analyzed using Pearson's product moment correlation and
multiple regressions at 0.05 level of significance. A significant relationship was found to have existed
between IFRS adoption and quality of taxation and reporting (r = .214); calculation and reporting of
income taxes (r = .244). Also, IFRS was found to have significantly improve quality of tax
computation and reporting (â = 0.034, t= 2.101) and calculation and reporting of income taxes (â =
0.032, t= 3.003).The importance of IFRS adoption and adaptation to taxation cannot be
overemphasized. Thus, the implementation of good governance and the independence of the audit
committee should be made sacrosanct by the government and management to ensure strict
compliance and adherence to IFRS accounting standards.
Word Count: 226
Keywords:
International Financial Reporting Standards & Taxation
INTRODUCTION
The introduction of an international accounting standard by the International Accounting
Standard Board (IASB) is to facilitate the harmonization of financial information that
companies present. The intention and expectation are that mandatory adoption of
International Financial Reporting Standards (IFRS) will help promote transparency and
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International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
comparability in the preparation and presentation of general-purpose financial statements,
thereby enabling the capital and credit markets to function more efficiently. The idea
behind the emergence of International Financial Reporting Standards (IFRSs) was
facilitated by International Accounting Standard Board (IASB), an independent
organization registered in the United State of America (USA) but based in London, United
Kingdom. This organization is presently known as the International Financial Reporting
Standard Board (IFRSB): first adopted in 2005 by many countries around the world.
The Body, International Accounting Standard Board (IASB) took over in 2001 from its
predecessor; International Accounting Standard Committee (IASC), a body established in
1973 by the professional accountancy bodies in Australia, Canada, France, Germany, Japan,
Mexico, Netherland, United Kingdom etc. and charged with the responsibility of issuing
International Accounting Standards (IAS) between 1973 to 2000.The International Financial
Reporting Standards (IFRS) comprises of four types of documents such as; International
Accounting Standards (IASs), International Financial Reporting Standards (IFRSs),
International Financial Reporting Interpretations Committee (IFRICs): formerly known as
the Standing Interpretations Committee (SICs), and IASB Framework for the Preparation
and Presentation of Financial Statements. In light of the expected benefits of IFRS adoption,
over 120 countries have commenced the adoption of this set of international norms. The
usage and adoption of IFRS in Europe had resulted in substantial change in accounting
standard from previous national GAAP to IFRS.
REVIEW OF LITERATURE
Concept of International Financial Reporting Standards (IFRS)
International Financial Reporting Standard (IFRS) is a global language which results from
the globalization of the business world and the quest for uniformity, reliability and
comparability of financial statement of companies at national and international level. IFRSs
are considered a “principles based” set of standards which found its principles in the
framework for the preparation and presentation of financial statements (that is, financial
reporting). Also, it establishes broad rules as well as dictates specific treatments for
transactions. The goal of financial reporting is to make information available for decision
making. Historically, there is diversity in financial reporting in different countries due to
culture, legal system; tax system and business structures. International Financial Reporting
Standards (IFRS) harmonizes this diversity by making information more comparable and
easier for analysis, promoting efficient allocation of resources and reduction on capital cost.
Consequently, IFRS comprises of; IFRS issued after 2001; IAS Standards issued before 2001;
Interpretation originated from the International Financial Reporting Interpretation
Committee (IFRIC); Standard Interpretation Committee issued before 2001; and the IASB
Framework stating Particular types of transactions and other events should be reported in
financial statements. Therefore, the notion of IFRS include; financial statement objectives,
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International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
qualitative characteristics, underlying assumptions, elements and its subdivisions
(Statement of financial position, Statement of comprehensive income statement, statement
of changes in equity, Statement of cash flow, Notes to the financial statement that contain
accounting policies and other explanatory information) which are discussed in detail
below. As International Financial Reporting Standard (IFRSs) berths in Nigeria, its
implementation poses major challenges for tax practices and administration. IFRS is the
whole body of authoritative standard and literature adopted and published by
International Accounting Standard Board (IASB) and in Nigeria by Federal Reporting
Council of Nigeria (FRCN).
Normative Theory
This theory argues that that economic future of a company or investor is very important,
therefore, it deals with future events rather than past data, which is the domain of positive
accounting practices. For example, if a company that increased dividend payments could
use some of those funds to improve corporate sustainability measures, this indicate how
much money should be invested in those measures to sustain corporate growth. Normative
ethics is also distinct from descriptive ethics, as the latter is an empirical investigation of
people's moral beliefs. In this context normative ethics is sometimes called prescriptive, as
opposed to descriptive ethics. However, on certain versions of the meta-ethical view of moral
realism, moral facts are both descriptive and prescriptive at the same time.
EMPIRICAL REVIEW
The impact of international Financial Reporting Standards on Taxation pinpointed that for
changes to be made in tax law because of IFRS, the following key questions need to be
answered:
i. How will tax systems handle the shift from a transaction-based approach to a valuebased approach in financial accounting from a tax perspective?
ii. Should unrealized profits be taxed and deduction for unrealized losses allowed? Or
to put the question on amore theoretical level – should tax accounting move from
transaction-based approach (based on “old accounting” theory; SAS) to a value
based-approach (based on “new accounting” theory; IFRS)?
They further reveal the following arguments for and against IFRS as a tax base: the main
argument in favour is that the use of IFRS as tax base move tax accounting closer to the “real
economic income” of companies. The arguments against are numerous and include the
following:
- Fair value accounting is highly subjective and will not be easy to control for tax
purposes.
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International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
The use of IFRS will lead to a situation where (unrealized) income is taxed which in turn will
affect the liquidity of companies; IFRS-standards are complicated and difficult to
understand; another argument is that the complexity of standards and the high number of
subjective judgments that have to be made will increase the risk of tax disputes. In Austrian,
the empirical work was on “what if IAS/IFRS were a Tax Based?” They posited that only in
few cases (such as depreciation in financial reporting and capital allowance in tax
reporting) are IAS/IFRS and tax accounts different. They suggested that no dramatic
change in tax base has to be expected. Based on the observations from the empirical works
discussed above, this study, therefore, holds that the adoption of IFRS will lead to slight and
not drastic change in tax laws. Similarly, the (Nigerian tax authorities issue guidance on tax
implications of adoption of International Financial Reporting Standards); Information
Circular (Tax Implications of the adoption of the International Financial Reporting
Standards) by FIRS, (2013).
Inside Tax issue, it was noted that impact of New Accounting Standards on Tax in Nigeria
(part 1&2); have all threw more light to the effect of IFRS on taxation in Nigeria as a whole
(i.e. inclusive of the South-Western Nigeria). However, each of these publications focus is
entered on extension of time for filing of returns and documentation, excess dividend tax,
change in accounting policy, exchange of assets, leases, inventory, and allowable and nonallowable deductions. Based on their findings, they listed the benefits from adaptation of
IFRS over the world to include:
1. Better financial information for shareholders
2. Better financial information for regulators
3. Enhanced comparability
4. Improved transparency of results
5. Increased ability to secure cross-border listing
6. Better management of global operations; and
7. Decreased cost of capital. International accounting standards and accounting
quality suggested that accounting quality could be improved with the elimination
of alternative accounting methods that are less reflective of firms' performance and
are used by managers to manage earnings.
They compare earnings management for firms that voluntarily switch to IFRS with firms
that use domestic accounting standards. They find that after IFRS adoption, firms have a
higher variance of changes in net income, a higher ratio of the variance of changes in net
income to variance of changes in cash flows, higher correlation between accruals and cash
flows, lower frequency of small positive net income, and higher frequency of large
losses.International sample of firms that voluntarily adopted IFRS up to 2003 exhibits lower
levels of earnings management and more timely loss recognition than a matched sample of
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International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
firms using local GAAP. As an extension of these findings, focus on the heterogeneity in the
consequences of voluntary IFRS adoption and find that on average capital markets respond
modestly to voluntary IFRS reporting. Overall the evidence on the association between
voluntary IFRS adoption and accounting quality is mixed, although papers applying more
recent data generally find relatively better accounting quality among the firms that adopt
IFRS.
A common feature of these studies is that much of the previous studies on IFRS compliance
relates to voluntary adopters, which by definition suffer from selection bias. This raises the
question as to whether we can attribute the improved quality to the application of IFRS per
se. That is, does the application of IFRS have an incremental effect on accounting quality, or
is the observed quality improvement a result of other changes implemented
simultaneously by the adopting firms.
METHODOLOGY
This study adopts the survey research design. Self-administered questionnaire through the
administration of questionnaires on respondents. The target population was 1,200 of the
Board of Internal Revenue (SBIR) within South-West Nigeria (Osun, Ogun and Ondo state).
The sample size was 150, and it was determined through Krejcie and Morgan (1970)
formula and was chosen through judgmental sampling techniques.
Results and Discussion of Findings
Test of Hypothesis
Research Hypothesisone (Ho1): There is no significant relationship between tax
computations of International Financial Reporting Standard adoption on taxation in SouthWestern Nigeria.
Table 1 : Model Summary
Sum of
Model
Squares
1
Regression
279622664.9
Residual
381140590.1
Total
660763255.1
Df
Mean Square
F
Sig.
2
139811332.4
5.502
.016
15
25409372.6
17
Adjusted R
Std. Error of DurbinModel R
R Square Square
the Estimate Watson
1
5040.77
.651a
.423
.346
1.305
a. Predictors: (Constant), Taxation
b. Dependent Variable: International Financial Reporting Standards (IFRS)
Source: Field survey, 2021
332
International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
Table 1 above shows the F-test statistic. The linear regression's F-test has the null hypothesis
that the model explains zero variance in the dependent variable (i.e. R² = 0). In other words,
there is no significant relationship between the International Financial Reporting
Standards IFRS and Taxation respectively. However, from the result obtained, the F-test is
highly significant at 5% level of significance since the calculated value is 0.016, that is, 0.016
<0.05 and therefore the null hypothesis H0 is rejected with the conclusion that there is a
significant relationship between International Financial Reporting Standards and Taxation
variables (IFRS and Taxation). Thus, it can be assumed that the model explains a significant
amount of the variance in the dependent variable. Also, from Table 1, it was observed that
the adjusted R-square is 0.346 which shows a strong relationship between the variables in
question. This means that the linear regression explains 34.6% of the variance in the data.
Durbin-Watson (d)
It was found that the Durbin-Watson value, d=1.305. Since the test statistic, d is between 0
and <2, then it shows that there is a positive autocorrelation. Autocorrelation is a correlation
between the elements of a series and others of the same series separated from them by a
given interval. A rule of thumb is that test statistic values in the range of 1.5 to 2.5 are
relatively normal, and since d is outside the range of 1.5<d<2.5, therefore, we can assume
that there is first order linear auto-correlation in our multiple linear regression data.
Research Hypothesistwo (Ho2): There is no significant relationship between tax base of
International Financial Reporting Standard adoption on quality of taxation in SouthWestern Nigeria.
Table 2: Model Summary
Sum of
Model
Squares
1
Regression 212588883.3
Residual
448174371.8
Total
660763255.1
Model R
1
0.567a
R Square
0.322
Df
1
16
17
Mean Square F
212588883.3
7.59
28010898.2
Adjusted R Std. Error of
Square
the Estimate
0.279
5292.53231
a. Predictors: (Constant), Taxation
b. Dependent Variable: IFRS
Source: Field survey, 2021
333
DurbinWatson
0.724
Sig.
.014
International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
Table 2 above shows the F-test statistic. The linear regression's F-test has the null hypothesis
that the model explains zero variance in the dependent variable (i.e. R² = 0). In other words,
it means that there is no significant relationship between economic growth and the
explanatory variable TI. However, from the result obtained, the F-test is highly significant
at 5% level of significance since the calculated value is 0.014, that is, 0.014 <0.05 and
therefore we reject the null hypothesis H0 and conclude that there is a significant
relationship between economic growth and the explanatory variable (Tax incentives).
Also, from Table 2, it was observed that the adjusted R-square is 0.279 which shows a strong
relationship between the variables in question. This means that the linear regression
explains 27.9% of the variance in the data.
Durbin-Watson (d)
It was found that the Durbin-Watson value, d=0.724. Since the test statistic, d is between 0
and <2, then it shows that there is a positive autocorrelation. A rule of thumb is that test
statistic values in the range of 1.5 to 2.5 are relatively normal, and since d is outside the range
of 1.5<d<2.5, it can therefore be concluded that there is first order linear auto-correlation in
our multiple linear regression data.
Research Hypothesis three (Ho3): There is no significant relationship between income
taxes of International Financial Reporting Standard on quality of taxation in South-Western
Nigeria.
Table 3: Model Summary
Model
1
Regression
Residual
Total
Sum of
Squares
Df
Mean Square
F
Sig.
69036443.16
1
69036443.162
1.867
.191
591726812.01
16
36982925.751
660763255.17
17
a. Dependent Variable: Taxation
b. Predictors: (Constant), International Financial Reporting Standards
Source: Field survey, 2021
Research Hypothesis four (Ho4): There is no significant relationship between tax reporting
of International Financial Reporting Standard adoption on taxation in South-Western
Nigeria.
334
International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
Table 4: Model Summary
Adjusted Std. Error of DurbinModel R
R Square
R Square
the Estimate Watson
a
1
.323
.104
.049
6081.35
.380
a. Predictors: (Constant), International Financial reporting Standards
b. Dependent Variable: Taxation
Source: Field survey, 2021
Table 4 above shows the F-test statistic. The linear regression's F-test has the null hypothesis
that the model explains zero variance in the dependent variable (i.e. R² = 0). In other words,
this shows that there is no significant relationship between economic growth and the
explanatory variable (IFRS). However, from the result obtained, the F-test is not significant
at 5% level of significance since the calculated value is 0.191, that is, 0.191 >0.05 and
therefore we fail to reject the null hypothesis H0 and conclude that there is no significant
relationship between economic growth and the explanatory variable, IFRS.
Also, from Table 4 it was observed that the adjusted R-square is 0.049 which shows a weak
relationship between the variable in question. This means that the linear regression
explains just 4.9% of the variance in the data.
Durbin-Watson (d)
We find that the Durbin-Watson value, d=0.380. Since the test statistic, d is between 0 and <2,
then it shows that there is a positive autocorrelation. A rule of thumb is that test statistic
values in the range of 1.5 to 2.5 are relatively normal, and since d is outside the range of
1.5<d<2.5, we can assume that there is first order linear auto-correlation in our multiple
linear regression data.
CONCLUSION AND RECOMMENDATIONS
From the outcome of the findings, though it was found that taxation have positive
correlation with Financial Reporting Standards, the huge difference in the average growth
rate between taxation and
IFRS (18% & 240%) suggests that tax incentives may
encourage investments in a country but do not materially promote economic growth. This
is because economic growth is affected by so many other factors such as the literacy level,
the proportion of the productive population and global competitiveness of the ease with
which business is done.
The findings also reveal a weak relationship between tax incentives and foreign direct
investments with a correlation value of 0.008. This implies that though tax considerations
are important in the investment decisions of foreign investors, they however, do not carry
335
International Financial Reporting Standards' (ifrs) Adoption And Taxation In South Western Nigeria
as much weight as other factors. Within the Nigerian business space, the huge market
seems to be the most critical motivating factor.
Some previous studies have shown that within the Nigerian fiscal environment, there is no
Institution specifically assigned the responsibility of administering and monitoring the tax
incentives policies of government to ensure that they deliver benefits to the economy in line
with defined objectives. Previous research works have not established in specific terms
whether or not government's investment in tax incentives have been worth the cost
considering the driving force of growing foreign direct and portfolio investments for
economic prosperity.
It is therefore important that government develops an institutional framework for
effectively monitoring and maintaining a database for the costs and benefits of taxation and
other tax expenditures such as waivers and exemptions.
It will also be relevant to advise that government undertakes a holistic review and
rationalization of the existing tax incentive programmes with a view to making them more
efficient and globally competitive. This way, non-productive tax incentive policies can be
reversed to save tax revenue that will otherwise be available for the provision of basic
public goods and services.
The existing systems and procedures require synergy between key stakeholders within the
revenue mobilization framework for the formulation of tax incentive policies that
command the acceptance of all and promote ease of implementation. This will ensure that
tax payers only claim the benefits due to them under the relevant tax laws.
It is also strongly recommended that beneficiaries of tax incentives should separately file
annual declarations specifying the values of tax incentives enjoyed to allow for the creation
of a database that supports decision making.
Finally, all companies operating in all the export processing and Free Trade Zones must be
compelled to file annual tax returns not withstanding that they are exempted from tax.
Furthermore, their tax holiday periods must be defined as it is done in other jurisdictions to
avoid situations where these companies believe they are exempted from tax in perpetuity.
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339
CHAPTER TWENTY FIVE
TAXATION OF ENTERPRISES IN FREE TRADE ZONES IN NIGERIA
Oladejo, Olusola James
Department of Management & Accounting
Lead City University, Ibadan, Nigeria
oladejoja@gmail.com; +2348086065155
INTRODUCTION
The objectives pursued by countries that use free zones have remained constant. The
objectives include: development of disadvantaged regions, generating income and
employment, attracting investment – especially foreign direct investment, and promoting
technology transfer. The objectives …are usually pursued through free zones by providing
a series of incentives to companies and firms operating in those zones.”
In Nigeria, companies that trade in “Free Trade Zone” or Export Processing Zone (EPZ) is
regulated by the Company Income Tax Act (CITA) 2011. As part of the provisions meant for
EPZ companies, they are granted allowances. There could be foreign and individual
companies operating in any EPZ zone and all such companies are exempted from tax on
their profits provided that the undertaking is 100% export oriented.
These sets of companies are not to be entitled to an investment allowance. The companies in
this category encompasses assembling, processing of goods for export provided the value
of exported goods is not less than 75% of the total turnover during the assessment year.
This is a tax incentive granted to companies in the Free Trade Zone to encourage exporting
of goods so as to diversify the economy and improve the revenue base of the government.
This would also provide job opportunities for unemployed people in the country.
However, this dealt with companies trading in a free zone.
The Federal Inland Revenue Service (FIRS) on Tuesday, 30 March 2020 published the list of
its tax offices designated for filing of income tax returns by Approved Enterprises (AEs)
operating in Nigeria Export Processing Zones and Oil & Gas Free Zones (collectively called
“the Zones”) further to the amendment of Section 18(1) of the Nigeria Export Processing
Zones Authority Act and Oil and Gas Free Zone Authority Act (“the Acts”) by Finance Act,
2020.
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Taxation Of Enterprises In Free Trade Zones In Nigeria
Based on the amendment, AEs are now required to submit their income tax returns with the
FIRS in accordance with the provisions of Section 55 of the Companies Income Tax (CIT)
Act. The following tax offices have been assigned to AEs based on the geo-political
locations of the Zones for ease of compliance:
S/N
1
2
3
4
5
6
Regional location of the Zone
Lagos
South-West
South-South
South -East
North -West
North-Central
Designated FIRS Tax Office
MTO – Lagos Island
MTO - Ibadan
MTO – Port Harcourt
MTO - Enugu
MTO - Kano
MTO - Abuja
The requirement for AEs to file CIT returns with the FIRS aligns with the general thrust of
the amended Section 55 of the CIT Act to enhance the FIRS' information database on all
companies carrying on business activities in Nigeria, including non-resident companies
and companies exempted from taxation in Nigeria. It is hoped that a complete and accurate
database of all businesses in Nigeria will enable the FIRS to improve tax administration and
service delivery, in line with the Federal Government's policy of improving ease of doing
business in Nigeria.
As responsible corporate citizens, AEs are expected to comply with the new filing
requirements and file their CIT returns at the designated tax offices to avoid penalty for
default.
Assessment of Companies in Free Trade Zones
In Nigeria, companies in free trade zones can be assessed to tax based on “Best of Judgment
Assessment” (BOJ). BOJ is a term used to describe the estimation used by the relevant tax
authority as the basis of assessment in a situation where no financial records or returns are
submitted by such company in a free trade zone to the tax authority.
This may also be used in circumstances where the financial records are found to be
unreliable. Furthermore, the assessment of companies in Free Trade Zones are similar to
Company Income Tax.
The basis of assessment of Company Income Tax have need to be understood by students.
For instance, company income tax in Nigeria provides the following considerations on the
basis for charging company income tax:
The comprehensive (global) profits of resident companies regardless of whether or not they
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Taxation Of Enterprises In Free Trade Zones In Nigeria
were brought into or were received in Nigeria are liable to tax. Dividend income to a
resident company is treated as Franked Investment Income (FII) on which no income tax is
payable.
The quota of the profits of non-resident companies derived from such companies'
operations in Nigeria is liable to tax.
Dividends, interest or royalties due to non-resident companies are assessed at 10%
(withholding tax rate) on the gross amount due and only the net is payable to the respective
companies.
Free Trade Zone Allowance
Allowance is granted to a company in a free trade zone which has incurred an expenditure
in its qualifying building and plant equipment in an approved manufacturing activity. The
rate granted for companies trading in a free trade zone is 100 per cent capital allowance in
any year of assessment. It is worthy to note that such companies operating in a free trade
zone are not entitled to an investment allowance.
The qualifying expenditure incurred by companies trading in a free zone on building, plant
and equipment in an approved manufacturing activity are claimable on the following:
Buildings expenditures: These are usually referred to as qualifying building expenditure.
They take the form of industrial non-industrial building. Industrial building expenditure
include structures or works of a permanent nature (e.g. warehouse, dock, port, jetty, wharf
etc) while non-industrial building expenditure include structures of permanent nature
other than industrial building (e.g. office complex);
Plant, machinery, fixtures and fittings: They are usually referred to as qualifying plant
expenditure;
There are also qualifying capital expenditure for housing estate, construction and
manufacturing industrial plants.
Note that any expenditure which is an allowable deduction in computing profits of the
company's trade or business in accordance with the provision of CITA, shall not be treated
as qualifying expenditure.
Taxable income of companies trading in a free zone are similar to those of corporate entities
in Nigeria. Thus, taxable income of companies operating in a free zone for a tax year is the
gross income of the EPZ Company less items of income specifically excluded; and the
amount of deductions allowed
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Taxation Of Enterprises In Free Trade Zones In Nigeria
Note that gross income of the companies trading in a free zone is the aggregate of economic
benefits the company derives during a tax year.
Non-Taxable Incomes
There are adequate provisions of the law on incomes that are non-taxable for companies in
Nigeria which are similar to those of companies operating in a free trade zone. For instance:
1. dividend received from investments in wholly export oriented businesses;
2. incomes of any Nigerian company in respect of goods exported from Nigeria
provided that the proceeds from such export are repatriated to Nigeria and are used
exclusively for the purchase of raw materials, plant, equipment and spare parts;
3. incomes of a company whose supplies are exclusively inputs to the manufacturing
of products for export provided that the exporter shall give a certificate of purchase
of the inputs of the exportable goods to the seller of the supplies power to exempt.
4. incomes of a company established within an export processing zone or free trade
zone, provided that 100 percent production of such company is for export otherwise
tax shall accrue proportionately on the profits of the company.
Note that the non-taxable incomes of a corporation are contained in Module 4. Thus,
students can refer to those non-taxable incomes of a corporation as they are similar to those
of companies operating in a free trade zone
Allowable and Non-Allowable Expenses
Allowable expenses are those permissible expenditures or deductions that have been
provided for by the relevant tax laws in Nigeria for companies and individuals in order to
reduce their tax burden, thereby creating what is often referred to as “tax shield”. The
allowable expenses of companies are similar to those operating in a free trade zone.
Allowable deductions are expenses or expenditures incurred by a company wholly,
exclusively, necessarily and reasonably in the creation of profits. This means that any
expenditure incurred to meet the above conditions is deemed allowable in arriving at the
chargeable profits of the company. This may not be the case where such expenditures are
specifically forbidden under any provision of relevant tax laws.
The tax laws in Nigeria provides for allowable deductions provided that they are incurred
for the purpose of acquiring the profits being subject to tax. For instance, allowable
expenses encompasses:
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Taxation Of Enterprises In Free Trade Zones In Nigeria
1. interest on borrowed money and capital employed;
2. rental sum and premiums with respect to land or buildings used for the purpose of
acquiring profits.
3. Repairs and renewal costs relating to the premises, plants, fixtures, furniture's etc
utilized in the business.
4. Bad and doubtful debts to the extent that they are respectively estimated to the
satisfaction of the Revenue Service to have become bad or doubtful of collection.
5. Contributions to approved pension, provident or other retirement benefits fund,
society or scheme;
6. Any expenses incurred during the year in respect of:salaries, wages or other
remuneration disbursed to employees;
7. Cost to the company of any benefit or allowance provided for the senior staff and
executives which shall not exceed the limit of the amount prescribed by the
collective agreement between the company and the employees and approved by the
Federal Ministry of Employment, Labour and Productivity and the productivity,
prices and income/revenue service as the case may be; and
8. The expenses provided to the satisfaction of the Revenue Service to have been
incurred by the entity on Research and Development for the period including the
amount of levy paid by it to the National Science and Technology Fund (NSTF).
Practice Questions
1. Briefly describe how companies trading in a free trade zone are granted capital
allowance?
2. In Nigeria, the manner in which companies trading in a free zone are assessed to tax
are similar to those of company income tax. How are companies assessed to tax in a
Free Trade Zone in Nigeria?
3. Briefly describe how companies trading in a free trade zone are granted capital
allowance?
4. List the taxable/non-taxable incomes and allowable and non-allowable expenses of
companies trading in a free trade zone in Nigeria?
5. List the allowable and non-allowable incomes of companies trading in a free trade
zone in Nigeria?
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CHAPTER TWENTY SIX
BUSINESS DISRUPTION AND CONTINUITY:
REPOSITIONING FOR TAX RESILIENCE
Ajibola, Joseph Olusegun
Professor of Economics
Department of Economics
Veronica Adeleke School of Social Sciences
Babcock University, Ilishan-Remo, Nigeria
Past President, Chartered Institute of Bankers of Nigeria
joeoluajibola@yahoo.co.uk; +2348034409494
1NTRODUCTION
The global business environment has remained unsettled for quite sometimes now. Several
entrenched business culture and models have been under severe attacks by new apostles of
change through the introduction of new, more sophisticated and high tech templates.
Several sectors and service based activities keep adjusting to the challenge of keeping pace
with the dynamics of human environment. Accordingly, competitive edge is now a
function of the ability of a business player to adjust to the reality fostered on it by the
disruption that is arising from this 'unpleasant' new normal. To protect its going concern
status, therefore, businesses must pursue an agenda that would help it survive in an ever
changing business environment. The paradigms are shifting and a new culture is emerging
by the day. For a business to survive and remain relevant, it must continue to reposition
itself to meet the changing demands of its stakeholders. Through taxation, the government
could be either a victim or a victor under in a disruptive business environment. For
government revenue not to suffer under the new normal, tax rules and regulations must
adjust to the realities of the day and keep pace with the new high-tech driven business
models.
Indeed, it is a challenging moment for business operators and their stakeholders, including
tax authorities, in most jurisdictions. Which is why business and tax experts need to
continue to dissect the issues and matters that would remain relevant to a disruptive
business environment; and what the operators need to do to remain resilient but not at the
expense of the Revenue.
This paper examines the fundamental issues pertaining to a disruptive business model, the
challenges fostered on the business operators as they struggle to protect their going concern
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Business Disruption And Continuity: Repositioning For Tax Resilience
status. It also examines the issues and matters that need be well dissected, managed and
controlled by the tax authorities to keep pace with the ever changing model, and protect the
revenue. .
CONCEPTUAL ISSUES
Disruption was defined by the Oxford Advanced Learner's Dictionary, (9th edition) as a
disturbance or problem that interrupts an event, activity or process, or that makes something difficult
to continue in its normal way/ traditional way.
Accordingly, business disruption displaces entrenched paradigms, recreates norms and
beliefs and reconstructs the business models
Originally, it is a specific process through which a business or other phenomenon disrupts
others by taking their market share However, the concept of Business Disruption was
further discussed in “The Innovator's Dilemma” where the author noted that it is inter alia, a
way where a successful company not just meet the customer's current needs, but anticipating their
unstated or future needs. Thus, this includes where small companies with minimal resources were
able to enter a market and displace the established or traditional system. Thus, it is a good thing,
and may attract the less demanding customers or create a market where none existed before
(Clayton, 1997). It has further been said to be a reality confronting business across the
economic landscape (Harvard Business School Online, 2018).
Consequently, it is worthy to note that there is a salient discrepancy between innovations
and disruptions. Certain innovations do not amount to a disruption. For such to be a
disruption, it is necessary that such innovation must change the established traditional way
of carrying out the business. For instance, the advent of Radio, Television, and Netflix etc,
changed the entertainment industry entirely as against the Uber, which merely shifted the
transportation industry but never disrupted it (Clayton, 2015).
Evidently, in further addition to the above stated, it is significant to note that true
disruptions:
a. Takes time
b. Are oftentimes stealthy
c. Are risky
d. Are not always flashy
e. Add value
f. Change the old established- traditional ways of doing business, etc.
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Business Disruption And Continuity: Repositioning For Tax Resilience
LOSS/ DESTRUCTION OF BUSINESS ASSETS & THE TAX IMPLICATIONS
Business assets are generally vital tools through which businesses operate effectively,
which are traditionally tangible; properties, objects of value that possesses, usually
considered as applicable to the payment of one's debts or realization of business goals.
th
The Oxford Advanced Learner's Dictionary, (9 edition) defined “Asset” to mean a thing of
value especially property that a person or company owns which can be used or sold to pay debts. See
examples as follows: shares, debentures, bonds, and or other properties of value.
From the above, it follows therefore that business assets are such properties of value, owned
by a business or company which raises funds or income (cash or otherwise) either when
sold or processed to the business/ company.
Notably, it is customary that all businesses/ companies keep record of their assets in the
company's accounting entries or record book, particularly, capital assets which are essential
to successful business operations (Corporate Finance Institute, 2015). This record or bookkeeping is required to be updated at intervals or whenever new assets are purchased for the
purpose of carrying out such business or when the assets are disposed for the purpose of
taxation. This cannot be over-emphasized for accounting purposes and to keep track of the
different successes or loss the company may have experienced.
Consequently, it is important to note that a company's asset (s) may be lost or destroyed
(damaged) either wholly or otherwise in the following ways;
a. Theft
b. Other accidentals such as fire, flood etc.
It is therefore our opinion that all companies/ businesses insures their various assets
particularly tangibles, or key capital intensive assets which are primary to the operation of
the business or company, as against such peculiar risks/ or threats etc. The essence of this is
not far-fetched, but to bounce back without much unnecessary delay when faced with such
threats or challenges.
The Tax Implications: Where a company's asset was destroyed or lost as a result of any of
the above or for any other unmentioned, BUT WITHOUT any insurance cover, such assets
are no longer subject to payment taxation, particularly, the Capital Gains Tax.
Section 18 of the Capital Gains Tax Act, Cap C1, LFN, 2004 (as amended) seems to have
explained this fact:
(1) If an asset whether under policy of insurance or otherwise is lost or destroyed, and a capital
sum received by way of compensation for the loss or destruction is applied within three years
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Business Disruption And Continuity: Repositioning For Tax Resilience
of receipt in acquiring another asset in replacement of the asset lost or destroyed, the owner
shall if he so claims be treated for the purposes of this Act…”
From the provisions of the law given above and with a careful study of the underlined
above, it therefore suggests thus:
a. It is immaterial that the company insured the asset or property in question
b. That there was paid or received a compensation for the loss/ destruction
c. It is immaterial who paid for the loss or destruction
d. The received compensation was applied within three years of acquiring a new asset
as a replacement.
Therefore, assuming without conceding the law is correctly held as explicitly seen to be, it
therefore follows that where the asset was not covered by any insurance policy, and no one
paid or the company did not receive any compensation whatsoever from anyone after the
loss or destruction out of negligence or otherwise, but the company went ahead to
purchases another asset to replace the old destroyed/ lost asset, then, the old lost/ destroyed
asset is not and cannot be subject whatever to the capital gains tax, and in so doing, the
government losses out in revenue generation.
But where the company receives any compensation either from an Insurance company or
from anyone; a staff of the company or a third party who was held negligently liable for the
destruction or loss of the asset, the company falls within the ambits of the law herein stated
in section 18 above.
BUSINESS CONTINUITY STRATEGY
Business Continuity Strategy is sine-quo-non to Business Continuity Planning (BCP) which
creates a preventive and recovery plan or system for whatever future threats to a company
(Will Kenton, 2020) which aims at protecting the personal and company's assets that has the
capacity or responsibility to respond quickly to the threat
Thus, in order to efficiently discharge or manage the company's risk, the strategy must be
founded upon certain fundamentals but not limited to:
a. Business Impact Analysis (BIA)
b. Recovery
c. Organization and
d. Training
To further breakdown, a company developing a business continuity strategy for her
business against threats and to maintain its competitiveness in the market must give
recourse to these steps below depending on the peculiarity of the business:
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Business Disruption And Continuity: Repositioning For Tax Resilience
a. Find the right Partners/Team: this is the team which serves as the business
continuity management which is saddled with the responsibility of highlighting,
implementing and executing all business continuity plans. The team is advisedly
made-up of a representative from each department of the company, and or this is
dependent upon the size and departments in the company.
Again, as a necessity, all members of the team must be trained and such training may be
annually held or at intervals to ensure that they are fully aware of how to respond or
implement a plan/ strategy. They must be informed of the processes involved, the required
skills and all important notes in assisting, responding in the execution of the plan, or even in
recovery processes where the business has been affected by threat (Colchester Borough
Council, 2019).
b. Conduct Business Impact Analysis(BIA): Business Continuity Strategy depends
on the commitment/ approach given by the management team to the found or
analyzed business threats.
Importantly, the analysis of the team must be obtained through business impact
assessments focused on business value drivers (Rahul Et al., 2013). The Business Impact
Analysis therefore identifies the specific risks and threats to financial and operational
performances of the company, her reputations, employees and supply chains. Notably, it
further examines the impacts on service objectives, cash flows, regulatory and contractual
issues, and market share/competitive risks (James Et al., 2012). This is the hallmark and
remains fundamentally relevant to the continuity of a business within and withal.
NOTE, in carrying out the above, it is our submission that the team assembles all the
necessary questionnaires so as to gather all relevant information needed in respect to such
business threats. The team must also get the returns of the questionnaires from staff and
otherwise, and shall then carry out a follow up in order to validate the information sourced.
Additionally, the information must remain very fresh and updated as necessary, because
failure to update such may have adverse effect on whatever initial business plan/ strategy
earlier stated.
c. Conduct a Risk Assessment to the identified potential threats: The team must
swiftly without delay having identified some potential threats, then shall conduct a
risk assessment to ascertain the impacts which the threats may have on the business
if affected. Without this assessment, the team may not understand the impending
damage which the business may go through if affected eventually. For instance, the
outbreak of the Covid-19 virus has caused more harm to several businesses and
companies who eventually seized from its going concern in Nigeria and globally.
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Business Disruption And Continuity: Repositioning For Tax Resilience
(Peterson K, 2020). This is largely as a result of the fact that the pandemic threat was
never premeditated nor planned or its risks assessed afore-hand.
d. Design and Develop Policies and Standards: The team is expected to make designs
and develop policies to suit the already discussed plans, etc. These policies must be
reviewed annually to ensure its continuous relevancy. Individual plans for each
service may be reviewed every six (6) months in order to keep such plans and any
information obtained up to date, fresh and relevant to suit into any unforeseen
threat that may befall the business arena.
e. Test, Implement and make Improvements: These policies, standards and designs
discussed above must be tested and their validity ascertained to be reasonable and
assessable.
f. Measure, Maintain and Update
The essence of developing the strategy/ plan is to remain a going concern and ever
competitive whether in the face or after an adverse event had taken place as the business
feels more prepared to handle every unexpected and consequently, failure of which may
not only cause the business a longer time to recover, but may advertently lead the company/
business off business completely. For example, several companies and businesses are
finding it very difficult in recovering from the Covid-19 disruption and many others lost
their business as a result therein.
Having therefore noted the above, it becomes evident that the importance of Business
Continuity Strategy/ Analysis cannot be over-emphasized and whereas neglected; the
company would lack such absorbing skills to manage any future threat or risk that may
come upon the business and may fail afterwards for been overtaken by events.
TAX PROVISIONS AND CONSIDERATIONS FOR BUSINESS DISRUPTIONS
(IMPAIRMENT)
Having understood what business disruption is, it is safe to say that it has permeated
through tax functionaries in the sense that with the technological growth in businesses, it is
also required that adequate provisions are made to meet the ever-changing business
climate for the purpose of taxation most especially as it relates to the digital economy.
The question was whether the international tax rules were sufficient to meet the demands
arising from the business models and ways of creating value that are emerging with the rise
of new technology. Governments around the world are harnessing state of art technologies
that involve the digital collection and analysis of tax data. There is much work for policy
makers to do, to develop new tax principles that will stand the test of time in the digital age.
Even still the energy and commitment that larger countries are putting into the BEPS 2.0
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Business Disruption And Continuity: Repositioning For Tax Resilience
discussions makes it likely that global businesses will need to navigate tax reforms in the
next few years. It has been recommended by KPMG that tax leaders can help their
companies to manage the impact of digital disruption on global tax policy and chart their
best course forward by;
a. Engage directly in the OECDs policy development work to influence solutions and
ensure that issues, specific to their company's business models and industries are
addressed.
b. Engage with governments, peer companies and industry association to understand
the OECD's PROPOSALs to contribute to the development of consensus positions.
c. To elevate the profile of global tax issues across the company so all functions take tax
into account early in the design and launch of new products services and business
models. Doubling down to the quality and the accessibility of the detailed
transaction data that may be needed to comply with a new global tax regime.
Now in situations where businesses are disrupted by the advancement of technology as
above or other factors and variables that may come into play as disruptions or even as
threats, “it is important that tax provisions consider those variables for an efficient management of
the tax system”.
The Tax Considerations
There exist certain measures such as delayed tax filing deadlines, waivers of Late Returns Penalty
for taxpayers who pay early but file their returns later, suspension of field audits, investigations, and
monitoring exercises, etc., should give taxpayers some welcome breathing room to preserve
their cash-flow and take additional time to organize their financial and tax affairs in these
trying times.
Considerately, the Economic Stimulus Package provided for the opportunities for cost
savings and relieving employers of some of the burdens which have arisen as a result of the
current global health emergency. Notably, these measures would protect and encourage
businesses/ companies and individual jobs, mitigating loss of income for employees.
rd
The Federal – Business Relief: The Federal Inland Revenue Service (FIRS) on 23 March,
2020, announced several measures to help support businesses during this period, including
an extension of the deadline for filing of the Value Added Tax (VAT) returns and an
extension to the due date for Corporate Income Tax (CIT) filings. In addition to the
measures initially announced, the FIRS released further measures to support taxpayers,
including the suspension of field audits, investigations, and monitoring exercises as well as
alternative tax payment options for taxpayers facing difficulties sourcing for foreign
exchange (“forex”).
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Business Disruption And Continuity: Repositioning For Tax Resilience
The State – Individuals: Different States tax authorities have extended the deadline for the
filing of the individual tax returns (Form A). Among these tax authorities are the Lagos
State Internal Revenue Service (LIRS) and the Federal Capital Territory Internal Revenue
Service (FCT-IRS), two out of the three states on full lockdown. They have indicated
respectively that they are extending the deadline for the filing of Personal Income Tax
Returns (Form A) from 31 March to 31 May and 30 June 2020.
The Bill, among other measures, seeks to provide relief on tax and other liabilities including
a 50-percent refund on PAYE contributions made by employers who maintain the same
status of their employees from 1 March to 31 April 2020.
These considerations introduced by the Federal Government through the FIRS remains a
welcomed development for taxpayers as it demonstrates FIRS' sensitivity to the disruptions
experienced by businesses/ companies. Taxpayers are encouraged to take advantage of this
window of opportunity to plan their tax affairs accordingly.
It is also worthy of note to state that other jurisdictions like the USA have Tax provisions like
the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), features
significant tax provisions and other measures to assist impacted individuals and
businesses. Stakeholders should carefully review proposals that are intended to help
employers retain employees and continue business operations during the current public
health emergency. Stakeholders also should continue to engage with policymakers as the
legislation is implemented and as additional relief measures affecting their business
operations and employees may be considered.
INCOME TAX AND CAPITAL GAINS TAX CONSEQUENCES OF BUSINESS
DISRUPTION
The importance of taxation (income taxes) in general and in any economy cannot be
overemphasized. Also, its effects remains significant, either positively or negatively,
depending on certain forces that evidently affects compliance or breach in revenue
generation (Oxford Business Group, 2016).
Income tax is a tax imposed on individuals or companies (tax-payers) which varies or
depends on the income (taxable income) of the tax-payer, and payable in a particular
jurisdiction, regulated by a legislation and includes salaries, wages, gains or profitsincluding bonuses, premiums and benefits derived from employment (Ayua, 1996).
Income tax is processed using the Pay As You Earn (PAYE) system whereby the employer
deducts the employee's tax at source (ie- from the salary, wages, etc), remits to the relevant
tax authority. This is clearly seen under section 81 of the Personal Income Tax Act, Cap P8, LFN
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Business Disruption And Continuity: Repositioning For Tax Resilience
2004 as amended which requires the employer to deduct income tax from emoluments of
employees under the PAYE scheme, must be deducted monthly as enshrined under the
provisions of sections 81 (2) PITA 2004 and 334 (11) of the Financial Regulations 2008 which
specified that all government establishments shall make monthly returns of PAYE to FIRS within
21 days after the end of the month of Account. And also, requires the employer to file a return.
The law is express in providing sanctions for failure to deduct on the part of the employer.
Unfortunately, there is need to adjust the provisions of the law to meet up with the current
realities in compelling employers (Abdulrazaq, 2014). The provisions of section 81 (3)
Personal Income Tax Act, 2004 as amended “Every employer who contravenes the provisions of
this section shall be liable on conviction to a penalty of 500,000 in the case of a body corporate, and
50,000 in the -case of an individual”.
Quietly, there have been several reformations by the Federal Inland Revenue Service (FIRS)
through several issued notices on the PAYE system so as to ensure best practices,
accountability and efficiency in collections, and remittance to appropriate tax authorities.
Also, the Capital Gains Tax (CGT) is a tax payable on the growth in value of investments/
assets disposed or exchanged by an individual or corporate body. This is regulated by the
Capital Gains Tax Act, Cap C1, LFN 2004 (as amended). The CGT is charged at a flat rate of
10% of chargeable gain. It is immaterial whether or not the asset/ investment in situate in
Nigeria.
Thus, the tax does not apply to unsold capital assets/ investments or “unrealized capital
gains”, such assets includes but not limited stocks, bonds, jewelry, coin collections, real
estate properties etc which is chargeable at 10% in accordance with the provisions of the law
under section 2 of the Act. The law is clear in providing for the exclusion of certain assets
from the capital gains tax while others not stated in the law are bound within the provisions
of the law and are subject to the CGT as under sections
The Consequences of Business Disruption
The consequences of business disruption in our society or globe are evidently and
positively overwhelming, with little or no negative results. Currently and globally, there
have been several digital disruptions in the entire world, and which certainly affects a
nation's economy if properly harnessed by the governments/ authorities.
Digitalization most especially as it relates to disruptive businesses, is pervasive, making it
difficult to ring-fence the digital world from the rest of the economy including for tax
purposes. The OECD Observer is a transformative process brought about by advances in
information and communications technology which is cheaper and more powerful in
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changing business process and bolstering innovations across all sectors of the economy
including traditional industries.
Notably, there exist many challenges facing the capturing of these digital business
disruptive innovations into the tax net for tax purposes even while they have significantly
changed the entire traditional ways of carrying out businesses in the entire world.
The first finding relating to the challenges was noted by all G20 and OECD countries under
Action Plan 1 of the Base Erosion and Profit Shifting (BEPS) Project. The question regarding the
definition of “Permanent establishment” (known as Fixed Base in Nigeria) became very
relevant. This loophole only made it easy for digital companies around the world to exploit
the loopholes in a bid to pay little or no corporate taxes as against huge profits made from
the digital businesses. In resolving this, the action plan 1 of BEPS introduced a rule known
as “Significant Economic Presence”(SEP) which seeks to achieve permanent establishments
of business in countries without having a fixed base so as to capture these digital
companies/ businesses into the tax-nets of the various States and of course, which will boost
the country's revenue collection when captured.
Some countries such as the United Kingdom have implemented Digital Services Taxes and
have seen this measure as a step to a more globally coordinated consensus on taxing highly
digitalized businesses. They believe current tax rules and treaty clauses are not catching
profits on the value of digital activity in their countries. They are putting DSTs in place for
specific types of digital transactions such as online advertising and sales of user data to raise
revenues while the global consensus is being forged.
Taxes applicable to digital companies are as follows:
a. Corporate Income Tax (CIT)
b. Withholding Tax (WHT)
c. Value Added Tax (VAT)
d. Tertiary Education Tax
e. Technology Tax
Therefore, where these business disruptive innovations under the digital economy are fully
captured into the tax net with due compliance to the above listed taxes, the revenue
collection of the Country will tremendously experience a fast growth.
KEY VALUATION CONSIDERATION: STOCK WRITE OFF, INSURANCE ETC
Business disruption can catch a business off guard, but it's never too late to take action.
Given the uncertainty with respect to the duration and severity of business disruptions and
its related economic impacts, it is likely that companies will need to employ even more
careful considerations and judgment as they work through impairment assessments
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pertaining to assets such as goodwill, PP&E, and equity method investments. Management
should apply informed judgment as it relates to these impacts on financial reporting
matters.
Key inputs to valuation models, such as cash flow forecasts and/or inputs into the discount
rates, are likely to change, especially in industries where there is likely to be a shift in
demand, disruptions in supply chain, etc. Put simply, it is likely to be an iterative process as
management works to reflect the risk and uncertainty in its cash flow forecasts and its
determination of an appropriate discount rate, given new facts and circumstances in the
wake of business disruptions.
Compounding the challenges for businesses are recent civil unrest in major cities. These
trends mean it's vital for risk professionals to know their property insurance policiesincluding business income or business interruption coverage- may respond to potential
losses.
Organizations face major disruption to their operations and experience underperformance
during period of crisis. In order to mitigate these challenges, organizations should adopt
the following key business evaluation consideration;
a.
Develop liquidity and cash management strategy:
Effective cash management can help businesses optimize resources during a crisis and
help them recover more quickly (KPMG, 2020). Companies will want to install short-term
cash flow monitoring discipline that allows them to predict cash flow pressures and
intervene in a timely manner. They will also want to maintain strict discipline on working
capital, particularly around collecting receivables and managing inventory buildup (EY,
2020).
b.
Risk Assessment:
Risk management involves identifying events relevant to the organization 's objectives
(risks and opportunities), assessing them in terms of likelihood and magnitude of impact,
determining a response strategy, and monitoring progress. By identifying and proactively
addressing risks and opportunities, businesses protect and create value for their
stakeholders (Chapman & Ward, 2011). Particular attention should be given to financial
and operational risks. Companies will need to monitor direct cost escalations and their
impact on overall product margins, intervening and renegotiating, where necessary (EY,
2020).
c.
Alternative supply chain and flexible service delivery options:
Companies that source parts or materials from suppliers in areas significantly impacted by
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COVID-19 will want to look for alternatives (EY, 2020). Establish a structured portfolio by
targeting value-add services. Comprehensive service management considering
dependencies between services and Manage the services along the complete lifecycle (Paul
and Friedrich, 2013).
d.
Evaluate budgets and business plans:
Companies should stress-test financial plans for multiple scenarios to understand the
potential impact on financial performance and assess how long the impact may continue. If
the impact is material and former budget assumptions and business plans are no longer
relevant, companies should revise them to remain agile. Where the business is significantly
impacted, companies will need to consider minimum operating requirements, including
key dependencies of workforce, vendors, location and technology (EY, 2020).
e.
Audit payables and receivables transactions:
Deloitte, 2020 recommended that ensuring paying the right amount for the goods and
services you procure and collecting the right amount for goods and services you sell. On the
payables side, double-check that you are not overpaying duties and taxes on purchases,
especially as alternate international supply locations are used to keep supply chains
running. Also, if you have the cash flow to support it, make sure you are taking full
advantage of all available discounts. On the receivables side, look for situations where
unearned discounts were applied and then aggressively pursue the proper payment.
f.
Contract modifications
Companies affected by business disruptions may experience cash flow challenges as a
result of disrupted operations, higher operating costs or lost revenues. They may need to
obtain additional financing, amend the terms of debt agreements or obtain waivers if they
no longer satisfy debt covenants. In such cases, they will need to consider whether any
changes to existing contractual arrangements represent a substantial modification or
potentially a contract extinguishment.
There are also consequences for lenders. Financial institutions, such as banks and insurance
companies, are being asked to help borrowers by providing relief on cash-flow obligations.
These will be considered contract modifications and will require institutions to think about
the measurements of their loan portfolio and expected credit losses. Similarly, real estate
companies will have to consider the consequences if they provide relief to lessees on rents.
g.
Asset Impairment assessments
An asset is impaired when a company is not able to recover its carrying value, either by
using it or selling it (EY, 2020). Many businesses will have to consider the potential
impairment of non-financial assets. International Accounting Standard (IAS) 36 requires
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goodwill and indefinite-lived intangible assets to be tested for impairment at a minimum
every year, and other nonfinancial assets whenever there is an indicator those assets might
be impaired (PwC, 2020). Temporarily ceasing operations or suffering an immediate
decline in demand or prices and profitability are clearly events that might indicate
impairment. However, reduced economic activity and lower revenues are likely to affect
almost any entity and might also indicate impairment (PWC, 2020). When assessing
impairment, companies are required to determine the recoverable amounts of the assets.
This calculation requires an estimate of expected future cash flows and expectations about
variations in cash flows (EY, 2020).
i.
Impairment of goodwill — IAS 36 requires goodwill and indefinite-lived intangible
assets to be tested for impairment at a minimum every year, and other non-financial
assets whenever there is an indicator those assets might be impaired (PWC, 2020).
Assess whether direct or indirect implications of COVID-19 have led to goodwill
impairment. Future cash flow expectations may be affected by COVID-19 if its
disruptive effects are sustained. If they are, this would requires companies, in the
light of this so-called ¯triggering event,? to evaluate whether a reporting unit's fair
value has degraded below its carrying amount. (Charles, 2020).
ii. Impairment of Property, plant and equipment (long-lived assets): The pandemic
might mean property, plant and equipment is under-utilized or not utilized for a
period, or that capital projects are suspended. IAS 16, =Property, plant and
equipment', requires depreciation to continue to be charged in the income
statement while an asset is temporarily idle. IAS 23, =Borrowing costs', requires the
capitalization of interest to be suspended when development of an asset is
suspended (PWC, 2020). Also, there is the need to consider whether any current,
significant devaluation of long-lived assets is recoverable. Indicators, such as
significant drops in price, sustained adverse changes in use or utility of an asset,
negative changes in business climate or downward economic pressures, should
prompt impairment assessments of longlived assets.
iii. Inventories: It might be necessary to write-down inventories to net realizable value
(PWC, 2020). If the company has suffered revenue declines or disrupted supply
chains, consider adjusting the carrying value of inventory downward (Charles,
2020). Losses may result from exceeding expiration or sell-by dates, physical
deterioration, obsolescence, or price changes. IAS 2, =Inventories ', requires fixed
production overheads to be included in the cost of inventory based on normal
production capacity. Entities should assess the significance of any write-downs and
whether they require disclosure in accordance with IAS 2 (PwC, 2020).
iv. Impairment of receivables, loans and investments — Review investment value for
potential impairment (Charles, 2020). This may be indicated with debt or equity
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issuers affected by COVID-19. Entities are required to disclose changes in business
or economic circumstances that affect the fair value of investment entities or
investments in associates and joint ventures carried at fair value under IFRS 9 (PwC,
2020).
h.
Focus on inventory (stock) management and expedite receivables.
According to Deloitte, 2020 companies are at risk of experiencing supply chain disruptions
due to shortages in raw material and component parts. Inventory safety stock parameters
will most likely need to be updated to reflect the increased demand and supply-side
volatility, which will have the effect of increasing overall inventory levels, assuming that's
possible. At the same time, businesses will be thinking about securing additional inventory,
or strategic stock, as a further buffer against the potential impact of a prolonged or much
broader supply chain disruption. Also at the same time, from a cash flow perspective,
companies may be considering actions to reduce finished goods inventories, especially in
perishable products, where waste is an important consideration and markets remain
difficult to access. Balancing the demands for more buffer inventory and managing cash
flow may not be as easy as it sounds. That's why it's important to improve the rigor of your
collection processes. Focus on customer-specific payment performance and identify
companies that may be changing their payment practices. Also, get the basics right, such as
timely and accurate invoicing. Any errors in your billing process can lead to costly delays in
receiving payment (Deloitte, 2020).
I.
Business interruption insurance.
According to Investopedia, 2020, business interruption insurance is insurance coverage
that replaces business income lost in a disaster. Companies should understand existing
business insurance policies and the coverage they have in the event of a significant business
disruption. Such insurance generally covers losses arising from disruptions to a business
customers or suppliers (Deloitte, 2020).
Most business insurance cover the following items according to Investopedia, 2020:
i. Profits: Based on prior months' performance, a policy will provide reimbursement
for profits that would have been earned had the event not occurred.
ii. Fixed costs: These can include operating expenses and other incurred costs of doing
business.
iii. Temporary location: Some policies cover the costs involved with moving to and
operating from a temporary business location.
iv. Commission and training cost: In the wake of a business interruption event, a
company will often need to replace machinery and retrain personnel on how to use
the new machinery. Business interruption insurance may cover these costs.
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v. Civil authority ingress/egress: A business interruption event may result in
government-mandated closure of business premises that directly cause financial
loss. Examples include forced closures because of government-issued curfews or
street closures related to a covered event.
vi. Employee wages: Coverage of wages is essential if a business does not want to lose
employees while shutting down. This coverage can help a business owner make
payroll when they cannot operate.
vii. Taxes: Businesses are still required to pay taxes, even when disaster hits. Tax
coverage will ensure a business can pay taxes on time and avoid penalties. h) Loan
payments: Loan payments are often due monthly. Business Interruption coverage
can help a business make those payments even when they are not generating
income.
EXCHANGE RATE FLUCTUATION
Exchange rate is simply the price of one country's currency expressed in terms of some
other country's currency. It determines the relative prices of domestic and foreign goods, as
well as the strength of external sector participation in the international trade.
Exchange rates are ratios and fiscal means that are used across all international markets;
finance, trading, and investment. Businesses and investors use these rates to compare their
currency's purchasing power with other countries. It is also used to determine the
comparative strength of a particular domestic currency against other foreign currencies.
They play a vital role in a country's level and participation of trade, which is critical to most
free market economy in the world. For this reason, exchange rates are among the most
watched, analyzed and governmentally manipulated economic measures in global
economic systems.
In the global and economic scheme of things, with exchange rates, there are no absolutes,
and everything is relative. That is to say, exchange rates are subject to fluctuations.
Obviously, exchange rates are very common for major economies of the world, and that
includes Nigeria, and when all this happens, they can impact global trading, the stock
market, economic growth, capital flows, inflation, interest rates, and even taxation.
Numerous factors determine and affect exchange rates, causing currencies to fluctuate,
depreciate, gain value or tumble down altogether, and major reason for this is relatively
simple; supply and demand.
The majority of the world's currencies are bought and sold based on flexible exchange rates,
meaning their prices fluctuate based on the supply and demand in the foreign exchange
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market. Therefore, increased demand for a particular currency or a shortage in its
availability will result in a price increase. A decreased demand or an influx in supply will
lower its price.
The indirect impact of exchange rates and their fluctuations extends much more broadly
and deeper in ways that affect several of the most important aspects of our economic lives.
Causes
The causes and reasons for currency fluctuations may not be known to the lay man trading
in a local market with his domestic currency, or the nominal tax payer, but some of the
leading factors that influence the variations and fluctuations in exchange rates are quite
noticeable if one avers their mind to it.
One reason for the highs and lows commonly associated with currency volatility is changes
in market inflation. A country with a lower inflation rate will obviously see an appreciation
in the value of its currency, and stand a better chance at exchange rate gains and profits.
Another factor is increase or decrease in interest rates, which may cause a country's
currency to appreciate or loose worth. For instance, higher interest rates provide higher
rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange
rates.
Let's not forget that banks are the major dealers in foreign exchange. They sell drafts,
transfer funds, issue letters of credit, accept foreign bills of exchange, e.t.c. Banking
activities influence the demand for and supply of foreign exchange, and hence the exchange
rates.
Additionally, a popular determinant for exchange rates fluctuation is related to bad
government's debt. A country with government or public debt is less likely to acquire
prospective foreign capital, which may in turn lead to inflation. A terribly indebted country
may turn away foreign investors who may prefer to sell their bonds elsewhere in the
international open market. As a result of government's debt, a decrease in the value of
exchange rate will mar a country's currency.
It therefore follows logically, that a country's political state and economic performance can
affect its currency strength and viability in the global world. Evidently, a country with less
risk for political instability is more attractive and fertile for foreign investment to thrive.
Countries that attract foreign investors tend to benefit more with increase in their foreign
capital which leads to an appreciation in the value of their domestic currency.
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Furthermore, a major drawback that results in currency fluctuations is recession. When a
country experiences a recession, its interest rates are likely to fall, decreasing its chances to
acquire foreign capital. As a result, its currency weakens in comparison to that of other
countries, therefore lowering the exchange rate.
Current Situation, Effects and Responses in Nigeria
The decline in value of the Naira with respect to other currencies and the extensive
fluctuations in the relative values of foreign currencies generally are unfortunate
circumstance that has befallen the Nigerian economy, and consequently the taxation
system.
2020, the year of the pandemic has brought the economic activities of different global
structures and sectors to a crippling halt, the capitalist and corporate world became
dependent on government's economic welfare to survive. Even Nigeria's private and local
industry were affected, and had to be supported and financially augmented by the
government's capital support.
This issue is worsened by the further depreciation in exchange rate. A global devaluation in
fixed exchange rate system becomes the business regiment of the day, no thanks of course to
the COVID-19 surge.
Nigeria has been trying to keep the Naira afloat and viable in the financial scheme of events
so as to balance the economy, but it has not been easy, rather the Naira keeps losing value,
tumbling down further. The plunging oil prices earlier this year didn't even help the matter.
Not to forget, Nigeria was already experiencing a severe economic crisis prior to the
outbreak of the pandemic. Our economic problems included mounting public debt, a high
unemployment rate, declining oil export earnings, and currency depreciation, among
others. And for the second time in 5 years, the country entered yet into another
unprecedented recession.
The impact of the pandemic on taxpayers was not friendly either, companies could not
function properly in order to fulfill their statutory obligations of tax payment, and it meant
that tax defaults were inevitable.
Besides, the pandemic affected tax residency by altering an individual's place of living
during the period of lockdown and stay at home. Many individuals who travelled for one
business venture or another were restricted movement and could not reach their
designated tax authority to remit their tax.
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The situation would have been more dire and dangerous for the Nigerian nation that is
highly reliant on tax remittance. Fortunately, the Nigerian government introduced a
number of measures to provide support to taxpayers and business in the COVID-19
outbreak.
Of first and worthy mention is the Federal Inland Revenue Service (FIRS). The fiscal and
economic palliative measures especially by the Federal Inland Revenue Service (FIRS),
included, but not limited to: extension of filing deadlines for monthly value-added tax
(VAT) and withholding tax (WHT) and extension of filing deadline for companies' income
tax (CIT) returns.
Unfortunately, though, the government did not announce any palliative measures in
respect of monthly withholding tax (WHT) and pay-as-you-earn (PAYE) taxes.
The Central Bank of Nigeria (CBN) was not left out either. They announced measures aimed
at ensuring the financial stability of the economy by reduction in the interest rate on all CBN
intervention facilities, from 9% to 5% per annum and establishment of a 50 billion Naira
target credit facility for affected households and small and medium enterprises,
improvement of foreign exchange supply to the CBN by directing oil companies and oil
servicing companies to sell foreign exchange to the CBN rather than the Nigerian National
Petroleum Corporation (NNPC), an adoption of a unified exchange rate system for InterBank and parallel market rates to ease pressure on forex earnings as oil prices continues to
plummet, making the official rate of 360 Naira to a dollar for International Money Transfer
Operators rate to banks, amongst other economic incentives.
Fortunately, also, the government also had to open up the land borders to trade, and this
was one of the most astounding measures taken by the government to curb the inflation rate
on the currency value.
Suggestions, Solutions and Implementation
Currency fluctuations have a rippling effect on almost every aspect of our lives, from the
highest rung of the government to the least level, as far as affecting exportation and
importation of goods, even tax policies and payments are not spared.
The way out then is for the government institutions to count down their bureaucratic
expenses and government costs, giving adequate tax reliefs and ensuring that the good
policies of both the FIRS and CBN mentioned above are duly followed and implemented.
For instance, the tax rebate policy enunciated by the Finance Act 2020 and 2021 if
implemented will encourage companies to retain their workers and prevent impending
poverty of many Nigerian households. It will also boost the morale of the labour force and
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the companies that rely on their services.
It would even do much good if the Bill is better reviewed and passed into law for effective
implementation.
Likewise, the tax relief measures as announced by the Federal Inland Revenue Service
(FIRS) should be extended by more months since the COVID-19 pandemic is still not over.
The Federal Inland Revenue Service (FIRS) should similarly relax the tax regulations for the
times so as to enable organizations enjoy the benefit of investing and settling many financial
difficulties peculiar to them. At the same time, the government stands to benefit from the
future proceeds of the investment, as the government anticipates the advantage of the tax
arising from it in the future.
The dramatic change in the value of the Naira has all manner of implications – including on
tax. It's high time the Nigerian government puts more effort to stabilizing the Naira and
making it easier for the tax payers to fulfill their statutory obligations
CONCLUSION
In conclusion, business disruption is the process in which an underrated or unexpected
products or service starts to become popular enough to replace or displace a conventional
product or service in the market and thereby changing the long-established business
narrative.
Having understood the subject matter, it is necessary to observe at this point that whether
business disruptors or business future threats or innovations, every business/company is
expected to have or maintain a Business Strategy/ Plan which seems to be the hallmark of
confidence and clarity of the business in the face of the disruption.
The adverse financial effect of this ongoing crisis on businesses has already started to show
itself. There is no perfect formula to predict the future of each sector; business leaders can
picture the next day based on each company's unique characteristics. Businesses should
improve their vigor towards external shocks by developing a strong service business. A
strong service business is necessary to decrease risks of fluctuating income streams from
product business and build resilience in preparation for the new normal. Timely and
meaningful disclosures about the potential effect on the financial position, performance
and viability of the company, as well as measures taken to manage the risks, are important
to regain trust. Financial reporting can play an important part in the communication
between companies and their stakeholders in this turbulent period. Therefore, business
agility has a crucial role here; being able to consistently evaluate all necessary information
to adapt to current effects is essential. So is foreseeing trends of the next day, month, quarter,
or year. After meeting with your financial team, shareholders, and vendors, and with a clear
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overview of the company's financial status – including current cash flow, credit situation,
revenue and expenses, tax planning etc. – on hand, here is what you can do to reinforce
agility
When a business/ company understands this principle, it does not just wade through those
mislabeled start-ups in the market, but will be more prepared to find faster, more
sustainable forms of innovations for your own business/ company. You may not find
yourself creating another Zoom, Wikipedia or Netflix, but much assuredly, can at a
minimum, guard yourself and company against any potential threat, industrial disruptors
or come up with more competitive solutions that will keep your business thriving well into
the future.
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The Nation Online News, "Nigeria Enters Into Second Recession in Five Years" (21st of
November, 2020), https://thenationonlineng.net/breaking-nigeria-enters-intosecond-recession-in-five-years/
Victor, A., & Nana, A. (2020). "Insight: COVID-19 Pandemic —Nigeria's Fiscal and
Economic Measures", Bloomberg Tax - https://news.bloombergtax.com/daily-taxreport-international/insight-covid-19-pandemic-nigerias-fiscal-and-economicmeasures?utm_campaign=PostBeyond&utm_source=Twitter&utm_medium=Soci
al&utm_term=%23327412
"What is an Exchange Rate?" https://www.myaccountingcourse.com/accountingdictionary/exchange-rate
"Why Do Currencies Fluctuate?" - https://www.xe.com/moneytransfertips/why-docurrencies-fluctuate.php
"Why the Naira is Falling" - https://nairametrics.com/2020/04/27/why-the-naira-is-fallingagainst-the-dollar/
Will, K. (2020). Business Continuity Planning (BCP), Reviewed by David Kindness,
th
Updated 24 June, 2020, https://www.investopedia.com/terms/b/businesscontnuity-planning.asp
366
CHAPTER TWENTY SEVEN
REVIEW OF CHAPTER: TAX COMPLIANCE AND ITS CHALLENGES
IN NIGERIA: THE PRACTICAL PERSPECTIVE
Adeagbo, Khadijat Ayobami
Department of Accountancy
Faculty of Financial Management Studies
The Polytechnic, Ibadan, Nigeria
ayobamideagbo@gmail.com; +2348034278109
Title of the book: Tax Management & Compliance in Nigeria
Editors:
Muhammed Akano Mainmona
Godwin Emmanuel Oyedokun
Kabiru Isa Dandago
Mohammed Taofeeq Abdulrazaq
Ishola Rufus Akintoye
Famous Izedonmi Prince
Rafiu Oyesola Salawu
Chapter Reviewed:
Topic:
Author:
Publisher:
ISBN:
Four
Tax Compliance and its Challenges in Nigeria: The
Perspective
OGBONNA, Udochukwu Godfrey
OGE Business School 2020, 609 pages.
978-978-978-734-0
Practical
Review of Chapter Four of Tax Management and Compliance in Nigeria titled Tax
Compliance and its Challenges in Nigeria: The Practical Perspective written by
OGBONNA, Udochukwu Godfrey, School of Postgraduate Studies, Rhema University,
Aba, Nigeria
INTRODUCTION
Tax compliance is defined “a process whereby a tax payer (individual or corporate)
voluntarily calls for assessment and pays the total amount of tax assessed without objection
or hesitation within the period allowed by law (Ogbonna 2004)”. It indicated that Section
41 of Personal Income Tax Act (PITA) 2011 as amended requires all taxable persons to file
their returns without notice or demand not later than March 31st of every year while Section
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Review Of Chapter: Tax Compliance And Its Challenges In Nigeria: The Practical Perspective
81 requires employers to file annual returns of all emoluments paid to their employees in
the preceeding year. It concluded that globally, total tax compliance is not achievable
because citizens do not want to pay tax wilfully.
Factors deterring Total Tax Compliance in Nigeria
The following factors are identified to be deterring total tax compliance in Nigeria:
1. Lack of tax culture in Nigeria: Nigerian citizens do not imbibe culture of paying tax
as and when due which could be ascribed to lateness of government in laying
emphasis on tax compliance.
2. Non-provision of adequate infrastructural facilities by government: Citizens are of
the opinion that tax paid are not used judiciously, because needed infrastructural
facilities are not provided for them. Therefore, they are not willing to be tax
compliant on time.
3. Advice by Tax Consultants: Tax consultants are used to unethical practices by
looking for ways of evading tax on behalf of their clients and offering of bribe to tax
officers in order to reduce tax liabilities of their clients.
4. Lack of Patriotism: People do not love and care for the development of their nation.
This could be attributed to selfish interest of individuals and organizations.
5. Ignorance of officials of organizations: Most tax payers do not bother about
correspondences sent to them on tax compliance not minding the implication of
such behaviours in law.
6. Engagement of non-professionals/Lack of training of Tax officers: Some tax payers
employ inexperienced people to handle their tax matters. Also, some tax officers are
not properly trained to perform their duties competently and thus not being able to
be tax compliant.
7. Non – Monitoring of Tax Compliance: Most tax authorities do not monitor
compliance to tax laws until the situation requires for tax audit or investigation.
This does not augur well as tax payers may be fortunate to evade payment of some
taxes.
8. Non – Enforcement of Tax Laws by Tax Authorities: Tax officers may not take
proper action towards punishment of tax evaders. This means that application of
tax laws are taking with frivolity. Furthermore, some cases stay long in Court than
necessary before judgement is given. These would be making suspect and others in
his shoe, thinking that tax officers has no power and hence continue with their
careless attitude towards tax payments.
9. Obsolete of Tax Laws: Most of the Tax Laws had become outdated and could not
stand test of time. Such laws could not be used to apprehend most tax evaders based
on current realities.
10. Archaic way of Assessment /Collection of Tax: Some tax authorities are in the habit
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Review Of Chapter: Tax Compliance And Its Challenges In Nigeria: The Practical Perspective
11.
12.
13.
14.
of using barbaric method like stone, holding of sticks and road blockage for
assessment and collection of tax. This is not in line with latest development and its
affecting revenue rendered to government purse as tax officers may decide to remit
amount lesser than actual revenue collected.
Corruption: This has become order of the day in every aspect of government
activities including all revenues sections. Tax payers are ready to do anything to
ensure that their tax liabilities are reduced either legally or illegally. The reduction
may be carried out in form of falsification of records, reduction or non-declaration
of income, colluding with tax officers etc.
Multiple/Double Taxation: In some cases, taxpayers are being assessed to tax on
similar activities due to the fact that such activities are allocated different names in
various Ministries or Agencies. This action would result in double taxation. Also,
tax payers would want to wait and know the actual amount to pay which may be
regarded as non-tax compliance.
Rivalry among Government Agencies: Various Ministries and Agencies have lists of
taxes to be collected by them from tax payers. Some of the taxes are duplication and
the Ministries will not want to concede it for each other. Therefore every ministry
will want to collect their revenue not minding the effect on tax payers
Advocacy/Communication Gap: There is communication gap between tax
authority and tax payers. Most tax payers do not know their rights and obligations
with respect to tax laws and responsibilities of tax officers. In some cases, when new
ideas are introduced to tax laws, the tax payers may not be informed. Such gap may
be bridged through education and advocacy. Tax authority may use advocacy to
appeal to tax payers to comply with tax laws.
CONCLUSION:
In conclusion, government should introduce policy that will enable tax payers to comply
willingly with necessary rules and regulations relating to taxes, which will afford the three
tiers of government to realize huge amount of revenues. Willingness of tax payers to tax
compliance will reduce cost of tax collection. Also, it will enable government to be alive to
their duties and responsibilities to the citizens by providing necessary infrastructural
facilities needed by people and thus improve the standard of living of the citizens of the
country. Furthermore, if government ensure adherence strictly to tax compliance, it can
lead to investment in human capital development in form of sponsoring seminars,
conferences and training for government employees and public which may result to
economic growth..
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Review Of Chapter: Tax Compliance And Its Challenges In Nigeria: The Practical Perspective
RECOMMENDATIONS
1. Frequent training should be organized for individuals and organizations so that
they will know about tax laws and their rights.
2. Team of tax officers should be deployed to tax payers to effect compliance to tax
payments.
3. Tax authorities and Judiciary should work in harmony with a view to quickly
dispensed tax matters which may lead to encouragement of tax compliance.
4. Tax Laws being a fiscal tools should be made to align with fiscal policies regularly.
5. Government should adopt use of automation as a veritable means of tax collection
and accountability.
6. There must be a way of harmonizing various tax liabilities of tax payers for easy
collection.
7. Use of appealing or advocacy method to encourage tax payers to comply with tax
laws.
REFERENCES
UNCTAD (2003). The financial grants to encourage investment and employment in non traditional sectors, New York: UNCTADAD.
Uwaloma, U., Ranti, U. O., Kingsley, A., & Chinyere, A. N., (2016). Tax incentives and
growth of manufacturing firms in Nigeria. the Social Sciences. 11(7), 1338 – 1342.
Wardana Arief Budi (2017). The Impact of Basic Infrastructure on Tax Effort: A case of
Municipalities/Regencies in Indonesia, International Institute of Social
Sciences. The Hague, Netherlands.
370
CHAPTER TWENTY EIGHT
COMPANY INCOME TAX AND PROFITABILITY OF
MULTINATIONAL COMPANIES IN NIGERIA
Lawal Babatunde Akeem1, Oyetunji Oluwayomi Taiwo2,
Lawal Busayo Olawumi3, & Sayo Enoch4
1
Associate Professor and Head, Department of Accounting & Finance,
McPherson University, Seriki-Sotayo, Ajebo, Ogun State, Nigeria
2
Lecturer in the Department of Accounting & Finance,
McPherson University, Seriki-Sotayo, Ajebo, Ogun State, Nigeria
3
Lecturer in the Department of Accounting,
Dominican University, Ibadan, Nigeria
4
Department of Accounting & Finance,
McPherson University, Seriki-Sotayo, Ajebo, Ogun State, Nigeria
E-Mail: ab400level@yahoo.com
ABSTRACT
This research work investigated the Company Income Tax and Profitability of Multinational
Companies in Nigeria using a case study of selected Multinational Companies in Nigeria. The
objectives of this research were to examine return on asset on taxation, determine return on equity on
taxation, and investigate sales growth on taxation. Descriptive and inferential statistic were used to
analyze the data using multinational companies quoted on the floor of the Nigerian Stock Exchange
from 2010-2019. The three profitability variables have been taken as the measure of performance in
the study whereas Taxation has been taken as independent variables, given the objective of this study;
it analyzes the effect of taxation on profitability in the multinational companies using correlation and
regression. Relevant data were collected from purely secondary data which was gathered from the
annual statement of multinational companies listed on the floor of the Nigeria Stock Exchange. Upon
the analysis, the following conclusions were drawn; CIT has a significant positive effect on ROA and
ROE, CIT has no significant positive effect on sales growth of Nigerian listed multinational
companies. It is recommended that the management of multinational companies should always
utilize loopholes in tax system to reduce tax liability through the service of tax experts and companies
should engage in advertising and maintain reasonable pricing policy that are capable of increasing
sales as tax planning as no significant effect on sales growth.
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
Keywords: Company Income Tax, Multinational Companies, Profitability, Return on Assets,
Return on Equity, Sales Growth.
1.0 BACKGROUND TO THE STUDY
Company income tax has its origin from the Income Tax Management Act of 1961 and it was
adopted by the Company Income Tax Act (CITA) 1979 and amended years after. It makes up
a great deal of the revenue profile of the service. In 2016, the revenue geared towards the
Companies Income Tax was ? 1.877 trillion representing approximately 40% of the total
projected tax revenue of ? 4.957 trillion for the year. The government impose a levy on the
income of every entity in the jurisdiction of that country known as tax. Taxation refers to
compulsory payments by individuals and organizations to relevant inland or internal
revenue authorities at Federal, State, or Local Government levels. Taxes perform fiscal or
budgetary functions, economic function and social or redistribute functions (Chude &
Chude, 2015).
Companies are required by the Act to pay 30% of their assessable profit as tax to the
government after the deduction of all allowable expenses as specified by the Act. The
Federal Inland Revenue Service (FIRS) is the body charged with the responsibility to collect
this tax on behalf of the government. The management board that administers the tax on the
profits of incorporated companies in Nigeria is the FIRS Board. Since the 1996 year of
assessment to date, the tax rate has been 30%. Educational tax is an additional 2% charge on
companies' profits. However, it has been noted that taxation is the major revenue source of
the government in every country, the life wire of every nation and a function of the level of
development seen in a nation (Omodero & Ogbonnaya, 2018). Infrastructures, public goods
and services are financed from the revenue derived from tax (Omodero, Okafor, Azubike &
Ekwe, 2016).
Company income tax is one of the main sources of income to the government, but also a
great factor of capital investment in every nation (Pitulice, Stefanescu, Minzu, Popa &
Niculescu, 2016). The government is concerned about raising more revenue to finance its
expenditure responsibilities while investors are interested in a conducive business
environment with a reduced tax burden (Pitulice, Stefanescu, Minzu, Popa & Niculescu,
2016). Therefore, the fiscal policy of every country has to strike the balance by including tax
incentives that could make a country attractive for meaningful and sustainable economic
investments. The payment of taxes is meant to be according to income earned which is
supposed to not have been a burden since those that earn higher pay more taxes and the
low-income earners pay fewer taxes (Bon, Remotin & Edgar, 2007).
However, the high rate of company income tax has created the problem of tax evasion and
avoidance of firms in Nigeria. Tax avoidance is a legal way a taxpayer tries to reduce or
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
eliminate his/her tax liabilities while tax evasion is the unlawful act to prevent payment of
tax (Mughal & Akram, 2012). This brings about less revenue for the government and has
brought about tax issues between companies and the government. Firms now employ the
services of financial experts to take advantage of tax laws to reduce the liability of tax on
them. This has led to a high profile of tax avoidance for companies who could afford to hire
the financial experts to lessen their tax burden by all means (Omodero & Ogbonnaya,
2018).By imposing a tax on the various entities in the country, the government seeks to
generate financial resources. Taxation as revenue to the government is of great interest
affecting both the macro-economy and micro economy (Marion, Gregory & Elizabeth,
2017). The main reason behind a company's existence is for it to be highly profitable.
Companies incorporated in Nigeria pay tax on their profit and this act is known as
Companies Income Tax (CIT). These incorporated companies include both companies
resident in Nigeria and companies non-resident in Nigeria but also carrying out their
businesses in Nigeria. The tax is paid both by private limited liability companies and public
limited liability companies.
Companies Income Tax Amendment Act 2007 regulates the taxation practice relating to
Companies Income in Nigeria. Company Income Tax is charged on the chargeable profits of
all companies operating in the country except those specifically exempted under the Act.
The administration of the Companies Income Act and the tax is under the care and
management of the Federal Board of Inland Revenue (the Board). The operational arm of
the Federal Board of Inland Revenue is called the Federal Inland Revenue Service (the
Service) and the Act that governed it, is called the Federal Inland Revenue Service
Establishment Act 2007 (Ezugwu & Akubo, 2014).
A multinational corporation is a corporation that manages production or delivers services
in more than one country. The International Labour Organization (ILO) defined a
multinational corporation as a corporation that has its management headquarters in one
country known as home country and operates in several countries known as host countries.
From the above definitions, we can see that a multinational corporation have subsidiaries in
other countries while also operating in its home country. The multinational enterprises has
its origin dated back to the early fifteenth and sixteenth centuries when European business
countries started moving to various parts of the world (Akanegbu, 2014). Since the mid1970s, multinational companies have extensively expanded its activities through foreign
direct investment worldwide (Otokiti, 2012).
A multinational company normally functions with the headquarters based in one country
called the home country while other facilities called subsidiaries are based in locations in
other countries called host countries. In some places they are referred to as a multinational
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
enterprise or a transnational corporation (Tatum, 2010). They come into host countries
using different strategies. Some come in by exporting their products to test the market and
to find whether their existing products can gain sizeable market share. For such firms, they
rely on export agents. These foreign sales branches or assembly operations are established
to save transport costs because there is a limit to what foreign exports can achieve for a firm
owing mainly to tariff barriers and quotas and also owing to logistics or cost of
transportation. To meet the growing demands in the foreign countries, the firm considers
other options such as licensing or foreign direct investment which are critical steps. Some
continue with export even when they have settled for the foreign direct investment option
(Abimbola & Awolusi, 2015).
For Nigeria, a good, long lasting economic growth and development is almost entirely
contingent upon securing substantial amount of foreign direct investment. In order to
attract foreign investments into the country successive Nigerian governments have put in
place sufficient arrangement by way of incentives to potential investors. Notwithstanding
these liberal incentives, administering corporate taxation with a view to reaping
commensurate benefits from the investments is faced with daunting challenges. This
includes the challenges posed by the current wave of globalization and technological
revolution and its attendant effect on company's income tax in Nigeria. Nigeria is a
signatory to many tax treaties but it remains a point of contention how these treaties have
been beneficial to its economy. The practice taxing Nigeria Company on its global income
and a foreign company on its Nigerian source income though understandable is tainted
with difficulties. The specific objectives of the study are:
1. To determine whether company income tax affects the sales growth of
multinational companies in Nigeria.
2. To determine whether company income tax affects the return on asset of
multinational companies in Nigeria.
3. To determine whether company income tax affects the return on equity of
multinational companies in Nigeria.
2.0
LITERATURE REVIEW
Theoretical Review
Theories of Tax Compliance
The reason why entities evade tax should be considered first before considering strategies
to prevent tax evasion. It is quite ambiguous. There are theories talking about the effect of
tax administration on the economic growth of developed and developing countries. This
study adopts the new endogenous growth theory, economic theories, psychological
theories and sociological theories.
Tax Shifting
In an effort to minimise tax payments, individuals alter their behaviours, resources are
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
reallocated and these reallocations are reflected in prices. This process is called tax shifting.
Taxes that don't affect resource allocation cannot be shifted and fall on economic rent and
the price of the service or commodity which is taxed. All other taxes are shifted, at least to
some degree. The changes in the price of commodities affected by the reallocation of
resources and taxed commodities measures the final burden of the tax. The burden is borne
by those who are adversely affected by changes in relative prices. Prices include the effects
on income sources, consumption for labour or property, and income uses, consumption and
savings. Albert (1981) opined that all price changes are traced to the people who are
affected, for only people can bear taxes. To the extent that wages fall, labour bears the tax
burden; to the extent that the price of mineral right falls, landowners bear the tax burden; to
the extent that profits fall, owners of the capital bear the tax burden; and to the extent that
prices of output increase, consumers bear the burden
The New Endogenous Growth Theory
Unsatisfied with previous models, the endogenous growth theorist incorporated a new
concept known as human capital into their model and believe that unlike physical capital,
human capital has indeed increased rates of return and that the skills and knowledge
acquired will make workers, to be more productive in an economy. Furthermore, these
theories believe that endogenous growth is linked with improvement in productivity
which results to a faster pace of innovation and extra investment in human capital, they
predicted that externalities and spill over effects from development of high value-added
knowledge economy that is able to develop and maintain a competitive advantage in
growth industries in the global economy. They, therefore, strongly believe the role of
human capital on economic growth as opined by.
Ability-To-Pay Theory
The most popular and the plausible theory of justice in taxation is that every taxpayer
should be made to contribute according to his ability or faculty to pay. The tax is to be based
on his taxable capacity. Nothing would appear to be more just. But the acceptance of the
principle does not mean the end of our difficulties; rather the difficulties begin. The
question which we then face is: 'What is the measure of a man's ability to pay?' (Dewett,
Navalur & Janmejoy, 2005).
Theoretical Framework
This work is anchored on the “Ability to Pay” Theory which talks about how every tax payer
should pay according to his ability to pay. The objective approach applies to the
multinational companies whose measurement of payment is with the income criteria as
company income tax is levied on the total income of the company.
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
Conceptual Review
Regulatory Framework on Company Income Tax (CIT)
Companies Income Tax Act 1979 (CITA 1979) contained in chapter 60 Laws of the
Federation of Nigeria (LFN) 1990 was the principal legislation governing companies tax
administration in Nigeria. The Act came into force after several amendments and
consolidation of the provision on the former CITA 1961. A further amendment was also
done on CITA 1979 in 2004 and continued until we now have the Companies Income Tax
Amendment Act 2007 which is the Act presently used in Nigeria for companies tax
administration. This is used in addition to the Federal Inland Revenue Service
Establishment Act (FIRSEA) 2007.
According to Azubike (2009), tax reform is a continuous process which tax administrators
and policymakers undertake to ensure that tax systems reflect the changes in the economic,
social and political environments of a nation. In line with the ongoing amendments, Section
26 of this FIRSEA (2007) provides that corporate bodies and individuals may be given
notice by the Service to produce information relating to their profits and income
respectively. The information may be in the form of books, documents and any other
information required by the Service for examination. This could be needed by the Service
for a stipulated time period. The individual or representative of the Company may also be
required to be physically present to give oral representation in respect of the income or
profit in question at a designated place as may be specified by the Service.
In respect of the above, Section 28 of this Act requires every bank to prepare and file
quarterly returns with the Service of all transactions involving the sum of N5,000,000 and
above which relate to individuals while corporate bodies' transactions from N10,000,000
and above are also filed alongside with their names and addresses. Any bank that defaults,
pays a fine of ? 50, 000 on individual customers while that of corporate customers is ? 500,
000.
Concept of Corporate Tax
Tax is a compulsory contribution imposed by the government on the incomes, profits,
goods, services or properties of individuals and corporate persons, trusts and settlements.
These taxes are collected for the purpose of executing government responsibilities in form
of defence, provision of education and health services, infrastructures and as a fiscal tool to
control the economy (Institute of Chartered Accountants of Nigeria, 2014). Taxation is seen
as a tool for National Development and growth (National Tax Policy, 2004). Company
Income Tax as one of the taxes collected by the government for national development is
levied on the chargeable profits of all companies operating in the country except those
exempted as specified by the Act (Ezugwu & Akubo, 2014). According to Syed, Syed, and
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
Zia (2011), company income tax is one that is charged on the profits generated by
companies, public corporations and unincorporated associations such as industrial and
provident societies, clubs and trade associations after every accounting period.
Incidence of Corporation Tax
It is a tax on companies. It is imposed on the net profit of the corporations or joint-stock
companies. By reducing the fund available for re-investment, the corporation tax militates
against expansion and development. Also, the amount available to be distributed as
dividends is reduced. This also serves as a disincentive to the investing public. Capital
formation is checked thereby. Thus, the flow of equity capital is checked. The prices of
goods manufacture by such a corporation's rise which may give a place to cheaper
substitutes resulting in a shift of resources in their favour. Further, since corporation taxes
discourage investment, the level of national income and employment is reduced. If
however, the corporation which is taxed, maintains the dividend rate by paying dividend
out of the undistributed profits, then neither is consumption reduced nor the flow of equity
capital checked. A corporation tax, by reducing the earning of the existing firms,
discourages the entry of new firms into the industry which may result in a monopoly or a
semi monopoly for the existing firms with all the attendant evils. This disincentive effect
may lower efficiency. A part of the corporation tax may be shifted to the buyers through a
price rise.
Concept of Corporate Profitability and Taxation
Taxation of corporate profits is a vital element of fiscal policy, it influences both
macroeconomic and microeconomic. Therefore, tax law reforms targeted towards keeping
tax rate low could increase the value of companies (Neghina, 2012). The importance of
corporate profitability and of keeping corporate tax rate low cannot be overemphasized. It
is such that every government that considers economic and employment growth a priority
must reflect in their fiscal policy (Canadian Manufacturers & Exporters, 2015). The
incidence of corporate tax is that it reduces the fund available for re-investment and growth
of a business. It also affects dividend distribution thereby discouraging the investing public
(Ezegwu & Akubo, 2014). In conclusion, when businesses make profit and pay little taxes,
they will have enough fund to re-invest and expand. By so doing more employment
opportunities spring up and the economy of the country improves. The reverse becomes
the case when tax rates are high and there are not adequate tax incentives to reduce the tax
burden on firms.
Firm Size
Financial performance has been positively linked to the company size. Hardwick (1997)
argued that the positive correlation between size and performance of companies can be
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
attributed to efficiencies in operating costs that improve performance by increasing output
and subsequently reducing the cost per unit of output. Investors will be able to diversify
their risks in large corporate and respond to the changing market circumstances. Bain
(1968) argues that the large firm possess monopoly power which enables them to set prices
of their goods above the economic costs of production thereby profiting additionally.
Conceptual Model
Sales growth
Company Income
Tax
Return on asset
Return on equity
Size
Independent Variable
Moderating Variable
Fig 2.1 Conceptual Model
Source: Researcher’ Study (2020)
Dependent Variable
Empirical Review
Chude and Chude (2015) studied the impact of company income taxation on the
profitability of companies in Nigeria using the Brewery Industry as a case study. The
research employed secondary data on all the variables. The dependent variable was the
earning per share (EPS) while the explanatory variable was the company income tax (CIT).
All data were obtained from the published financial statements of the Brewery Companies.
The Augmented Dickey-Fuller (ADF) unit-root test was carried out to test the effect of CIT
on EPS at a 5% level of significance. The result indicated the existence of a long-run
equilibrium relationship and a positive significant impact of CIT on the EPS (P-Value 0.000
< 0.05). The study concluded that CIT affects the profitability of Nigerian Breweries
significantly and recommended more improvement in tax administration.
Etale and Bingilar (2016) examined the impact of Company' Income Tax (CIT) and Value
Added Tax (VAT) on the economic growth in Nigeria. The data employed covered a period
of 2005 to 2014 and were sourced from the statistical bulletin of the Central Bank of Nigeria.
The study made use of the Ordinary Least Squares (OLS) method with the application of
SPSS version 20 for data analysis. The findings revealed that both the CIT and VAT had a
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
significant positive impact on economic growth in Nigeria. The study, therefore, suggested
that tax authorities should employ more qualified tax professionals and retrain the existing
tax officers for efficient and effective tax administration and collection.
Onuorah and Chigbu (2013) used the Ordinary Least Square (OLS) technique to examine
the impact of corporate taxation on the company's reserves and dividends in Nigeria. The
study made use of secondary data covering the period of 2000 to 2011. The problem was that
corporate tax was reducing the company's reserve as well as hindering expansion and
payment of dividends. The data used for the study were collected from 35 companies listed
in the Nigerian Stock Exchange and they were selected from 7 different sectors. The
dependent variable employed was the annual dividend payments while the independent
variables were the annual corporate tax expenses, earning per share and returns on earning
per share. The result of the study indicated that corporate taxes do not affect companies
reserve or payment of dividend. The study, therefore, suggested appropriate tax
restructuring that will not affect regular dividend payment to encourage the investing
public and expand businesses.
Ezeugwu and Akubo (2014) did an empirical study on the effect of the high corporate tax
rate on the profitability of corporate organizations in Nigeria. The problem the study was
concerned about is the extent to which high corporate tax rate threatens the survival of
companies in Nigeria. The study employed a causal research design and a multi-regression
statistical tool. The population used comprised 45 corporate organizations in Lagos while
the sample size was 41. The study variables were corporate profitability (dependent) and
corporate tax rates (independent). The secondary data employed were collected from the
Federal Inland Revenue Services (FIRS). The data analysis was done with the aid of the
Statistical Package for Social Sciences (SPSS version 17). The study found a positive
relationship between corporate tax rates and realized a profit of companies. It was therefore
recommended that the Nigerian Corporate tax rate of 30% should be reduced to avoid
negative economic effects in the Country.
Odia and Ogiedu (2013) researched the effect of corporate taxes on the dividend policy of
banks in Nigeria. The study's focus was to test the relationship between profit, dividend
and taxes. Therefore, the independent variables were the profit and corporate taxes while
the dependent variable was the dividends paid. The periods covered were 2000 to 2008 and
the sample of nineteen commercial banks in Nigeria was used. The secondary data
employed were gathered from the financial statements of the banks as published by the
Nigerian Stock Exchange. The regression result of the data analysis indicated that taxes had
a negative and non-significant impact on the dividend policy of the banks while the profit
showed a significant positive relationship and had a robust significant positive impact on
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
the dividend. The study, therefore, suggested that since profit is the major means of paying
dividend to encourage investors, the tax liability should be considerably minimized to
boost business expansion through more meaningful investment by the investing public
who are motivated through regular payment of dividend.
Becker, Fuest and Riedel (2012) measured the relative importance of quality and quantity
effects of corporate taxation on foreign direct investment. They conclude that booth effects
of corporate tax have a negative impact on foreign direct investment. Buettner and Wamser
(2006) showed that corporate taxes affect both the extent and location of international
investment. Keuschinigg (2008) created a model of monopolistic competitive industry with
extensive and intensive investments and show how marginal changes of these investments
reacts to changes on average and marginal corporate tax rates. Lanaspa, Pueyo and Sanz
(2008) pointed to the possibility that governments can influence foreign direct investment
(FDI) location decisions of firms through capital tax rates. They confirm the general
conclusion that countries with lower tax burdens are FDI net recipients.
Mutti and Grubert (2004) examined the impact of taxes on the horizontally integrated
international organizations which are considering foreign investment. They conclude that
foreign investment is sensitive to the host country tax rates and this sensitivity is greater in
developing than in developed countries and increases over time. Tremblay (2010) brought
out that the absence of a neutral relationship between corporate taxes and investment to the
human capital. In his study he comments negative relationship after adhering employee
and company investing to the human capital and positive relationship after adhering only
company investment to the human capital.
Baranová and Janíèková (2012) studied taxation of corporations and their impact on
economic growth, they made reference to EU Countries, Dependent variable is represented
by the growth of gross real domestic product per capita (GDP / pc) expressed in purchasing
power parity. The explanatory variables are capital accumulation (CAP), approximated by
the share of investments creation to GDP expressed in purchasing power parity per capita,
population (POP) which represents the rate of population growth in the given country and
also human capital (HUM), this variable is represented by a share at least secondary
educated population in the labor force. Corporation tax burden is approximated by tax
quota separated for corporate income tax (TQC), the implicit tax rate on capital (ITRC)
compiled, and the effective average tax rate (EATR) and effective marginal tax rate (EMTR)
received by forward looking micro view. They concluded that reduction of the tax burden
will have a greater effect in EU15 countries rather than in the EU new member countries.
Abiola (2010) conducted a research work on the recent developments in company's income
380
Company Income Tax And Profitability Of Multinational Companies In Nigeria
taxation in Nigeria and analyzed the variables with the use of quantitative survey method
and finds out that the Nigeria tax system is unduly complex, skewed low revenue yielding
poorly administered anti-federalism largely inequitable and loaded with unduly large
number of overlapping taxes which have more nuisance value than revenue value. The
study recommended that the tax administration amending Act altered some of the
penalties under CITA to reflect current realities and make them more administrable.
In the study of Riedel and Dischinger (2008), they examined corporate taxes and the
location of intangible assets within multinational firms using Multinational Enterprises in
Europe. The study found that the lower a subsidiary's tax rate relative to other affiliates of
the multinational group, the higher is its level of intangible asset investment. This effect is
statistically and economically significant, even after controlling for subsidiary size and
accounting for a dynamic intangible investment pattern.
Arnold and Schwellnus (2008) examined the effects of corporate taxes on productivity and
investment using a stratified sample of firms across OECD economies over the period 19962004. The study found that corporate taxes have a negative effect on productivity at the firm
level. The effect is negative across firms of different size and age classes except for the small
and young, which may be attributable to the relatively low profitability of small and young
firms.
Raza, Ali and Abassi (2011) investigated the effect of corporate income tax and firms' size on
investment: evidence by Karachi stock exchange using multiple regression analysis as a
statistical technique for Panel financial Data on an annual basis gathered for the period of
six years from 65 sample manufacturing companies. Their results revealed that there is a
negative relationship exists between corporate income tax and investment while firm size
and investment reveals a positive relationship with each other.
Furthermore, Beigi, Rafat and Panah (2013) investigated the analysis of the effect of the tax
on profitability indices in listed companies of Tehran Stock Exchange using approach
applied descriptive-analytic and the data of 28 companies listed in Tehran Stock Exchange
from 2004 to 2010. The results pointed out a negative significant effect on various
profitability indices. It equally indicated that the debts ratio to asset and the type of the
industry showed a negative effect on profitability and capital ratio to asset and the size of
the company indicated positive significant effects on profitability index.
Gatsi, Gadzoand Kportorgbi (2013) investigated the effect of corporate income tax on the
financial performance of listed manufacturing firms in Ghana. The study used panel data
methodology covering ten listed manufacturing firms for over seven years. Their result
381
Company Income Tax And Profitability Of Multinational Companies In Nigeria
revealed that there is a significant negative relationship 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.
Ezugwu and Akubo (2014) carried-out the effect of high corporate tax rate on the
profitability of corporate organizations in Nigeria. The population of study comprises the
selected corporate organizations while the sample size of the study is forty-one (41) using
regression analyses. The study depicted a direct positive relationship between corporate
tax rate and realized profit.
Madugba, Ekwe, and Kalu, (2015) studied corporate tax and revenue generation: Evidence
from Nigeria using Pearson correlation and simple regression were used to analyze the
data gotten from Central Bank of Nigeria Annual Statistical Bulletin. The result revealed a
negative significant relationship between Petroleum Profit Tax (PPT) and Total
Consolidated Revenue (TCR) and Companies Income Tax (CIT). Furthermore, the
education tax rate result depicts that the coefficient is 36.28245 and its p-value is 0.0000.
3.0
METHODOLOGY
Ex post facto research design was employed. Descriptive research is used to provide
information on the characteristics of the phenomenon. Descriptive statistics was also
usedthat serves as a guide leading to quantitative research as it gives the overview of
valuable pointers as to what variables are worth testing quantitatively. The population of
this particular study consists of five (5) multinational companies which are United African
Country (UAC), Lever Brothers, Cadbury, Nestle and Unilever listed in the Nigerian Stock
Exchange (NSE). The companies were selected using purposive sampling method as well as
availability of the information necessary for conducting the research and the readiness of
the annual reports of the financial years 2010-2019 which was a period of ten (10)
years.Secondary data was used to carry out this research.
Correlation and Regression analysis was used to find out the relationship between the
variables and also the effect of company income tax on the profitability of Multinational
Companies in Nigeria.
Measurement of Variables
The independent variable of the study is the company income tax and measured using tax
rate on the net income. The dependent variable of the study is profitability and measured
using; Return on Asset, Return on Equity and Sales.
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
Variables
Dependent
Description
Return on Assets
Dependent
Return on Equity
Dependent
Turnover/Sales
Independent
Company Income Tax
Source: Authors’ Computation (2020)
Measurement
Net Income
Total Assets
Net Income
Share Holders Equity
Net Turnover
Tax
Model Specification
There are three specific models employed in this study. Company income tax is the
independent variable for all three models. The dependent variable for the first model is
sales. The dependent variable for the second model is Return on Asset. The dependent
variable for the third model is Return on Equity.
Specification for Model 1
TSR = F(CIT)+Ut
Where:
TSR = Turnover/Sales/Revenue
CIT = Company Income Tax
In a more explicit functional form it implies that;
TSR = âo + â1CIT + Ut ……………………………………………(1)
Specification for Model 2
ROA = F(CIT)+Ut
Where:
ROA = Return on Assets
CIT = Company Income Tax
In a more explicit functional form it implies that;
ROA = âo + â1CIT + Ut ……………………………………………….(2)
Specification for Model 3
ROE = F(CIT)+Ut
Where:
ROE = Return on Equity
CIT = Company Income Tax
In a more explicit functional form it implies that;
ROE = âo + â1CIT + Ut ……………………………………………….(3)
4.0
Data Analysis, Interpretation and Discussion
This chapter presents the results, interpretation and discussions of the data analysis on
effect of company income tax on profitability of multinational companies in Nigeria, using
descriptive statistics and inferential statistics.
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
Descriptive Statistics
Table 4.1 Descriptive Statistics
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
Jarque-Bera
Probability
Sum
Sum Sq. Dev.
SG
0.088197
0.062637
2.136773
-0.364930
0.322166
5.229679
34.18048
2253.376
0.000000
4.409869
5.085763
ROA
0.096159
0.074224
0.641685
-0.014715
0.097465
3.652377
20.81585
772.4252
0.000000
4.807968
0.465475
ROE
0.077279
0.234321
0.627791
-8.966479
1.317102
-6.662329
46.29487
4274.984
0.000000
3.863951
85.00314
LCIT
14.75465
14.73296
16.76833
10.82614
1.326411
-0.502619
3.143371
2.019153
0.364373
693.4685
80.93079
LSIZE
18.31068
18.41578
19.77849
17.07112
0.833700
0.142798
2.023367
2.157037
0.340099
915.5342
34.05770
Observations
50
50
50
50
50
Source: Author’s Computation, 2020 using E-views 9
The table above shows the statistical attributes of the variables of the study. Sales growth
has a mean value of 0.09 with corresponding minimum and maximum values of -0.365 and
2.137 respectively. ROA has a mean value of 0.096 and ranges from -0.0147 to 0.6417. ROE is
averages 0.08 with minimum of -8.9668 and maximum of 0.6278. Log inverse of company
income tax is averaged 14.75 and varies from 10.826 to 16.768. As to firm size, it is averaged
18. 31 and ranges from 17.017 to 19.78. Company income tax is the variable with the highest
standard deviation while ROA has the lowest standard deviation.
Correlation Analysis
Table 4.2: Correlation analysis
SG
ROA
ROE
SG
1.000000
ROA
0.229371
1.000000
ROE
0.301581
0.751576
1.000000
LCIT
0.066022
0.562596
0.330209
LSIZE
-0.120458
0.054545
-0.099396
Source: Author’s Computation (2020) using E-views 9
LCIT
LSIZE
1.000000
0.756571
1.000000
Table 4.2 above shows the relationship among the variables. ROA has a negative correlation
of -12%. The table clearly shoes none of the variables has a correlation coefficient that is the
neighborhood of 82%/ this is an indication of no multicolinearity. The study therefore
reliably estimated a regression analysis.
384
Company Income Tax And Profitability Of Multinational Companies In Nigeria
Regression Result
Table 4.3: Company Income Tax and Sales Growth
Regressors
C
LCIT
LSIZE
R-square
Adj.R-square
J-stat
Prob J-stat
Durbin Watson
Hausman Test
Pooled OLS Estimation
Coeff
t-stat
p-val
1.59006
1.45205
0.153
0.08967
1.65512
0.105
-0.153377
-1.79468
0.0796
0.072271
0.030101
1.713810
0.191986
2.620710
15.225620
5
0.0094
Fixed Effect
Coeff
t-stat
1.70611
0.66872
0.06898
1.12757
-0.1430
-1.0436
p-val
0.5075
0.2662
0.3029
0.1419
0.0132
1.1028
0.3777
2.8366
Random Effect
Coeff
t-stat
1.5900
1.4395
0.0896
1.6409
-0.1533
-1.7792
p-val
0.157
0.107
0.082
0.0722
0.0301
1.7138
0.1919
2.6207
Source: Author’s Computation (2020) using E-views 9
The result of table 4.3 above shows that fixed effect regression is the appropriate estimation
technique for testing the hypothesis as it relates to company income tax and sales growth.
The fixed effect shows that a constant of 1.706 meaning that without company income tax
and firm size, sales revenue will still increase by almost 1.706 units. As to the effect of CIT on
sales growth, it was found that there is no significant positive effect of CIT on sales growth
implying that CIT is not a significant driver of sales in Nigerian multinational companies.
Firm size as a control variable has a coefficient of -0.143046 and is found to be insignificant.
This means that a unit increases in firm size will reduce sales growth by almost -14%. The
implication of the finding is over- investment in non-current asset may crowd out firms
investment in inventory that can generate sales revenue. The adjusted R-square of 0.0132
implies that almost 1% variation in sales is accounted for by CIT and firm size while the
remaining 99% variation is caused by other factors not captured in this study. This low
adjusted r-square is further buttressed by the insignificant value of F- statistic. The Durbin
Watson statistics of 2.8366 mean that there is absence of autocorrelation.
Robustness Check
In order to validate the result of the pooled OLS, the study further conducted fixed effect
and random effect regression. From table 4.3 above, the summary of the Hausman (1978)
specification test indicates that fixed effect is the a priori model to test the hypothesis. This is
confirmed by the chi-square value of 5, with corresponding p value of 0.0094 which is
significant at 1%.
Discussions
Company Income Tax and Sales Growth
Hypothesis One: Company income tax has no significant negative effect on sales growth in
Nigerian listed multinational companies
385
Company Income Tax And Profitability Of Multinational Companies In Nigeria
Apriori Expectation
Company income tax is expected to exert significant negative effect on sales growth
Findings: As to the effect of CIT on sales growth, it was found that there is no significant
positive effect of CIT on sales growth implying that CIT is not a significant driver of sales in
Nigerian multinational companies. We therefore accept H01 that CIT has no significant
effect on sales growth in Nigerian listed multinational companies.
Discussion of findings: The fixed effect shows that a constant of 1.706 meaning that
without company income tax and firm size, sales revenue will still increase by almost 1.706
units. As to the effect of CIT on sales growth, it was found that there is no significant positive
effect of CIT on sales growth implying that CIT is not a significant driver of sales in Nigerian
multinational companies. Firm size as a control variable has a coefficient of -0.143046 and is
found to be insignificant. This means that a unit increases in firm size will reduce sales
growth by almost -14%. The implication of the finding is over- investment in non-current
asset may crowd out firms investment in inventory that can generate sales revenue. The
adjusted R-square of 0.0132 implies that almost 1% variation in sales is accounted for by CIT
and firm size while the remaining 99% variation is caused by other factors not captured in
this study. This low adjusted r-square is further buttressed by the insignificant value of Fstatistic. The Durbin Watson statistics of 2.8366 mean that there is an absence of auto
correlation.
Regression result for CIT and ROA
Table 4.4: Company Income Taxand ROA
Regressors
C
LCIT
LSIZE
R-square
Adj.R-square
J-stat
Prob J-stat
Durbin Watson
Hausman Test
Pooled OLS Estimation
Coeff
t-stat
0.386206
3.292600
0.051053
8.796570
-0.057321
-6.261691
0.638579
0.622151
38.87092
0.000000
1.356091
15.100629
2
p-val
0.0020
0.0000
0.0000
Fixed Effect
Coeff
t-stat
1.223315
5.267311
0.041289
7.413849
-0.095145
-7.625520
p-val
0.0000
0.0000
0.0000
0.758569
0.722355
20.94652
0.000000
1.733161
Random Effect
Coeff
t-stat
0.454412
3.873202
0.050024
9.885685
-0.060217 -7.200753
p-val
0.0004
0.0000
0.0000
0.632754
0.616061
37.90532
0.000000
1.386291
0.0005
Source: Author’s Computation (2020) using E-views 9
Company Income Tax and ROA
Hypothesis Two: Company income tax has no significant negative effect on profitability in
Nigerian listed multinational companies
Apriori Expectation
Company income tax is expected to exert significant negative effect on ROA
386
Company Income Tax And Profitability Of Multinational Companies In Nigeria
Findings: As to the effect of CIT on ROA, the regression result shows that there is significant
positive effect of CIT on ROA and as such, a significant driver of ROA in Nigerian
multinational companies. We therefore reject the H02 that CIT has no significant effect on
ROA in Nigerian listed multinational companies. This outcome is in line with that of Chude
and Chude (2014) that found significant effect of income tax on profitability of Nigerian
firms.
Decision: the decision is based on earlier proposition to emphasize and choose ROA as
proxy for profitability.
Discussion of findings: The result of table four below shows that fixed effect regression is
the appropriate estimation technique for testing the hypothesis as it relates to company
income tax and sales growth. The fixed effect shows that a constant of 1.223 meaning that
without company income tax and firm size, ROA will still increase by almost 1.223 units. As
to the effect of CIT on ROA, it was found that significant positive effect of CIT on ROA
implying that CIT a significant driver of ROA in Nigerian multinational companies. This
contradicts the a priori expectation of the study as company income tax is a charge against
profit which should reduce profitability. However, the finding may be justified by the fact
that most of the multinational companies do engage in aggressive tax policy that
significantly reduces their tax expense and as such, such policy may significantly increase
profitability. Moreover, most of the companies do shift their profit outside Nigerian
through transfer pricing policy that may result to paying higher prices for goods bought
from other branches in other country. This in effect erodes the profitability of the company
in the company where they operate, and as such, profitability is increased. This finding
attunes with that of. This outcome is in line with that of Chude and Chude (2014) that found
significant effect of income tax on profitability of Nigerian firms. Firm size as a control
variable has a coefficient of -0.095145 but is found to be significant. This means that a unit
increases in firm size will reduce sales growth by almost -9.5%. The implication of the
finding is over- investment in non-current asset may crowd out firms investment in
inventory that can generate sales revenue and thus, profitability is adversely affected. The
adjusted R-square of 0.722355 implies that almost 72% variation in ROA is accounted for by
CIT and firm size while the remaining 28% variation is caused by other factors not captured
in this study. This high adjusted r-square is further buttressed by the significant value of Fstatistic which shows the joint significant effect of independent and control variables on
ROA. The Durbin Watson statistics of 1.733161 means that there is absence of
autocorrelation since it is in the neighborhood of 2.
387
Company Income Tax And Profitability Of Multinational Companies In Nigeria
Regression result for CIT and ROE
Table 4.5: Company Income Tax and ROE
Regressors
C
LCIT
LSIZE
R-square
Adj.R-square
J-stat
Prob J-stat
Durbin Watson
Hausman Test
Pooled OLS Estimation
Coeff
t-stat
p-val
1.519581
3.236026 0.0023
0.122770
5.283896 0.0000
-0.166807 -4.551588 0.0000
0.366715
0.136682
14.31859
0.000016
1.091537
10.608548
2 0.0050
Fixed Effect
Coeff
t-stat
5.071377
6.849890
0.083328
4.693619
-0.328891 -8.268810
p-val
0.0000
0.0000
0.0000
0.743436
0.704952
19.31778
0.000000
2.563869
Random Effect
Coeff
t-stat
3.755002
6.039049
0.097612
5.680286
-0.268848 -7.641285
p-val
0.0000
0.0000
0.0000
0.576355
0.557098
29.93025
0.000000
1.884715
Source: Author’s Computation (2020) using E-views 9
Company Income Tax and ROE
Hypothesis Three: Company income tax has no significant negative effect on return on
equity in Nigerian listed multinational companies.
Apriori Expectation
Company income tax is expected to exert significant negative effect on ROE.
Findings: As to the effect of CIT on ROE, the regression result shows that there is significant
positive effect of CIT on ROE and as such, a significant driver of ROE in Nigerian
multinational companies. We therefore reject the H03 that CIT has no significant effect on
ROE in Nigerian listed multinational companies. This outcome is in line with that of Chude
and Chude (2014) that found significant effect of income tax on profitability of Nigerian
firms.
Decision: the decision is based on earlier proposition to emphasize and choose ROE as
proxy for profitability.
Discussion of findings: The result of table 4.5 above shows that fixed effect regression is
the appropriate estimation technique for testing the hypothesis as it relates to company
income tax and ROE. The fixed effect shows that a constant of 5.071377 meaning that
without company income tax and firm size, ROE will still increase by almost 5.071377 units.
As to the effect of CIT on ROE, it was found that significant positive effect of CIT on ROE
implying that CIT a significant driver of ROE in Nigerian multinational companies. This
contradicts the a priori expectation of the study as company income tax is a charge against
profit which should reduce profitability. However, the finding may be justified by the fact
that most of the multinational companies do engage in aggressive tax policy that
significantly reduces their tax expense and as such, such policy may significantly increase
profitability. Moreover, most of the companies do shift their profit outside Nigerian
388
Company Income Tax And Profitability Of Multinational Companies In Nigeria
through transfer pricing policy that may result to paying higher prices for goods bought
from other branches in other country. This in effect erodes the profitability of the company
in the company where they operate, and as such, profitability is increased. . This outcome is
in line with that of Chude and Chude (2014) that found significant effect of income tax on
profitability of Nigerian firms. Firm size as a control variable has a coefficient of --0.328891
but is found to be significant. This means that a unit increases in firm size will reduce ROE
by almost -33%. The implication of the finding is over- investment in non-current asset may
crowd out firms investment in inventory that can generate sales revenue and thus,
profitability is adversely affected. The adjusted R-square of 0.704952 implies that almost
70% variation in ROE is accounted for by CIT and firm size while the remaining 30%
variation is caused by other factors not captured in this study. This high adjusted r-square is
further buttressed by the significant value of F- statistic which shows the joint significant
effect of independent and control variables on ROE. The Durbin Watson statistics of
1.884715 means that there is absence of autocorrelation since it is in the neighborhood of 2.
5.0
CONCLUSION AND RECOMMENDATION
Arising from the findings, the major conclusion of the study is that CIT has significant
positive effect on profitability of Nigerian multinational companies. Arising from the
findings, the followings were recommended:
Sales growth: The study found that CIT has no significant effect on sales growth of
Nigerian listed multinational companies. We therefore recommend that companies should
engage in advertising cost that is capable of increasing sales
ROA: The study found significant positive effect of CIT on ROA. This may be an indication
of aggressive tax policy and shifting of profit through transfer pricing. We therefore advise
that the managers should always utilize loopholes in tax system to reduce tax liability
through the service of tax experts.
ROE: CIT has significant positive effect on ROE. We therefore recommend that companies
should always utilize loopholes in the tax system to as to reduce tax payable. Also,
companies can adopt high profit retention ratio so as to reduce the amount of tax payable,
this will be possible as dividend paid to shareholders is subject to tax but if such is retained,
it is tax free.
Contribution to knowledge
The study has contributed to empirical argument in literature by modeling the nexus
between CIT and financial profitability. It is to be noted that financial performance goes
beyond profitability which is the most popular barometer for measuring performance.
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Company Income Tax And Profitability Of Multinational Companies In Nigeria
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CHAPTER TWENTY NINE
BUILDING A SOCIAL CONTRACT: UNDERSTANDING
TAX MORALE IN NIGERIA
Adebayo, Ganiyu Adebowale, PhD, FCA, FCTI
Department of Management and Accounting
Faculty of Management and Social Sciences
Lead City University, Ibadan, Nigeria
gaadebayo@gmail.com; +234 802 344 3909
INTRODUCTION
An essential part of every country's development process is building a social contract in which
citizens pay taxes and, in turn, receive public goods and services ( Neil et al., 2021). Nigeria has
one of the world's lowest ratios of Tax to GDP. The available record showed that the
country's tax to GDP was 6.1 percent in 2019 compared to South Africa of 28.6 percent,
Namibia of 30.1 percent, Ghana of 17.6 percent and Ivory Coast of 17.4 percent to mention a
few from Africa. The ratio was 46.2 percent in France, 46 percent in Denmark, 44.6 percent in
Belgium, 40.6 percent in Cuba, 32.3 percent in Brazil and 32.2 in Canada, to mention a few
European and American countries. Nigeria recorded a total tax collection of about N8.8
trillion in 2019, the total taxes collected from oil and non-oil tax plus taxes collected by
States. Nigeria had a nominal GDP of N145.6 trillion as of December 2019.
The poor fiscal capacity of Nigeria has been linked to poor tax morale. Some researchers
described this non-compliance as a cultural phenomenon, where tax evasion is the norm
rather than a crime.
The tax morale in Nigeria has also been linked to the trust of taxpayers or citizens in the
government for effective utilization of the tax revenue to provide for their needs, such as
infrastructures.
The social contract places revenue mobilization and revenue utilization on both ends of
fiscal legitimacy, emphasizing why individuals voluntarily surrender their hard-earned
income to obtain governance benefits. Tax is the contribution made by members of a society
towards their collective welfare. It follows, therefore, that individuals with a positive
experience of public service delivery and a feeling of inclusion in governance are more
likely to be encouraged to pay tax.
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Social Contract Theory
The social contract is an agreement between the ruled and their rulers, defining the rights
and duties of each. The social contract theories differed according to their purpose: some
were designed to justify the sovereign's power, while others intended to safeguard the
individuals from oppression by a ruler who was all too powerful.
Social contract theory says that people live together in society following an agreement that
establishes moral and political rules of behaviour. Some people believe that if we live
according to a social contract, we can live morally by our own choice, not because a divine
being requires it.
Over the centuries, philosophers as far back as Socrates have described the ideal social
contract and explain how existing social contracts have evolved. For Thomas Hobbes, the
sovereign's authority is absolute, in the sense that no authority is above the sovereign,
whose will is the law. Jean-Jacques Rousseau described it as a means to serve two
purposes: to provide peace for everyone and ensure the right to property for anyone lucky
enough to have possessions. Rousseau also believed in the possibility of a genuine social
contract, one in which people would receive in exchange for their independence a better
kind of freedom, namely true political, or republican, liberty. Philosopher Stuart Rachels
suggests that morality is the set of rules governing behaviour that rational people accept, on
the condition that others accept them too.
Locke's contractual theory of government outlines his ideal for a modern society. People
had to willingly do things like pay taxes and serve in the military, but in return, the
government had to listen to their desires and provide for their needs. Locke challenged the
idea that a king was to rule unquestioned. Kings might still rule, but the people had a say in
how he does so. For Locke, governments were created to ensure that wealth and property
were protected.
Social contracts can be explicit, such as laws, or implicit, such as raising one's hand in a class
or house to speak. To some people, Nigeria's Constitution is an example of part of a social
contract in Nigeria. This is because it sets out what the government can and cannot do.
Indeed, regardless of whether social contracts are explicit or implicit, they provide a
valuable framework for harmony in society.
The social contract theory provides that the state exists to enforce the rules necessary for
social living. A social contract is only possible with the consent of the people. It establishes the
legitimacy of authority and the state over the people.
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A social contract defines what the government expected from people and what they expected
from the government. In a social contract, the people surrender some freedoms to authority, but
they do so voluntarily in exchange for protection of their remaining freedoms as well as the
promise of services from the government.
A social contract is based on values. Therefore, values determine their importance in society.
The social contract ensures availability, access, and low cost for all essential goods and
services.
In short, most elements of a country's social contract are embedded in its statutory laws and
not explicitly stated in a separate document such as a constitution. This confuses people; they
would have preferred an explicit constitution. The rule of law is a primary function of a
social contract.
Need to Grow Tax Revenue
Research has shown that countries with huge revenues from natural resources, such as
Nigeria's revenues from crude oil, opt for lower tax revenue drives to minimize public
scrutiny of government. The tax culture in Nigeria was also not helped by the long rule of
the military in Nigeria; the military was not prepared or trained for accountability of funds.
Therefore, it would prefer not to ask for direct contribution to governance by the people
through taxation to avoid responsibility to the governed.
The available data showed that Nigeria earned N3.93 trillion revenue in 2020, representing
a 27% drop from the target revenues of N5.365 trillion. However, debt service for the year
was a sum of N3.26 trillion or 82.9% of revenue. Nigeria's debt service cost of N3.26 trillion
was also 92 percent higher than the N1.7 trillion spent on capital expenditure in the same
year. For years, a review of Nigeria's budgets showed that it could not generate adequate
revenues to meet its recurrent and capital needs most times. Therefore, it has to borrow to
bridge the gap. In 2021, for example, the Budget shows a projected aggregate expenditure of
N13.59 trillion with expected revenue of N7.88 trillion resulting in a deficit of N5.71 trillion.
The budget deficit will be financed by new foreign and domestic borrowings, proceeds
from privatization, public/private partnerships, signature bonuses and draw downs on
loans secured for specific development projects.
Some of the States in Nigeria are not doing better; Lagos realized the sum of N419b or 32%
of the total internally generated revenue of all the States and FCT in Nigeria, to imagine
their revenue generation's strength. Yobe generated only N7.8b in 2020. Some states could
not even pay salaries promptly to their workers. They wait for a refund of parish club loans
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and similar free funds to implement any significant projects.
The need for Nigeria to increase its domestic funds cannot be overemphasized; foreign
financial aids are drying up and remain uncertain.
Taxes remain the most sustainable and reliable source of the public revenue of any modern
state. In Nigeria, the search for a sustainable source of public finance has brought taxation
to the front burners. This is further reinforced by dwindling oil revenue, which has led to
increasing reliance on debt to finance the country's annual Budget. However, the
International Monetary Fund has maintained that borrowing to shore up revenue is not
sustainable.
Survival of the Society
The following basic needs are necessary for the survival of any society and ought to attract
the attention of the government or ruler as part of a social contract:
1. Protection of life and property - prohibitions against crimes. This can be achieved
through adequate policing of society. Unfortunately, the level of insecurity in
Nigeria is a testimony to a failure in this area.
2. Protection of society against outside threats- This required effective working of
armed forces to protect the territorial landmark of Nigeria.
3. Other rules are needed to secure the benefits of social living- The need at different
levels and times will determine this.
4. Provision of other essential things such as basic infrastructures such as
transportation, health and medical care, education, housing
5. Protection of the environment.
6. Protection of civil rights or basic freedoms of citizens such as freedom of speech,
freedom of religion, freedom of association, freedom from arbitrary discrimination.
7. Justice- fair and equal treatment
8. Protections for minorities, indigenous peoples, and disenfranchised groups. The
current agitations confirm the importance of this part of a social contract in Nigeria.
9. Economic security –The need for employment of able hands in any society cannot be
overemphasized. The insecurity in Nigeria has been linked to the level of
unemployment in Nigeria. According to the data released by the National Bureau of
Statistics, the unemployment rate in Nigeria stood at 33.3 percent at the end of
December 2020.
a. Unfortunately, the rate of business failure in Nigeria is high because of the
high cost of doing business, poor business knowledge, and lack of
infrastructure.
10. Obligations to fellow citizens – Citizens have obligations to their colleagues.
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11. Obligations to the state- these are obligations of citizens to Nigeria. Nigerians ought
to invest in Nigeria's project to ensure that they are also safeguarded from harm.
Assessment of Tax Compliance in Nigeria
A review of the country's tax revenue position from the available data reveals Nigeria's low
level of tax compliance. According to the Federal Inland Revenue Service, the country's
total tax revenue in 2020 was N4.95 trillion (N1.52 trillion from PIT and N3.43 trillion from
the Non-oil sector). The Federal Government earned the sum of N5.26 in 2019. From the
statistics released by the National Bureau of Statistics, all the states and FCT earned only
1.09 trillion in 2020 from taxes as against 1.33 trillion in 2019.
The sum of N790.6billion only was received from the Company Income Tax from local
companies; the country could not earn N1 trillion locally from Company Income Tax in the
last years. A review of the collection from the organized sector was even better than the
informal sector, where levies were being heavily paid informally.
The number of businesses and individual taxpayers who are not paying taxes in Nigeria is
staggering. From the data provided by the Federal Inland Revenue Service, as of 2018, over
62 per cent of the 120,000 registered businesses do not pay any form of tax.
The statistics on tax payment by economically active persons in Nigeria are equally
disturbing. The National Bureau of Statistics (NBS) puts Nigeria's population of employed
persons at 49.5 million people as of December 2020. However, the latest available data of
individual tax-paying population is estimated as 19 million, to show that about 59 per cent
of employed Nigerians don't pay tax. Non-payment of tax by those earning a maximum of
N30,000 per month cannot justify this. According to Arthur Vanderbilt, "Taxes are the
lifeblood of government, and no taxpayer should be permitted to escape the payment of his
just share of the burden of contributing thereto.”
Tax Morale in Nigeria
Tax morale is low in Nigeria. Neil et al. (2021) found that 48.7 percent of the sampled
population in their study would not pay any taxes if the government would not catch them.
In 2018, the Nigerian Economic Summit Group (NESG) investigated factors influencing
people's attitudes towards tax compliance in Nigeria. About 16,000 individuals
participated in the survey; only 17%believed it was 'wrong and punishable' not to pay taxes.
Over 54% believed that it was wrong but understandable. In addition, 58% agreed that
'people should refuse to pay taxes until they get better services from the government.
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Many people believed that paying taxes is not necessary; it is an infection on the
entitlements of individuals or businesses.
Factors affecting tax morale in Nigeria
The following factors affect tax morale in Nigeria:
(i) Attitudes of colleagues or neighbours - the influence of peers or friends cannot be
undermined on tax morale in Nigeria.
(ii) Poor service delivery- poor electricity, poor roads, rising insecurity. The feeling of not
getting anything back in return.
(iii) Existence of substitutes -People who provide their water, light and even security
cannot understand why they should pay tax.
(iv) The level of enforcement and size of the penalties for non-payment.
(v) Disengagement from governance (vi) Poor communication/engagement –many people felt that the only communication
received from the government or tax authority is demand for tax payment or audit. A
negative experience of interactions with tax authorities could end a business.
(vii) Lack of adequate information and knowledge about taxes – sometimes citizens don't
know about taxes and levies relevant to them, which directly affects their morale or
compliance with the tax laws.
(viii) Ineffective and inefficient tax collection structure – ease of tax payment. The structure
of collecting police levy under Police Trust Fund has not been functioning as expected
since the period covered.
(ix) Lack of transparency and trust in the Tax system - No society can exist without some
level of trust. Whether it is trust between individuals or trust in authority or
government. The perception of fairness of the tax system is crucial to both morale and
compliance (Hennighausen & Heinemann, 2015; Richardson, 2006; Vihanto, 2003).
(x) Income – To some, their income is not adequate to attract taxes.
(xi) Multiplicity of taxes – this has been a significant problem in Nigeria.
(xii) Outdated and Ambiguity of tax laws – provisions of tax laws
(xiii) Dysfunctional audit system – some of the officials of tax authorities see tax audits to
generate more tax revenue from the taxpayers. They believe tax revenue must grow
regardless of the state of the taxpayer's business. A tax audit that revealed
overpayment of tax will always remain inconclusive.
(xiv) Corruption – This has become a serious problem; some taxpayers would avoid or
evade tax payments to bribe tax officials who have shown more interest in their purses
than the government that employed them. The scope and complexity of Nigeria's tax
system are immense.
(xv) Excessive levies – Levies are uncountable in each state, some paid to the government,
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Building A Social Contract: Understanding Tax Morale In Nigeria
some to trade groups or associations. Payment of levies in Nigeria has been
bastardized; an individual pays similar levies all over Nigeria.
(xvi) Poverty – Some believe they are too poor to pay taxes.
Overcoming the poor tax morale to enhance the government's revenue
(I) Citizens are more likely to pay taxes in countries where the revenues have been used
on construction or roads, rails, education and provision of health services, among
others. The government could account for the revenue as different from the money
embezzled by politicians and associates. People are interested in what the tax income
is spent, provisions of infrastructures could be linked to tax revenue. The government
should ensure that tax revenue is used on meaningful developmental projects to
ensure sustainable development and economic growth. We need transparency in
government spending; each government expenditure can be put online to ensure that
all Nigerians can see where and how their tax money is being spent.
(ii) Deployment of technology- Social distancing has enhanced the role of technology in
human communication much quicker than anyone could have predicted before the
outbreak of corona virus pandemic in the world. The government can use technology
to communicate, assess and collect taxes.
(iii) Engagement with taxpayers or citizens – The government should engage citizens to
inform them of developments or in the areas where it is recording progress. With
more Nigerians online, things like virtual town hall meetings can become a staple in
the discourse. Many people who would ordinarily not have attended due to busy
schedules, including Nigerians in the diaspora, will be encouraged to participate in
public service conversations. By improving communication, governments can boost
the citizens' inclusion in governance. The need to increase transparency and
engagement around taxes cannot be overemphasized. The use of radio and television
is crucial, and the programmes must be aired in local languages. The engagement of
trade and similar groups or unions is also critical to increasing engagement and
boosting Nigeria's tax morale.
(iv) To improve tax morale, taxpayers need to understand their taxes, why they pay, and
how they utilize such taxes.
(v) Civil society organizations and professional bodies such as the Chartered Institute of
Taxation of Nigeria have a significant role in improving tax morale in Nigeria. They
could help the public interpret or translate complex tax laws, understand their rights
and responsibilities, develop collective demands, and facilitate constructive
engagement.
(vi) Revenue collectors must see themselves as working for society, including government
and people and not only the government. Tax laws are only reviewed in Nigeria to
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Building A Social Contract: Understanding Tax Morale In Nigeria
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
increase revenue generation to the government, not to resolve issues favouring the tax
system or taxpayers.
Nigeria should also update its tax laws, remove ambiguities and improve collection
processes. One of the steps to encourage compliance is to ensure that tax systems are
user-friendly and straightforward. This also reduces compliance costs. In addition,
the tax laws should be stable or maintain continuity of agreed frameworks.
Increase the enforcement level through annual tax audits and penalties for nonpayment.
Transparency is needed on how governments spend money and the tax authority to
demonstrate that it treats all taxpayers equally regardless of their status in society.
Broaden the tax base, close loopholes and flatten the tax rates - to bring more revenue
stability and ease filing of tax returns. In addition, the government and tax authorities
should encourage voluntary tax compliance through a seamless tax returns
mechanism.
"It is a paradoxical truth that tax rates are too high today and tax revenues
are too low, and the soundest way to raise the revenues, in the long run, is to
cut the tax rates."–John F. Kennedy.
A direct link between payment of taxes and usage of government infrastructures or
facilities may increase awareness of tax obligations and, consequently, the rate of tax
compliance.
Publication of some details of tax revenues and profiling residents by the state and
Federal Government can boost tax morale in Nigeria.
Whistle blowing – raising alarms to expose tax offenders.
Timely preparation and presentation of government's financial statements for the
citizens.
Conclusion and Recommendations
It must be acknowledged that there is a depth of systemic issues to be resolved to rebuild the
broken links in the social contract. However, the coronavirus pandemic impact on digital
communication and business in Nigeria offers the opportunity to leverage digital growth
and engagement to bargain a more robust social contract, particularly with its largest
demographic.
Taxation is not all about raising revenue; it is inextricably linked with processes of statebuilding and politics. Increased taxation has the potential to drive popular demand for
government accountability, leading to better governance.
The Federal Government should exploit the yearly Finance Act to review the existing tax
laws. It should also promulgate relevant tax laws to capture or block revenue leakages from
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other untapped sources in Nigeria.
The blame game for poor tax morale or tax compliance must stop to avoid a total collapse of
public services. Instead, it is time for exploring areas of collaboration between government
and taxpayers. In addition, concerted efforts should be made to address the fundamental
issues of inclusive economic growth, fiscal discipline and effective resource utilization,
among others, in the short, medium and long term.
The relationship between the taxpayer and the tax authority is a contract that involves a
complex interaction and must be governed by the tenets of fairness and reciprocity. A
mutually beneficial relationship will lead to an increase in the number of taxpayers and,
therefore, tax revenue for the government on the one hand and direct economic benefits
and growth for taxpayers on the other hand. Accordingly, officials of tax authorities must
behave as public servants.
The Chartered Institute of Taxation of Nigeria should rise to help the system improve the
tax morale in Nigeria through tax education and public engagement. It should facilitate
beneficial interaction between taxpayers and tax authorities. It should be more involved in
revising and enacting relevant tax laws at local and national levels
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403
CHAPTER THIRTY
INCOME TAXES AND FINANCIAL PERFORMANCE OF SMALL
AND MEDIUM ENTERPRISES IN NIGERIA.
1
2
Adewale, Olusesan Taiwo ; Adewumi, Moyosore Akingbade
3
and Oyedokun, Godwin Emmanuel
Department of Management and Accounting
Faculty of Management and Social Sciences
Lead City University, Ibadan, Nigeria
1
taiwo.adewale@lcu.edu.ng;2adewumi.moyosore@lcu.edu.ng3godwinoye@yahoo.com;
1
+234 803 234 2576; 2+234 808 080 6179; 3+234-803 3737 184
ABSTRACT
This paper seek to examined income tax and financial performance of Small and medium enterprises
in Nigeria. Intreview various taxes in operations as it affects the Financial performances of Small and
Medium Enterprises in the country. Since SME'S plays a Pivotal role in any nation Economic
growth and developments and various comments and issues has risen on the impacts of too much
taxes on their Financial performances but the paper was able to bring to fore that the imposition of this
taxes rarely have any significant effects on the Financial performances of Small and Medium
Enterprises especially the taxes due from Federal government. it is recommended that, government
should look into various taxes imposed especially by States and Local governments as it affects the
performances of SME's by trying to harmonised them through Joint tax board in all level of
governance so as not hampered the growth and in order to achieve the main objectives of
establishment of SME's for economic growth. Finally, the study recommends a strong overhauling of
the foundation of SME's all over the country, with strong backing of the Law for sustainability for the
achievement of the economy goals.
INTRODUCTION
Small and medium enterprises (SMEs) play an important role in the development of a
nation's economy. The reasons for this are the fact that SMEs provide benefits such as job
creations, knowledge spillover, economic multipliers, innovations driver and cluster
1
development in an economy .Given the significance of SMEs in an economy, it becomes
quite reasonable to look at factors affecting the financial performance of Small and medium
enterprises which is a major determinant of their survival and growth.
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
Small and Medium Scale Enterprises (SMEs) and their development has been the focal
point of all economies in the world. This is as a result of the fact that they contribute
immensely to the economic growth and development of nations. The influence of this subsector is reflected in greater utilization of local raw materials, employment generation, and
encouragement of rural development as well as development of entrepreneurship2.
In addition to the aforementioned, other economic growth and development influences of
the SMEs are in the mobilization of local savings, linkage between primary producers and
large firms, provision of regional balance by ensuring an even spread of investments,
provision of avenue for self-employment, provision of opportunity for training managers
and semi-skilled workers, immense contribution to the Gross Domestic Product (GDP) of
nation as well as a source of tax revenue to government. More so, Small and Medium Scale
Enterprises (SMEs) are seen as playing pivotal roles in the industrialization of national
economies as well as their sustainability. 3Equally noted their roles in poverty reduction,
even in centrally-controlled economies of China, Russia, Slovenia and Vietnam. Others are
now creating favourable environment for the setting up of small businesses as well as for
their growth4.
A veritable platform was created by the Nigerian stock exchange for emerging businesses to
access the capital market which is refer to as the Alternative Securities Market (ASEM)
which is a special board to accommodate small and mid-sized enterprises with high growth
potential. It seeks to address major challenges of emerging businesses in Nigeria such as;
Difficulty in accessing long term capital due to high cost of fund as a result of perceived high
risk, Informal nature of operations, Inadequate accounting standards, controls and
management of resources in spite of this opportunity, not more than 11 SMEs are
participating in this capital market.
A report in 2015 by Small and Medium Scale Enterprises Development Agency of Nigeria
(SMEDAN) indicated that about 90% of companies in Nigeria were made up of SMEs. On
the realization that one of the ways of strengthening economic environment is via the
creation of entrepreneurial cells across the country, couple with the fact that a strong and
vibrant economy is driven by large pool entrepreneurs and SMEs Governments constantly
vary their economic policies in a manner that should stimulate the economy, create jobs,
improve the citizens quality of life and at the same time generate revenues for the
government to defray her expenditure without necessarily distorting operations at the real
sectors of the economy. Tax policies of government are a part of the fiscal policy framework.
It is concerned with the manipulation of government expenditure and taxes with a view to
influencing macro-economic variables such as Gross Domestic Product, employment, price
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
level towards a desired goal. It deals with the aggregate effect of government expenditure
and taxation on income, production, employment and other economic activities. It can be
expansionary when there is an increase in government expenditure or a decrease in
taxation while a contractionary fiscal policy entails the reduction in government
expenditure or increase in taxation. A well-structured fiscal policy framework should not
lead to high real interests and uncompetitive exchange rates which negatively affects the
real sector and easily results in lower outputs, tax revenue and unemployment.
The Keynesian School of Economic thought argues that fiscal policy measures and by
extension taxation policy have a strong and direct impact on the economy because of its
immediate influence on economic activities. Nonetheless, the extent to which SMEs
economic activities have impacted the Gross Domestic Product (GDP) vis-a-vis taxation
revenue in Nigeria have received scanty empirical investigations as studies abound in the
literature focus on their contribution to economic growth and development in the areas of
poverty alleviation, employment generation and their management practices. Others
looked at the problems, challenges and prospects, yet others at government policies and
programmes geared towards SMEs development5,6,7,8,9,10. Since SMEs cut across all the
sectors of the Nigerian economy, it implies that the tax regimes are been affected by and
impacted on by SMEs. There is therefore an intervening relationship between the SMEs on
the one hand and tax revenue in the country on the other hand as it affects GDP. SMEs tax
contribution to economic growth of Nigeria therefore became the central focus of this study.
The period under review was 2011-2020.
REVIEW OF RELATED LITERATURE
CONCEPTUAL REVIEW
Income Taxes
These are the conceptual framework which emphasized the historical background of
income tax and financial performance of small and medium enterprises in Nigeria, the
concept of income taxes to SMES, company income taxes to Private sector, Value Added
rate, the theoretical framework emphasizing on the ability to pay theory, benefit theory and
principle of equal distribution theory; empirical review for in-depth knowledge of
previous efforts in investigating SMEs financial performance.
Taxation is as old as humanity and it predates the Colonial era in Nigeria. It cuts across
social political and religious divides as it has been shown that people pay taxes in one form
or the other to support the common good. In the biblical times even before the birth of Jesus
Christ, taxes have been ordained as part of the human existence and it was found out that
the two major religions support the payment of taxes. Before the advent of colonial rule, the
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
native chiefs and kings extract taxes/tributes from their subjects either for the common
good or as a form of right.
Federal Inland Revenue Service (FIRS) traced the history of modern taxation in Nigeria to
the stamp duties Proclamation of 1903 in the then northern protectorate. It was observed
however that the Native Revenue Ordinance Act of 1917, which was extended to the
western and eastern territories in 1918 and 1927 respectively, marked the advent of modern
tax legislation and reforms in Nigeria. The first tax legislation in Nigeria was the Income Tax
Ordinance Act of 1939, which was amended in 1940, with specific provision that both
individuals and corporate organisations should be subjected to tax. There have been
va r i o u s a t t e m p t s t o m o d e r n i s e , r e f o r m , e x p a n d a n d u p d a t e N i g e r i a
Taxsystemeversince.In1943,theNigerianInlandRevenueDepartmentwas carved out of the
Inland Revenue Department of British West Africa. This Department was later renamed the
Federal Board of Inland Revenue under the Income Tax Ordinance, No. 39(1958). This was
followed by the Companies and Income Tax Act, No.22 (1961),which established the
Federal Board of Inland Revenue, FBIR. The Act also created a Body of Appeal
Commissioners to resolve tax-related disputes11.
Some notable tax legislations in Nigeria according to12 are as follows:
i.
Company Income Tax Act (CITA) CAP.21 Volume 3,LFN 2004(as amended).
ii.
Education Tax Act; CAP. E 4 Volume 17 LFN 2004 (Replaced with Tertiary Education
Trust Fund (Establishment, etc) Act ,2011.
iii.
Personal Income Tax Act (PITA) CAP P8 ,Volume13 LFN2011( as amended)
iv.
Petroleum Profit Tax Act : Cap,P13 Volume 13 LFN 2004 (as amended)
v.
Value Added Tax(VAT)Act; Cap .VI Volume 15 LFN 2007(as amended)
vi.
Capital gain tax Act CAP CI Volume 2LFN 2004( as amended)
vii.
Stamp Duties Act CAP S8LFN 2004(as amended)
viii.
National Information Technology Agency Act ; CAP N 156 LFN 2004(as amended)
ix.
Custom and Exercise Management Act; CAP45 LFN, 2004 (as amended).
x.
Casino Taxation Act; CAP.C 3 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 2015 (as
amended).
xv.
Nigeria 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).
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
vii.
xviii.
Finance Act 2020 (Amending 8 Tax Laws)
Federal Inland Revenue Service(Establishment) Act (As Amended in Finance Acts
2020).
The collection of taxes from people is not as simplistic as it seems, as people also have their
own opinions about such payments. In 1929,the Aba women in the Eastern part of Nigeria,
protested the subjection of women to income tax13. This is a notable example of how far
people can go in resisting tax payments out of the feeling of injustice. The women, who felt
oppressed took to arms to protest the introduction of income taxes by Lord Lugard, who
was the colonial master as at then, the policy was later withdrawn. Likewise in UK, the
peasant revolted against perceived tax injustice in the fourteenth century14. Tax
administrators therefore face a herculean task of collecting all the taxes from all the people
who largely are unwilling to part with their money for various reasons.
The concept of taxation has been a concern of global significance as it affects every economy
irrespective of national differences15.Tax is a compulsory charge imposed by a public
authority on the income of individuals and companies as stipulated by the government
decrees, acts or cases laws irrespective of the exact amount of services rendered to the payer
16
in return . Tax is designed to raise revenue required for the expenditure authorized in a
government budget expectation. It is also a veritable instrument of promoting social and
economic justice and equality amongst citizens of a state or members of an organization.
Tax is not a voluntary payment; it is a compulsory pecuniary burden placed upon the
subjects of a given country to support the people.
Taxation is a civil responsibility which its assessment is in accordance with all established
cannon; the principle of equity, convenience and productivity. The Nigeria tax system
features a wide and mixed range of statutes by which various governments in the country
seek to charge and collect for public expenditure17.
Taxation is divided into two namely: Direct and Indirect taxes18.
Direct tax in Nigeria consists of personal income tax and company's income tax. While
Indirect taxes are levied against goods and services e.g., stamp duties, entertainment, pool
and casino taxes, industrial training funds, custom duties and exercise duties. Assessment
and collection of direct taxes is by the State Board of internal Revenue on resident
individuals while company's incomes tax is by Federal Board of Inland Revenue on
corporate bodies.
The objectives which taxation might be used to accomplish are mostly social and economic
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
and among others include the following:
a. Provision of additional revenue for government.
b. Encouragement of saving and regulation of expenditures on luxuries.
c. Provision of investment incentives in industries.
d. Protection of new industries from foreign completion and
e. Adjustment of trade –imbalance through imposition of discriminatory tariffs.
f. Provision of free social services e.g. health care, education etc.
g. Correction of balance of payment disequilibrium.
Taxation has encouraged some activities in the private sector depending on how favourable
the policy is on the company's return on investment and balance available for private
saving only payment to the state Internal Revenue Services.
Government's fiscal policy is based on the three-tier tax structure i.e. the Federal, State and
19
Local Governments, each of which has different tax jurisdictions . It was opined that tax
system in Nigeria is characterized by avoidable complexity, distortion and largely
inequitable tax laws that have limited application in the informal sector that dominates the
economy20. The Nigerian tax system has experienced remarkable variations in recent
times21.The tax system is the process of taxation which involve sets of rules, regulations and
procedures with the organs of administration in terming ling with one another to generate
fund for government22.The Nigerian tax system is of multi activities which include tax
administration, tax laws, and tax policies23.Under current Nigerian law, taxation is enforced
by the three tiers of Government, which is Federal, State, and Local Governments with each
tier of Government having its sphere clearly writing out in the Taxes and Levies (approved
18
list for Collection) Act,1998 . They further said that the most veritable tax handles are under
the control of the federal government while the lower tiers are responsible for the less
buoyant sources, meaning that the federal government collects tax from corporate bodies
while state and local governments' tax individuals.
Generally, the tax system of Nigeria comprises of the tax policy, tax laws and tax
administration as observed by24. The effective administration of existing tax laws will lead
25
to efficient harnessing of tax resources in Nigeria according to , in efficient tax
administration over the years has been identified as the reason for low tax revenue yield.
However26,it was submitted that, the ever increasing needs of governments across the three
tiers of government to provide infrastructures and quality services requires tax reforms
that is a non-going process and changes according to the dynamics of the society.
Historically, taxes have been used as policy instruments to achieve some set objectives such
as raising revenue for public expenditure or redistribution of wealth or sectorial allocation
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
27
of resources. In the opinion of , governments need to raise revenues to enable them to
discharge their obligations to provide funding for infrastructure, education and public
health, and in some cases there is still much to do to reduce the significant public deficits
which persist. However, in a world which has now truly embraced globalisation, some
governments also see a need to put in place tax systems which are seen to be efficient. A
sensible business tax system is not just about attractive tax rates but also tax rules which are
simple and easy to comply with.
The central objectives of Nigeria tax system is the appropriate utilization of revenue for the
common good and enhancement of the people's well-being. The presidential committee on
national tax policy (2008)citedin27,stated that the central objectives of Nigeria tax policy are;
contribute to the well-being of all Nigerians directly through improved policy formulations
and to enhance that of the populace too indirectly through the appropriate utilization of tax
revenue. Further objectives include;
i. Generate stable revenue resources needed by government to accomplish laudable
projects and or investment for the benefit of the people.
ii. Encourage economic growth and development.
iii. Provide economic stabilization.
iv. To pursue fairness and distribute equity.
v. Correction of market failure and imperfections.
Small and Medium Enterprises (SMEs)
Small and Medium Scale Enterprises as defined by28,as an enterprise that has an asset base
(excluding land) of between N5Million – N500Million and labour force of between 11 and
300. Alternative Securities Market (ASEM) for emerging businesses (2013) defined SMEs as
an enterprise with an asset base excluding land and building of N10million to less than
100million with 10 – 49 employees for “SMALL” and N100million to less than N1billion
with 50 – 199 employees for “MEDIUM”.
Financial Performance
It was however observed that performance is the indicator used to measure set goals and
32
objectives . Business owners make performance an utmost priority. This was then put
forward that general performance of an organization is largely dependent on the right
management approach which involve three levels of management33.Financial performance
is the major outcome of organizational effectiveness. Though such performance standards
are considered vital, but not sufficient to determine the overall effectiveness. Accountingbased considers profitability in terms of Return on Sales (ROS), Return on Assets (ROA) and
Return on Equity (ROE) to measure financial performance. Organizational effectiveness
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
measures tend more towards stakeholders than shareholders. There are two perspectives
with indicators in respect to quality such as product quality, worker satisfaction, overall
quality and those indicators linked with social responsibility like environmental and
community responsibility.
Performance is used to indicate firm's success, conditions, and compliance. In broader
sense, financial performance refers to the degree to which financial objectives being or has
been accomplished. It is the process of measuring the results of a firm's policies and
operations in monetary terms; which is then used to measure firm's overall financial health
over a given period of time and can also be used to compare similar firms across the same
industry or to compare industries or sectors in aggregation. Financial performance is a
subjective measure of how well a firm can use assets from its primary mode of business and
generate revenues. Measurement of financial performance include an analysis of the firm's
production and productivity performance, profitability performance, liquidity
performance, working capital performance, fixed assets performance, fund flow
performance and social performance.
Therefore, financial performance is the measurement of business entities activities,
operations and policies in monetary term. It can also be explained as the modality of
measuring how effective businesses use it resources from the beginning of the business in
generating revenue. It also describes as the basis of comparison among firms in the same
line of businesses or other businesses that are in different sector of the economy activities in
aggregate.
The study of firm financial performance is in diverse area in management sciences which
drawn the attention of many researchers. Its however, stated by34 that finance is one of the
vital objective of financial managements, the reason for this is that, one of the major goal of
financial management is to maximize shareholder's wealth in terms of return on their
investment (dividends) which is a prove of a better performance of firms to the owners and
also drown attentions of potential investors to such business organization. In conformity
with the above,35 suggested that financial performance is an indicator as how sufficient and
effective firms are in utilization of their resources for the purpose of achieving their
objectives and increase returns on investor's capital.
According to36 financial position of a firm is a focal interest of stakeholders such as
managers, shareholders, governments, lenders and tax authorities etc. their concerns is
about what a financial position of a firm is at a given period of time to enable them make
business or investment decisions.
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Income Taxes And Financial Performance Of Small And Medium Enterprises In Nigeria.
There are different modalities of measuring financial performance, these are return on
assets (ROA), return on equity (ROE), return on capital employed (ROCE) and return on
investment (ROI). In this wok we shall adopt ROA as a tool for performance, It serves as a
prove on how well business organizations used its asset to generate profit at a given period
of time, these assets are, cash at hand, cash in the bank, amount receivable, properties,
inventories, furniture and equipment's. It is measure by dividing the total annual earnings
by the worth of the assets for the period, in this work ROA will be referred to other measures
as it generally considers the best internal management ratio because it measures profit
against all assets organizations use in generating their earnings.
However, financial performance is a major determinant of the financing decisions for
37
SMEs, especially the ones with high profit margins induced higher use of short-term debt .
It is further determined that financial performance correlates negatively with overall
leverage, indicating that the pecking order hierarchy is followed by SMEs. This is
supported by38 who demonstrated a strong and robust negative relationship between
financial performance and leverage. Having solid financial performance does however not
imply that firms disregard external debt all together. Firms that readily obtain institutional
finance are generally the one with best financial performance, the most solvent and the
largest. These features provide them with credit quality, facilitating access to financing in
more beneficial conditions compared to firms with economic and financial problems. In
conjunction with this, the worse the financial performance of a firm, the more likely it is to
resort to default in payment of taxes due. hence higher chances of bankruptcy or non39
payment result in institutional finance constraints . The relationship between financial
performance and income taxes
was further pointed out by40.They found that the
dependence on trade credit is negatively related to the strength of the firm's relationship
with its bank, which is highly correlated with its financial status. Even though there seems
to be a negative relationship between financial performance and overall leverage, some
evidence points towards that firms with a solid financial performance turn towards
institutional debt. One can therefore expect that firms with mediocre financial performance
rely more on, and turn towards, alternative financing. This is of interest for this degree
project as it aims to investigate if financial performance affect the usage of trade credit for
SMEs. Thus, controlling f