Ambitious reforms, good results

The reform agenda has been vast and resulted in an up-to-date tax system that can compete with those of many industrialised nations. An important component was the establishment of the Federal Inland Revenue Service (FIRS). This large government department is made up of five separate branches and is responsible for administering tax affairs. It received its financial and administrative autonomy from the FIRS (Establishment) Act in 2007. The FIRS enjoys autonomy in terms of recruitment, remuneration and internal discipline of staff.

In 2010, the government collected almost 10 % of GDP in taxes. Before the reforms started, the respective share was not even half as much. The most important taxes are levied on personal incomes and corporate turnover. The bulk of the tax revenue come from the oil and gas sector. “Petroleum Operations” as defined by Nigerian tax law includes petroleum exploration, development, production and sales of crude oil.

The value added tax (VAT) is also of great relevance (see box). It is the second most important source of government revenue. The VAT is charged at a flat rate of five per cent on all invoiced transactions. Diplomats and humanitarian agencies are exempt from the VAT.

The Nigerian government is finding it difficult, however, to collect taxes from the informal sector, which accounts for about 30 % of GDP according to Olusegun Aganga, Nigeria’s minister of finance. He acknowledges that some experts reckon the share is even higher. There is no doubt, however, that “it represents a large chunk of the nation’s economy”, to use Aganga’s words.

Currently, the tax base is made up of 85 and 89 % of the nation’s formal sector. Previously that share was only 20 %. The FIRS says it covers all profit-­making companies, registered societies, institutions of ecclesiastical, charitable, educational or sporting nature, profit making corporations under municipal and state law as well as all income-earning indi­viduals in the formal sector.

In December 2010, moreover, Nigeria’s Federal ­Executive Council (FEC), the top decision-making body, approved the FIRS’ Integrated Tax Administration (ITA) scheme, a modernisation of the tax collection system which will cost 3.07 billion Naira (€ 13,6 million). It is designed to ensure strict compliance, including in the informal sector. Experts hope that it will raise the tax yield to 30 to 40 % of GDP, so the government would become less dependent on oil revenues. Moreover, each taxpayer now has a Unique Tax Identification Number (UTIN), which should also help to include the informal sector in the tax base.

It has been made “a criminal act” to refuse to pay tax or deliberately attempt not to pay the correct amount of tax in Nigeria. Tax evaders are now treated as criminals, which was not the case previously. Relevant investigations are handled by the Criminal Investigations Department (CID) of the FIRS, which cooperates with other law-enforcement agencies.

Closed loopholes

Carefully drafted tax laws have gradually made tax evasion more difficult in Nigeria. Though there are no reliable statistics on revenue lost due to tax evasion, it is assumed that the figures used to be high. The culprits were mainly large companies. Several loopholes were closed. They included:
– splitting contracts – every phase of a deal was handled separately, so the amounts of money transferred were smaller and fell into lower tax brackets,
– cost shifting – if a deal involved a foreign country, companies would transfer costs to the country with the lowest taxes or even no taxes,
– informal operations – companies would stay outside the tax system by not registering businesses and/or concealing transactions,
– “legal” evasion – some businesses simply pushed the legal boundaries as far as possible by relying on very loose interpretations of the law and
– blatantly illegal methods – companies reported smaller sales and profits than they actually made, they laundered money or simply did not file taxes at all.

In light of such practices, Nigerian lawmakers made concerted efforts to reduce the amount and ease of tax evasion. The new laws strengthened the authorities. Three years ago, moreover, the FIRS began to educate citizens – mostly students – on the importance of paying taxes and ramifications of not paying taxes.

To ensure effective monitoring and compliance, FIRS relies on high-ranging Large Tax Offices (LTOs). They are based in Nigeria’s states. The idea is to be close to the people, as Ifueko Omoigui-Okaru, the ­executive chairman of FIRS, explains: “The essence is to make taxpayers comply voluntarily and reduce the tendencies for tax evasion.”

Another step towards enforcing tax compliance was that those who want to run for public office were made to publish their tax records. They must declare how much money they earned and how much taxes they paid in the past three years. Voters are interested in such data and unlikely to elect people who refuse full disclosure.

Politicians are not the only group targeted to prevent tax evasion. Companies that are bidding for government contracts are similarly forced to publish their earnings and the amount of taxes they paid. Failure to do so excludes them from doing business with the government.

For most of independent Nigeria’s history, governments only enforced tax laws half-heartedly. Under various regimes, corporate organisations as well as rich individuals resisted the introduction and enforcement of taxes. For a long time, only the agencies in charge of collecting the money showed any real interest in the matter.

That changed in the past decade. President Olusegun Obasanjo started reforms, which his successors Umaru Musa Yar’Adua and Goodluck Jonathan continued. The idea was to improve governance and to catch up with global standards. International experience shows that governments are more responsive to citizens’ needs if they depend on the taxes the people pay. A solid system of public finance is an important component of fighting corruption.

Reforms were opposed at first, and the introduction of the VAT was especially controversial because it affected all consumers. Controversy has ebbed somewhat, however, since it became obvious that the system makes sense. In the election campaigns in April, taxes were therefore not a hotly debated topic.