In brief

On the 21st and 22nd March 2016, the National Economic Council held a strategy retreat at the state house in Abuja. The aim of the retreat was to develop strategic initiatives that would be implemented to  diversify the economy and address revenue challenges.

Some of the key resolutions regarding revenue generation include improved collaboration between the Federal Inland Revenue Service (“FIRS”) and the State Internal Revenue Services (“SIRS”), possible gradual increase in VAT rate, and tax harmonisation.

In detail

Background

The National Economic Council (NEC) is a constitutional body comprising the Vice President as Chairman, all 36 State governors and the Central Bank governor, with a mandate to advise the President concerning the economic affairs of the Federation, and in particular on measures necessary for the co- ordination of the economic planning efforts and programs of the various tiers of government of the Federation.

Eight thematic areas were covered in the retreat as follows:

  1. Nigerian States: Multiple Centres of Prosperity
  2. Agriculture
  3. Solid minerals
  4. Investment, industrialisation and enabling monetary policies
  5. Infrastructure and services
  6. Investing in our people
  7. Revenue generation and fiscal stability
  8. Survival of the States and beyond.

On the 7th and 8th thematic areas which focused on revenue generation, presentations were made by the Minister of Finance and the Executive Chairman of the FIRS.

The Minister of Finance in her presentation (titled “Revenue Generation and Fiscal Stability”) stated that different ways were being explored to optimise revenue generation through the FIRS and Nigerian Customs Service. Also government will focus on efficiency and cost reduction.

Proper governance at the Customs is expected to improve customs collection which is significantly below expectation for the import size of the country.

Measures targeted at different key areas being implemented by the FIRS to improve compliance in addition to improved cooperation between the FIRS and the SIRSs as well through tax harmonisation.

The minister was of the view that time is not right yet to increase VAT rate but rather government will focus on improving the compliance rate.

The Executive Chairman of the FIRS, Mr. Tunde Fowler also presented on how the FIRS intends to improve tax collection nationwide.

Highlights of the presentation

It was stated that some states in Nigeria have compliance rate of less than 10% going by the number of taxpaying population in their tax net. There is also an opportunity to improve tax compliance and revenue yield through improved collaboration between states and the FIRS.

Challenges with tax administration highlighted by the FIRS are:

  • Low level of tax compliance. VAT compliance rate was identified as being about 12%.
  • Some organisations maintain different tax records for the various tax authorities.

Strategies to improve tax collection and collaboration

The strategies and collaboration measures being implemented by the FIRS are:

  • Identifying and locating taxpayers through the information sharing and consolidation of databases. The FIRS has written to state governments and have signed agreements with some SIRS for exchange of information.
  • Taxpayer Identification Number (TIN) Project – This is a Joint Tax Board project for TIN to be centrally generated for all companies and individuals. The FIRS requested for state governors to allow their states integrate with the TIN Project.
  • The FIRS plans to automate the VAT and Withholding tax (WHT) collection processes in the states to improve efficiency and block leakages.
  • Use of technology to improve tax collection such as automated VAT collection for some sectors - aviation (where VAT is deducted when customers pay for tickets), power (where VAT is to be collected automatically when power bills are paid). Other sectors being targeted are telecoms and financial institutions.
  • Collaboration with states on review and amendment of tax legislation from time to time.
  • Appointment of State Coordinators/industry sector heads within FIRS to drive compliance in different sectors and strengthen collaboration with States
  • Nationwide tax audit exercise to be done using consultants (experienced tax and audit firms) and States that agree to carry out joint audits
  • Capacity building by training of tax officers and hiring of experienced hands such as ex- Chairmen of SIRS. Joint training programs are also being proposed for Tax Administrators at FIRS and SIRS.
  • Improved performance management through use of reward based compensation and imposing sanctions for tax officers involved in sharp practices.
  • Taxpayer education, publicity and enlightenment on the benefits of compliance and consequences of non- compliance. FIRS Engagement and Enlightenment Tax Teams (FEETT) have been set up

The FIRS recommended some quick wins to improve Internally Generated Revenue in States including:

  • Enactment of State tax administration laws, which grant autonomy and proper funding to the SIRS
  • Centralising tax and revenue collection systems in the States to be carried out by only the SIRS. This will minimise leakages at the various Ministries and Agencies and improve accountability and transparency in revenue generation.
  • Automation of tax payment and collection (electronic collection through Banks only) within the States to block leakages and improve efficiency in the process.
  • Integration of the taxpayer registration process in the State with the TIN Project of the Joint Tax Board.
  • Publication of tax revenue collection to boost confidence in the tax system.
  • Constituting Joint State Revenue Committee comprising the Chairman of the SIRS as the Committee Chairman with representatives from all local governments. Its functions will include implementing the decisions of the JTB, harmonizing taxes and levies and tax enlightenment.

The takeaway

We expect that the SIRS and FIRS will become more thorough in conducting tax audit exercises as a result of the joint tax audit. Taxpayers should therefore keep proper tax records to avoid any tax exposures.

Taxpayers should begin to assess the impact of joint audits on their tax strategy. On the one hand, joint audits may reduce the number of visits by various tax authorities and free up time for the tax function to focus on more strategic matters. On the other hand, it may uncover unanticipated areas of exposure as the total payroll cost can now be sufficiently audited for all locations and instances where staff costs are not properly allocated and reconciled for different states can create exposures.

Overall, some of the strategies are laudable and should make a difference if implemented properly, such as central TIN, sharing of information on databases at both States and

Federal level. This may assist in curbing tax evasion and increase the number of taxpayers within the tax net.

There may be legal challenges with some of the strategies. For example, real time collection VAT may deprive taxpayers from their right to make valid input VAT claims. Also, the use of consultants for tax audits could be challenged by taxpayers especially in view of concerns around confidentiality of information.

Section 12(4) of the FIRS Establishment Act provides that “The Service may appoint and employ such consultants, including Tax Consultants or accountants and agents to transact any business or to do any act required to be transacted or done in the execution of its functions under this Act: Provided that such consultants shall not carry out duties of assessing and collecting tax or routine responsibilities of tax officials.”

The provision is subject to interpretation but generally seems to allow the FIRS to use consultants for consultation on internal issues or for advice (such as strategies for improving revenue) but prohibits the FIRS from using consultants for routine responsibilities of FIRS officials which would naturally include tax audits or reviewing confidential records of taxpayers.