Breaking Resistance To Voluntary Tax Compliance In Nigeria
SAM DIALA takes a holistic look at the Voluntary Assets and Income Declaration Scheme (VAIDS) recently launched by the federal government to widen the nation’s tax net, including the possible factors that could create resistance to compliance with the scheme.
Compelled by stark economic realities, the Nigerian government, after decades of prevarications and wishful posturing, adopted urgent measures to drastically alter the age-long narrative of citizens’ tepid, stand-aloof attitude to tax. The measure represents noticeable paradigm shift that upped the ante in accountability on the part of the leaders, and willing embrace of civic duties by the citizens.For the first time, radical policy measures were put in place to tap the full potential of tax revenue in a system that had, for about half a century, depended virtually on a mono revenue source -crude oil. This walk on a dangerous precipice (extreme reliance on crude oil) revealed its pangs of death when the price of oil in the international market plummeted from about $100 per barrel to below $40 per barrel mid-2014. Consequently, all tiers of government began to feel the effects of paucity of fund as payment of workers’ salaries and meeting other obligations became increasingly difficult.
Caught up between the devil and the deep blue sea, Nigerian government had no alternative but to seek a hiding place from the unguided missile called recession which hit the economy in the first quarter (Q1) of 2016. The economy subsequently plunged into the worst recession in 25 years as the decline in the nation’s gross domestic product (GDP) hit the bottom of the trough with negative growth of -2.6 per cent in Q2 2016. Inflation had hit an all-time high of 18.2 per cent in January 2016, while unemployment rose sharply to 14 per cent.
Capital importation (foreign investment) through the Nigerian Stock Exchange (NSE) dropped drastically amid scarcity of foreign exchange (forex) that saw the Naira depreciate to all time high of N500/US$1 early 2017. Many firms, unavoidably, resorted to employee lay-off while others either shut down or relocated to neighbouring West African countries. Government seemed to have approached a crossroads in its fiscal and monetary policy choices. The development left a deep imprint on the mind of Nigerians that a worse narrative can not be imagined in a country of over 180 million people whose future hung precariously on the balance.
VAIDS as needful
Looking inwards entails deep reflections on how to salvage an economy marooned in the sinking mud of oil revenue slide. A shift to tax became imperative. It was time to talk and practise tax beyond what had been mere policy prevarications over the years. Before now, tax was treated like a voluntary engagement embraced only by a select few who are compelled, perhaps unavoidably due of their nature of work, to fulfill their civic duty of paying the correct tax, and as when due. Majority did not see tax as a necessity; hence would do all they could to subvert every means that would bring them in contact with the tax master.
According to Taiwo Oyedele, head of Tax and Regulatory Services at PwC Nigeria and Tax Leader for PwC West Africa, only 14 million people are registered with all 36 tax authorities and the FIRS out of almost 80 million workforce in Nigeria. Out of the 14 million, 96 per cent are captured through the Pay As You Earn (PAYE) tax system while only four (or 560,000) file returns through direct assessment as self-employed and high net-worth individuals (HNIs).
Oyelade further disclosed that within the direct assessment population, only 943 people pay N10 million or more in personal income tax (including 214 who paid N20 million or more), compared to about 950,000 in South Africa. To pay N10 million in income tax, one needs to earn about N50 million annual income (or about N100 million to pay N20 million tax). Compared to South Africa, Nigeria’s PAYE tax revenue is smaller than South Africa’s with less than one-third of Nigeria’s population and higher unemployment rate.
To abandon the old ways, Nigerian government introduced the Voluntary Assets and Income Declaration Scheme (VAIDS), an initiative that brought practical and result-oriented approach to tax administration. The scheme was created in a bid to provide tax defaulters an opportunity to defray all unsettled tax liabilities. Under the Scheme, tax defaulters are required to voluntarily disclose any previously undisclosed asset and income relating to the preceding six (6) years of assessment within a nine (9) month period from July 1, 2017.
The objectives of the Scheme, which has been described as giving tax amnesty to defaulters albeit for a limited period, include to encourage full tax compliance, discharge of outstanding tax liabilities as well prevent tax evasion. While it increases government revenue, the Tax Payer also benefits from it vide workable tax payment plans, and immunity from prosecution for tax offences and tax audit. An application under VAID is valid where the disclosure is voluntary and substantially verifiable, and the payable tax is assessed by the relevant tax authority. The Scheme is to be implemented across the Federation and is applicable to all taxable persons and entities.
“The idea of the scheme is that it is a voluntary programme, the decision to participate should, therefore, be left to the taxpayers. The FIRS and other relevant federal and states tax authorities shall give effective publicity to the programme and encourage as many people as possible to take advantage of it. This will also be complemented by the community tax liaison officers (CTLOs). Intending participants in the Scheme are advised to confirm the extent of their Nigerian tax liabilities with their professional advisers,” said Kemi Adeosun, minister of Finance.
To cast the country’s tax net wider, VAID embraces all federal and state taxes such as companies income tax, personal income tax, petroleum profits tax, capital gains tax, stamp duties, tertiary education tax, technology tax, tenement rates, and property taxes. It also covers all back taxes for the last six years in line with the statutory periods of limitation under the relevant tax statutes.
The scheme, according to Adeosun, is “specifically targeted at taxpayers who have not been fully declaring their taxable income/assets; have not been paying the tax due at all; have been underpaying or under remitting; are under a process of tax audits or investigations with the relevant tax authority; are engaged in tax disputes with the relevant tax authority but are prepared to settle the tax dispute out of court; are new taxpayers who are yet to register with the tax authorities; and are existing registered taxpayers who have new disclosures to make.
“It does not matter whether the relevant tax default arose from undeclared assets within or outside the country. If tax should have been paid, the Voluntary Asset and Income Declaration Scheme is providing a once in a lifetime opportunity to declare the tax outstanding and resolve it definitively”.
VAIDS and technology
The success story of VAID hinges largely on its data-driven platform that operates with appropriate technology. This has dual benefits: it guarantees the integrity of the Scheme as well as ensuring that every escape route is blocked. In addition, all the parties have a platform that provides shared data to ensure accuracy and equity – two critical factors in Taxation.
To take off from a credibility stance, government noted that its tax compliance team had looked at import records and compared the value of goods imported to the tax declarations of the importers, but the discovery was said to be worrisome as “the variance was disturbingly wide”.
“We have blocked a major loophole by using data to profile tax payers. Thus, someone owning properties across multiple states and overseas can selectively declare knowing that tax authority had no means of cross checking.
“This is especially the case with overseas assets and income where State Governments lacked jurisdiction. But with the centralisation of data under Project Lighthouse within the Federal Ministry of Finance, a major loophole has been plugged,” Adeosun added.
“A lot of data mining is going on daily, both locally and internationally, on property ownership and other items. Data is an extremely powerful tool that is now being utilised. For instance, we have reviewed all companies that received major payments from the Federal Government in the last 5 years and found that even those who made money from government, under-declared.”
“On personal income taxes, we reviewed property and company ownership as well as registration of high value assets and foreign exchange allocations, which gives us a sense of the lifestyles of the persons.
“But again, we found major non-compliance. In some cases, people declared as little as N10 million as income but purchased expensive property overseas and in Nigeria, registered high specification vehicles and funded luxurious personal events costing multiples of the declared income.
“We have blocked a major loophole by using data to profile tax payers. Thus, someone owning properties across multiple states and overseas can selectively declare knowing that tax authority had no means of cross checking. This is especially the case with overseas assets and income where State Governments lacked jurisdiction. But with the centralisation of data under Project Lighthouse within the Federal Ministry of Finance, a major loophole has been plugged”, Adeosun noted.
VAIDS’ foot soldiers
To ransack every nook and cranny of the country, government recruited and trained over 2,000 graduate Community Tax Liaison Officers (CTLOs) under the VAIDS initiative to play the role of foot soldiers. The CTLOs have been deployed to their states of origin to raise awareness about the VAIDS and taxation in general. They will also offer any relevant assistance that would eliminate attitude of resistance among taxable individuals and corporate entities.
With effective feedback made possible by the data-sharing mechanism of the Scheme, the CTLOs already familiar with the environment, are able to communicate with central and co-ordinating field offices. When fully operational, the scheme is expected to create over 7,000 direct opportunities for Nigerians as CTLOs through the N-Power scheme of the Federal Government. The involvement of CTLOs will facilitate the achievement of projected revenue of $1billion that is expected to be generated through VAIDS.
“The scheme is expected to bring about an appreciable jump in the country’s tax-to-gross domestic product ratio from the meagre six per cent it currently is to a more respectable 20 per cent by 2020,” said Vice President Yemi Osinbajo when VAIDs was launched on 29 June 2016 via an Executive Order signed by him as Acting President.
The CTLOs, working under close supervision and with effective co-ordination, will drive home the fact that VAIDS is specifically targeted at taxpayers, who have failed to fully declare their taxable income and assets or have not been paying the tax due. They will also educate members of their communities that VAIDS is also aimed at those who are underpaying or under-remitting; those under a process of tax audit or investigations by tax authorities or are engaged in tax disputes with tax bodies, but are prepared to settle the disputes out of court.
Government has vowed it will not extend the tax amnesty beyond March 2018 as articulated in the VAIDS. The involvement of the CLTOs will persuade doubting Thomases and those who would adopt a wait-and-see attitude to take advantage of the Scheme while it lasts. “Creating VAIDS to operate on an effective ICT platform; its modus operandi well-articulated; highly motivated community liaison tax officers recruited, trained and deployed to their states of origin, anyone who fails to take advantage of this unique opportunity which I call the period of Mercy, is undoing himself,” said Titus Okeleme, a Lagos-based chartered accountant and tax consultant.
Resistance potentials to VAIDS
Some resistance factors could work against the Scheme. First is the psychological factor. Often, Nigerians are urged to pay their taxes and “hold their leaders accountable”. In reality, this is an attempt to square a circle. Government belligerent posture may produce unintended outcome, such as passive resistance, that poses a threat to VAIDS. Nigerians still battle with the psychology of poor governance offered by their leaders. Obviously, you cannot offer poor leadership to the people and expect them to be excited over this revolutionary tax reform,” said Okeleme.
Bad leadership creates the belief that citizens are eternally doomed in the hands of their corrupt leaders who perpetrate unjust governance with impunity. With billions of Naira cornered by state governors as security vote, unaccounted for, and the huge budgetary allocations shared by members of the National Assembly in opaque circumstances amid serious infrastructure gap, for instance, voluntary tax compliance becomes practically impossible.
When we reel out statistics to support our claim over an issue that concerns Nigeria, we often fail to look at the issues all-sided. For instance, Oyelede published a table of comparison of tax data among some selected African countries which showed that Nigeria lagged virtually in all areas assessed. He showed that Nigeria garnered paltry N6 trillion total tax revenue at all levels as at 2016 compared with the equivalent of N27 trillion hauled by South Africa during the same period.
Nigeria had estimated population of 182.2 million in 2016 according to the National Population Commission (NPC), a labour force of 80 million and unemployment rate of 14 per cent according to the National Bureau of Statistics. Conversely, South Africa with a population of 55 million, labour force 21.8 million and unemployment rate of 26.6 per cent.
Yet South Africa has total registered individual taxpayers of 14 million according to Joint Tax Board as against 19 million in South Africa. Furthermore, Nigeria’s tax to GDP ratio is bare 6 per cent as against 26.2 per cent of South Africa; while Personal Income Tax to GDP ratio is 0.8 per cent and 9.5 per cent for Nigeria and South Africa respectively. Nigeria ranks 182/190 in World Bank East of Paying Taxes as against 51/90 earned by South Africa.
Tax revenue is a function of productivity. We must address the productive base of the economy to guarantee successful implementation of VAIDS or other tax reforms. Using 2016 as base, Nigeria lagged behind South Africa in several fundamentals that impact on the economy. According to CIA Fact book, Nigeria’s GDP at 2016 was -1.6 per cent against South Africa’s 0.3 per cent.
Nigeria’s industrial production growth rate was -8.9 per cent while South Africa recorded -1.3 per cent. Regarding population below poverty line, South Africa had estimated 16.6 per cent while Nigeria had 75 per cent. In Nigeria, population without electricity in 2016 was 95 million as against South Africa’s 7.7 million. Electricity production in Nigeria as at 2015 was 29.83 billion kWh compared with 229.2 bn kWh in South Africa.
VAIDS will certainly signal a regime of seamless, voluntary tax compliance among citizens happy with how their leaders spend their tax proceeds. Targeted at the elite and high net-worth individuals and companies at the moment, the aggressive tax drive is like a wild fire that will consume every standing member of the community. The infrastructure deficit bedeviling our environment and the untamed multiple taxation remain a threat to smooth tax administration. Pursuing VAIDS without corresponding attention to deteriorating infrastructure and governance by impunity will create resistance to VAIDS.