Victor Athe: Strict Implementation of PIT Act Will Change Nigeria’s Revenue Fortunes

Victor Athe is a partner, of Tax Services, Stransact Chartered Accountants and Audit, an RSM correspondent firm in Nigeria. In this interview with Festus Akanbi and Adedayo Adejobi, he speaks on issues including the 2023 Finance Act, Nigeria’s public debt to GDP ratio, the implication of tax to GDP on the growth of the Nigerian economy, why Nigerians are feeling overburdened by existing taxes and VAT, and how the federal government can increase the morale of the taxpayers and harmonise tax collection

After a decade of heavy borrowing to fund infrastructure expansion, the ratio of public debt to GDP in Nigeria has continued to increase with debt service obligations taking more than 60% of the nation’s tax income, and the country is turning back to the tax authority to ramp up revenue collection. How can the federal government maximise Nigeria’s tax revenues?

Under IMF’s Debt Sustainability Framework (DSF), a country’s debt-carrying or debt-accumulation capacity would typically be determined by the strength of its macroeconomic performance and policies. Studies have shown that the accumulation of debts above recommended threshold levels could be inimical to economic growth, especially when the debt increase is not aligned with the country’s growth needs.

A high public debt-to-GDP ratio can also further exacerbate the already deteriorating exchange rate in various ways, including putting pressure on foreign exchange reserves, investor confidence, inflationary pressures, and the need for more foreign currency to service debt obligations. This underscores the importance of sustainable fiscal management and prudent borrowing practices to maintain exchange rate stability and overall economic health.

One important thing I believe the federal government should do is to ramp up our tax revenue in our current context, by widening the tax base.  Several steps can be taken to achieve this, including the increased formalisation of the current vast informal sector in Nigeria.

Do you think the current leadership of the Federal Inland Revenue Service is ready to widen the tax net?

On assumption of office, the current Chairman of the Federal Inland Revenue Service (FIRS)  also immediately expressed commitments to significantly improve the nation’s tax-to-GDP ratio from the then 10% to as much as 18%.  There is an inverse relationship between the “public debt-to-GDP ratio” and the “tax-to-GDP ratio”. This means that as the latter increases, the former is likely to reduce since it would directly mean that the government would, have a larger pool of resources available to finance its expenditure priorities, and would not need to borrow or cut down on its expenditures to maintain fiscal stability.

Another measure that can be taken, is the stringent implementation of some of the recent amendments to our tax laws, such as the Significant Economic Presence (SEP) rules.  There are currently cases of multinational enterprises (MNEs) deriving income from sales through digital/electronic channels to Nigerians (mostly B2B transactions) that are caught under our SEP rules but do not remit the appropriate share of income taxes to the Nigerian government. Considering the significant earnings these MNEs derive in Nigeria, it may be an effective strategy to channel focus to collecting the appropriate level of taxes (income tax and VAT) from these multinational businesses that are deriving enormous value from Nigeria.

With many Nigerians already feeling overburdened by existing taxes and VAT, should the federal government embark on tax base expansion, while the government repairs public finances, so that more people share the tax load, thus easing the burden on the existing base?

It is certainly important for the federal government to work at expanding the tax base to capture a sizeable portion of the country’s vast informal sector, which mostly comprises unregistered small-scale businesses. This sector plays a crucial role in the nation’s economy, as it accounts for a significant portion of employment and national GDP -more than 50%.

Tax collection from the informal sector has remained a complex issue, since a majority of the businesses therein, largely operate without proper regulatory oversight. However, recent efforts by the government, which include the introduction of Micro, Small, and Medium-sized Enterprises (MSME) Development Fund, Ease of Doing Business reforms, and Tax Reforms, introduced by the amendments to our tax legislation (e.g. the exemption of small businesses from VAT and Income Tax obligations); are all laudable steps aimed at encouraging the increased formalisation of the informal sector. 

Today, for any company, having a full-service consulting firm to support them is extremely valuable. What is the philosophy of Stransact Chartered Accountants and Audit in this regard?

 Stransact, currently offers, a broad spectrum of professional services covering tax compliance/advisory services, all aspects of transfer pricing (TP) and its related services, transaction advisory, deal advisory, accounting, audit, and all other Attest-type services.  Our strategy for our target market is to provide these professional services to our clients with the same or a superior level of ‘quality’ compared to what is offered by the big brands in the market. This way, we constantly help our clients derive strategic value in all their transactions, which is significantly more than the costs to them.

Last year, Nigeria enacted the Finance Act 2023 (FA 2023), with the most significant aspect being its effort to enhance the compliance or enforcement modalities surrounding the taxation of income derived from international shipping and airline transportation. What is your structural assessment of this Act?

The Nigerian Companies Income Tax Act (CITA) provides specific rules for the taxation of foreign entities engaged in international shipping and airline transportation in Nigeria.  The profits that these foreign entities specifically derive in Nigeria are typically subjected to tax using a deemed income approach (where the income tax rate is applied to a fair and reasonable percentage of their gross revenues).

The FA 2023 now requires that the gross revenue statements submitted by these foreign entities when filing their annual income tax returns would now have to be certified by an external auditor. The agencies that maintain regulatory oversight over shipping and air transport companies have also been mandated to ensure that these foreign companies present evidence of adequate tax compliance in Nigeria before all relevant regulatory permits and approvals are approved for them. 

 In my view, the additional requirements introduced by the FA 2023, would help ensure that the tax bases relating to the economic activities carried on by the foreign entities in Nigeria are not eroded. This way, the country can reap its fair share of taxes from the enormous economic activities of these foreign businesses in Nigeria.

In your opinion, what are the key challenges and opportunities for businesses concerning taxation in the current economic and regulatory landscape?

 There are undoubtedly a plethora of challenges in Nigeria’s current economic and regulatory landscape as it relates to taxation, which includes: multiplicity of taxes, poor tax administration, non-availability of a database, tax touting, the ambiguity of Nigerian tax laws, non-payment of tax refunds, Issues around utilisation of Withholding Tax Credit Notes, Wrong Interpretation of tax laws during tax dispute resolutions, etc.  Most of these issues generally result in a low tax morale in taxpayers (both businesses and individuals).

 Recent studies have shown that a key determinant of tax morale is the perceived quality of the tax administration.  An increase in tax morale has also been linked to satisfaction with public services, supporting the existence of the fiscal contract between taxpayers and the state- willingness to pay tax in return for effective public services.

Notwithstanding, the existing challenges, there are lots of tax incentives that have been structured to encourage increased investments in the Nigerian economy. Some of the existing incentives include tax holidays, tax exemption schemes, repatriation of foreign capital or profits at official exchange rates, export incentives, export expansion grant (EEG) schemes, gas utilisation incentives, tourism incentives, reduced tax rates on interest income, etc. 

What is the implication of tax to GDP on the growth of the Nigerian economy and where are we compared to peers in Africa?

 There is evidence to support the fact that countries with high tax-to-gross domestic product (GDP) ratios have higher tax morale. Improving tax morale has the potential to increase government revenue from taxation with relatively little enforcement efforts.

States are battling with taxes too. What do you think is holding back other states in addressing the issue of multiple taxation they have?

 The Nigerian Constitution, the bedrock on which all other laws run, contains the exclusive, concurrent, and residual Legislative lists’, which each specify the type of taxes that the various tiers of government in Nigeria should have legislative powers over.  The debacle on whether the federal government or state governments should collect VAT is yet to be conclusively resolved due to the peculiar complications and complexities around the issue.

 The practice of coming up with different names for the same tax type by federal, state, and local government agencies and ministries is tantamount to “Tax duplication”. Duplication or multiplicity of taxes is driven primarily by the need for states to generate more revenue.  Despite the increase in statutory federal allocations to the states by about 69% in 2024 compared to the prior year, most states are yet not able to independently fund the deficit of their respective budget expenditures.

 The outcome of tax duplication is that taxpayers would have to bear a burden of taxes that is astronomically higher than what they had anticipated or planned. This huge disincentive for businesses in Nigeria contributes significantly to the poor ranking of Nigeria on the World Ease of Doing Business Index and weighs negatively on the investment climate in Nigeria. This also encourages tax touting -the creation of illegal taxes that are enforced and collected through illegal, aggressive, and unorthodox means, which are mostly extortionate.

What kind of policy should be in place for there to be harmonisation of taxation?

Our National Tax Policy (NTP) document was first created sometime in 2012 and then revised in 2017, to provide policy direction for tax matters generally. This also serves as a procedural guideline for achieving effective harmonisation between the respective tax authorities of the different tiers of government.  The NTP was designed to be an instrument for creating awareness of the importance of taxation as a stable flow of revenue for the Nigerian government in the face of dwindling oil revenue. The NTP sought to address fundamental issues relating to multiple taxation, lack of accountability for tax revenue, and a lack of clarity on the taxation powers of each level of government.

However, considering the fact the NTP is only a document that is not a legal instrument, the intended benefits are yet to be realised, primarily due to the lack of effectiveness in its implementation, perhaps due to the lack of legal backing.

I wonder how the federal government will cope if the Supreme Court reaches judgment on the case instituted against it by Rivers, Lagos, and some other states that joined on both parties; on the issues of VAT and who has the right to collect taxes. The lower court says it’s strictly a state tax. If the supreme and appeal courts affirm that decision, it will leave the federal government open in terms of revenue shortfalls. What do you think?

 One of the challenges Nigeria is currently facing is that the indices that drive the allocation of revenue accruing to the government centrally do not effectively consider and reward contributions to the economy from arms of government that demonstrate effective utilisation of resources, promotion of investments, infrastructural development, and others.

The working poor — and, increasingly, the squeezed middle — are contributing a higher proportion. How do you think things would develop in Nigeria if federal government started taxing big money and redistributing wealth democratically? Would we see instant changes?

One of the major challenges bedeviling our revenue system is that a lot of high-net-worth individuals (HNIs) are either outrightly evading payment of taxes of some or all sources of their income, or do not pay the appropriate level of taxes commensurate to their income in line with the provisions of our income tax laws.

 For instance, the Personal Income Tax (PIT) Act which governs the taxation of individuals in Nigeria stipulates that every individual who is a Nigerian resident should be assessed to PIT on their global income (i.e. income earned from both within and outside Nigeria).  The proper enforcement of this provision alone can change Nigeria’s revenue fortunes very significantly.

One of the cardinal features of a proper/effective tax system is the redistribution of wealth. This is why the PIT rates in Nigeria are graduated such that the highest income earners are taxed at the highest rate.  However, where there is a paucity of data on the actual income earned by high net-worth persons, who may have exploited a large part of our collective economic resources in generating such income, then the Nigerian economy will constantly be short-changed where an effective system is not put in place to hold these HNIs accountable to remit their fair share of taxes.