NESG Citizens Tax Perception White Paper

NESG Fiscal Policy Roundtable

The Nigerian Economic Summit Group (NESG), supported by the Bill & Melinda Gates Foundation, created the Fiscal Policy Roundtable in 2018 to provide evidence-based input into fiscal policies in order to improve the tax system and support Nigeria’s economic growth.

The Fiscal Policy Roundtable is an independent non-partisan one-off commission, solely focused on fiscal policy. It is a reform platform designed to support the Nigerian government in its efforts to increase revenues by introducing people and business-friendly reforms and addressing gaps in tax policy.

The Roundtable commissioned researches on Nigeria’s tax system, citizens’ perspectives on taxation, and macro modelling on the impact of increase in Value Added Tax (VAT) rate on revenue mobilization, equity, and the economy broadly. The Roundtable also reviewed existing researches by other organizations. One of the outcomes of this is the Better Tax Initiative.

Better Tax is an evidence-based advocacy that brings together the Nigerian Government and its citizens to make taxation work for Nigeria’s socio-economic development. The overarching objective is to set a tax reform agenda that is all encompassing and engages all stakeholders in a way that drives mutual collaboration, and transforms the tax system for sustainability.

Key Findings

Nigeria’s revenue from tax remains very low at about 6% of GDP. Fiscal deficits (around 3% of GDP) and debt service to revenue (over 50%) are both high and unsustainable. The combined effect of these factors is that Nigeria is unable to generate the revenue required to fund critical infrastructure, deliver social services and facilitate economic growth.

One of the critical challenges facing the tax system in Nigeria is the shockingly high level of non-compliance or low tax morale. Tax Morale is the willingness to comply with taxes and the belief that tax evasion is wrong. Different factors influence tax morale, including:

• Knowledge and Complexity: The level of understanding of the tax system and its simplicity improve compliance
• Fiscal Exchange/Social Contract: People are more willing to pay their taxes if they feel that they are getting something in return.
• Social and Individual Norms: People are more willing to pay taxes if they have strong religious beliefs that mandate them to; or if others in their community are also compliant
• Legitimacy, Trust and Fairness: People are more likely to pay their taxes if they regard the government as legitimate, if they trust the administration, and if they perceive that tax is collected fairly
• Participation and Voice: The average Nigerians will be encouraged to pay taxes if they are involved in discussions about the subject, and effective accountability is provided

So why are businesses and individuals reluctant to pay taxes? The NESG conducted a review of Nigeria’s tax system and engaged taxpayers and administrators on their perception and experience with the tax system.

The key findings are:

• Tax morale in Nigeria is very low. Over 80% of individuals and nearly 70% of businesses in Nigeria believe that tax evasion is either not wrong at all, or that it is wrong but understandable. Only a few believe that tax evasion is wrong and punishable.
• Most Nigerians do not pay income tax and many of those who pay do not pay the correct amounts. Majority of citizens who pay income taxes are those in formal employments where deductions are made at source from their income by way of PAYE tax. Tax evasion is high among the upper class and those in the informal sector.
• Nigerians have limited knowledge about the tax system. There is no clarity on the type of taxes payable, the tax base, frequency and timing of payment etc. There is confusion regarding some of the taxes either because of overlapping jurisdictions or seemingly double taxation. There is also no clear method used for determining tax liability in some cases. This is a major reason for poor tax compliance.
• Penalties for non-compliance are very low, and generally not enforced consistently. The consensus with survey respondents is that penalties are not severe enough to deter those who do not wish to comply.
• Tax collection is inefficient, opaque, unprofessional and sometimes corrupt. The tax compliance process requires personal interaction with tax officials, giving the opportunity for bribe requests. A significant percentage of taxpayers said they were asked to pay a bribe in the process of discharging their tax obligations. Also, there was lack of information about the costs of collection for various taxes, which suggests that it may constitute a very significant proportion of the total revenue collected.
• Tax administration is driven and developed by the “supply side”, with no commensurate value added in return. Tax administration is focused mostly on the immediate and short-term revenue generation, with very little consideration for overall economic impact. Policies are often not evidence-based as they are formulated without sufficient data and involvement of key stakeholders.
• There is a crisis of trust in government and tax officials. Many Nigerians believe that government at all levels do not prioritize the interests of citizens. They do not trust government and trust tax officials even less.
• Nigerians feel that they get virtually nothing back for their taxes. The level of satisfaction with infrastructure and public services is very low.
• Tax officials are ill equipped for their job and cannot influence service delivery. Tax officials do not have sufficient training and the resources needed to carry out their duties. They have no influence over the government’s use of tax revenue.
• Nigerians are willing to pay their taxes in return for service delivery. The majority favor the idea of paying their taxes if the government delivers better services. Individuals and households would be willing to pay more for better education and health services, and businesses would be willing to pay more for reliable electricity supply and good roads.
• Political interference. Nigerians believe that there is political interference in the administration of taxes and revenues. In some cases, tax collection appears to be a channel for rewarding political favor by offering “consultancy” roles to “political loyalists”, who are paid through exorbitant fees for revenue collection.
• Poor communication. Respondents indicated that tax authorities rarely provide them with any information – only 12% of the survey population had received any kind of communication from the government on tax in the year preceding the survey.
• Inconsistent policies – Tax officials complained about the difficulties of implementing inconsistent or unclear policies. In some states, there is a mix-up between tenancy rates and other property taxes
• Limited resources – Tax officials complained about the shortage of resources, including cars, fuel and access to security agencies for tax enforcement
• Unrealistic targets – Tax officials say that they are not consulted in the process of determining the targets upon which they are evaluated
• Poor systems and lack of transparency – None of the tax officials at the state and local government levels was able to provide information on the number of taxpayers or the amount of taxes collected per type of tax. The tax offices do not have an accurate database of taxpayers and the basic tools for determining citizens and businesses’ tax liabilities
• Low Awareness and Non-implementation of National Tax Policy (NTP) – There is a lack of awareness of the revised NTP – two-thirds of the corporate taxpayers surveyed, especially the medium size taxpayers, have not read the tax policy. Also, the NTP is not being implemented, and there appears to be a lack of harmony between the policymakers and those that will implement it.
• Irregularities in audit process and multiplicity of revenue agencies –Taxpayers complain about irregularities in audit processes and a multiple/high frequency of tax audits visits by external tax consultants and different agencies of government. While this practice may have some short-term benefits, it does not build the capacity of the existing tax auditors, and poses issues of public confidence in the government and create integrity issues regarding information confidentiality.

Recommendations

Summary of Recommendations

• Simplicity – Harmonise and simplify tax requirements and processes.
• Communication and participation – Get the people involved; communicate with citizens frequently
• and more effectively using various channels, not just seminars in cities.
• Capacity – Train and empower tax officials, improve tax administration processes, use technology
• effectively and depersonalize compliance
• Delivery / Social exchange – Improve social services and link to
• Accountability and transparency – Publish detailed revenue reports showing collections and the NESG Fiscal Policy Roundtable has detailed its recommendations around the three key thematic areas, which were the focus of its exploration. They include policy, legislation and administration.

Policy

• Government at all levels should be required to publish quarterly data of revenue collection by type of tax over time, and to publish the cost of tax collection and number of taxpayers annually.
• Political leaders and heads of government ministries, departments and agencies should be fully compliant with the law and demonstrate this to the public.
• Utilize existing public funds to deliver value to citizens as a means of building trust, which will in turn improve government’s reputation for using tax contributions for the public good.
• Improvements in tax compliance cannot come from the tax system alone, but by linking taxation to significant improvements in the quality and relevance of public expenditure.
• Tax reform and policies should be evidence-based. Ensure taxpayer engagement, and sensitization before and after-tax policy approval and implementation to ensure awareness and understanding of tax policies.
• Ensure quarterly feedback on the implementation of tax policies, including the enactment of consequential laws that will give life to policies
• Facilitate the inclusion of tax education in the curricula at primary, secondary and tertiary levels. This will serve as a means of ensuring that future taxpayers are sensitized and imbibe the culture of tax compliance as part of civic duties from an early stage
• Review the incentives provided in the various tax laws including the Companies Income Tax Act, Nigeria Export Processing Zones Authority, and the Petroleum Profits Tax Act. Eliminate discretionary power in granting tax incentives by line ministries and other central government offices.
• Use tax incentives sparingly and only to address market failures or generate multiplier effects such as infrastructure development
• Integrate tax expenditure budgeting into the annual budget process, and group tax expenditures in functional categories that can be easily compared to corresponding direct budget expenditures
• Limit multiple points of collection and administration (non-revenue agencies should focus on service delivery, all revenue collection functions should be transferred to the FIRS and State Internal
• Revenue Services). Audits should be conducted as much as possible through joint audits to avoid multiple audits and to reduce the disruption of taxpayers’ businesses and time.
• Adopt e-governance in its complete sense, with a harmonized national identification system, a system for checks and balances while limiting human interaction. This will in turn help to increase revenue at all levels of government.
• Only persons with requisite qualifications and character traits suitable for revenue administration should be allowed in the system with strict adherence to proper career development, strict performance measures, annual performance reviews and regular rotation of staff across locations and job types as expected of professional staff.
• Revenue administration institutions should have the ability to discipline and terminate employment immediately, without recourse, if need be.
• Put in place effective whistleblowing provisions to identify defaulters.
• Repeatedly educate the Nigerian publics on their civic duty to pay taxes, their rights and the processes. This can build a “social norm” for payment.

Legislation

• Revise tax legislation to resolve ambiguities and eliminate overlapping or double taxation. The aim should be to consolidate and produce a much clearer, simpler and effective tax system. This should begin with the re-writing and passage of major tax laws in simple and plain languages that are easy to apply.
• The taxing powers of various tiers of government must be clearly stated in the constitution, in manners that do not bring about overlapping jurisdictions that result in multiple and double taxations on the same taxpayers.
• Introduce measures to curtail multiple taxation by limiting the number of taxes that may be imposed by each level of government.
• Enact laws to require governments at all levels to publish periodic data of revenue collection by type of tax over time.
• Give tax agencies financial and administrative autonomy.

Administration

• Collaborate more with the Enabling Business Environment Secretariat to simplify taxes on business and ensure the implementation of the Office of Tax Simplification.
• Implement continuous training and capacity building for tax officials at all levels.
• Prioritize data matching that utilizes a wider array of data to identify compliance risks. This will facilitate a risk-based audit approach.
• Utilize one central identification number that harmonizes the current National ID number, voters’ card, Tax Identification Number (TIN), Bank Verification Number (BVN), International Passport Number, Driving License and all other known means of identification.
• Introduce Taxpayers’ charters and code of ethics for tax revenue officials to guide the relationship between taxpayers and tax officials.
• Mete out severe disciplinary measures against those caught in corrupt practices
• Communication with taxpayers should be deployed using diverse channels, beyond the traditional occasional workshops, advertisement, and billboards and radio program0s. It should include social media. Messages should also be tailored to the targeted audience.
• Eliminate the use of third-party tax consultants as tax auditors to Revenue Services, or even as tax audit team members, which exposes taxpayers to loss of strategic confidential business information. The use of tax consultants also deprives the revenue services of the opportunities for developing the competences of their own staff. The revenue services should implement a plan for attracting skilled auditors into the FIRS
• About 66% of non-oil tax revenue is from large taxpayers, and non-compliance by even a smaller number of large taxpayers will result in substantial amounts of foregone tax revenue. The new policy allowing taxpayers to choose tax offices should be fine-tuned to facilitate compliance and ensure a taxpayer file is not assigned to an office without the requisite capacity and skill to correctly address large taxpayers’ needs, complex issues and compliance challenges.
• Audits should be conducted strictly on risk-based audit case selection, which should be automated, as much as possible. All processes of audit must serve as an assurance of transparency and an
• additional signpost that the system is devoid of human bias and interventions. The revenue services should also establish a reporting system on the results and quality of the review process.
• Publish information about the number of taxpayers, the potential tax take, and the size of tax targets or tax collection performance annually.
• Publish information about the cost of tax collection by each level of government and type of tax annually.
• Implement continuous training and capacity building for tax officials at all levels.
• Deploy technology to create comprehensive and reliable tax databases and ensure full adoption of deployed technology platforms by measuring the rate of taxpayer adoption.

Excise and VAT reforms

Excise Tax Reform

Despite the existence of a number of excisable products and services, the Nigerian government only taxes tobacco products and alcoholic beverages at 20%. States tax motor vehicles, while petroleum products are not taxed. Excise duties account for less than 2.3% of total tax revenue or 0.1% of GDP, compared to the average of 12.3% of total tax revenue or 3.2% of GDP for Commonwealth and ECOWAS peers.

Excise duties should continue to be confined to traditional excisable goods, and be imposed on environmental degradation with the view to containing and reducing it over time. They should be converted from ad valorem to specific rates to reflect the external costs of consumption and production. Excise tax reform can only be a gradual process given the risk of consumer pushback, and the real risk of smuggling non-excise bearing goods across Nigeria’s porous borders.

Value Added Tax Reform

Nigeria’s VAT revenues stagnated at an average of 0.9% of GDP for the period 2005 – 2015. For the same period, the average revenue collection for Commonwealth and ECOWAS peers was 3.8% of GDP. VAT is primarily intended to raise revenue predictably and efficiently. It generates revenue that should grow as its base (consumption expenditures) expands with economic development.

Government should consider the timing of a VAT rate increase, which should be preceded or implemented jointly with other reforms with the following design characteristics:

• Exemptions and Zero-Rating – Provide only limited and well-targeted exemptions to protect the poor. Continue to zero-rate export of goods and extend also to exported services.
• VAT Input Credits and Refunds – Grant full input VAT credits for businesses except where the input Vat has not been incurred to produce VATable outputs. Provide timely input tax credit and refunds subject to clear procedures and deadlines
• Investment promotion – To promote investment, reduce the cash flow impact and potential reform claims from import VAT through an import VAT deferral mechanism for capital goods
• Reverse VAT – Introduce reverse VAT system for imported services in line with global best practices to make local providers competitive.
• Threshold – Establish a threshold that excludes some 80% of potential VAT payers from having to register and pay tax. The lack of a threshold means government may in fact be spending more to collect VAT from micro and small businesses that have no capacity to comply.

Conclusion and Next Steps

These evidence-based recommendations identify areas for the Nigerian government and tax administrators to take action in order to address the problem of low tax morale, non-compliance and poor tax revenue performance.
The recommendations have the potential to improve revenue generation and free up fiscal space for economic development.
Nigeria’s fiscal policy and economic landscape will only experience the impact of these recommendations if they are implemented in a coordinated manner by governments across all levels.
As a first step, the NESG is available to discuss these recommendations and the accompanyingreports with key policy makers and stakeholders with responsibilities for tax policy.

Here is the link to the NESG White Paper: here