Nigeria currently has the distinction of being the largest economy in Africa in terms of overall GDP. But it also tops another league, one of which perhaps it is not quite so proud. Based on 2019 figures, the OECD calculates that Nigeria, at 6%, has the lowest tax-to-GDP ratio on the continent.
There are many reasons that lie behind this statistic, including current tax policy and administration, but, nonetheless, it is a position that the oil-rich country would rather not be in.
There are uncoordinated areas of responsibility between those responsible for the tax incentives and the fiscal administrators
The average tax‑to‑GDP ratio of the 30 African countries in the OECD survey was 16.6%. The ratio is measured as tax revenues (including compulsory social security contributions paid to general government) as a proportion of GDP. By way of comparison, in the same period the average tax‑to‑GDP ratios in 24 Asian and Pacific economies, Latin America and the Caribbean, and the OECD were 21.0%, 22.9% and 33.8% respectively.
This average hides a wide range within each of the regions. Looking specifically at Africa, in 2019, tax‑to‑GDP ratios ranged from 6% in Nigeria to 34.3% in Seychelles and Tunisia.
So why is it that Nigeria’s performance in tax revenue raising, compared to the level of income its economy is generating, is so poor?
Lack of trust
According to Taiwo Oyedele FCCA, PwC’s regional head of tax in Africa, this is due to a number of factors, the major one being the low tax ‘morale’ due to a lack of trust in the government. ‘This leads to a high level of tax evasion and aggressive avoidance,’ he says.
There are also systemic issues. According to Gbenga Falana, managing partner of MTouch Professional Services and a former manager in Nigeria’s Federal Inland Revenue Service, some of the current challenges are caused by tax incentives, which reduce much-needed public spending on infrastructure, public services or social support.
He adds that there are uncoordinated areas of responsibility between those responsible for the tax incentives and the fiscal administrators, together with weak administration at the various levels of government. In addition, profit-based incentives, such as tax holidays and preferential tax rates, often in special economic zones, contribute to the erosion of tax revenue.
IMF shines spotlight on mining sector
Nigeria and other Sub-Saharan African nations lose up to US$730m annually through multinational mining companies that avoid tax, according to a report by the International Monetary Fund (IMF).
‘Governments in sub-Saharan Africa now under tremendous pressure to raise public spending in response to the pandemic are losing between US$450m and US$730m per year in corporate income tax revenues as the result of profit shifting by multinational companies in the mining sector,’ the report said.
Profit-based incentives, such as tax holidays and preferential tax rates, contribute to the erosion of tax revenue
Nigeria on global tax
Nigeria, with a corporate tax rate of 30%, has chosen not to sign up to the OECD’s plan for a 15% global minimum rate amid uncertainty about how it would benefit poorer countries. Government officials cited the high cost of implementation and negative impact on revenues as its reasons.
Kenya, Pakistan and Sri Lanka also declined to sign the agreement.
For more on the OECD plan, read Global tax deal faces challenges.
‘Unrecorded and unreported’
‘The absence of credible statistics and systematic evidence on the informal sector, as well as the varying tax regimes at the sub-national level, result in the issue of multiplicity of taxation, most of which are unrecorded and unreported,’ Falana says. And there is what he calls a ‘colossal trust deficit’ and an ‘apathy towards tax matters’ because taxpayers fail to see their contributions going towards nation-building.
This matters because Nigeria has historically relied on revenue from oil to fund public expenditure. The combined effect of disruption to production, an inability to attract investment to the sector due to perceived country risk and the global energy transition away from fossil fuels, as well as the volatility of oil prices, has meant that Nigeria is struggling to balance its budget.
‘Borrowing has been on the increase,’ Oyedele says. ‘It is therefore important to improve domestic tax revenue mobilisation for sustainable public finances.’
Lack of capital
Falana agrees. ‘Funding of infrastructural projects such as education, healthcare, power and energy that will enable development has come under significant strain and has reduced over the years given the fact that 80% of revenue generated is deployed to debt servicing,’ he says. ‘So, capital formation for the country is a mirage or an illusion.’
So, what can be done to improve the current situation, which will have been made worse by the Covid-19 pandemic?
‘The Nigerian government needs to address the trust deficit between the people and the government by improving transparency and accountability of public finance as well as the quality of social services,’ Oyedele says.
‘To address the high prevalence of tax evasion, the government must enhance tax administration capacity and leverage on technology to provide tax intelligence for ease of identification and prosecution of evaders.’
‘The government needs to address the trust deficit by improving transparency and accountability of public finance’
However, Falana has concerns over the digitalisation of the tax administration collection process. ‘Digitalising without the right infrastructure has had consequences,’ he says. ‘It is an elite-driven process, with assumptions that everyone has access to the internet, smartphones and laptops.’
He adds that with a lack of ownership over the process, the tax administration is being ‘held hostage by the IT companies’. Ultimately, this is leading to a lack of tax compliance.
Falana calls on the Nigerian government to implement a strong tax compliance framework with clear and robust policies. Such policies would need to tackle concerns over tax incentives and e-commerce that can undermine the country’s tax base.
He argues that tax incentives must have eligibility criteria, identifying how an investor or a project qualifies, and that there needs to be transparency in terms of the objectives of the incentives and the beneficiaries, as well as the amount of revenue forgone due to the incentives by published tax expenditure reports.
‘The technical capacity of state tax officers at the sub-national level must also be improved,’ he adds.
‘It is very germane that government at all levels must redeem the trust deficit, with improved transparency and accountability in the social contract with the taxpayer community.’