Thinking a national tax policy …thinking the tax laws.

At the forum, Omoigui also lamented the loss of revenue to the government because of the patronage of tax consultants by State Governments. The host of the meeting, Ali Moudu Sheriff, the Governor of Borno State, however, responded that the use of tax consultants by the State Governments was as a matter of expediency due to the inefficiency of tax administrators at the states, which, according to him, has brought dwindling revenue accruals to the states. Also, at meeting with the CEOs of companies quoted on the Nigerian Stock Exchange sometime in September 2007, President Yar'Adua expressed his intention to further review the tax reform bill, presented to the National Assembly by the past administration, and then re-introduce it to the National Assembly to be enacted into law. He identified multiple taxation as a major issue that needed to be addressed and assured the CEOs that other problems that they identified will also receive appropriate attention. Furthermore, Dr. Sham-Suddeen Usman, the Minister of Finance, while receiving the draft National Tax Policy from the Presidential Committee on National Tax Policy sometime in October 2007, said that the draft document requires additional input from stakeholders before a final document that will stand the test of time is completed. He also identified multiple taxation as a major source of concern to policy makers and tax administrators and advised collation of comments and contributions on the draft policy in preparation for planned regional public hearing in the six geopolitical zones.

Some of the recommendations made in the draft policy are; increase of Value Added Tax (VAT) from the current 5% to 15% by 2009; reduction of Companies Income Tax to 20% and cutting down Personal Income Tax to 17.5% by 2009. This is to achieve an upward effect on stable revenue base. It was disclosed that the draft policy would be published in national dailies by October 30th 2007 while debate on it and sensitization workshop in the six geopolitical zones would follow in November 2007. It is expected that the draft policy would be submitted to the Federal Executive Council for its approval by December 19, 2007.

I assume that the policy is yet to be published to enable stakeholders to prepare their comments and contributions. However, as most people are probably aware, policy has no force of law in itself but serves as a guide to lawmakers in achieving the ultimate objectives of the nation when those policies are considered while enacting laws for the country, just as government (including the executive, the legislature and the judiciary and all their agencies) is expected to consider Part 2 of our constitution i.e. the Fundamental Objective and Directive Principles of State Policy in carrying out their functions.

Government officials should restrain themselves from giving the impression that the National Tax Policy is tied to any person's agenda. It should be the other way round, i.e. the agenda of any administration should be tied to the National Policy.

Some of the critical policy issues we need to address at this time include foremost, the worth, in public good enjoyed by taxpayers in Nigeria vis-à-vis the taxes they pay. It is very easy to compare our tax rates with other countries and quite conveniently forget to compare living standards in those countries particularly in the form of social security or social benefits available to citizens of those countries. This is vital when assessing voluntary compliance by taxpayers. Secondly, we need to determine whether loss of revenue is as a result of low tax rates or inefficiency in tax collection. When we determine that we would be in a better position to know whether to work on the rates or to strengthen collection and, if necessary, a more comprehensive tax base. High tax rates tend to discourage investment, spawn tax shelters amongst high income earners, and alienate the poor, who usually feel the tax system is unfair. All this will give rise to increased cost of tax collection. Severe measures to prevent misappropriation of taxes by tax collectors and government officials is also recommended. Another vital issue is the level of autonomy the states should have regarding imposition of taxes.

Considering the fact that many of our tax laws were made by military regimes, I share the view of Dr. Usman that stakeholders should make contributions before a final policy is formulated. My intention here is to highlight certain aspects of Nigerian Tax laws and administration that also require attention at this time we are preparing a national tax policy. Addressing these problems will make our tax system more efficient, fair, and uncomplicated. I will also make suggestions as to how the issues could be addressed. These issues are:

1. Lack of Taxpayer Profiling

2. Administration and Accountability

3. Multiple Taxation

4. Federal Inland Revenue Service (Establishment) Act, 2007

5. Value Added Tax

1. LACK OF TAXPAYER PROFILING:

Lack of an organized record of individuals with gainful employment in Nigeria is a major setback to successful tax collection. A lot of business transactions between individuals and even amongst corporate taxpayers escape taxation due to lack of a credible record of taxpayers that will facilitate efficient tracking of such business transactions by the relevant tax authorities. There is need for us to develop reasonably accurate and reliable demographics from which we can assess the number of eligible taxpayers, determine the spread of any tax to be imposed, make an assessment of the amount likely to be collected from the tax, and then work out an efficient way of collecting the tax at minimal cost to the government. The issue of reliable demographics arguably is a congenital problem with us, but this, in my opinion, may be largely because of reasons of politics and revenue sharing, not tax administration. We may, in fact, be on the verge of addressing that problem, if we use the demographics made available by the states as a basis for assessing the amount of revenue collectible from the states. To whom much is given, there is nothing wrong in expecting much. In addition, the Corporate Affairs Commission and other institutions as the Nigeria Stock Exchange, the National Population Commission, the banks and so forth, should collaborate with the relevant tax authorities with respect to tracking the income of companies under their supervision for adequate taxation.

Unless we are able to set up a reliable and constantly updated record that will enable effective monitoring of sources of income to individual and corporate taxpayers, we will be wasting time and energy talking about diversifying our revenue base with a view to realizing more from the non-oil sector. The amount of revenue loss attributable to this lack of records can only be appreciated if we compare our loss with what other countries are getting from income tax. The United States federal government, for example earns about $1.2 trillion from income taxes annually, out of which personal income tax alone accounts for about $1 trillion, while company income tax accounts for about $200 billion. In Nigeria, the fact that revenue from Personal Income Tax remains at a distant third position to Companies Income Tax, even behind Education Tax, is an indication that we are yet to secure that enormous revenue source to the government.

Tax evasion is a serious offence which is consistently monitored and severely punished elsewhere. It is never treated with levity in most countries, unlike in Nigeria where individuals and even corporate taxpayers routinely evade taxes because we lack the records to monitor sources of income. In the case of individuals, the US government has to a very large extent succeeded in monitoring sources of income by the introduction of the Tax Identification Number for Non Resident Alien individuals, and the Social Security Number for Citizens and Resident Aliens alike. Without either of the Social Security Number or the Tax Identification Number, and perhaps other official authorization, it is almost impossible for anybody to earn income in the United States. It is important for the relevant tax authorities in Nigeria to ensure, necessarily by legislation, that employers constantly update their records with the tax authorities for effective taxation of income of their employees.

2. AMINISTRATION AND ACCOUNTABILITY

Following on the heels of the lack of profiling is the inefficiency in tax administration and lack of accountability of taxes collected by the tax authorities. As noted above, many state governments claim that they resorted to the use of tax consultants to collect tax because of the inefficiency of the State Inland Revenue Services, ("State Services"). This claim needs to be verified because politicians have been variously accused in the past of patronizing tax consultants because it offers them an easy way of diverting and appropriating their state revenue to unofficial and, in some cases, personal ends. However, inefficiency and poor accountability on the part of the State Services is inexcusable. The primary reason for which the State Services were set up was for efficient tax collection at the state. Dwindling revenue is therefore a serious allegation against the State Services as this could mean that the taxes are not dutifully collected, or when collected, are not fully accounted for. It could also mean poor utilization of resources thereby incurring more costs during tax collection. It is good that this fact is not lost on Ms. Omoigui who recently publicly acknowledged the need for tax authorities at all levels to continuously strive to excellence because, as she noted, taxation remains a reliable and inexhaustible source of revenue to the government.

One of the ways to improve the efficiency of tax authorities, particularly with regards to accountability, may be by reviewing some of the penalty provisions for offences under some of our tax laws to provide for stiffer penalties. For example, the penalties provided for offences under the Personal Income Tax Act (PITA) are absolutely ridiculous and may not in any way deter offenders. It is incredible that where an offence under the PITA is the failure to keep records required under the Act the offender gets away, if convicted, with just a fine of two hundred and forty Naira (=N=240) as provided for under Section 86 (1) of the Act. This penalty would even encourage falsification of records by both taxpayers and tax administrators alike, given the enormous "income" the offender stands to "earn" from that act. The same Section 86 (1) provides that where no penalty is specifically provided for any particular offence under the Act, a person convicted of such an offence under the Act would walk away after paying =N=200 fine. Given the present level of poverty and corruption in Nigeria, one wonders if these penalties are not incentives in themselves to likely offenders.

It is also intriguing that, apart from the provision in Section 90 of PITA that the imposition of a penalty, fine or term of imprisonment, does not relieve a taxpayer of taxes for which he is liable originally, no mention is made in the Act of the punishment for tax administrators who fail to keep the required records under the Act. Furthermore, in the case of illegal tax collectors (a very common practice in Nigeria) also referred to in the Act as persons not being authorized under the Act to collect taxes, no provision addresses what happens to the money they illegally extorted from hapless taxpayers. Section 92, however, meekly provides that the provisions of the "Offences and Penalties" part of the PITA do not affect any criminal proceedings under any enactment. If we really want to address tax offences then more sever penalties should be applicable to offenders, comparable to punishments provided for in the Value Added Tax Act.

With respect to the use of tax consultants, FIRS should agitate for the repeal of provisions in the tax laws that allow or encourage government to patronize tax consultants. For example, Section 85B(3) of PITA approves of the State Board of Internal Revenue to, inter alia, merely by a stroke of the pen or by notice in a gazette, authorize any person to perform or exercise on behalf of the State Board, any function, duty or power conferred on he Board. This is merely a lincence to states to contract out revenue collection to tax consultants, and an easy way of rendering the SIRS' completely redundant while branding its staff inefficient. Repeal of this type of provisions would compel state governors to instill discipline, efficiency and accountability in their respective SIRS. It will also guarantee the relevance of the SIRB and restore confidence to the members of their staff.

Another provision of PITA that in my opinion should be repealed, though for different reasons, is Section 85F, which establishes the Joint State Revenue Committee (JSRC) for each State of the federation. This provision is a carryover from military era when the military administrators of a state took orders directly from the head of state. JSRC assumes the responsibilities that squarely fall on the SBIRs. To illustrate this point, the functions of the JSRC are to:

a. Implement the decisions of the JTB

b. Advise the JTB and the State and Local governments on revenue matters

c. Harmonize tax administration in the State

d. Enlighten members of the public generally on state and local government revenue matters; and

e. Carry other such other functions as may be assigned to it by the JTB

Compare this with the functions of the SBIR which are:

a. Ensuring the effectiveness and optimum collection of all taxes and penalties due to the government under the relevant laws

b. Doing all such things that may be deemed necessary and expedient for the assessment and collection of the tax and shall account for all amounts so collected in a manner to be prescribed by the commissioner

c. Making recommendations, where appropriate, to the JTB on tax policy, tax reform, tax registration, tax treaties and exemption, as may be required, from time to time

d. Generally controlling the management of the State Service on matter of policy, subject to the provisions of the law setting up the State Service;

e. Appointing, promoting, transferring and imposing discipline on employees of the State Service.

If we allow the JTB, which is a federal tax body, to assign the responsibilities mentioned above to the JSRC, parallel to the SBIR, conflict will ensue between the tax bodies. It is capable of causing confusion due to overlapping responsibilities. Again, the Federal government should concentrate on federal revenues and completely hands-off revenue matters within the jurisdiction of the states and the local governments.

3. MULTIPLE TAXATION

This is, perhaps, the most notorious issue in tax administration in Nigeria. It particularly gives the Federal Government, tax administrators, and taxpayers, especially corporate tax payers a lot of headache. Apparently, the federal government would, if it could, without throwing the proverbial baby away with the bath water, solve this problem by cutting down many of the taxes that give rise to this problem. Everybody is lamenting the continued harm multiple taxation is doing to the economy as it is literally killing industries. The problem rears its ugly head in several ugly ways. One way of understanding this problem is to imagine the anxiety of the management of a new company set up in an unstable economic environment at the initial years of its operation. At that stage, the bank that loaned part of the start-up capital wants to immediately start receiving payment of interest on the principal amount, and perhaps some part of the principal amount as well; the shareholders that contributed the rest of the start-up capital want to receive dividends; tax collectors are lurking around the corner monitoring the company's income to tax any profits that the company may declare. At the same time, the company wants to save part of its profits for future operational needs. All the parties wanting a piece of the company's income have legitimate right to it. This is exactly what makes multiple taxation more damning; the fact that all the tax collectors continuously inundate the taxpayer with several demands backed by several enactments purported to ascribe legitimacy to their demands.

The attempt to describe multiple taxation above represents just one aspect of the problem. The problem is in fact much worse than that. The federal government in a bid to solve the problem enacted the Taxes & Levies (Approved List for Collection) Act, 1998 which attempted to streamline tax administration at all levels of government. In the schedule to the Act are listed the taxes which each tier of government is entitled to collect thereby making illegal any attempt to impose or collect any other taxes not contained in the Act. Notwithstanding this Act, and that Item 59 of Exclusive Legislative List set out in Part I Second Schedule gives the federal government exclusive power over taxation of incomes, profits and capital gains (impliedly power to impose taxes), states and the local governments, in flagrant disregard of this constitutional provisions, continue to impose all sorts of taxes in the form of levies, fees, rates, etc, on companies and individuals within their jurisdiction. I have personally represented several clients in several courts in several states in the country arguing against the imposition and attempt to collect these illegal taxes by state and local government agencies.

These fees, rates and levies include an "advert" levy for wearing safety coverall with the company's emblem by the company's staff. The tax consultants utilized by the state and local governments to collect these illegal taxes are usually very vicious and would go to every length to enforce payment of these taxes because they are retained on commission basis. Essentially for them, you eat what you kill. In one case the law cited by the tax consultant was a local government revenue law made by a past military administrator of the state, which law was purportedly amended by a Local Government official! It was so brazen and outrageous that I asked the court to disregard the purported amendment that the tax consultants clung to. With that, the case could not be sustained and was consequently dismissed. Many of the cases instituted by the so-called consultants, who by the way are illiterates unable to make any case against the taxpayers most of the time, were unsustainable. In their frustration, the consultants constantly resorted to threats against the lawyers representing the taxpayers in Court, and any representatives of the taxpayers attending court proceedings. I experienced this on several occasions. Many of the cases get dismissed even without going to trial, many also get struck out for lack of diligent prosecution by the tax consultants and very few ever go to trial. Sometime in August 2007, the Lagos Division of the Court of Appeal held in a case on appeal before it that it is illegal for the Lagos State Government to impose these taxes. The Federal High Court in the case of Mama Cass Restaurant Ltd. & 2 Ors. Vs. FBIR & AG Lagos State (reported on FIRS website), also held that the Lagos State Government lacked the powers to impose sales tax on the plaintiffs because the Federal Government had "covered the field" with the imposition of VAT on the plaintiffs. But the problem has persisted, especially in the Niger Delta.

As a solution to this problem, the autonomy granted to the State Boards of Internal Revenue under Section 85 of PITA should not be blindly pursued as to lose sight of the bigger picture, which here is the fact that it is in the interest of the tax collectors (the states) that the taxpayer continues in business and not to be hounded out of the state or country as a result of multiple taxation. FIRS in collaboration with JTB and other relevant tax authorities should as a matter of urgency agree on a taxing structure that would assuage the thirst for the income of taxpayers who are subjected to identical taxes on one particular source of income at multiple levels or in different tax jurisdictions. Furthermore, multiple taxation in Nigeria resembles double taxation, which is a nightmare to multinational corporations operating in several countries. Two very popular ways countries have evolved to deal with double taxation are tax treaties and tax credits. With assistance from FIRS, State Services could adapt these solutions to the problem of multiple taxation, assuming that there is no other way the problem could be solved. The JTB, established under Section 85 of PITA with its membership drawn from all the States and the Chairman of the FBIR as its head, presents a good forum at which the Federal Government and the States could address tax collection issues such as multiple taxation, and mutually agree on an acceptable tax structure. The JTB could also set up a panel to review and advise the JTB on cases of multiple taxation, and also encourage taxpayers with such complaints to take their case to the panel. Membership of the panel should be spread beyond the tax authorities to include independent tax experts.

Those who believe that the states should enjoy more autonomy in matters of revenue at the State level are in order because that is one of the hallmarks of federalism. To illustrate this point, recently the Mayor of San Francisco, which is one of the counties in the State of California (say, our equivalent of a local government chairman) proposed a new tax on beverages high in fructose corn syrup to fight obesity, which he said amounts to tens of millions of dollars in the city's health care costs. He cited a recent San Francisco Health Department survey which shows that about one quarter of the city's 5th, 7th and 9th graders was overweight and that high sugar drinks make up about one tenth of a child's daily calorie count. The Mayor did not have to wait for the US Congress to pass an Act backing a new tax that will enable the county to impose the tax. I read recently that Lagos State Government will soon impose a tax on excessive use of generators by companies operating in the state. This, as before, will trigger another round of litigation that we know where it will all end. Do we have to continue on this circus?

4. THE FIRS ESTABLISHMENT ACT 2007

Profound ambiguity has trailed the enactment of the FIRS Establishment Act 2007 ("the FIRS Act") as to whether the Act seeks to do away with the State Inland Revenue Services. Due to the lack of clarification with respect to the status of the State Services with the passage of this Act, it will be very helpful to make available the Senate Finance Committee, and House of Representatives Ways and Means Committees' reports on the Act to help clear these ambiguities. Notably, the explanatory memorandum to the Act says that the Act dissolves the FBIR and establishes the FIRS as an autonomous parastatal charged with the functions of administering the various Federal Tax laws in Nigeria, including all the functions that were initially performed by the FBIR. Also in the preamble it is stated that it is an "[A]ct to provide for the establishment of FIRS, charged with the powers of assessment, collection and accounting for the revenues accruable to the government of the Federation; and for further related matters". Curiously, several provisions of the Act make extensive references to individual taxpayers creating the impression that the FIRS has suddenly usurped the responsibilities of the SIRS' in the administration of the Personal Income Tax.

To illustrate, Section 8 (1) (a) of the Act for instance provides that it's the function of the FIRS to assess persons including companies, and enterprises chargeable with tax. Furthermore, under Part V of the Act (Tax Administration and Enforcement) sections 25, 26 27 and 28 are replete with references to individual taxpayers. As many people are probably aware, Section 2 (b) of PITA conferred the now dissolved FBIR the powers to impose tax on individuals resident in the federal capital territory, Abuja. Other individuals mentioned in that provision are members of the armed forces, who are necessarily, Federal Government responsibilities. This provision of PITA recognizes the contemplation of the provisions of the Constitution. However, given the provisions of the FIRS Act referred to above, and further the mandate in Section 68 of the Act to modify existing laws in order to bring them into conformity with the FIRS Act, the apprehension that the FIRS Act is a subtle way to usurp the powers granted to the State Services under PITA to the FIRS, becomes legitimate. It will be recalled that Item 7 of the Concurrent Legislative List set out in Part II of the Second Schedule of the Constitution allows the National Assembly in the exercise of its powers to impose any tax or duty on capital gains, incomes or profits or persons other than companies, … to provide that the collection of any such tax or duty or the administration of the law imposing it shall be carried out by the government of a state or other authority of a state, just as Item 9 provides that a House of Assembly may on its part, allow the collection of any tax, fee or rate or for the administration of the law providing for such collection by a local government council. The provisions of PITA are in conformity with these constitutional provisions.

If indeed the intention of the National Assembly was to subordinate the SIRSs to the FIRS as if those state bodies are federal parastatals directly under the supervision of the FIRS, and perhaps to take instruction from the FIRS even in State revenue matters, then the States should seek the Supreme Court's interpretation on this issue. If on the other hand the references to individual taxpayers in the Act are to residents of the Federal Capital Territory, Abuja and members of the armed forces, then FIRS should issue regulations pursuant to Section 61 of the Act to clarify these provisions of the Act. In fact, the power conferred on the FIRS to issue regulations is vital as it could help to explain vague provisions of the Act capable of misleading taxpayers and tax experts. In the US for example, the Internal Revenue Service (IRS) by virtue of similar powers has issued a whole body of regulations, which are now accepted as part of US tax laws and quite helpful for tax law students, taxpayers, tax practitioners and even the Courts.

5. VALUE ADDED TAX

As noted above, one of the recommendations in the draft National Tax Policy is that VAT should be increased from the current 5% to 15% by 2009. This represents a whopping rate of 200% increase within 2 years. The reason given for this is "…to achieve upward effect on the country's stable revenue base". However, the intention of the Federal Government in formulating the tax policy, as stated in the draft policy, is to implement a strategy whereby revenue from crude oil would be used to alleviate the tax burden on companies in order to diversify the economy. There is a latent conflict which may manifest when both objectives stated above are assiduously pursued by the government. VAT, like sales tax is usually regressive because it affects low income earners who spend almost all their income on consumption. The difference between VAT and sales tax is merely the point of collection. While VAT is broken down and collected when goods pass different stages of production, Sales tax is collected at the point of sale to the final consumer. It is not unusual for both taxes to affect the prices of goods by a proportional margin of the tax. It is likely that increasing the rate of VAT would trigger a corresponding increase in the prices of goods and services thereby further stifling the purchasing power of low income earners, who incidentally command a staggering majority of Nigerians at the moment. Without speculating the net effect of the increment in VAT and the proposed reduction in company and personal income taxes to 20% and 17.5% within the same period, in my opinion, government should alleviate the tax burden of both companies and individuals with the crude oil sales proceeds and this should be sustained long enough to rehabilitate both taxpayer groups before any upward review of VAT. To increase demand, individuals should have more purchasing power in the form of more money in their hands to spend. Government's anxiety over the threat to its revenue from crude oil should not overshadow the need to boost demand and supply which also has a positive long term effect on the economy.

By way of comparison, the rates of sales tax in the US vary with the states, cities and even counties. California, New York and Texas are amongst the states that have high sales tax rates and are respectively 8.25%, 6.25% and 8.375% in New York City. Sales tax is levied and collected by the states, unlike in Nigeria where the Federal Government gets a 15% share in VAT. In Singapore, Goods and Services tax (VAT) is 5%. It will be good if the Federal Government completely hands-off VAT except, of course, VAT collected in the Federal Capital Territory, Abuja. Finally, it is my suggestion that the proposed comprehensive tax reform bill follow the National Tax Policy so that it will give effect to the policy objectives.

CONCLUSION

In conclusion, it's good that we realize the need to have a National Tax Policy, which will serves as a guide to the legislature as to the thrust of our tax laws. As we work on the tax policy, let us spare some time also for our tax laws that require review in order to achieve symmetry between the tax policy and the tax laws. In the end, we would have scored a major point if we reduce tax rates, improve efficiency in tax collection, and utilize the proceeds to improve our living standard.

Ugochukwu Opiegbe, formerly an Associate Attorney at Udo Udoma & Belo-Osagie, is completing a Tax LL.M. at Loyola Law School, Los Angeles, California.