Victor Athe: The stringent implementation of Significant Economic Presence rules, on Multinational Enterprises would increase FG’s revenue
Victor Athe, an expert taxman, is a partner at Tax Services, Stransact Chartered Accountants and Audit, an RSM correspondent firm in Nigeria. Athe, in this interview with Adedayo Adejobi, he shares interesting insights on Nigeria’s public debt to GDP ratio vis-a-vis its implication on taxes, the burden of taxes, grey areas of the existing taxes, VAT and how to boost the morale of the taxpayers and harmonise tax administration in general. Excerpts:
The ratio of 60 percent public debt to GDP in Nigeria surpasses the International Monetary Fund’s recommended threshold of 50% for developing countries. How can the country maximise its 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 macro-economic 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.
On assumption of office, the current Acting Federal Inland Revenue Service (FIRS) Chairman, 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 groaning under the weight of taxes and VAT, indications are that the Federal Government hopes to increase the ratio of tax revenue to GDP. Don’t you think this could further exacerbate the burden of taxes on Nigerians?
It is certainly important for the Federal Government to work at expanding the tax base to capture a sizable 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, that 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.
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 still 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 -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 lack of effectiveness in its implementation, perhaps due to the lack of legal backing.
How will the federal government cope if the Supreme Court reaches judgment on the case instituted against it by Rivers, Lagos and some other states that joined both parties on the issues of VAT and who has the right to collect taxes?
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.
