Transforming Nigeria’s Tax Systerm with AI and Big Data

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Nigeria’s tax system, pivotal for economic stability, currently faces challenges like low compliance and administrative inefficiencies. However, emerging technologies such as Artificial Intelligence (AI) and Big Data offer transformative solutions. These advancements promise to enhance efficiency, transparency, and revenue collection, aligning Nigeria with global tax administration standards. This article explores the integration of these technologies into Nigeria’s tax framework, highlighting their potential to revamp the current system and drawing on global best practices tailored to the Nigerian context.

AI and Big Data offer transformative opportunities for Nigeria’s tax administration. AI’s rapid data analysis can improve decision-making and uncover tax evasion patterns, while big data analytics can enhance understanding of taxpayer behavior. Globally, these technologies have boosted compliance and optimized revenue collection, promising significant benefits for Nigeria in efficiency and effectiveness.

Artificial Intelligence (AI) involves creating machines that can perform tasks requiring human-like intelligence, including data analysis, pattern recognition, and decision-making. In tax systems, AI can analyze complex data to predict trends and identify potential non-compliance or fraud.

Big Data refers to large datasets that, when analyzed, reveal patterns and trends related to human behavior. For tax administration, this includes analyzing taxpayer information to enhance policy-making, improve compliance monitoring, and offer tailored services.

Globally, the integration of AI and Big Data in tax administration is gaining momentum. Many countries are adopting these technologies to enhance efficiency, accuracy, and compliance.

1. Automated Compliance Checks: Countries like the United States and the United Kingdom are using AI to automate compliance checks, significantly reducing the time and resources required for tax audits.
2. Fraud Detection and Risk Assessment: Nations such as Canada and Australia employ AI algorithms for sophisticated fraud detection and risk assessment, identifying suspicious activities more accurately.
3. Data-Driven Policy Making: In the European Union, Big Data analytics are being utilized to inform tax policy decisions, ensuring they are based on comprehensive data analysis.
4. Enhanced Customer Service: Countries like Singapore are using AI to provide better taxpayer services, including chatbots for inquiries and AI systems for quicker tax return processing.
5. Predictive Analysis: South Korea and Japan are pioneering in using predictive analytics for forecasting tax revenue and identifying sectors with potential compliance issues.

The Nigerian tax system, like many developing economies, faces several challenges, many of which can be illuminated through relevant data:

1. Low Tax-to-GDP Ratio: Nigeria has one of the lowest tax-to-GDP ratios in the world, indicating underutilization of the tax system for revenue generation.. Nigeria’s tax-to-GDP ratio in 2021 (6.7%) was lower than the average of the 33 African countries in 2023 (15.6%) by 8.9 percentage points.

Fig 1: Tax to GDP Ratio for Nigeria and the average GDP ratio across Africa 2010–2021. Source, Revenue statistics in Africa by AUC, OECD and ATAF

Tax-to-GDP Ratio Over Time:

• The tax-to-GDP ratio in Nigeria increased from 5.5% in 2020 to 6.7% in 2021.
• In comparison, the average tax-to-GDP ratio for 33 African countries remained unchanged at 15.6% during the same period.
• Since 2010, the average tax-to-GDP ratio for these African countries increased by 1.5 percentage points, from 14.1% to 15.6%.
• Nigeria’s tax-to-GDP ratio decreased by 0.6 percentage points from 7.3% in 2010 to 6.7% in 2021.
• The highest tax-to-GDP ratio for Nigeria since 2000 was 9.7% in 2011, and the lowest was 5.3% in 2016.

2. Tax Revenue target vs actual: The graph comparing Nigeria’s tax collection targets to actual figures for select years between 2011 and 2020 reveals inconsistencies. While 2011 saw actual collections exceed the target by nearly NGN 1 trillion, 2016 and 2020 experienced significant shortfalls, with actual revenues falling below targets by NGN 0.89 trillion and NGN 1.20 trillion, respectively. These discrepancies underscore the challenges in predicting and achieving tax revenue targets

Fig 2: Actual Vs Target Collections 2010–2022

1. Inefficient Tax Collection and Administration: The cost of collecting taxes in Nigeria is relatively high compared to more efficient systems globally.

Fig 3: Cost of Collection 2016–2022

1. High levels of Tax Evasion & Limited Tax Base: A significant portion of Nigeria’s economy is informal, and thus not effectively captured in the tax net. In 2022, the International Monetary Fund reported that in Lagos State, about 5.5 million individuals are employed in the informal economy, which constitutes approximately 75% of the state’s labor force of 7.5 million. Across Nigeria, a nation with a population nearing 200 million, the informal sector employs over 80 percent of the entire workforce, according to the IMF. It is also good to know that the huge sector contributes a lot to the GDP of the nation. The following chart shows the data about the informal economy size as a percentage of GDP for various countries in Africa. These are the top countries with the largest informal sectors as a percentage of the GDP.

Fig 4: Informal Economy size as a percentage of GDP

1. Compliance Issues: Compliance rates, particularly among self-employed individuals and small businesses, are typically low. A survey taken by techpoint Africa /in 2017, revealed that approximately 80% of SMEs and start-ups in Nigeria do not pay any form of tax for various reasons including ignorance, complexity of taxes, and so on.
2. Digitalization Gap: There’s a lag in adopting digital technologies in tax administration compared to global standards. Nigeria’s online banking penetration rate is forecasted to steadily increase by 4.1 percentage points from 2024 to 2028, reaching a high of 7.7%. according to Statista. This marks the fifteenth year of ongoing growth in online banking usage in the country. The data, part of Statista’s Key Market Indicators, aggregate various macroeconomic, demographic, and technological metrics from multiple reputable sources for consistent global comparison.

Fig 5: Penetration rate of online banking in Nigeria 2013–2028. Source, Statista.

As online banking increases, there will be a subsequent increase in electronic transactions. This is an opportunity that has not been harnessed by the tax administration for tracking financial transactions.

This data-driven perspective lays the groundwork for understanding the specific areas where AI and Big Data could be most effectively applied to address the challenges in Nigeria’s tax system.

Given Nigeria’s tax system challenges, including low compliance rates, high administrative costs, and a limited tax base, modernization and digitization are essential. Embracing digital technologies can streamline tax collection, improve compliance monitoring, and expand the tax base by efficiently incorporating the informal sector. Digitization offers a pathway to overcome these systemic challenges, aligning Nigeria with global best practices and enhancing both the efficiency and effectiveness of its tax administration.

Opportunities for AI and Big Data in Nigeria’s Tax Administration

The integration of AI and Big Data into Nigeria’s tax administration presents numerous opportunities for improvement and innovation:

1. Enhanced Compliance and Fraud Detection: AI can process vast amounts of data to identify patterns of non-compliance and potential fraud. This capability allows for the early detection of tax evasion, significantly improving the effectiveness of compliance efforts.
2. Efficient Tax Collection Processes: Automation of routine tasks through AI can streamline tax collection processes, reducing administrative burdens and costs. This efficiency not only benefits the tax authorities but also simplifies procedures for taxpayers.
3. Data-Driven Decision Making: Big Data analytics can inform policy-making by providing insights into taxpayer behavior, economic trends, and the efficacy of different tax policies. This data-driven approach can lead to more effective and targeted tax policies.
4. Improved Taxpayer Services: AI can be used to enhance taxpayer services, such as through AI-powered chatbots for inquiries, which can provide quick and accurate responses to taxpayer queries, improving overall taxpayer experience and compliance.
5. Revenue Forecasting and Risk Assessment: Predictive analytics enable more accurate forecasting of tax revenues and assessment of risks related to tax collection, aiding in better planning and resource allocation.
6. Addressing the Informal Sector: By leveraging data from various sources, AI and Big Data can help in better understanding and incorporating the informal sector into the tax net, thus widening the tax base.

Implementing AI and Big Data in Nigeria

Implementing AI and Big Data in Nigeria’s tax administration requires a strategic and phased approach:

1. Infrastructure Development: The first step involves setting up the necessary digital infrastructure. This includes robust data centers, secure networks, and the integration of various data sources into a unified system.
2. Capacity Building and Training: Equipping the workforce with the necessary skills to handle AI and Big Data tools is crucial. This could involve training programs for existing staff and hiring new personnel with specialized skills.
3. Data Collection and Management: Establishing comprehensive and accurate databases is essential. This involves consolidating existing data and continuously updating it with new information.
4. Developing AI and Analytics Models: Tailoring AI models and analytics tools to address specific challenges in Nigeria’s tax system, like fraud detection, compliance monitoring, and revenue forecasting.
5. Pilot Testing: Before a full rollout, pilot programs should be conducted to test the effectiveness of AI and Big Data applications in real-world scenarios, allowing for adjustments and optimization.
6. Policy and Legal Framework: Updating or creating new policies and legal frameworks to support the use of AI and Big Data in tax administration, ensuring privacy, security, and ethical use of technology.
7. Public Engagement and Transparency: Keeping the public informed and engaged about these changes is vital. This includes explaining the benefits and addressing any concerns about privacy and data security.
8. Continuous Evaluation and Improvement: Regularly assessing the performance of AI and Big Data applications in tax administration and making necessary improvements.

Ethical Considerations and Privacy in AI and Big Data Usage for Tax Administration

Integrating AI and Big Data into Nigeria’s tax administration necessitates a careful balance between technological effectiveness and the protection of taxpayer rights. Ensuring data privacy and safeguarding taxpayer information is crucial. Transparency in how AI systems function and make decisions is essential, as is maintaining human oversight for accountability. Regular audits are necessary to prevent biases in AI algorithms, ensuring fairness in taxpayer treatment. Public trust is paramount, and clear communication about the use and protection of data can foster this trust. Aligning with international standards will further ensure that Nigeria’s approach to using AI and Big Data in tax administration is both effective and ethically sound.

The Road Ahead: Nigeria’s Tax System Transformation

The transformation of Nigeria’s tax system through AI and Big Data is marked by immediate and future goals, involving collaborative efforts from the government, private sector, and academia.

Short-Term Goals: These include setting up the necessary digital infrastructure, training the workforce in new technologies, and initiating pilot programs to test AI and Big Data applications in tax processes.

Long-Term Goals: The focus is on fully integrating AI and Big Data across tax administration, updating policies and legal frameworks to support this technology, and establishing a sustainable, adaptive tax system.

Collaborative Roles:

• Government: Leads policymaking, provides resources, and ensures national goals alignment.
• Private Sector: Offers technical expertise and implements technological solutions.
• Academia: Supports through research, development, and training initiatives.

This joint effort is key to efficiently modernizing Nigeria’s tax administration, promising a more effective and transparent system for the future.

The integration of AI and Big Data into Nigeria’s tax system heralds a new era of efficiency, transparency, and effectiveness. These technologies offer the promise of streamlined tax collection, enhanced compliance monitoring, improved taxpayer services, and data-driven policy-making. The ability of AI to process and analyze vast amounts of data swiftly, coupled with Big Data’s insights into taxpayer behavior, creates a robust framework for a more equitable and effective tax system.

The road ahead requires a collective effort from all stakeholders in Nigeria’s tax ecosystem. Government agencies must lead the way in policy reform and infrastructure development. The private sector should contribute innovative technological solutions and expertise. Academia needs to support through research and training the next generation of tax professionals.

As we stand at the cusp of this transformative journey, it is a call to action for all involved. By embracing AI and Big Data, Nigeria can not only overcome the current challenges in its tax administration but also set a standard for other countries to follow. This integration is not just an upgrade of the existing system; it is a step towards a more prosperous and financially inclusive future for Nigeria.