Billions lost to weak tax regime as poverty bites

An Akaeze, a community in Ivo Local Government Area of Ebonyi State, 43-year-old commercial motorcycle rider Sunday Okereke lives in a mudhouse with his family.
In early November, a tragic incident turned their lives upside down.
Okereke’s four children and their mother, Elizabeth, were in the house when heavy rain began.
The mudhouse could not withstand the downpour. It collapsed, killing three of the children. Elizabeth and one of her sons, both injured, survived.
Like the Okerekes, about 90 million Nigerians live in extreme poverty, according to the World Data Lab’s Poverty Clock.
The World Economic Forum (WEF) says almost six people in Nigeria fall into the poverty trap every minute.
Partly due to illicit financial flows (IFFs) that occur through a weak tax regime, revenue which could have gone to poverty reduction is lost.
The Global Financial Integrity (GFI), in its 2018 report, says Nigeria loses about $15.7billion annually.
With Nigeria’s 2019 budget being about $29 billion, the country loses nearly half of its annual budget through IFFs.
“We are working to lift Nigerians out of poverty and set them on the path to prosperity.
“We intend to lift 100 million Nigerians out of poverty over the next 10 years,” President Muhammadu Buhari said during a retreat for his ministers.
Weak compliance
Tax compliance remains a problem as Nigeria struggles with widespread evasion.
Nigeria’s tax to GDP ratio is one of the lowest in the world, according to the Tax Justice Network.
At fewer than six per cent, it is far below the sub-Saharan African average of 20 per cent, and the 15 per cent considered necessary to fund public services.
Aware of the situation, the Federal Inland Revenue Service (FIRS), on December 18, gave a seven-day notice to tax defaulters to pay up or be prosecuted.
Multinationals are also culpable. According to the Corporate Tax Haven Index, governments globally lose over US$ 500 billion in tax each year due to corporate tax havens.
It noted that multinationals are taxed under an international regime set up a century ago, and which has utterly failed to keep pace with secret banking and transfer pricing abuses.
A Senior Advocate of Nigeria (SAN), Prof Fabian Ajogwu, said most African countries, including Nigeria, have been lagging in the fight against IFFs.
“The statistics are mind-boggling. We are looking at about $854 billion that has disappeared from Africa between 1970 and 2008,” he said.
According to him, while Africa receives aid from abroad, the money leaving the continent is in the ratio of 2:1.
“So, for every $1 Africa is given as aid, $2 has disappeared through IFFs.
“The legal framework has to be toughened…We must harmonise our laws to block these loopholes and tackle the issues of under-declaration and non-declaration of resource trading,” Ajogwu said.
The senior lawyer wants stiffer penalties for tax avoidance and evasion.
“We need to have a track on offshore tax-shelters, where people set up businesses solely to avoid tax or to just not declare their true returns,” he said.
Dr Jane Lethbridge of the Public Services International Research Unit (PSIRU), University of Greenwich, London, said much of Nigeria’s IFF problem stems from off-shore tax evasion, where companies set up off-shore offices or engage in transfer pricing to evade tax.
She noted that a lack of coordination between different structures facilitates tax evasion.
“For example, it is possible to register with Nigeria’s Corporate Affairs Commission (CAC) without registering with the FIRS,” Lethbridge said.
Helpful incentives?
The Tax Justice Network says Nigeria has been granting many tax incentives (reduced or no tax) to some multinational companies in a bid to attract foreign direct investment (FDI).
Last year, the Federal Government launched the Compendium of Tax Incentives to promote Nigeria as an attractive investment destination using tax incentives.
But, a report by the Tax Justice Network and Actionaid says corporate tax incentives significantly reduce revenue and do not necessarily attract FDI, compared to providing an enabling environment.
“Our research shows that three countries alone – Ghana, Nigeria and Senegal – are losing up to $5.8 billion a year to tax incentives,” the report says.
It recommended: “Publicly review and assess all corporate tax incentives, with costings and justifications provided for each.
“Ensure that all new incentives get parliamentary approval, are overseen by a single well-resourced entity, and end discretionary corporate tax incentives.”

Needed reforms
The Tax and Fiscal Law (Amendment) Bill, also known as the Finance Bill, seeks to raise revenue through tax reforms and is awaiting the President’s assent.
The Bill seeks to amend the Company Income Tax Act (CITA) of 2004 to curb “Base Erosion and Profit Shifting (BEPS)”.
It also seeks to amend the Petroleum Profit Tax Act, Customs and Excise Tariff Act, Personal Income Tax Act, Value Added Tax, Stamp Duties Act and the Capital Gains Tax.Nigerian Law Reform Commission (NLRC) Acting Chairman Prof Jummai Audi noted an aspect of the CITA that needs an amendment.
“The powers of the President to exempt any company or class of companies from the payment of tax under this Act are very wide.
“The powers of the President and minister to allow certain donations to be deducted from the profits of a company for tax purposes are also very wide,” he said.
The review, he said, should involve increasing tax default penalties, which are currently too low.
Mr Olanrewaju Suraju, Head of Project at Human and Environmental Development Agenda (HEDA Resource Centre), a research and policy advocacy group, said Nigeria’s tax regime and weak law enforcement allow IFFS.
“Our laws are inadequately implemented to secure the country from IFFs. The country is losing substantial revenues to the weak tax regime.
“The elites and multinational corporations are the most culpable,” Suraju said.
Chairman of the Independent Corrupt Practices and other Related Offences Commission (ICPC), Prof Bolaji Owasanoye, said the Federal Government has set up an inter-agency committee on transfer pricing to check abuses.
“We need to strengthen regulators that have roles to play in stemming IFFs.
“We need to strengthen, for instance, the capacity of the FIRS to recover taxes and to learn new ways companies avoid taxes.
“We need to change the laws with regards to beneficial ownership – a major way through which IFFs occur.
“Nobody should incorporate a company with a nominee or a proxy,” he said.
Owasanoye wants Nigeria to strengthen its information exchange mechanisms.
“Our tax-collecting agency must have information about the true profit of companies operating in Nigeria.
“If you don’t have access to their global income, the jurisdictions they’re operating in and the records they’re filing in those places, it’ll be much more difficult to tax them effectively,” he said.
At a national workshop on Reform of Tax Laws in Nigeria, Attorney-General of the Federation Abubakar Malami (SAN), spoke on the need for tax law reforms.
“The Nigerian legislative framework lacks the required efficacy to address the challenges resulting from the implementation of CITA, hence the need to review and reform the Act,” he said.
Maya Forstater, a tax expert at the Center for Global Development, Washington DC, said there was the need for legislative reforms to curb trade mis-invoicing and tax avoidance by multinationals.
“Legislative changes can shift behaviours…and administrative improvements and information sharing can make it easier…,” she said.
Dr Christiana Okojie of the Partnership for African Social and Governance Research believes the large volume of illicit transfers from Nigeria must be addressed.
She said much of such transfers occur through tax malpractices and corruption.
Other IFF enablers, she said, are trade mis-invoicing, “especially by Nigeria’s oil trading partners”, and excessive tax exemptions/incentives.
“Tax reforms are required to block some of these avenues as well as to improve revenue generation,” Okojie said.
A tax expert, Dr Fredrick Akinfala, writing in the Journal of Economics and Development Studies, says all corporations, big and small, must be registered for tax purposes.
“Nigeria must institute costly consequences for corporations who flout anti-corruption laws or who evade taxes with impunity.
“The government could look into banning such corporations from any future government procurement agreement no matter who the culprit is…”
According to Akinfala, Nigeria can only successfully prevent IFFs if it musters the political will to drive stringent policies to stem the tide.
“Government, through its watchdog agencies, should require that beneficial ownership information is provided when companies are incorporated or trusts registered.
“This information must be updated regularly and placed on the public record,” he adds.

• This story was produced by The Nation. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in partnership with the Institute for the Advancement of Journalism. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.