Towards a more efficient, supportive tax framework
Death and tax are, perhaps, the most upsetting realities of life. The two are inevitable but while the former is natural, man as a means to achieving socio-economic justice, created the latter.
Due to the failure of the human system as opposed to nature, tax is less inescapable than death. Yet, the extent to which individuals and organisations could cheat the tax system depends on culture, legal system and laxity or otherwise of the enforcement mechanism. The tendency towards tax evasion, some studies have shown, is directly correlated with the cost of living and business transactions. This suggests that businesses and individuals are less willing to fulfill their tax obligations when times are hard.
A recent study says governments around the world lose about $427 billion yearly to tax avoidance and evasion as companies and wealthy individuals push their assets to tax havens.
Indeed, ‘tax havens’ have become an uncomfortable phrase as the global community grapples with the challenge of fixing a broken system that gives wealthy individuals and companies the leeway to cheat and get away with it. Part of efforts to address the loophole is a global reform that will set a minimum corporate tax at 15 per cent. This will hopefully reverse decades-long race to the bottom of corporate tax rates, which have encouraged companies to shift profits to low-tax jurisdictions, thus depriving countries of the resources needed to tackle rising social challenges.
While the global community needs a more efficient tax practice, Nigeria sits at the bottom of efficiency parameters. This makes the country’s tax revenue to gross domestic product (GDP) among the poorest globally, which is about six per cent as opposed to 16 per cent regional average.
Like Nigeria, tax revenues to GDP ratios in many oil-producing countries are historically low. For instance, it is about one per cent in the United Arab Emirates while that of Kuwait is estimated at 1.5 per cent. But with the future of the petrodollar increasingly uncertain, every country is beginning to appreciate the importance of taxation, not as an alternative but as a primary source of public financing.
In the face of an urgent global need to develop a tax culture that works, Nigeria’s tax laws are still largely obsolete and lethargic, creating much room for circumvention. The Chartered Institute of Taxation of Nigeria (CITN) and other stakeholders had, at different fora, blamed the poor performance of the system on obsolete legislations and slow response to changes.
The need to create an efficient tax administration system that aligns with the prevailing social needs has made new Tax Appeal Tribunal (TAT) rules approved by the Minister of Finance, Budget and National Planning, Zainab Ahmed, an interesting subject. The tax appeal panel has emerged as a cost-effective option for resolving assessment disputes in the United States, the United Kingdom and many other countries.
A readily available justification for a functional tax appeal panel is the fact that the traditional justice system is bogged down with low capacity among others. In the now-rested Ease of Doing Business Ranking, time, cost and quality of judicial process were the three variables that the World Bank took into account in assessing countries on the enforcing contracts parameter.
Whereas a distinct panel is easily dismissed as a duplication of the responsibility of the court system, Fiscal Policy Partner and Africa Tax Lead at PwC, Taiwo Oyedele, says tax issues are too important to be allowed to linger endlessly, a challenge that has become a norm in the judicial system.
Oyedele describes the revised TAT as a positive development as it is a remarkable departure from the sluggish dispute resolution process. “TAT is very helpful. You can get a dispute resolved within six months, and the commissioners have good knowledge of the tax issues. To that extent, I see it as a positive effort towards enhancing the tax administration system,” he noted.
A professor of economics, Ken Ife, corroborates Oyedele’s position, saying it aligns with the global trend. According to him, tribunals are faster in dispensing justice and resolving conflicts relating to tax matters.
“In the UK, the tax tribunal has become an established mechanism for settling tax disputes. The commissioners are independent and discharge their responsibilities with speed. Tax administration is a big issue. There are cases where government agencies deduct taxes but do not remit to the Federal Inland Revenue Service (FIRS). Meanwhile, the taxpayers are required to start chasing the agencies involved to remit to the appropriate bodies. TAT is in a better position to address disputes such as these,” Ife states.
A partner and Head, Tax Regulatory and People, KPMG, Wole Obayomi, also notes that the new TAT rules are in line with the Federal Government’s commitment to improve Nigeria’s tax system – a process that commenced with the Finance Act 2019 and was built on by subsequent legislations.
According to him, the amendments to the rules, which specify for formal tax adjudication, align with changes in global tax administration practices and would ensure that TAT’s procedures are up to date while increasing public confidence in the system.
The roles of the tax commissioners are different from those of the judges in a strict judicial sense. Rather than becoming a part of the judiciary, the tax appeal panel serves a preparatory role or acts supplementary to the conventional judicial system.
TAT is a product of the failure of the regular court, as Oyedele argues, to resolve tax disputes speedily. Hence, its objectives include helping reduce the incidence of tax evasion, ensuring fairness and transparency of the tax system, minimising the delays and bottlenecks in the adjudication of tax matters and improving the taxpayers’ confidence in our tax system.
Others are providing an opportunity for expertise in tax dispute resolution, providing an avenue for effective involvement of parties, focusing on facts rather than legal technicalities and promoting early and speedy determination of matters without compromising the principle of fairness and equity.
Some have commended the changes introduced by TAT 2021 rules, which took effect in June. Among the changes is the admittance of service of documents or processes carried out by email or such other electronic means and the recognition of virtual/remote hearing of applications as well as delivery of rulings by the tribunal. These changes have the potential of reducing the cost of dispute resolution and align with the trends.
Also, the rules impose a tough but necessary timeframe during which cases must be resolved. The rules give the panel a six-month time frame from the date of commencement of trial to conclude and provide a decision. Thus, the tribunal cannot sit on a matter indefinitely. It also implies that a petitioner knows how the timeframe within which he would get justice before he files a complaint. The new rules will, certainly, not resolve the anomalies in the tax administration but they are a starting point in building the confidence required to make the tax system deliver on its mandate.
More than ever before, Nigeria needs an efficient tax system to shore up its pantry revenues and achieve fiscal stability. Today, Nigeria is neck-deep in debt partly due to wastefulness and corruption . But also important is the fact that the country’s earnings are a far cry from the national social-economic needs and incomparable with other countries in the same stage of development.
For instance, the proposed N16.4 trillion ($40 billion) total spending in the 2022 appropriation is about a quarter of $147 billion South Africa plans to spend in the same year. Egypt, another country competing with Nigeria for regional economic power, also plans to spend $158 billion.
Both South Africa and Egypt are ahead of Nigeria in terms of physical infrastructure. This means Nigeria needs to spend much more than they are doing to bridge the gap. Sadly, Nigeria has lagged in terms of infrastructural funding in recent years.
Still, the share of earned income in the country’s spending outlays is extremely low even with the future increasingly uncertain. The Federal Government, for instance, intends to borrow about N15 trillion in the next three years as contained in the 2022-2024 Medium-Term Expenditure Framework/Fiscal Stability Paper (MTEF/FSP).
Whereas the debt level continues to increase, capital spending is on a reducing balance. There has always been a trade-off between tax and debt financing when economies face the sort of challenges Nigeria is currently grappling with. But should Nigeria choose to switch to tax, there is certainly the need to retool the rules. This makes the tribunal approach to dispute resolution a necessity for sustainable income.