Tax reform proposals: Squaring policy objectives and the political calculus

Calculus is an aspect of mathematics which examines the degrees, rates, types and complexities of incessant change. In Mathematics for Engineers and Technologists (2002), Fox et al, opined that calculus is the “mathematical backbone” for addressing problems where variables change over time or some other contextual reference. Comprehending calculus is vital, they argued, to solving real engineering challenges.

The proposition therefore begs the question as to the nexus between mathematical calculus and Nigeria’s tax reforms? The answer is not long drawn because the concept of adapting to change as variables alter is as applicable to mathematics and other natural sciences, as it is to policy formulation and execution relative to unique contextual challenges.

Indeed, Charles Darwin, the 19th Century British naturalist, asserted as much in his magnum opus, On the Origin of Species (1859), where he expounded the view, valid till this day, that it is neither the brightest nor strongest of species that survive, but those most adaptable to change. This logic holds true in the context of natural persons and incorporeal persons and of course, innovations and policies which emanate from them.

In simple terms, change is an altering dynamic. Persons, nations, institutions, policies, which fail to adapt to change will regress, become comatose, wither, and ultimately perish. That thesis invokes the logic of clear thinking, creativity, sound policy development, evolution, innovation, and imaginative problem-solving. And the combination of those factors is rightly utilised in aspirational and enlightened societies to solve some of the most intractable problems straddling education, health and care, science and technology, national security, statecraft, business simplification or the ease-of-doing-business, and, crucially, tax reform; today’s subject.

What then is the basis Nigeria’s tax reform proposals? What is the policy defect, which the proposals objectively, aim to cure? Why now? Credible democratic governance is, by its explicit definition, a political process. That is, there are always competing interests, and colliding ideologies which, invariably yields “winners” and “losers” applying conceptual social science game theory. Abstractly, the latter proposition holds true. Yes!

Practically however, the proper function of leadership is to consistently govern in the collective interests of all people and national interests and to achieve equity, fairness or semblance thereof. Noble as that proposition is, it does not diminish the constancy of partisanship and realpolitik in statecraft, hence the point on competing interests. Nonetheless, the compelling question therefore is whether the tax reforms have the support of the people through their representatives in Nigeria’s bi-cameral legislature comprising the Senate and Representatives? Yes and no! Some legislators are in support whilst others aren’t.

To start with, Nigeria is confronting a serious revenue crisis. Through 2022 to 2024, Nigeria’s external debts rose from N43 trillion to N134.3 trillion, a ginormous percentage increase of 212.3 %. These debts are substantially USD-denominated at the same time as Nigeria’s currency has been freely floated on the foreign exchange market and subject to cyclical forces of the laws of demand and supply.

In short, the country is saddled with a greater debt burden than ever before and the opportunity costs of foreign and domestic debt servicing, necessarily imperils the government’s latitude for investments in education, health, social care, infrastructure development, defence etc.

Added to this, lingers the challenge of multiple taxation by various tiers of government which enfeebles effective and efficient tax administration and collection, strategic planning, whilst undermining the Presidential Enabling Business Environment Council business simplification or the ease-of-doing-business policy objectives; and material provisions on the subject contained the Companies and Allied Matters Act 2020.

According to the Presidential Fiscal Policy and Tax Reforms Committee (the “Committee”) established on July 7, 2023, the country’s Tax to GDP ratio is one of the lowest in the world and much below the African average. Indeed, International Monetary Fund data affirms that Nigeria’s tax to GDP ratio in 2023 was 9.4%. In the same period, Togo’s tax to GDP ratio was 14.8%, Kenya’s 14.4%, Senegal’s 19.4%, and Tanzania’s 11.5%; amongst African countries. Further afield, the United Kingdom’s tax to GDP ratio was 27.3%, Canada’s 14%, Brazil’s 14.2%, and Thailand’s 15.5%.

The corollary in Nigeria’s case is a sub-optimal fiscal base, plus an inordinate dependence of government borrowing for public expenditure; which itself defies the fundamental logic of prudent financial management and balanced budgets! That is, ensuring that revenues consistently outperform debt burdens or are balanced. The philosophical argument being that it is unwise and unconscionable to vicariously saddle succeeding generations with crippling debts!

Likewise, no country borrows itself to economic development. Rather, economic development is a largely function of sustained productivity, sensible business operating climes, financial discipline and prudence, cutting waste, coordinated and transparent policies, consistent application of rules and procedures, and, naturally, effective leadership.

The Committee’s terms of reference encompass: harmonising multiple taxes and levies at all government tiers for efficient tax administration; brigading and streamlining revenue collection functions into single agency per level of government; optimising technology for effective revenue administration; catalysing data for intelligence to curb evasion and hostile tax avoidance; eliminating retrogressive tax provisions which impede to business and economic development; frame initiatives for improving policy coordination across government agencies, transparency; ensuring the deployment of fiscal revenues for the intended purposes for advancing social good, voluntary compliance and a proactive tax culture; whilst boosting revenue generation for socio-economic development to a minimum 18% tax to GDP ratio by 2026.

Against this backdrop is the policy contention that the status quo on the country’s tax administration is untenable, therefore demanding radical, intelligent action, and legislative reform.

It is upon this seminal foundation, that the Committee, via the Executive, proposed four bills to Parliament in 2024: 1.) the Nigeria Tax Bill (NTB), aimed at establishing a robust fiscal policy foundation for tax administration and business simplification; 2.) the Nigeria Tax Administration Bill (NTAB), which seeks to harmonise tax administration, cut opaqueness and disputes; 3.) the Nigeria Revenue Service Establishment Bill (NRSEB) which seeks to replace the Federal Inland Revenue Service; and 4.) the Joint Revenue Board Establishment Bill (JRBEB), aimed at establishing a tax tribunal and an ombudsman, inter alia.

In principle, the tax reform proposals are entirely reasonable and ought to be welcome by all. Afterall, leadership entails the ability, readiness and willingness to take radical, necessary and tough decisions when demanded. The sticking point however, and thus the counter-argument in some quarters as earlier alluded to, pertains to the political calculus given Nigeria’s multi-party democratic political configuration and contested interests. Some of the posers raised pertain to the insufficient time given for consultation, the seeming haste to get this through the National Assembly and the lack of active consideration for the essence of federalism within the country’s constitutional framework.

For example, section 318 (1) of the 1999 Nigerian Constitution (as amended) (the “Constitution”), defines the “Concurrent Legislative List” as the list of matters outlined in the first column in Part II of the Second Schedule therein; with respect to which the National Assembly and a House of Assembly may make laws to the extent prescribed.

Indeed, section 9 of the Second Schedule Legislative Powers Part II Concurrent Legislative List of the Constitution; stipulates that a House of Assembly may, subject to such conditions as it may prescribe, make provisions for 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 succeeding section 10, further provides that where a Law of a House of Assembly provides for the collection of tax, fee or rate or for the administration of such Law by a local government council in accordance with the provisions hereof it shall regulate the liability of persons to the tax, fee or rate in such manner as to ensure that such tax, fee or rate is not levied on the same person in respect of the same liability by more than one local government council.

In other words, states, within Nigeria’s federal system of government plainly have an important constitutionally defined role in tax administration and collection, and by compelling implication, proposals geared at tax reforms like the Nigerian Tax Reform Bills currently before the National Assembly.

The case for additional time for consideration by the States and other key stakeholders is entirely reasonable, in the greater national interest, albeit, not for more than 60 days.

Because the strategic thrust of the tax reform policy proposals anchored on effective and efficient tax administration, business simplification, transparency, equity and fairness for all brackets of taxpayers, putting Nigeria on a sound economic footing; and crucially, boosting the country’s tax revenues, for the overriding objective of socio-economic development is quite simply unimpeachable by any rational analysis.

That said, no nation can tax its way into productivity. Productivity, a balanced and simplified business climate for individuals, SMEs and large corporations, an attractive investment climate for investors, security of life and property, a listening government, and tax reform must go hand in hand.

Ojumu is the Principal Partner at Balliol Myers LP, a firm of legal practitioners and strategy consultants in Lagos, Nigeria, and the author of The Dynamic Intersections of Economics, Foreign Relations, Jurisprudence and National Development.