CHALLENGES OF TAX EXEMPTIONS AND DUTY WAIVERS
BY AKINTAYO BALOGUN
Tax Exemptions, Duty Waivers and Zero Awareness on Taxation; A Great Disservice/Fraud to the Nigerian Economy
It was reported on several news media on and around the 19th of September 2022 that the Federal Government of Nigeria had foregone a mind-boggling sum totaling N16.76tn in revenue to tax reliefs and concessions to large companies doing business in Nigeria between 2019 and 2021 according to an analysis by the PUNCH. The tax exemptions and duty waivers were given to 46 companies currently doing business in Nigeria. It was also reported that another 186 companies currently doing business in Nigeria have also applied for tax exemption reliefs and duty waivers. These reports were contained in the tax expenditure statement (TES) reports in the Medium-Term Expenditure and Fiscal Strategy documents posted on the website of the Budget Office of the Federation. According to the report, most of these tax incentives were administered via Company Income Tax (CIT), Value Added
Tax (VAT), Petroleum Production Tax (PPT), and Customs Duty
It was further reported that during this period covering from 2019 to 2021, tax exemptions included imported goods covered by diplomatic privileges, military hardware, fuels and lubricants, hospital and surgical equipment, aircraft (their parts and ancillary equipment), plant and machinery imported for use by companies in export processing zones, health and medical supplies to abate the spread of COVID, reliefs on the presidential initiative on COVID-19 supplies, Import Duty and VAT on commercial airlines.
The Economic Free Trade Zone in Nigeria also falls under this category of exemptions. It is a geographic area where goods may be landed, stored, handled, manufactured, or reconfigured and re-exported under specific customs regulations. Generally, such goods are not subject to customs duty. Free trade zones are usually organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade. This License is granted by the Federal Government of Nigeria, through the required authority to an export-oriented manufacturing enterprise of over 75% of its production. The concept of these free trade zones is to ensure that at least 75% of the products of these companies operating in the free trade zones are being exported so as to boost the country’s exportation drive and to improve the value of the Nigerian currency through these trading.
It must be noted that Nigeria operates a decentralized tax system where each level of government is independently responsible for the administration of a particular class of tax within its jurisdiction. Collection of taxes in Nigeria falls under the concurrent list which gives access to both State and Federal Governments on issues bordering on taxes. However, the government at all levels has prioritized the allocations coming from the national purse as its only or major source of income at the expense and detriment of internally generated funds. it is believed that if Nigeria has a viable working tax regime, the funds pooled together at all tiers of government is enough to fund Nigeria’s budget and allow government at all levels to operate fairly independently.
Objectives of granting tax waivers
Over the years, the essence of granting tax exemptions and waivers is to help grow local companies, stimulate economic growth, and earn investors’ confidence. It is also aimed at building and strengthening bilateral relationships between Nigeria and other countries where Nigerian companies are also doing business. In a way, it reciprocates the gesture Nigerian companies are receiving from those other companies.
As part of the procedure to encourage investments, the Nigerian Government introduced the Economic Free Trade Zone, which was established for companies to do business within a confined area in the free trade zone and to export their product upon compilation in a bid to strengthen the exportation mechanism of Nigeria and to improve the value of the Nigerian currency through trading.
The disservice of tax exemption reliefs and duty waivers to Nigeria
It was reported by an online news media, Investors King that about five countries accounted for about 86 percent of total customs relief, with China accounting for nearly two-thirds of total relief granted. Netherlands, Togo, Benin, and India were the other top sources of supplies benefitting from the reliefs. It is not surprising that China accounted for nearly two third of the total relief that was granted. Both Nigeria and China have trade relations which had increased by 157 percent to N1.49 trillion in the first half (H1) of 2022 according to reports.
However, the mention of Nigerian companies like Dangote, Lafarge and Honeywell as well as some hotels on the list of companies that are already on the exemption list drew a lot of irk from Nigerians. Why would big companies making good profit refuse or request not to pay anything to the government? Worst still, it is shocking to know that we have as many as 186 companies doing business in Nigeria and probably making a good profit, yet they have applied for tax exemption reliefs and duty waivers. In other words, they are here to make money and not give anything in return to Nigeria. Meanwhile, 46 companies in Nigeria are already enjoying this privilege.
What are these companies offering to Nigeria in exchange for these exemptions? How is the government or Nigerian people benefitting from these waivers? Is it the constant gridlock caused by trailers on the Lokoja-Okene-Obajana expressway or the various ports in Nigeria caused by the zero-tax-paying companies that the country has benefitted from? Is it the constant damage to our roads by the heavy duties machines on our roads? How much community services have we enjoyed from these companies to compensate for the exemption? For the country to waive as much as 16 Trillion Naira for just 46 companies in 3 years shows the volume of net profits these companies are generating in Nigeria. What is the percentage of these taxes on the net profit of these companies that they cannot afford to “close eyes” and pay to Nigeria? Is this package not a daylight robbery on Nigeria?
It was reported that South Africa earned $107billion in tax revenue in 2021. In contrast, Nigeria earned $15bn, behind smaller countries like Kenya and Angola which have better tax management systems. As of 2017, Nigeria was saddled with one of the lowest tax-to-GDP ratios in the world, at 6 percent of GDP. This is while other countries of the world make a fortune from a well-organized tax regime. While Nigeria is exempting big names from paying taxes, Elon Musk, one of the richest men in the world has not been exempted from paying taxes in his country. He tweeted vide his verified Twitter account on 20th December 2021 that he’ll be paying $11bn in tax for the year early in 2022. He does not enjoy any exemption. As a matter of fact, many developed countries of the world make a larger part of their fortune from taxes.
In the current rage for relocation to other countries of the world, particularly the United Kingdom and the Canada, one of the biggest surprises that will greet Nigerians is the payment of tax on virtually everything including parking space. Taxes in these developed countries are paid in such a way that the worker is left with almost nothing, especially where such a person is involved in menial jobs. It is not wrong to conclusively state that there is obviously a conspiracy between these big companies to have their names on the exemption list while the pocket of government officers responsible are well-greased so as to have them orchestrate these negotiations in favour of these companies at the expense of a collapsing Nigerian economy.
Many of these companies particularly foreign ones dare not make this obnoxious application in their home countries. It is Nigeria that has been tagged a “Use and bribe and dump” country that these kinds of applications for exemption can be heard and granted once the persons in places of authority have been settled.
The intention of allowing companies to operate without paying tax might be good but the execution is destroying Nigeria. How do you explain a country that allows another country to do business within its borders free of charge yet the country is broke and living on borrowed resources? The calculation is erroneous. Nigeria should stop being a father Christmas to companies doing extremely well in business and other countries of the world that are ten times more economically viable and comfortable than Nigeria. Is it China recorded as the fastest-growing economies in the world that should be enjoying tax exemption?
Zero knowledge of tax payment among Nigerians
Aside from the above-stated issues of tax exemption in Nigeria, there is also the huge challenge of companies and individuals deliberately (fraudulently) plummeting accrual taxes or completely canceling the payment of taxes, (with the connivance of officers of the FIRS and States IRS), false deductions, claiming personal expenses as business expenses, as well as the absence of the knowledge and workings of a tax system among a majority of the Nigerian working class. Nigeria is one of the countries in its class of development with the worst tax monitoring and engagement system. There are Nigerians who have worked and done business in Nigeria for over 50 years and have become millionaires and some billionaires, yet have little or no knowledge of taxation, not even to talk of paying the same. Taxes are majorly paid by workers in the public service and some highly organized private sectors which form less than 30% of the workforce in Nigeria. This is a great disservice to the country.
At the “Public Presentation and Breakdown of the Highlights of the 2022 Appropriation Bill” held in October 2021, the Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami, revealed that only 41 million out of 200 Million Nigerian citizens pay taxes in the country. He added that despite the 41 Million taxpayers in the country, Nigeria still generated less than what other African countries earned from Personal Income Taxes (PIT) only. He further stated thus; …“If you also compare that with South Africa where they have a total population of about 60million people, with just 4 million taxpayers, the total personal income tax paid in South Africa last year was about N13trillion. You can now see that these things are not adding up…“So if we don’t pay these taxes, there is no way the government will be able to provide the social amenities required, the critical infrastructure required for the wellbeing of the country,”…
The Current Economic Downturn in Nigeria vis a vis the Tax Exemption policy
Nigeria is broke. Our funds are not meeting our needs. Just in July 2022, the Minister of Finance reported that the debt servicing in Nigeria as of that day now exceeds the total revenue of the country. In other words, Nigeria is operating at a loss. There has also been an astronomic rise in the prices of goods and services and a galactic fall in the value of the Nigerian currency. It was reported also that the external reserves have plummeted to $15Billion contrary to the $36 Billion alleged by CBN. Based on the economic quagmire that Nigeria has found itself in the last few years, you would have expected that the government would do everything within its power to improve its finances rather than ride around with its flying sleigh and reindeers.
Recommendation on taxation
1. Every Nigerian who earns a living should be compelled to pay their Personal Income Tax (PIT). The Federal Government through the FIRS and States IRS should consider a downward review of taxes, particularly Personal Income Tax to encourage the greater and voluntary participation of Nigerians.
2. Payment of taxes should be according to earnings. The lower your earnings, the lesser the percentage paid. The more your earnings, the higher the taxes paid.
3. The awareness of the various classes of payment of tax is at its shallowest. The government at all levels needs to create a larger level of sensitization and drive on these issues. The Nigerians who flaunt their wealth and affluence on social media should be called upon to show evidence of tax payment in the proportion of the wealth they display.
4. Tax clearance certificates should be made mandatory for political aspirants and the political class, as well as those coming in and out of the country. The duty of the FIRS and the States IRS in Nigeria is enormous, particularly in awareness creation. Standing up to this task will ease the burden of total dependence on one lean dwindling source of income.
5. Payment of annual returns with the Corporate Affairs Commission (CAC), for companies doing business in Nigeria should be accompanied by evidence of payment of Company Income Tax (CIT) and other taxes as may be required for its specific business and not just the TIN as currently required.
6. The government should do a massive review of its tax exemption policy and investigate possible compromises in the grant of these exemptions. The exemptions should be reviewed such that every company must be liable to pay taxes.
7. There should also be a review of the companies operating in the free trade zones in Nigeria. The concept of these free trade zones is to ensure that at least 75% of the products of these companies operating in the free trade zones are being exported so as to boost the country’s exportation drive and to improve the value of the Nigerian currency through these trading. However, it has been observed that the products of these companies operating under the umbrella of the free trade zone have flooded the Nigerian market rather than being exported as contemplated in the free trade zone agreement. This marketing should be checked. If they wish to sell their products in the Nigerian market, then they should be subjected to payment of taxes.
8. There is an Appeal Tax Tribunal operational in Nigeria, whose existence is unknown to a majority of Nigerians and particularly legal practitioners. The Tax Appeal Tribunal seats in only 6 states of the federation. The government can make efforts to have these Tribunals established in every state of the federation and same must be self-sufficient as its duty is to raise funds for the government through taxes and not to put more financial burdens on the government.
9. When there is a visible improvement in the payment of taxes by Nigerians, the government should ensure the utilization of these funds for meaningful and visible projects that directly affect the taxpayers such as good roads, education, provision of social amenities, and the various projects that affects the everyday life of Nigerians.
The payment of tax in Nigeria is backed up by section 24(f) of the 1999 Constitution. It provides that:
“It shall be the duty of every citizen to- Declare his income honesty to appropriate and lawful agencies and pay his tax promptly.”
In Nigeria today, with the number of person trading either in small or large-scale businesses, as well as those in salaried employment particularly the private sector (who earned well above the minimum wage of N30,000.00) , which are largely unmonitored and considering the number of businesses registered and still being registered in Nigeria, it is safe to say that a well-organized and properly managed/documented tax regime covering every sector in Nigeria, can fund the entire Nigerian budget and still have leftovers. In my personal opinion, I am not in support of an outright tax exemption or waivers for any organization doing business in Nigeria notwithstanding the bilateral relationship with the country source of the companies or the ethnic or socio-political status of the CEOs/Chairmen of the companies. The taxable amount might be reviewed downwards but not an outright exemption.
If just 46 companies out of nearly 2 Million registered companies in Nigeria (aside from business names), can be responsible for a whopping 16 trillion Naira in the last 3 years, how much more all registered companies paying their required taxes and all working-class Nigerians paying their Personal Income Tax (PIT). The tax exemption so far in the last three years is enough to fund the entire budget of Nigeria in one year. If you add this to creating awareness and all Nigerians pay their taxes as when due, then Nigeria would on a better financial footing. Nigeria is broke and needs these funds to remain afloat. The policy of tax exemption, tax evasion, and near zero awareness of tax payment is a brutal robbery and disservice to the Nigerian economy.
* Akintayo Balogun, a lawyer and public affairs analyst, can be reached at email@example.com.
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