EMERGING ISSUES IN TAX ADMINISTRATION: THE WAY FORWARD FOR NIGERIA BEING THE LEAD PAPER BY THE EXECUTIVE

CHAIRMAN FEDERAL INLAND REVENUE SERVICE & CHAIRMAN, JOINT TAX BOARD IFUEKO OMOIGUI OKAURU, MFR @

THE 4TH NATIONAL CONFERENCE OF THE DEPARTMENT OF FINANCE FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF LAGOS NIGERIA

12TH JULY, 2011

A PAPER DELIVERED BY THE EXECUTIVE CHAIRMAN FEDERAL INLAND REVENUE SERVICE (FIRS) IFUEKO OMOIGUI OKAURU ON EMERGING ISSUES IN TAX ADMINISTRATION: THE WAY FORWARD DURING THE 4TH NATIONAL CONFERENCE OF THE DEPT. OF FINANCE, FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF LAGOS ON JULY 12TH, 2011 Distinguished guests, Ladies and Gentlemen INTRODUCTION It is always with pleasure, a feeling of honour and a high sense responsibility that I receive invitations to speak in academic environments. This is because I believe that the task of Nation building can hardly be achieved if the individual is not well equipped with a functional education that allows him or her develop the capacity to appreciate the issues involved in economic, financial and social development. And what better place can there possibly be to stimulate discourse in this regard than the institutions of higher learning, which are the seat of knowledge and bedrock of intellectual development? It is with that focus that I therefore approach this paper. I have noted that the theme of this Conference is Global Economic and Financial Recovery. While this provides a broader perspective, it may be more relevant and helpful to our current situation, if our deliberations are focused more on Nigeria. Much as Nigeria cannot extricate itself from the global economy, I think charity should begin at home. By that I mean that it is important that we as a Nation develop capacity, both human and otherwise, so that we will be better placed to access and utilize the benefits of being part of the global economy. Otherwise, we may be unable to properly and effectively engage with the global economy if we have not developed the structures and capacity that will aid in such engagement. It is for this reason that I find the topic for this paper Em erging issues in Tax Adm inistration: The w ay forw ard for N igeria quite relevant and timely. The stated mandate of the Department of Finance of the Faculty of Business Administration is to promote the knowledge of and disseminate information on

banking and finance in particular and economic issues in general, as well as to contribute to public discourse on the on-going economic and financial recovery. I therefore believe, that this paper falls within the economic issues in general stated

in the mandate. The question may however be asked as to the connection between tax administration and economic recovery. How are these two seemingly diverse concepts linked? I think the answer to that question is quite straight forward as there is not only a direct, but in fact a vital connection between the economy and taxation, whether in a stable state or in a state of recovery, especially for a developing nation, such as Nigerians. The major economies of the world are built and supported by a sustainable system of revenue generation. One major if not the major sustainable means of revenue

generation globally is taxation. No economy can grow without adequate resources for infrastructural development and provision of power and public utilities and services. The trend in Nigeria up till now has been an undue dependence on oil revenue to the detriment of all other sectors including taxation. The unsustainable nature of this practice however came home very forcefully during the economic downturn. Oil revenue accruing to the Federation was hit from two angles. There was the fall in international oil prices and then we had internal challenges with oil production, whereby our production fell below a certain level. This had had a very significant impact on federal revenue. For example total federally collected revenue for the period before 2009 was as follows: 2005 N5,619.30 trn 2006 N6,061.00 trn 2007 N5,715.50 trn 2008 N7,866.60 trn

However in 2009 when the downturn was at its peak, federally collected revenue took a drastic fall to N4,844.6 trillion. The reason for this significant reduction in federal revenue was not farfetched. Oil prices had fallen, coupled with the fall in oil production. This was a painful and stark reminder that something drastic and quick had to be done about our overdependence on oil revenue. Indeed this reduction in revenue also spilled over to tax collection, which fell to N2,1972.6 trillion in 2009, down from a high of N2,972.2 trillion in 2008. More significant was the decrease in petroleum profits tax (tax from oil operations) from N2,060.9 trillion in 2008 to N939.4 trillion in 2009. The above figures buttressed the absolute need for a shift from dependence on oil revenue to other more sustainable sources of revenue, chief among which is taxation. It should be noted that even the fall in tax revenue between 2008 and 2009 showed the inherent ability of the tax system to absorb such eventualities. While reduction in tax revenue in 2009 was 26.06% (N774.59 billion) of 2008 collection, reduction in overall federally collected revenue was 38.41% (N3.022 trillion) from 2008 levels. The conclusion is that while no source of revenue is constant, as far as our current circumstances dictate and the nature of our economy it is a safer bet to rely on taxation as a source of revenue for growth and to stimulate development rather than on revenue derived from exploitation of a resource over which we have little or no control. As stated a proven alternative, such as taxation, over which we have greater control and whose impact on our socio-economic development we can determine, will serve better, both in the long and short run EMERGING ISSUES IN TAX ADMINISTRATION This brings me to crux of this paper, which is emerging issues in tax administration in Nigeria. As a first step, let me correct the widely held but erroneous view that tax administration is the concern of only tax authorities or those who are in one way or the other connected with administering the tax system in Nigeria. Such a position is borne out of the misconception that taxation is an imposition maintained only for the benefit of Government or those who administer the taxes collected. This is wide off 3

the mark, as tax administration / tax system encompasses those persons, agencies, institutions (in the public and private sector) and the processes involved in: tax legislation; administration / enforcement of tax laws; collection, allocation, distribution and expenditure of tax revenue; and other ancillary matters related to the effective and efficient performance of tax functions and the tax system.

The very nature of taxation requires participation by several parties, including those who are being taxed (taxpayer), those collecting the tax (tax authorities), those who utilize the tax (Government ministries department, agencies etc), those who create the laws on the basis of which the tax is collected (legislature) and ultimately those on whose behalf the tax is collected and for whose benefit is it utilized (the entire citizenry). The pyramid below illustrates the all encompassing nature of the tax system

As can be seen from the pyramid, we have at the top the President and State Governors who are expected to give overall direction in the tax system, next are tax authorities and support agencies who are involved in the day to day administration of the tax system. After this, we have various other components, such as the Ministry of Finance, which oversees tax policy, the National Assembly which makes and amends tax legislation, the Judiciary which interprets tax laws and resolves tax

disputes, down to education and academic institutions, tax consultants, taxpayers, the media and civil society. What this illustrates is a tax system, which requires the participation and contribution of all. In this light, it means that the emerging issues, which we shall discuss are really emerging issues for all of us and which we all have a responsibility to implement. I will discuss these emerging issues under three broad headings namely: Policy issues Legal issues; and Operational issues

Policy Issues The approval of the National Tax Policy by the Federal Executive Council and its further ratification by the National Economic Council in 2010 introduced a new dimension to tax policy in Nigeria. Hitherto, there was no single document, which laid down a definite policy direction for taxation in Nigeria. The introduction of the National Tax Policy has therefore created for the first time in the history on Nigeria a policy direction, which tax authorities and other stakeholders in the tax system are supposed to adhere to. Amongst the several policy directions set out in the NTP are the following which impact tax administration in Nigeria: (i) the use of taxation as a tool to create wealth in the economy and provide employment opportunities. As an emerging issue in tax administration it therefore entails that taxation is utilized to provide conditions which will enable increased economic activities that will create wealth, jobs and ultimately attract domestic and foreign investment in the economy. In this regard, revenue from taxation should be applied in a manner that will ensure that taxation is not an end in itself, but a means to achieving the various ends which Government commits to provide and which taxpayers and the entire citizenry expect from Government. Shift from Direct to Indirect Taxation for Economic Growth This entails a deliberate shift from over reliance on direct (income) taxes, which are usually imposed a small number of taxpayers to indirect taxes (value added tax and other transactional taxes), which are usually consumption based and affect a larger number and have a greater potential for bringing more tax at a lower cost. Use of Technology in Tax Administration This is a major issue in tax administration and one which has the potential to change the face of tax administration in Nigeria. Technology, the automation of tax systems, procedures and processes and the use of electronic platforms is the future of tax administration in Nigeria. If properly used and utilized it not only has the ability to significantly improve tax collection in Nigeria, it also has the ability to
Taxation as a Tool for Wealth Creation and Employment - This entails

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minimize if not eradicate leakages of tax revenue and other unethical practices. In the FIRS several technology based initiatives have been implemented in the last six to seven years, which have yielded significant dividends in improved tax collection, increased taxpayer confidence in the tax system, increased efficiency in tax operations and reduction in leakages etc (iv) Institutionalizing a Tax Culture in Nigeria This is a necessity if we are to build a tax system which is the pivot of National Development in Nigeria. There is a need to create a tax culture in Nigeria, such that taxation resonates in every sphere of life in Nigeria. There is a need to build system where taxation is central to everything we do and is placed on a pedestal. This will elevate the status of taxation and ensure that tax revenue becomes a major tax earner for the country and ultimately enable us move away from an unhealthy dependence on oil revenue. Accountability for Tax and Other Revenue collected This is the end stage of tax administration where taxes have been assessed, collected, disbursed and expended. There is a need to create a continuous value chain so that taxpayers can monitor the uses to which tax revenue has been put. Where taxpayers can see that tax revenue is used for their ultimate benefit it increases compliance rates, improves taxpayer confidence and creates a better relationship between tax authority and the taxpayer.

(v)

Legal Issues While there are significant legal issues impacting tax administration in Nigeria today, I will discuss only three major ones as follows: (i) Need to strengthen Constitutional Provisions relating to taxation and the tax system The Nigerian Constitution sets out some basic provisions relating to the tax system and tax administration in Nigeria. There are however several challenges in the tax system, which can be resolved by the enactment of explicit Constitutional provisions on such matters. The Constitution in some instances does not set out provisions, which are detailed or elaborate enough to deal with the dynamic and ever changing circumstances that we face in our tax system. Accordingly it is a priority to ensure relevant amendments to the Constitution, which will cater for these matters and resolve issues, such as jurisdiction over certain taxes, legislative powers over taxation and need to make tax compliance a major criterion for holding public office in Nigeria amongst others. Resolution of tax disputes Nigerian tax laws provide various mechanisms for the resolution of tax and other fiscal disputes or disagreements as they arise. However, over the years, we have seen increasing tendency to resort to self help in the resolution of disputes and disagreements. This has led to prevalence of issues such as multiple taxation, use of unorthodox or illegal methods for the collection of taxes, engagement and use of third parties in core tax administration and the like. There is therefore an urgent need to put in place a system for the speedy and impartial resolution of all tax related

(ii)

disputes arising in the system as a means of dealing with increasing resort to self help. This will help bring certainty to tax administration and improve confidence in the tax system by all stakeholders. (iii) Regular amendment of tax laws to strengthen tax administration Prior to 2007, when the wholesale review and amendment of several tax laws were carried out, the last such exercise had occurred in 1993, nearly a decade and a half ago. The 2007 review showed the necessity for carrying out regular reviews and amendment of tax laws to ensure that they are responsive to changing circumstances and also to remove obsolete and outdated provisions therein. Following from that there is now a new drive to not only ensure regular review of tax laws but to move towards plain English in drafting them, so that they can be read and understood by all. This impacts the ability of tax authorities to implement and administer tax laws and also creates certainty in the meaning and interpretation of tax laws.

Operational Issues There are several operational issues that impact tax administration, some of which have been covered above and which cut across policy, legal and operational fields. In the emerging system of tax administration which is being implemented, several initiatives are at various stages of consideration and implementation by the FIRS. These include: (i) Modernization of tax administration this includes automation, introduction of electronic processes and tailored made projects to address specified areas of the tax system such as: Project FACT (Factual Accurate Complete Timely) - an integrated electronic system of tax registration, tax payment and accounting which has been concluded U-TIN (Unique Taxpayer Identification Number) Project being overseen by the Joint Tax Board and funded by FG/ States, it is an electronic system of tax identification, involving the assignment of a unique identifier to every taxable person in Nigeria and development of National Tax Database linking all revenue authorities and major stakeholders ITAS (Integrated System of Tax Administration) includes, Business Process Reengineering, Systems Development, Change Management and automation of Finance and Accounts Function HR Reengineering and Automation Finance and Accounts Reengineering and Automation Reengineering of Facility Management and Procurement E Library and E Learning Tax clearance verification Tax Refund Application Software Contact Management Centre Electronic Platform for automatic tax payments Electronic Platform for Mobile Banking and Electronic Payments Several others

It should be noted that modernisation is cost intensive and there is a need for sustained funding of tax authorities if we are to have a truly modern tax system. (ii) Taxpayer segmentation delineation of taxpayers into groups based on specific criteria, such as small and medium taxpayers, large taxpayers, oil and gas etc for increased efficiency and to achieve greater specialization in tax administration. Diversification of revenue sources from oil to taxation as earlier discussed thus is a major initiative of the government and it implementation has seen the FIRS bring down the percentage of oil taxes in relation to total tax collection from a high of 77.6% in 2005 to an all time low of 42.7% in 2009. Even though this figure climbed up to 52.14% in 2010, the commitment and focus shown in addressing this issue provides significant assurance that Government is moving in the right direction. This is also in line with the National Tax Policy and is no more a clich, but a major policy initiative of Government. Let me state that there is nothing wrong with raising revenue from oil taxes; it should however be done in a balanced manner to ensure that we do not focus on a depleting resource to the neglect of more sustainable revenue sources such as taxation. Increased collaboration with Stakeholders as illustrated in the pyramid above, the tax system is a participatory one and therefore to achieve success there is need for increased horizontal and vertical collaboration with stakeholders if tax authorities are to achieve the stated goals of the tax system. There has been focused co-operation with several stakeholder bodies, such as the Nigeria Governors Forum, NASS, Joint Tax Board and even external bodies, such as the United Nations, IMF, OECD and regional and International tax organisations. Some of the collaborative activities have been discussed above. Others which are ongoing include: Government Integrated Financial Management system (GIFIMIS) with Office of the Accountant General of the Federation Data Connectivity with (a) Corporate Affairs Commission (CAC) (b) Nigeria Customs Service (NCS) FIRS-Nigerian Information Technology Development Agency (NITDA) Collaboration (v) Development of a comprehensive compliance and enforcement strategy to support core tax administration tax administration as we know depends on compliance with laws. This is however not always achievable for diverse reasons and when voluntary compliance is not achieved, there may be a need to employ enforced compliance. In this regard the FIRS is currently engaged in the development of a comprehensive compliance and enforcement strategy to aid ease of compliance. On the

(iii)

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other hand the enforcement strategy is to cater for failure of voluntary compliance by taxpayers. Some of the ongoing initiatives in this regard, include the introduction of a comprehensive Self Assessment Regime and the development and implementation of an Enforcement Manual, which details enforcement processes and procedures. THE WAY FORWARD AND CONCLUSION All the above initiatives, projects and other interventions in the tax system can only yield the desired results, where there is clear and stated support for tax authorities from the highest to the lowest levels of Government and also from a critical mass of the citizenry. As stated earlier, the tax system is owned by and operated for the benefit of everyone; accordingly all hands must be on deck to enable tax authorities succeed in their duty of administering the tax system. Therefore I ask you to consider what your part is in the grand scheme. The minimum that is required of you is to pay your taxes promptly and correctly. When a taxpayer voluntarily steps out to pay his/her taxes in fulfillment of his legal and civic obligations and responsibility he/she, as a patriot is making a contribution to national development. More than a mere act of physical compliance, it is a portrayal of an attitude, a much needed mindset that shows a willingness to voluntarily contribute to the development of the country. This type of spirit should be encouraged and replicated within the relevant sectors of the economy as it can serve as the foundation of a silent revolution to create a disciplined, patriotic citizenry, which puts country first and is first willing to do for the country, before asking what the country can do. There can be no greater vehicle for the achievement of the much needed economic and financial wellbeing than persons who are willing to voluntarily make the required sacrifice for the achievement of that vision even if that will entail standing alone. There is no gainsaying the fact that if our economy will develop we absolutely must have a vibrant tax regime. We simply cannot eat our (national) cake and have it; the economies we look to as examples of where we want to be did not get there without the often sacrificial co-operation of its populace specifically in paying their taxes. Why do we hope to get to where they are without doing what they did? In the words of the philosopher Herman Von Helmholtz, he cannot hope to arrive at the end whom did not begin at the beginning. Overall, my point is that tax payers should see themselves as part and parcel of the Nigerian tax system and not outsiders and therefore carry out their constitutional and civic roles through payment of the right taxes, as their contribution to national development and growth. This in essence is the path to economic and financial recovery which if we follow with sincerity and passion, will enable us look forward to the future with hope. Thank you all for listening. God bless Nigeria.