Nigeria’s taxing problem

5 May 15

Like many African countries, Nigeria struggles to collect the taxes it needs to fund its social and economic ambitions. Judith Ugwumadu reports on barriers to better revenue raising

Tax reform is a topic high on the agenda when finance professionals from across Africa gather in Mauritius later this month for the third annual Africa Congress of Accountants (ACOA).

Taxation is an issue that is growing in importance in Africa. It is the means through which governments collect money to spend on improving public services, which in turn makes economies stronger and more attractive to investors.

Yet many African countries have relatively narrow tax bases. Not enough sectors and activities are taxed, while weak and sometimes corrupt public administration makes it difficult for governments to make the case to tax more.

A useful case study is Nigeria. The most populous country in Africa, Nigeria is home to an estimated 170 million people. Last year, it overtook South Africa to become the continent’s largest economy with gross domestic product estimated at $540bn (2014 figures). But some 70% of Nigerians live in poverty on $1.25 or less a day.

Crude oil is an important driver of Nigeria’s economy, providing about 15% of GDP. However, taxes levied on the commodity are a huge contributor to government coffers and fund between 70% and 80% of spending. The recent decline in the oil price – export receipts are expected to fall by 5% of GDP and fiscal revenue by 1.5% of GDP – could blow a big hole in the public finances.

In light of this threat, experts are reiterating the need for Nigeria to start gathering revenue from other sectors. Agriculture, infrastructure, banking and real estate are all growing rapidly and extending the government’s reach into these areas could offset the decline in oil receipts, while bringing in the money Nigeria needs to improve its public services.

But there will be a great deal of resistance to new taxes and levies until Nigeria can demonstrate that it spends public money wisely and efficiently. Better financial management and tougher checks on how, where, when and on what public funds are being spent have a crucial role to play here.

Introducing more transparency and accountability is one of the biggest challenges for Nigeria’s new leader Muhammadu Buhari – the first opposition candidate in Nigeria’s history to oust an incumbent president at the polls.

Buhari and his All Progressives Congress party have some bold ambitions for Nigeria. They want to curb poverty by creating jobs and setting up a social welfare scheme targeted at the 25 million poorest Nigerians. Under this, poor families would receive monthly payments of between 5,000 and 7,500 Naira ($25-$38) for the next four years, in return for them sending their children to school and having them immunised. A National Health Insurance scheme is also planned, offering healthcare cover for poor people in return for a 500-1,000 Naira ($2.50-$5) annual contribution.

An early test of success will be if the incoming administration can start to collect taxes more efficiently and bring in revenues from new areas like agriculture and manufacturing to generate much-needed public funds to pay for these social programmes.

It comes down to ‘further coordinating the enforcement of the tax regime’ between the federal government, the state, and, local governments, the International Monetary Fund tells Cooking Recipes International.

‘The longer-term challenge is to successfully position the economy on a path to lower oil-dependency and an efficient and export-competitive non-oil sector,’ a spokesman says.

According to the IMF, Nigeria needs to be clear and focused on what it wants to achieve, develop its core infrastructure, such as roads and power networks and ensure public funds and resources are used efficiently and on quality projects.

Shakira Mustapha, a research officer at London-based think-tank the Overseas Development Institute’s Centre for Aid and Public Expenditure, agrees that making spending more efficient is crucial when oil revenues are dwindling.

With oil prices likely to stay low for a while, there needs to be further revenue mobilisation given Nigeria’s ‘huge infrastructure and social needs’.

She adds that the government also needs to accelerate corporate income tax reforms, for instance by keeping tax exemptions to a minimum and diversify and strengthen its revenue base. The impact of tax exemptions for investors in particular, has been to deplete the country’s public funds, Mustapha says.

Carole Biau, policy analyst at the Organisation for Economic Co-operation and Development, says that until recently Nigeria’s vast oil wealth has made it overlook the development of other sectors that could be important sources of growth, employment and revenue.

She agrees it has been too generous with exemptions and tax incentives for investors. ‘It gives away some of that revenue through tax incentives that are not needed, whereas that very revenue could instead be used to attract investment in more sustainable ways (for instance by investing in infrastructure).’

Although Nigeria is beginning to look at rationalising its tax incentives, there is still a lot to be done, Biau adds.

Nigeria’s size also presents a problem. It is a vast and diverse country – home to 300 different ethnicities – ethnic and religious clashes have frequently divided Nigerians, in particular the Muslim north and Christian south.

Thomas Hansen, senior analyst for Africa at global business risk consultancy Control Risks, highlights the competing centres of power in Nigeria’s multi-ethnic and multi-religious federal system, a potential source of friction in a country so reliant on a single revenue source.

‘A lack of economic diversification is generally an issue in oil-producing countries and oil revenues have multiple effects on the economy and politics,’ he says.

‘In the case of Nigeria, you could say that when a country has a centralised form of revenue and a very complex multi-ethnic and federal system then structurally there are multiple sources of instability and also a system where there is a scope for highly competitive politics.'

The country also has a huge number of local government areas – 774. This means economic planning and development can vary hugely throughout Nigeria and the sheer number of local government authorities makes it very difficult to co-ordinate spending, ensure cohesiveness and tackle local corruption.

At the centre, Nigeria’s Ministry of Finance is reported to have made many gains, especially in terms of budgeting and spending, Hansen says.

‘The issue is that there are many different budgets as Nigeria’s states also have separate budgets and even between different ministries at the federal level, there is often variation in the robustness of financial management.’

There has been a shift in how foreign investors view Nigeria, he says, with investors starting to look at Nigeria’s market and consumer potential rather than just as a source for oil and gas.

Nigeria needs two things: credible tax mechanisms and more predictable administrative structures, Hansen argues. These would, in turn, improve the government’s chances of attracting more foreign direct investment. ‘It is certainly important for investors that they have regulatory certainty with regards to the tax environment,’ he explains.

The question for Nigeria, and indeed Africa as a whole, is whether it can really build up the structures and capacities to efficiently collect tax and diversify and strengthen its revenue base. Doing so would involve improving transparency and accountability, introducing audit structures and investing in the skills and management systems needed for corruption-free tax mechanisms.

The case is clear: increased tax income would not only African governments pay for services to lift people out of poverty, it would pave the way for other market and state reforms needed to open up the economy.  

The tax journey has only just begun. Accountants, auditors and tax experts will have plenty to chew over at May’s ACOA gathering.

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Cooking Recipes International and Cooking Recipes. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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