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Issues in Nigeria Police Trust Fund Act and effect of VAT increase on the economy

A presentation at the CITN seminar on Police TrustFund and Value Added Tax

Asiata Agboluaje, LLM Cantab. ACTILead, International Tax & Regulatory Service18 October 2019

2© 2019. For information, contact Deloitte & Touche. All rights reserved

Outline

The Nigerian budget: Funding challenges

Practical Considerations for the Police Trust Fund act

The need for the proposed VAT increase

The Police Trust Fund: any need?

Highlights of the Police Trust Fund act

Other VAT considerations


The Police Trust Fund: Any need?

41:450.

1:599 (+x)

1 2

Overall we need money

4

$700 (N250,000) -Average cost to kit a police officer

3

Police needs to be well paid and training is paramount


The Nigerian budget: funding challenges

Budget deficit

The proposed 2020 budget has a deficit of ₦2.18 trillion, assuming FGN meets its revenue targets. The 2019 budget also had a deficit of ₦1.92 trillion

Debt servicing

Debt servicing in the proposed 2020 budget is not less than 24% of total expenditure

© 2019. For information, contact Deloitte & Touche. All rights reserved 5

Tenor

• Six years, except extended by the National Assembly

Coverage

• Federal Government - 0.5% of the total revenue accruing to the Federation Account into the Fund

• Companies carrying out business in Nigeria – 0.005% of net profit

Purpose

• funding of training and retraining of personnel

• procurement of security equipment

• procurement of books for police colleges

• funding of related activities for skill enhancement

• welfare of the Nigerian Police force

Highlights of the Police Trust Fund Act


Effect on ease of doing business

Additional burden for taxpayers

Applicability to foreignersNo penalty provisions

Tax deductibility

The act presupposes that all companies doing business in Nigeria would contribute into the fund. Clarity on this, as well as the agency responsible for administering the act would have to be provided

It increases the compliance burden of taxpayers as realistically, both sources of the fund for the police, are ultimately from the taxpayer

It makes it difficult in view of government’s decision to make doing business in Nigeria, easier

One step forward 5 backwards

The Act does not provide for penalty in case of breach. Does this imply that payments to the fund is a contribution and not a levy?

Nonetheless there are powers to make regulations

Regulations would be required to clarify whether or not, contributions made to the fund would be tax deductible –

Fifth Schedule Donations??

Practical considerations of the Police Trust Fund act


1

2

3

4

• Current funding challenges in the budget

• Relative ease of administration/collection of VAT

• Transaction based: hence the greater the activity, the greater the VAT

• Low tax to GDP ratio of 6% when compared with the ideal level of 15%

The need for proposed VAT increase/reform

4• Ease of doing business for small and medium scale

players

Tax collection rate

Need for VAT increase/reform

Nigeria

6.1%

South Africa

26.9%

United Arab

Emirates

1.4%

United Kingdom34.4%

USA

Label 1 Label 2

27.10%

World Average Tax

revenue to GDP ratio

22.30%

China

20.1%

Nigeria was in the bottom 7% of taxto GDP ratio.

UAE had the lowest tax to GDP ratio.

Algeria

64.07%

Algeria had the highest tax to GDP ratio.

Source: Nigerian Economic Submit GroupSurvey of Nigerian Households and small businesses (2019)

Nigeria has a tax to GDP ratio of 6.1%. This is majorly due to the inefficiencies in tax administration. - A staggering 59% of Nigerians do not pay tax of any kind, thereby leaving only a handful of individuals to pay their fair share of taxes and consequently fund the infrastructure used by everyone.

Another major contributor to the low tax to GDP ratio is low morale of tax payers and poor compliance of tax payers.


Proposed VAT registration threshold

• ₦25 million turnover per annum threshold for VAT registration (Angola is N14m, Kenya N36 million)

• In essence, businesses below the threshold do not charge, collect or remit VAT

• Uncertain if exemption covers payment

• Leads to numerous practical issues:

• Exempt businesses dealing with non-exempt businesses

• Ability to claim input output

• Need for administrative clearance

• Exempt businesses may opt for voluntary registration

Low VAT rates: Myth or Reality

• Nigeria has currently have one of the lowest VAT rates @ 5% …even @7.5%

• However Nigeria has limited input/output VAT mechanism

• Increases exposure of taxpayers and ultimately – double VAT

• Ability to deduct such VAT for income tax purposes does not provide equivalent succor as input/output VAT



Expansion of the list of exempt items

• Increase in the exempted from VAT is a welcome development

• Not full expansion of list but further clarity on existing exemption “basic food item”

• Welcome development but need for framework to determine qualification as basic food time


VAT Increase …will it take us to promise land

• Need to plug existing leakages to ensure the increase is worthwhile

• Further upgrade to the laws and our administrative system to capture dynamic transactions

• Ensuring judicious utilization of the increased tax revenues

• Government has to periodically show the revenue generated and what it has been used for – best form of compliance is voluntary

• Enlightenment on benefits of tax payment with real live examples

• As tax payers the more we pay, the more interested we are in what happens with our contribution

• We should ask right questions and demand accountability

Income tax revenue from tax payers

Government’s Role and impact of enforcement

Top

1%

Bottom

90%Top

10%Bottom

25%

20%

• In the US, the top 1 percent of taxpayers account for 37.3% of all income taxes, while the bottom 90% accounts for 30.5% of all income taxes.

• In the UK, the top 10% of taxpayers are projected to be liable for 59.7% of total tax, with the bottom 25% projected to pay 2.2%.

• In Nigeria, only 14 million people from an active population of circa 70 million paid taxes in 2016.


The Way Forward

Regular update of the database to widen the tax net

Eliminating inherent loopholes

2Full deployment of technology to aid tax administration and to simplify tax compliance procedures

41Periodic review of tax policy and legislation in order to provide clarity and ensure synergy between tax policy, tax legislation and tax administration

Education of taxpayers in order to encourage voluntary compliance

Know our rights and demand accountability

53Justiciability of the directive principles of state policy to promote accountability


Concluding Thoughts

As government seeks to raise revenue principally through taxes, the question as to whether it has built sufficient ‘trust capital’ whereby the taxpayers can see their tax in action becomes relevant.

While there is never a convenient time to pay taxes, government must however show how it intends to judiciously use the funds generated.

“Death, taxes and childbirth! There's never any convenient time for any of them”

Margaret Mitchell


LLM (Cantab), ACTI Lead, International Tax & Regulatory Deloitte Nigeria

Asiata Atinuke

Agboluaje

Asiata Atinuke Agboluaje is legal and tax practitioner with over 10 years of experience in Nigeria and United Kingdom.

She holds an LLB from the University of Ilorin, BL. with the Nigeria Law School and is an alumnus of University of Cambridge where she obtained her LLM in Corporate and Commercial Law.

Asiata started her career with Templars & Associates, one of the leading law firms in Lagos. She had a stint with Olswang LLP, a prestigious law firm in United Kingdom, under the International Lawyers for Africa Programme.

She was the legal and compliance officer for an investment bank in Lagos, before joining Deloitte in 2012.

As a member of the Nigerian Bar Association and Chartered Institute of Taxation, Nigeria (CITN), Asiata is experienced in tax and corporate law advisory on various aspects of cross border investments from inception to conclusion.

She has provided tax and regulatory services to several companies in Nigeria across different industries ranging from deciding the most optimal investment structure to investment location, options for repatriation of profits and exit strategies, amongst others.

Her experience also spans assisting foreign companies commence operations in Nigeria liaising with various regulatory bodies on behalf of her clients.

Outside of her professional career, her hobbies include dancing, listening to music and cooking. Asiata is married and blessed with 2 wonderful boys.

@tinuagbo

Atinuke Agboluaje

Atinuke Oyebamiji-Agboluaje

+234 (01) 904 1890

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