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Taxation

Good Use Of Tax Revenues Will Enhance Tax Morale And Compliance – FIRS

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Good Use Of Tax Revenues Will Enhance Tax Morale And Compliance - FIRS

Olushola Okunlade Writes

When governments deploy tax revenues for the common good of the citizens, there is a concomitant increase in tax compliance by citizens who see the direct benefit of the taxes they pay.

This was the position held by the Executive Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami during his opening remarks at the launch of the Public Finance Database by the Nigeria Governors’ Forum at the Wells Carlton Hotel, in Abuja, on Tuesday, last week.

Mr. Nami argued that the low compliance tax rate in most developing countries was a result of the failure of the social contract between the taxpayers and the government, noting that those in political leadership in the country had a duty to promote a tax-paying culture by relating projects and infrastructural developments executed by them to taxes paid by taxpayers.

“Taxpayers need to see what has been done with their money to be encouraged to continue to pay their obligations under the Social Contract they have with the government.

“I am delighted that one of the sessions focuses on the tax-for-service programs as they impact tax revenues. This issue is dear to us as tax administrators as there is a nexus between the effective utilization of tax revenue and tax compliance,” he stated.

“The low level of tax compliance in developing countries can be attributed to the failure of the social contract between the taxpayers and the government. It is expected that if the citizens are committed to paying taxes, the government should be committed to using the taxes for the common good of all citizens.”

The FIRS boss further argued that projects funded by taxpayers’ moneys should be reported as such and not personalized so that citizens would begin to relate these projects as the proceeds of their taxes.

“Those in political leadership should promote the tax-paying culture by relating projects and infrastructural developments executed by them to tax.

“The government at all levels is doing a lot with taxpayers’ money but citizens do not easily appreciate these facts because of the way and manner the projects are reported.

“There is the need to de-emphasize and de-personalize projects so that the citizens will begin to relate all the ongoing laudable projects in the states to tax revenue. This singular act to a great extent will increase the tax morale and enhance compliance.”

In 2019, the Southern Swamp Associated Gas Solutions project was commissioned, and the SPDC JV is planning to reduce associated gas flaring further through its Forcados Yokri gas-gathering project, of which large parts are set to be completed in 2022. Despite such efforts to reduce continuous flaring, unfortunately flaring intensity (the amount of gas flared for every tonne of oil and gas produced) at both SPDC- and SNEPCo-operated facilities increased in 2021 owing to short-term operational issues. Flaring from SPDC-operated facilities increased by around 5% in 2021 compared with 2020. The increase was primarily because of the extended outage of the gas compression system in SPDC’s shallow-water operations. The system was restored and became operational from January 2022. Flaring at SNEPCo-operated facilities rose by around 160% in 2021 compared with 2020. This was mainly because of an increase in flaring on the Bonga floating production, storage and offloading (FPSO) vessel. Repairs to a flex-joint on the Bonga FPSO’s gas export riser in the second quarter took longer than expected, in part because of weather conditions. While repairs were under way, the FPSO continued to produce oil and therefore flaring was necessary for safety reasons. The repairs were safely concluded in July 2021. Although flaring intensity levels rose in 2021, SPDC and SNEPCo over the last 10 years have almost halved the combined amount of hydrocarbons they flare from 1.5 million tonnes in 2012 to 0.8 million tonnes in 2021. This reduction is the result of a strict flaring reduction management process and both SPDC and SNEPCo will continue to work in close collaboration with joint-venture partners and the government to make progress towards ending routine flaring of associated gas. NIGERIA LNG EXPANSION UNDERWAY Global demand for LNG continues to grow as the world increasingly seeks reliable supplies of lowercarbon energy. Shell’s investment in Nigeria’s gas infrastructure for export is expected to help 6 This is according to a data provided by global research and consultancy business Wood Mackenzie. the country benefit further from revenues. Shell Gas B.V. and its partners took a final investment decision in 2020 on a new LNG processing unit – known as Train 7 -- at NLNG. The expansion is expected to create around 12,000 jobs for Nigerians during construction and stimulate growth of the local oil and gas service sector, with 55% of engineering and procurement of goods and services being sourced in-country. Train 7 is expected to ensure Nigeria’s continued place as a global player in a lower-carbon energy source. Once operational, Train 7 will add around 8 million tonnes per annum of capacity to the Bonny Island LNG facility, taking the total production to around 30 million tonnes per annum. In 2021, NLNG began awarding procurement and construction contracts. Early works started at the site. The first phase of the worker village is expected to be ready for occupancy in 2022 and the new material offloading facility ready for use by the end of 2022. NLNG’s Train 7 is expected to come onstream in the middle of the 2020s. KEY LICENCE RENEWED FOR DEEP-WATER SNEPCo has interests in four deep-water blocks in the Gulf of Guinea, two of which it operates. Today, nearly one-third of Nigeria’s deep-water oil and gas production comes from the Bonga and the nonoperated Erha fields.6 Since production began in 2005, Bonga alone has produced more than 950 million barrels of oil with the 2021 average oil production per day at 105,000 barrels. The Bonga FPSO vessel has a total production capacity of 225,000 barrels of oil per day and 150 standard cubic feet of gas export per day. In 2021, the availability of the FPSO vessel increased to 80% from 70% in 2020. In addition to Bonga, SNEPCo’s exploration activities have led to several significant discoveries of oil and gas over the last two decades, including the Bolia and Doro fields (Shell interest 55%). Nigeria Briefing Notes Helping to power Nigeria’s economy 13 In the right investment climate, SNEPCo believes that there are opportunities to expand. In 2021 the OML 118 (Bonga) production sharing contract was renewed and the lease extended for 20 years. Bonga North and Bonga South West Aparo (BSWA) oil fields are two such potential opportunities. Bonga North is a proposed tie-back project to the existing Bonga FPSO with Phase 1 comprising 14 wells. BSWA is a development of a new FPSO with Phase 1 comprising 23 wells. SUPPORTING RENEWABLE ENERGY STARTUPS Millions of Nigerians are excluded from the country’s power grid and Shell Companies in Nigeria have established and provided substantial funding for a not-for-profit, impact-investing company called All On. Operating as an independent company, All On works to bring reliable electricity – often from renewable energy sources -- to off-grid urban and rural customers. This support aims to build a solid pipeline of viable businesses that can create the scale required to address Nigeria’s access to energy gap. In December 2019, SPDC and SNEPCo made a significant additional 10-year financing commitment of $160 million in All On, bringing the total commitment to $200 million. By the end of 2021, All On had provided investment capital to over 40 renewable energy start-ups in its portfolio – an increase of more than 30% from 2020. One such company is Infibranches Technologies Limited, to which All On has committed $2 million, which is expected to enable the indigenous technology company to expand sales of solar home systems via its more than 13,000 agent banking partners across Nigeria. With the support of the Rockefeller Foundation, the All On Hub was established in 2020 to provide nonfinancial support and build the capabilities of off-grid energy entrepreneurs. In 2021, the hub supported 81 ventures – nearly double the 41 supported in 2020. Also in 2021, All On, Odyssey Energy Solutions and the Global Energy Alliance for People and Planet launched a $10 million equipment financing facility as part of the DART pilot programme in Nigeria. 7 Hydraulic flying leads support the delivery of hydraulic fluid and/or chemicals between subsea equipment. 8 Subsea trees are an assembly of valves and other components used to monitor and control the production of a subsea well. DART will combine demand pooling, aggregated purchasing of solar equipment, and access to affordable finance to unlock economies of scale for solar companies, achieve cost savings for end-users, and accelerate the growth of the renewable energy sector in Nigeria and beyond. DEVELOPING LOCAL CONTENT AND SKILLS Shell Companies in Nigeria contribute to the growth of Nigerian businesses that can provide technical and support services to the industry. This includes the manufacture of tools and technical kits, the operation of helicopter flights in the Niger Delta, and strategic partnerships between foreign and local companies to stimulate technology transfer and capacity development. While there are government-required programmes in some areas, such as the Nigerian and Community Content Strategy embedded in the Assa North/Ohaji South gas development project, Shell Companies in Nigeria deliberately seek to contract local businesses wherever possible. In 2021, Shell Companies in Nigeria awarded $800 million worth of contracts to Nigerian-registered companies. Of these, 92% were companies with at least 51% Nigerian ownership. SNEPCo has awarded major engineering and construction contracts to companies that are indigenous, have local staff, or possess domestic capabilities in the country. At present, the manufacture and rebuild of hydraulic flying leads7 (HFLs) is being carried out in-country by wholly indigenous companies. Pressure Controls Systems Nigeria Limited, another Nigerian company, continues to refurbish old subsea trees.8 Sometimes, a lack of access to capital hinders Nigerian companies from competing for and executing contracts effectively. Shell Companies in Nigeria have provided access to nearly $1.6 billion in loans to 901 Nigerian vendors under the Shell Contractor Support Fund since 2012. These loans help improve their tendering opportunities.

Mr. Muhammad Nami, an advocate for a harmonized tax system as a cure for tax revenue leakages used the platform to call for the country to make a bold paradigm shift by harmonizing the country’s tax system to optimize tax revenue collection.

“Recently, there has been a clamour for a holistic review of our tax system. Its proponents, including myself, argue that if Nigeria must achieve its tax revenue potential as the fulcrum of economic development, a harmonisation of our tax system must be undertaken.

“Tax harmonisation for enhanced revenue generation, which was the theme of the 2nd National Tax Dialogue was carefully chosen to reiterate the need for us as a nation to rethink the current tax system being operated.

“There was a consensus at the dialogue that Nigeria needs a transition to a unified tax administration as practiced globally by most of the efficient and effective tax jurisdictions that have achieved optimum tax revenue collection. 

“Certainly, there is no gainsaying that if Nigeria must be less dependent on external borrowing and buffer from the volatility and dwindling oil revenue, there should be a paradigm shift. Beyond politics and sentiment, the country should be willing to make those bold and hard but beneficial tax reforms and there is no better time than now if we must avert the looming debt crisis. The gains from a harmonised tax system far outweigh the fears expressed in some quarters, if dispassionately analysed.”

Taxation

FIRS: Nigeria’s Tax-To-GDP Ratio, 10.86% As At 2021

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FIRS: Nigeria’s Tax-To-GDP Ratio, 10.86% As At 2021

By Moninuola Sulaiman

Nigeria’s Tax-to-GDP ratio which, in the last 12 years, hovered between 5% to 6% rose to 10.86% by the end of 2021.

The new ratio was communicated to the Federal Inland Revenue Service (FIRS), via a letter signed by the Statistician-General of the Federation, Prince Adeyemi Adeniran, on the 25th of May 2023, following a joint review by the Nigerian Bureau of Statistics (NBS), in collaboration with the Federal Ministry of Finance and the FIRS, using data from 2010 to 2021.

The revision took into account revenue items hitherto not previously included in the computations; particularly, relevant revenue collected by other agencies of government.

Tax-to-GDP ratio is a measure of a nation’s tax revenue relative to the size of its economy as measured by Gross Domestic Product (GDP). The ratio is a useful tool for assessing the “health” of a country’s tax system, and highlighting its tax potential relative to the size of the economy. It is the ultimate measure of the effectiveness of a nation’s tax system compared to other countries.

In a statement announcing the new Tax-to-GDP ratio, the Executive Chairman of FIRS, Mr. Muhammad Nami, explained that sources that previously put the country’s Tax-to-GDP ratio at between 5% and 6% did not consider tax revenue accruing to other government agencies in their computation. Particularly, revenues collected by agencies other than the FIRS, Customs, and States Internal Revenue Service were excluded. This situation was peculiar to Nigeria as most other countries operate harmonised tax systems (all or most tax revenues are collected by one agency of government) with single-point tax revenue reporting.  As such, all relevant tax revenues are included in the computation of the Tax-to-GDP ratio.

 

“In order to correctly state the Tax-to-GDP ratio, the FIRS initiated a review and re-computation of the ratio for 2010 to 2021. In recomputing the ratio, key indicators that were previously left out were taken into account. This resulted in a revised Tax-to-GDP ratio of 10.86% for 2021 as against 6% hitherto reported,” the statement noted.

 

Mr. Nami further noted that Nigeria’s Tax-to-GDP ratio should ordinarily be higher than 10.86% but for certain economic and fiscal policy factors, including tax waivers and leakages occasioned by the country’s fragmented tax system.

“It is important to note that the Tax-to-GDP ratio for Nigeria should be higher but for the impact of tax waivers contained in our various tax laws (including exemptions to Micro, Small, and Medium Enterprises brought in by Finance Act, 2019), low tax morale, leakages occasioned by the country’s fragmented tax system and the impact of the rebasing of the GDP in 2014”, he explained.

The FIRS boss implored the government to consider reviewing its policies on tax waivers thereby guarantying increased revenue to prosecute its programs and positively moving the needle of the country’s tax-to-GDP ratio.

The Statistician-General of the Federation, Prince Adeyemi Adeniran, in his letter to the Executive Chairman of FIRS, described the revision as a facelift to the Tax-to-GDP ratio for Nigeria in comparison with other countries.

He further noted that the NBS had “carefully and diligently reviewed the methodology used for computing the revised estimates, as well as the various items that have been included in the new computation,” and that the NBS as an outcome of its review and meetings with FIRS has adopted the new Tax-to-GDP computation.

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Muhammad Nami, Executive Chairman, FIRS Wins ICAN Merit Award

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Muhammad Nami, Executive Chairman, FIRS Wins ICAN Merit Award

… Also named winner BusinessDay Newspaper Excellence in Public Service Award 2022 

Rashidat Okunlade Writes

The Executive Chairman, Federal Inland Revenue Service (FIRS), Mr. Muhammad Nami has been named winner of the Institute of Chartered Accountants of Nigeria (ICAN) Merit Award 2023 in its Non-Members Category at the Institute’s 2023 Annual Dinner Awards.

Mr. Nami, who received the Award at the Monarch Event Centre, Lagos, yesterday was described by the President of the Association, Mallam Tijani Musa Isa as an unassuming and humble achiever who has led the FIRS to excel in the international tax circle despite global economic challenges by achieving milestones in revenue collection.

“This Award is in recognition of your positive impact on society. You have made significant contribution to the institute and to Nigeria. The governing board deemed it fit to acknowledge the role you have played and your outstanding achievements,” Mal. Isa noted.

Muhammad Nami, Executive Chairman, FIRS Wins ICAN Merit Award

Mr. Muhammad Nami, Executive Chairman, Federal Inland Revenue Service (FIRS) flanked by staff of the FIRS, after he received the ICAN Merit Award, at the ICAN 2023 Annual Dinner Awards, Lagos. (May 6, 2023).

In his Citation, Mr. Muhammad Nami was described as “a go-getter and an ingenious leader.” It further stated that “the reforms he is implementing at FIRS attest to his dexterity, visionary leadership, and patriotism. Under his visionary leadership, the FIRS in 2022 achieved an unprecedented revenue collection of N10.1 trillion, which is the highest tax collection ever made in the history of the country.”

While receiving the award, the Executive Chairman FIRS appreciated the Council Members of the Institute, saying that he has been lucky to work with their members throughout his 32-year career.

“Since I left the university, over 32 years ago, I have had the privilege and luck to be directly and indirectly associated with ICAN members: from the PKF to Manam Professional Services, and now I am working directly with well over 3,000 members of this Institute as the Executive Chairman of the FIRS.

“I feel blessed by this honour and privilege. I am grateful to God, and to all of you who have found me worthy of this recognition. I pray God rewards all of you enormously,” he noted.

Mr. Nami dedicated the award to his alma mater from primary to tertiary levels; his former colleagues at the Presidential Committee on Audit of Stolen Recovered Stolen Assets; members of the Tax Advisory Committee of the FIRS; all taxpayers; the Board Members, Management, and staff of the FIRS, and his family members.

Muhammad Nami, Executive Chairman, FIRS Wins ICAN Merit Award

Mr. Muhammad Nami, Executive Chairman, Federal Inland Revenue Service (FIRS) speaks to Tax Matters at the ICAN 2023 Annual Dinner Awards, held in Lagos. (May 6, 2023)

In a similar recognition earlier in the week, on Thursday 4th May 2023, the FIRS boss was named the winner of the BusinessDay Excellence in Public Service Award 2022, at the BusinessDay States Competitiveness And Good Governance Awards 2022.

The country’s influential business newspaper explained that it named him the winner of the award for his “visionary and leadership qualities [that] have brought tremendous change to the FIRS.”

It further noted that: “Under your leadership, you transformed the tax administration and compliance landscape in Nigeria. You deployed the revolutionary TaxPro Max: FIRS’ homegrown digital platform for tax administration which allows taxpayers to register, file returns and pay their taxes easily from any location other than their respective tax offices.

“You have repositioned the operations and staff of the FIRS, and introduced technological tools to institute more transparency, accountability, and effectiveness, which in turn has translated into the increased capacity to deliver on the mandate with results.”

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OECD, Nigeria Meet On Maximising Benefits Of Two-Pillar Tax Solution

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FIRS Makes Positive Trend In 2022 Compare To Its 2021 Record, Collects N10.1 Trillion

… Nigeria to continue to participate in rules development in the interest of the country and Africa

A delegation from the Organisation for Economic Co-operation and Development (OECD) met with Nigerian representatives on the 4th and 5th April 2023, at a workshop it jointly organised with the Federal Inland Revenue Service (FIRS), to discuss the maximisation of the benefits of the Two-Pillar Solution for Nigeria.

This is contained in the Workshop’s Outcome Statement released today. The Outcome Statement was signed by the Executive Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami and the OECD Representative, Mr. Ben Dickinson.

The Two-Pillar Solution, a proposal by the OECD Inclusive Framework, is a set of proposed rules, endorsed by 138 countries across the world as a uniform solution to the tax challenges of the digitalised economy, as well as Base Erosion and Profit Shifting.

Nigeria, one of the four members of the Inclusive Framework that did not endorse the set of rules, met with the OECD delegation last week to familiarise relevant government officials with the rules, Nigeria’s position, as well as the potential benefits of the Two-Pillar Solution to the country and the world in general.

The workshop was attended by key stakeholders, led by the Executive Chairman of the FIRS, Mr. Muhammad Nami, who was represented by the Coordinating Director, Executive Chairman’s Group, Mr. Muhammad Lawal Abubakar. Also in attendance were the representatives of the Office of the Vice President, the Federal Ministry of Finance, Budget and National Planning, the Federal Ministry of Justice, Federal Ministry of Industry, Trade and Investment, Nigerian Investment Promotion Commission (NIPC), Nigeria Export Processing Zone Authority (NEPZA), Oil and Gas Free Zone Authority (OGFZA), Nigeria Export Promotion Council (NEPC), Joint Tax Board (JTB), and some States’ tax authorities.

After a critical review of the rules and Nigeria’s participation in their development, stakeholders at the meeting resolved that “there is the need for Nigeria’s continued participation in the rule development, as a member of the Inclusive Framework, to ensure that the interest of the country and Africa is factored into the design and development of the rules.”

The Outcome Statement noted that whether or not Nigeria endorsed the statement of October 2021 and the detailed rules to be released later, to address challenges arising from the digitalisation of the economy, the country’s tax base and fiscal policy options will be impacted by the implementation of the Two-Pillar solution, especially the Pillar 2 Global Minimum Tax Rules of 15% effective tax rate (the GloBE rules).

The meeting consequently observed that there was the need for Nigeria to immediately implement fiscal policy measures to address these potential impacts.

“In light of this, there is a need to commence immediate implementation of fiscal policy measures around the Global Minimum Tax Rules, in view of the fact that other jurisdictions around the world have commenced implementation of measures that will enable them reap top-up taxes allowed under the rules, which will be to the detriment of Nigeria from 2024, if no step is taken.

“There is also an urgent need to review and streamline Nigeria’s tax incentives, as the rules will have the impact of allowing other jurisdictions to mop up taxes not collected in Nigeria due to tax incentives,” the statement read.

The Stakeholders also observed that Nigeria could implement and reap the benefits of Pillar 2, even where it does not wish to implement Pillar 1, noting that “Effective implementation of Pillar 2 rules holds significant potential for increased tax revenue to fund government program, boost the economy and keep Nigeria as an attractive investment location.”

As part of its recommendations, the OECD-Nigeria Meeting urged stakeholders within the country to commence internal engagements and “draw up a national strategy for immediate streamlining of its tax incentives, to avoid ceding its tax base to other jurisdictions, owing to the implementation of Pillar 2 rules.”

The Workshop Statement enjoined Nigeria to take immediate steps to respond to Pillar 2 through the implementation of tax policy options, which may include “changing its income tax rule to bring up its effective tax rate to a minimum of 15% or introducing a Qualified Domestic Minimum Top-up Tax (QDMTT)”.

The meeting emphasised the need for Nigeria to continue to participate in the rule development “as a matter of importance to protect the national interest.”

Nigeria is a member of the Inclusive Framework, and has actively participated in the rule development process despite not endorsing the Inclusive Framework October 2021 Statement on the grounds that it was in Nigeria’s best interest not to do so, to ensure that the country does not lose out on potential revenue from the digital economy.

The Executive Chairman of the FIRS had in a statement in May 2022 noted that the country had concerns over the impact the rules could have on Nigeria’s tax system and revenue generation.

“There are serious concerns on how the rules (particularly on Pillar 1) would compound the issues in our tax system. For instance, to be able to tax any digital sale or any multinational enterprise (MNEs), that company or enterprise must have an annual global turnover of €20 billion and a global profitability of 10%. That is a concern. This is because most MNEs that operate in our country do not meet such criteria and we would not be able to tax them,” Mr Nami stated then.

“Secondly, the €20 billion global annual turnover in question is not just for one accounting year, but it is that the enterprise must make €20 billion revenue and 10% profitability in average for four consecutive years, otherwise that enterprise will never pay tax in our country, but in the country where the enterprise comes from, or its country of residence,” the statement read.

Thirdly he noted that for Nigeria to subject a Multinational Enterprise to tax under the rule, the entity must have generated at least €1 million turnover from Nigeria within a year.

Mr. Muhammad Nami stated that this is an unfair position especially to domestic companies which, with a minimum of above N25 million (that is about €57,000) turnover, are subject to companies income tax in Nigeria. He added that this rule will take-off so many Multinational Enterprises from the scope of those that are currently paying taxes to Nigeria. In other words, even the MNEs that are currently paying taxes in Nigeria would cease to pay taxes to us because of this rule.

Fourthly, on the issue of dispute resolutions under the Two-Pillar Solution, the FIRS Executive Chairman explained that the rules were such that in the event of a dispute between Nigeria and a Multinational Enterprise, Nigeria would be subject to an international arbitration panel as against Nigeria’s own justice system.

“It would be subject to international arbitration and not Nigeria’s judicial system and laws—even where the income is directly related to a Nigerian member of an MNE group, which is ordinarily subject to tax in Nigeria on its worldwide income and subject to the laws of Nigeria. We are concerned about getting a fair deal from such process. More so, such a dispute resolution process with a Multinational Enterprise, in an international arbitration panel outside the country, would lead to heavy expenses on legal services, traveling and other incidental costs.

“Nigeria would spend more; even beyond the tax yield from such cases,” the statement had read.

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