Reform Taxation to Compete Globally

by Thompson Ayodele

The new administration has indicated its interest to reform the current tax system. The reform is coming as a result of series of complaints by companies operating in Nigeria over the problems associated with the current tax regime. The proposed tax reform is aimed at addressing multiple taxation and the need to strike a balance between governments’ lawful need for revenue and the desire to encourage investors.

Over the years, there have been several policies aimed at tax compliance by individuals as well as corporate organizations. The bottomline of such policies is the desire by all tiers of government to derive high revenue from tax. The effect is all tiers of government ended up collecting taxes for the same purposes under different guises.

Under this circumstance, one thing which policymakers are yet to
understand is that the expected high revenue won’t be realized and
compliance costs would be high. From a consumer standpoint, it has left so much businesses with no alternative than increasing the price of their services. This has left the incidence to shift to the consumers
many of whom are with uncertain income.

More depressing is the penchant to lock up business outfits. The purpose of any tax system is defeated if it cannot be used to lure potential investors. With the current prevailing tax system, a lot of investors are either unwilling to invest or expand their existing operations. This is because of the plethora of taxes that all tiers of government end up collecting.

The reform in the tax system is coming at a critical time. Just as
competition is essential for economic progress, tax competition also
spurs more growth and opportunity. This is because capital goes where it is welcome and stays where it is well treated.

As part of the tax reform, the Federal Inland Revenue has proposed 15 per cent increase in the Value Added Tax (VAT). In addition, it has proposed a reduction in company’s income tax from 30 per cent to 20 percent. This simply amounts to giving with the right hand and at the same time taking with the left hand. A 15 per cent increase in VAT would reduce companies’ income. This is because income is determined by the amount of goods/items consumers purchase or consume.

The increase in VAT would affect the purchasing power of the individuals and hence companies’ income. Our tax system should not be viewed from the amount that would accrue to the government. Rather it should be seen from the standpoint of how it
could be used to lure investors, enable existing companies to increase their operations and how it can be used to launch the nation towards global competition. As the nation prepares for a comprehensive tax reform, what is unique is that there are solutions to the prevailing tax system.

These solutions have demonstrated their value in other markets and it would be good for the present administration to start paying attention to them.

A growing number of countries have instituted or are adopting a flat tax rate. The idea is spreading. The logic behind it is that it helps to
create more prosperity and countries have realized that if they don’t
adopt the flat tax, they would lose jobs, capital and their own
ambitious entrepreneurs to more growth-friendly nations. The reason is simple: it spares taxpayers the countless headache of complying with several tax codes.

Many emerging countries in central and eastern European countries have reformed their tax with a flat rate solution. For instance, flat tax rate in Estonia contributed to making it an international hot spot for foreign investment. Estonia has attracted about $890 million in foreign direct investment in 2003 alone and over $926 million in 2004. Per capital, this is more than ten times what red-hot China is receiving.

According to the recent World Bank Study on Doing Business, it was found that there are over 35 different forms of taxes levied by the federal, state and local government. There is need to harmonize our taxation system.

Take for instance, before its reform, Russian economic system contained so many different taxes. Confusing levels of regional and local taxes that invariably overlapped and complicated these. In fact, the tax system was really organized chaos.

Tax-collecting officials became so notorious for negotiating tax
liabilities instead of determining them based on a tax statute. However, in 2001, 13 per cent flat tax was introduced. The result: higher tax revenues collected every year. By the end of 2004, government revenue from income taxes alone had more than doubled in the over four years the flat tax had been on the book.

When a tax regime becomes so convoluted that tax collecting has a legal component of arbitrariness, it cultivates corruption, evasion and failure.

Our tax policy should not lose sight of the prevailing situation in
Nigeria at the moment. With deteriorating infrastructural facilities,
crippling power supply, these have increased the transaction costs for organizations and the concomitant effect on production and distribution of goods and services.

Any tax reform that does not take cognizance of these might not achieve its end views. At best, business outfits would have no other option than to find dubious means of evading tax or conniving with tax collectors so as to under-pay them. Ultimately, an effective and efficient tax system would in the end enable Nigeria to compete globally.

• Ayodele is the executive director of Initiative for Public Policy
Analysis in Lagos.

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