The challenge of tax enforcement has been a recurring decimal in Nigeria. At the international plane, while the argument for tax enforcement generally oscillates between the voluntary compliance ideal on one hand and the command-control strategy on the other hand, this post will suggest that these two are not Nigeria's only options.
Voluntary tax compliance is the concept by which taxable persons volunteer information relevant for appropriate taxation by tax authorities. Studies show that in Africa, mismanagement of public resources, poor governmental accountability and the general absence of a quid pro quo strongly militate against tax compliance. In the Nigerian experience, because widespread corruption and waste have been prominent features of public office, voluntary tax compliance remains largely an unrealized ideal. This is especially true of personal income taxation. That about 53% of Nigeria's labor force presently remains in the underground economy, undocumented and untaxed, is proof.
On the other hand, the command-control strategy for tax compliance is a belief in the power of sanctions and its potential to compel obedience to tax laws. The deterrent effect is the thrust of this strategy. How has Nigeria fared with this? In 2011, Nigeria amended her Personal Income Tax Law to among other things, increase sanctions for tax violations. Yet, sample research conducted in Kaduna State of Nigeria revealed that the increase in sanctions had not triggered a corresponding increase in tax compliance. In many other states, figures are disparate, showing no clear or consistent pattern of increase in direct assessment revenues.
In the face of poor voluntary tax compliance and a similarly weak deterrence strategy, the Nigerian revenue authority can leverage on constraint as the way forward for income taxation, especially personal income taxation. This may be achieved by intricately weaving tax compliance into the social fabric to such an extent that would limit the opportunity for taxable persons to decide whether or not to subject themselves to income tax law. Constraint would effectively diminish the element of choice and fear on which voluntariness and deterrence are respectively founded.
While some constraints already exist in Nigerian tax statutes, it is observed that they do not cut across the national demographics enough to trigger a significant improvement in tax compliance. Below are suggestions designed primarily to improve visibility and identification of taxable persons and transactions across professional, age, gender and geographic divides. Improved identification of taxable persons would trigger greater participation of such persons, mobilize tax consciousness within Nigeria while simultaneously reducing Nigeria's bloated informal economy.
1. The National Youth Service Corp (NYSC) Program:
Section 12 of the NYSC Act Cap N84, LFN 2004 forbids the employment of any person in the private or public sector of Nigeria without the production of a certificate of national service or a certificate of exemption from it. The national service program involves a call-up stage and a discharge stage, following which the certificate is issued. The law criminalizes the employment of any person without the provision of any of the aforementioned certificates. This law is already widely enforced in Nigeria. Under this law, the President and the Director General of the corps are empowered to make regulations and bye-laws respectively to give effect to the objectives of the service corps, one of which is the acceleration of national economic growth. Bearing in mind that about 1.8 million youths join the Nigerian labor market annually, the President can by regulations require a tax certificate as part of the call up and discharge process, failing which employment will not be secured. In cases where no income has been earned, the tax certificate would so state.
By constraining all applicants to register for and obtain tax compliance certificates, all graduates of Nigeria's tertiary institutions would effectively be brought under the lens of the taxman and required to file tax returns annually.
2. Professional Licensing:
Professional associations such as the Nigerian Bar Association, the Nigerian Medical Association, and professional bodies of engineers, architects, accountants, nurses, etc already require specific documentation as part of licensing and annual license renewal processes. The Nigerian fisc may leverage on this system by working with professional associations to make the production of tax compliance certificates a requirement for licensing and license renewal. For instance, by virtue of the Legal Practitioners Act, the General Council of the Bar may make regulations for the practice of law in Nigeria. Requiring the production of a tax compliance certificate as a mandatory requirement for licensing, payment of practicing fees, and the issuance of practitioners' seals would improve tax compliance within this professional group. Similar initiatives can be replicated in other professions.
3. Vehicle Registration and Driver's Licensing:
The importance of transportation affects all societal subsets in a way that traverses the public and private sectors, the literate and illiterate, formal and informal economy, small, medium and large scale enterprises. The pervasiveness of the transport sector therefore creates a platform that can be useful for tax purposes. The Federal Road Safety Commission Act authorizes the Federal Road Safety Commission to make regulations to give effect to the Act. Pursuant to this, a federal regulation may be made, requiring the production of tax compliance certificates for the registration of all vehicles (commercial and noncommercial saloon cars, buses, motorcycles, tricycles, lorries, etc) and their ANNUAL license renewal. While Lagos State and a handful of others already apply this initiative, several others trail behind. The multiplicity of vehicles and the frequency that would be required for annual licensing and vehicle registration would widen the tax compliance net and demand frequent taxman-taxpayer interaction. The revenue generation benefit of this proposal, while potentially significant, may even be secondary to its capacity to boost Nigeria's tax compliance culture.
4. Court Processes:
Persons frequently utilize the instrumentality of the courts to give legal effect to marriages, a change of legal name, to obtain sworn declarations and affidavits, to institute and defend actions in court, and so on. As far as practicable, all persons seeking (personally or by legal representation) to avail themselves of court civil processes should be required to show proof of tax compliance. Court civil procedure rules should be reviewed to give legal support to this proposition without violating the right of access to courts. Furthermore, the rule requiring legal practitioners to show evidence of tax compliance to practice can be synchronised with this requirement.
5. Assignment of stalls in markets and public places:
Artisans and small business owners are a common feature of Nigeria's business landscape. Even though many of such business owners occupy public markets and spaces, their personal incomes are largely untaxed. If states are to exact a minimum tax on these businesses, as is the case with Lagos State presently, identification of taxable persons remains crucial. In many cases, local government mechanisms already exist for numbering and assigning market stalls, and for exacting local levies. A system for tax enforcement can be built into the existing levy collection frameworks by including a requirement for tax compliance certificates for these businesses. The incorporation of tax compliance certificates into processes for stall assignment and rent payment would significantly induct these informal businesses into the mainstream of Nigeria's economy.
6. Business Registration and Banking:
The Corporate Affairs Commission is authorised to demand specific documents for business registration and subsequent filings. Requiring the production of tax compliance certificates for the registration of business names would promote the tax compliance drive. For companies, this requirement is already in force, although effective only for filings subsequent to incorporation. Because business names (sole proprietorships) in Nigeria generally have no legal personality separate from their owners, demanding tax certificates from such individuals prior to registration is very practicable as it avoids the legal impediment encountered for company registration.
Federal banking regulations should also require the production of tax compliance certificates for account opening for all persons, natural and corporate.
7. Greater Federal Government Involvement is Crucial
To achieve these effectively would require federal level involvement in providing the legal and material infrastructure necessary to ensure nationwide success. It should be recalled that in Nigeria, while the federal government legislates tax law, the duty of tax collection is statutorily assigned to the states, with the exception of a few circumstances. While the propriety or otherwise of this approach is beyond the circumference of the present discussion, suffice to mention that this approach disincentivizes the federal government from taking an active role in personal income tax enforcement. This should change.
Tax enforcement success in Nigeria need not be isolated instances which depend on the creativity of individual states. Federal regulations must therefore step in to create the legal infrastructure (such as the proposed NYSC and FRSC regulations) necessary for nationwide success. Fortunately, the legal framework for these regulatory interventions already exists and would require minimal regulatory adjustments to be effective.
Obtaining digitised records of taxable persons also holds advantages statistically as it creates opportunities for informed policy making and for tax audits. On this note, it must be stressed emphatically that tax audits and investigations are a critical aspect of tax enforcement in which government must invest and support. Identification of taxable persons passes the tax enforcement baton on to the tax auditor. Government must prepare to discharge that responsibility.
In closing, we should be reminded that resort to these constraints is palliative, pending when the sociopolitical climate of Nigeria is conducive for the voluntary tax compliance ideal. Until fiscal accountability is addressed in Nigeria, a serious discussion on voluntary tax compliance can only be futuristic.
Osarugue Obayuwana holds a First Class law degree from the University of Ibadan, Nigeria. She also holds a masters degree in International Tax Law from the New York University School of Law where she was honored as an International Finance and Development Fellow. Osarugue worked for years at a leading Nigerian law firm and thereafter at the World Bank, Washington D.C. She currently practices as a Tax Advisor at KPMG, Malta, Europe