Introduction
Technology has become an integral part of various sectors of the Nigerian economy. It has revolutionized communication with superfast telephony and internet networks and automated manufacturing processes. It has also introduced virtual classes, smart devices, real-time online medical procedures, digital assets, artificial and generative intelligence, to name a few examples.
Technology has also significantly impacted how the tax authorities approach tax administration in Nigeria. A decade ago, tax administration in Nigeria was largely manual. Taxpayers physically interacted with the tax authorities for most of their tax compliance needs. For example, tax filings, tax registrations, etc. were largely done at the premises of the tax authorities. This meant that taxpayers who are not located close to a physical tax office, have to travel many kilometers just to comply with their statutory tax obligation.
Thankfully and kudos to the tax authorities in Nigeria, technology has been significantly infused into tax administration in Nigeria. Take for instance, the TaxProMax (TPM) portal which was introduced in 2020 by the Federal Inland Revenue Service (FIRS), allows taxpayers file their company income tax, value added taxes, withholding tax, capital gains tax returns, etc. The e-TP portal, which was also introduced by the FIRS, allows taxpayers file their Transfer Pricing returns. The e-tax platform which was introduced by the Lagos State Internal Revenue Service (LIRS) allows residents of Lagos State, file their income tax returns. Other states in Nigeria also have technology solutions that allow taxpayers resident within the states file their income tax returns.
The impact of this technology infusion into tax administration in Nigeria cannot be over-emphasized. The tax authorities have been able to include more people in the Nigerian tax net, collect more taxes, and ease business transactions in Nigeria. This fact can be corroborated by the figures released by the FIRS wherein the tax collection increased from NGN5.2 trillion in 2019 to NGN10.2 trillion in 2022. Approximately 100% increase in tax collection in the space of 4 years.
The new government which was sworn in in May 2023 needs to consolidate on this success. The government has stated its plans to further bolster the tax revenue in Nigeria and make the tax regime in Nigeria favorable to all taxpayers. The government is further seeking to increase the tax-to-GDP ratio from the current rate of about 10% to 18%. This is an ambitious but attainable goal and technology must play a key role in attaining this ambition.
In this article, we have examined some areas the government may consider in achieving this ambitious plan.
Our proposition
1. Collection of taxes from Digital Asset transactions
In an earlier article (see link in the reference section of this article), we discussed the Nigerian tax implications of transactions in digital assets. In the article, we highlighted a lack of clarity from a regulatory standpoint as a major impediment to the effective collection of tax on digital asset transactions.
However, this challenge appears to have been mitigated as the CBN in a recent circular dated December 21, 2023, lifted the ban on crypto bank accounts and released guidelines for regulating virtual assets. The circular, however, still prohibited banks and other financial institutions from holding, trading, and/or transacting in virtual currencies on their account.
Given this development, it is my view that the Government should aim to collect appropriate taxes on digital asset transactions. However, questions around how this collection can be done, how technology can be leveraged to ease collection, etc. need to be answered.
In the said earlier article, we recommended the execution of an information exchange agreement between the tax authorities and crypto exchanges where these crypto transactions are consummated. This arrangement will give the tax authorities a view of all transactions happening within the exchange. This type of information exchange is not uncommon in jurisdictions where crypto transactions are taxed. The tax authorities can effect this information exchange through technology solutions that access specific information from the IT infrastructure of the crypto exchanges.
We also suggested that for transactions carried on within the exchanges, the tax authorities may consider making the crypto exchanges the collection agents for withholding tax purposes. This is because it may be challenging to collect the tax from the individuals who are transacting on the crypto exchanges.
These initiatives if implemented at the early stage of the evolution of these exchanges will ensure an onboarding of compliance habits that can be imbibed by all participants in that nascent ecosystem.
2. Electronic Invoicing/Billing
Electronic invoicing or e-invoicing has been adopted across Latin America, including Brazil, Argentina, Chile, Mexico, etc. Typically, e-invoicing will require taxpayers to validate their invoice(s) with the tax authority before issuing such invoice(s) to the payer. This way, the tax authorities have a record of the transactions of the company/taxpayer in real-time and the potential taxes expected from such taxpayer. A mismatch between the projected taxes and what is eventually reported can form a basis for a tax audit.
It is important to note that a similar initiative has been introduced by the LIRS through a technology solution called the "Eco Fiscal System (EFS)". This system is specifically tailored to businesses operating in the Hospitality sector such as hotels, event centers, restaurants, bars, and related facilities in Lagos State. These operators are required to download and install the EFS software, which will interface only with the Point of Sale (PoS) of the taxpayer and transmit records of all sales transactions to the LIRS Online Tax System (OTS) in real-time. The system will issue invoices with unique numbers. The primary purpose of this software is to automate and monitor in real-time, the collection of consumption tax in Lagos State.
Following this initiative, we recommend that other tax authorities like the FIRS adopt this initiative in monitoring and collecting taxes in Nigeria. Perhaps a phased approach may be adopted by the FIRS where certain sectors/taxpayers are targeted before extrapolating this initiative to all taxpayers. This initiative has a lot of advantages which include real-time monitoring of tax collections in Nigeria, more tailored audit queries, and potentially higher tax revenues given that a lot of taxpayers will be brought into the tax net.
3. Additional Features on the TPM portal
The TPM is a very resourceful tool deployed by the FIRS in 2020 to meet the tax compliance needs of taxpayers in Nigeria. Recently, additional functionalities and/or updates were made to the TPM. These include, but are not limited to:
- A wallet payment option: This functionality allows taxpayers warehouse cash in their wallets on the TPM and then use such cash in the future to make tax payments.
- Payment of taxes in USD: The functionality permits taxpayers to make tax payments in USD. This was not the case before now. We understand the TPM is currently being updated to permit payment in currencies such as GBP and Euros.
In recent interactions with the FIRS, it was noted that work is in progress to include additional features in the TPM. These include:
- A self-service feature: This feature will enable taxpayers to register a company for tax purposes on the TPM without physically going to the tax office. This service will also allow taxpayers make changes to their tax profile without physically going to the tax office.
In addition to the above, we also recommend the FIRS considers the update below:
- Tax refund module: It will also be useful to incorporate a tax refund module in the TPM such that taxpayers can make an application online, upload the necessary documentation, and upon review/audit by the tax authorities, taxpayers can get a refund by way of a tax credit or a cash refund. The refund amount should also be visible in the dashboard of the taxpayer on TPM.
4. Tax Audits
Tax audit in Nigeria is an area that requires technological intervention. The tax law was amended in 2021 via Finance Act 2021, to empower the FIRS to deploy proprietary or third-party technological solutions to automate tax administration processes including tax assessments. However, presently, tax audit processes are still manually conducted. Tax audit processes can span as long as one year or more with taxpayers and tax authorities visiting each other's premises for meetings and/or reconciliation exercises. This process diverts taxpayer's resources from income-generating activity to resolution of audit matters. It also diverts the tax authority's scarce resources to specific tax audits that may take months or in some instances, years to complete. We recommend the government through the FIRS deploy software that will enable taxpayers and tax authorities resolve tax audit matters electronically. Perhaps, the FIRS can include this as a module in the TaxProMax platform.
5. Robust Database and monitoring
Building a robust taxpayer database is very important in achieving efficient tax administration and optimal tax collection in Nigeria. Every government should know who is operating in its jurisdiction and/or earning revenue in its jurisdiction. This includes both resident and non-resident entities. Information such as this helps a government gain insight into tax compliance patterns and also helps the tax authorities mine information from such data to efficiently administer taxes.
The government has done a good job building a robust database with some of its policies. These policies include:
- The collaboration between the FIRS and the Corporate Affairs Commission (CAC) to issue newly incorporated entities a Tax Identification Number (TIN). This way, the tax authorities will have a record of such entity in its database immediately the entity is birthed.
- Also, the amendment to the tax law that requires persons engaged in banking or financial services to request the TIN of their customer's business before an account can be opened for such business, or in the case of an existing account, the continued operation of such account, is a positive policy direction that ensures the tax authorities have a record of taxpayers in Nigeria who were hitherto the amendment of the tax law referenced above, operating outside the radar of the tax authorities.
Notwithstanding the above, there remains a set of taxpayers earning income in Nigeria who are not necessarily captured in the records of the Nigerian tax authorities. These are non-resident entities providing services to Nigerian residents. While it must be noted that it can be challenging obtaining the records of these non-resident entities especially when the service recipients in Nigeria are individuals, the FIRS can leverage the tax authorities in the jurisdictions where these non-resident entities operate to exchange information about the activities of these non-resident entities in Nigeria. For ease of information exchange, technological solutions can be leveraged by both taxing authorities. It is however important that this information exchange should happen within the confines of the data privacy rules in both Nigeria and the jurisdiction of the non-resident entity.
Conclusion
Growing the Nigerian tax-to-GDP ratio to 18% and improving tax compliance in Nigeria is an effort that can be achieved with careful planning and dogged implementation. Technology must be leveraged if these aspirations must be met. We hope that with collective effort, the Nigerian dream of making the country a digitized tax environment will be achieved soon.
References
Digital Asset Transactions In Nigeria: Tax Implications - Tax Authorities - Nigeria (mondaq.com)
GUIDELINES ON OPERATIONS OF BANK ACCOUNTS FOR VIRTUAL Asset Providers.pdf (cbn.gov.ng)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
