The Covid-19 pandemic has sent unprecedented shocks around the global economy, and the need to contain it comes at a significant economic cost. Countries must be prepared to brace for a new global recession that is predicted to be worse than the 2008 recession. The national response to the pandemic evolves daily, as nothing is certain except the reality of an inevitable global economic shock. Like many other countries, Nigeria is navigating through uncharted economic territory and has had to adjust its budget to meet new economic realities.
President Muhammadu Buhari approved an initial 10.59 trillion Nigerian naira ($27 billion) budget for 2020, at the end of 2019. The budget had an estimated deficit of 2.18 trillion naira to be financed through foreign and domestic borrowings. The budget was prepared against the assumption that Nigeria’s benchmarked (Brent) crude oil would trade at $57 per barrel. Unfortunately, oil prices then went into a rapid decline, aggravating the existing budget deficit.
Nigeria is therefore confronted with both the fall in oil prices as well as a potential reduction of income from taxation. It is imperative that the tax collection system is agile and efficient enough to optimize tax compliance and collection. This may tackle some of the budgetary pressures on the Nigerian economy. But how prepared are we to leverage technology seamlessly?
Electronic Taxation in Nigeria—Current State of Play
Over the past decade, there has been a strong global move towards digitalization. Most sectors are gravitating towards improving and transforming their business operations. Business functions and business processes are leveraging technology solutions to expand the use and context of digitized data. In most economies, tax authorities have also harnessed the benefits of digitalization and enhanced revenue collection through seamless adoption of technology.
Some tax authorities in Nigeria are also adopting digitalization, as onerous manual processes are being replaced with more convenient methods for taxpayers through electronic services. For example, as part of the digitization efforts of the tax authorities, the Federal Inland Revenue Service (FIRS), in 2017, announced the introduction of six new electronic tax services (e-services) for the convenience of taxpayers in Nigeria. These are:
e-Registration: for the registration of new taxpayers with the FIRS; e-Stamp Duty: for the payment of stamp duties on qualifying documents; e-TaxPay: presenting more modern payment solutions for all federal government taxes and levies through any of the following platforms—Nigeria Inter-Bank Settlement System (NIBSS), Remita and Interswitch; e-Receipt: for receiving and verifying e-receipts generated after taxes are paid through e-TaxPay; e-Filing: for taxpayers to file their tax returns online via the website; e-TCC: a platform intended to replace the physical application, issuance and verification of a company’s tax clearance certificate (TCC).
Other more recent efforts include the e-filing of transfer pricing declaration and disclosure forms as well as country-by-country reporting, introduced by the FIRS.
State tax authorities are also advancing their automation efforts. Lagos State has made significant strides in digitalizing tax administration. Some of their efforts include auto-generated individual taxpayer IDs, which are generated online in very simple steps, using a newly developed self-service portal solution (LIRS e-Tax). The Lagos State Internal Revenue Service (LIRS) has also been accepting personal income tax returns through online filing since 2019.
Certainly, there is no better time to evaluate the capabilities of a digital tax system than a period when social distancing and lockdowns are being enforced to curtail the spread of Covid-19.
It has been over three years since the FIRS introduced the e-filing platform allowing all taxes and levies collected by the FIRS to be filed online, yet companies still use the parallel paper-filing process. The requirement to physically action items contradicts the idea of an electronic system and negates efficiency gains from the digitalization of the process.
Another challenge faced by users of the electronic tax platforms is the significant downtime experienced during the peak of the tax filing or TCC application periods. In recent times, some companies that attempted to download their withholding tax credit notes found that the portal was inaccessible for days. Such issues discourage taxpayers from relying on these online platforms.
Taxpayers have also raised concerns about the security of logging in to the online portals, which use a simple password system. Security and confidentiality are critical to tax administration. Any potential weaknesses leveraged by hacks into the system would be costly to the reputation of the tax authorities and the trust of taxpayers.
In addressing these challenges, the Nigerian tax authorities may consider evaluating lessons from other countries that have made significant advancement in their electronic tax administration.
Key Considerations for Effective Electronic Tax Administration
Upgrade of data management systems: the unreliable nature of online tax portals is a major reason why many taxpayers, including nonresident companies, are forced to use traditional paper filing, despite the inconvenience. In order to enhance the taxpayer experience, the Nigerian tax authorities would need to upgrade their servers, to accommodate the volume of traffic anticipated from users of the portals. This would reduce the frequency of downtime experienced on the portals and attract more taxpayers to the convenience offered by the digitalization of the processes. Smart use of data analytics and information management systems: data analytics and access to real time transaction information can be a game changer in harnessing the benefits of a digital tax administration. For example, through issuance of electronic tax invoices for value-added tax (VAT) purposes, tax authorities can form an expectation of tax due from a company before the returns are filed. This could help curb under-remittance of taxes and drive compliance. Kenya has a success story to tell in this respect, as the digitalization of VAT operations helped to boost its tax collection by more than $1 billion between 2016 and 2017.
The FIRS is also moving in the right direction, as it recently introduced a VAT automation collection system. The platform, known as VATrac, will enable seamless collection and remittance of VAT on relevant transactions covering branded shops, super stores, general supermarkets, standard restaurants and eateries. The platform will also enable direct audit/reconciliation of all VAT transactions to enhance tax compliance. The automated system was scheduled to be effective from April 1, 2020, as the approved channel for all VAT returns filing and payment processing for the affected businesses. However, the implementation seems to have been delayed due to the effects of the national lockdown.
Nonetheless, the VATrac is a welcome development, equally underscored by the FIRS’ assurance to taxpayers that the system will improve ease of doing business without disrupting the affected businesses’ operations. The FIRS should however create more awareness by sensitizing the public on the modalities for implementing the system, as there are still some lingering issues on its operationalization. In addition, the FIRS should ensure that data privacy measures are given priority.
The U.K. has also steadily transformed itself into one of the most digitally advanced tax administrations by successfully reducing the need for filing annual tax returns and creating a single view of a taxpayer’s affairs through a portal on the government website. The U.K. tax authorities are also able to pre-populate personal tax returns with some information in their database, such as an individual’s earnings and taxes paid. Also, their payroll tax system, once largely reliant on annual returns, was replaced in 2013 by Real-Time Information (RTI); a solution that involves employers updating HM & Customs (HMRC) along the same timeline that they pay their employees. The aim is for HMRC to profile each employee accordingly and ensure that the correct amount of tax is collected from individuals at each pay point in the year, thereby reducing the tax gap (ICAEW Thought Leadership: IT Faculty. Digitalisation of tax: International perspectives—2019 Edition).
Globally, governments are using data analytics to help optimize tax collections and monitor compliance initiatives to advance overall efficiency. The exponential use of data analytics in real-time and predictive tax administration will revolutionize the Nigerian tax administration as data can be transformed into a powerful tool to monitor tax compliance.
Effective integration of tax database with existing database management systems: the tax authorities should consider leveraging existing data from banks and other government agencies, to expand the tax net.
The Nigerian government is already taking a step in the right direction, as the amendments to Section 10 of the Companies Income Tax Act now provides that every company must have a tax identification number (TIN), which should be displayed by the company on all business transactions with other companies and individuals, as well as corporate documents and correspondence with tax authorities, ministries and government agencies. More importantly, banks and other financial institutions are now expected to request a TIN as a precondition for opening a bank account or for continued operation of existing accounts.
Extending this initiative to individual bank accounts will create more visibility and transparency with unreported income earners, thereby minimizing tax leakage and expanding the tax net.
It is, however, important that the tax authorities safeguard all data and information of taxpayers obtained from the integration process, to ensure that data privacy laws are strictly adhered to.
Enhanced tax audit and verification systems: a risk-based audit, linking the likelihood and nature of an audit to the taxpayer’s inherent risks, will be a time-saving tool for the tax authorities. Also, the e-filing platforms should be robust enough to enable taxpayers to file their tax returns, receive assessment notifications and submit responses online.
The e-TCC platform should enable taxpayers to track the status of their TCC applications online, know when there is additional information required to update their records and further process their application. This should have an “upload” function for support documents (like evidence of tax payments), required to ease the process.
Security of taxpayers’ data: taking advantage of modern cyber security methods to address security challenges on the online platforms would help build taxpayers’ confidence in the system. The portals should use strong encryptions to protect taxpayers’ data. Strong passwords should be required to set up and log in to a taxpayer’s account online. Multi-factor authentications (requiring more than just a username and password) for a taxpayer to access his account should also be available.
Government must promote a compliance culture developed through taxpayer education and simplified digital filing processes.
Online tax services must be robust enough to function as an intelligent solution that can accommodate end-to-end validation, combat tax fraud and police tax returns.
The journey to fully implementing and reaping the benefits of a seamless e-tax administration system is neither short nor simple. There is no one-size-fits-all solution; however, an assessment of the above consideration will enhance the performance of the tax system in Nigeria and ultimately increase government revenue.
Elizabeth Olaghere and Oyindamola Adewuyi of KPMG assess the current status of electronic tax reporting and collection in Nigeria, and consider effective methods for improving tax administration and increasing government revenue.