**2. A review of the Nigerian tax system**

#### **2.1. Policy, legal, and institutional reforms: a historical overview**

Policy, legislative and administrative reforms of the Nigeria tax system predate independence and can be traced back to early twentieth century when the then High Commissioner of the [then] Northern Protectorate issued the Stamp Duties Proclamation in 1903, followed immediately thereafter in 1906 by the Native Revenue Proclamation. This latter Proclamation systematised all the pre-colonial taxes by defining taxable rates; and procedures for assessment and collection, as well as penalties for default thus eliminating arbitrariness that had hitherto characterised the Nigerian tax system. It introduced the four certainties essential in tax practice: what to pay, when to pay, where to pay and who to pay to. The same Proclamation was re-issued as the Native Revenue Ordinance in 1917 to cover the Southern territories and by 1927, was applicable in the whole country. The year 1943 was a watershed period in the history of the Nigerian tax system as it witnessed the creation of the Inland Revenue Department (renamed the Federal Board of Inland Revenue in 1958), the precursor to the present day Federal Inland Revenue Service (FIRS). Following independence in 1960, other legal and institutional reforms were effected in 1961 through the establishment of the Federal Board of Inland Revenue (FBIR) and the Body of Appeal Commissioners as the first point of call for tax dispute resolution. In the same year, the Joint Tax Board (JTB) was created with the primary responsibility of ensuring uniformity of standards and application of Personal Income Tax.

frequency with which tax reforms have been implemented should however, be viewed within the broader context of the structure of Nigeria's economy and the centrality of taxes to the attainment of national development objectives. In specific terms, four main considerations seem to have informed these frequent tax reforms: the need to diversify the revenue portfolio to safeguard against the oil price volatility in the global market; the need for an accurate and reliable determination of the optimal tax rate, since Nigeria operates on a cash budget system, where expenditure proposals and overall fiscal management are anchored on revenue projections; historical overreliance on petroleum and trade taxes while overlooking direct and broad-based indirect taxes such as value added tax (VAT); and the ever-widening fiscal deficit, an ever-present threat to macroeconomic stability. According to [20], the objectives of tax reforms in Nigeria include the need to bridge the gap between the national development needs and the funding of the needs; achieve improved service delivery to the public; improve on the level of tax derivable from non-oil activities, vis-à-vis revenue from oil activities; constantly review the tax laws to reduce/manage tax evasion and avoidance; and improve the tax administration to make it more responsive, reliable, skilful and taxpayers friendly, as well as achieve other fiscal objectives such as managing inflation and improving balance-of-payment conditions. But the fiscal objectives were only a means to an end. The end objectives of the tax policy reforms were to generate revenue; promote growth and development; ensure effective protection for local industries and encourage greater use of local raw materials; promote value addition and greater geographical dispersion of domestic manufacturing capacities; and create jobs. And although specific policy, legal and institutional measures have varied

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Tax regulations and laws refer to the embodiment of rules and regulations relating to tax revenue and the various kinds of taxes. A tax administration that encourages voluntary compliance, resolutely and legally enforces compliance, treats the tax payer as partner, rewards pro-tax behaviour and operates in an environment of accountability is a preferred tax system [21].

The federal system of government in Nigeria implies that fiscal power is based on a three-tiered tax structure: Federal, State and Local Governments, each of which has, in principle, different and distinct tax jurisdictions. Specifically, the Federal government taxes corporate bodies while State and Local Governments tax individuals. The Taxes and Levies (approved list for Collection) (Decree, 1998) gives the Federal, State and Local Governments the responsibilities for collecting

Part 1 of the schedule contains taxes to be collected by the Federal Government. These include: Companies Income Taxes; Withholding tax on companies, residents of the Federal Capital Territory, Abuja and non-resident individuals; Petroleum profits tax; Value added tax; Education tax; Capital gains tax on residents of the Federal Capital Territory, Abuja, bodies corporate and non-resident individuals; Stamp duties on bodies corporate and residents of the Federal Capital Territory, Abuja; and personal income tax of members of the Armed Forces of the Federation, members of the Nigeria Police Force, residents of the Federal Capital

the taxes and levies listed in, respectively, Parts I, II and III of the schedule to the Decree.

Territory, and staff of the Ministry of Foreign Affairs and non- resident individuals.

over time, these objectives have remained relatively unchanged.

**2.2. Taxation laws and regulations: who taxes what?**

Other major reforms to the tax system were effected in 1982 with the establishment of the Chartered Institute of Taxation of Nigeria [24] and 1993 with a review of the composition of the FBIR and establishment of the present day Federal Inland Revenue Service (FIRS) as the operational arm of the FBIR; as well as a review of the functions of the JTB. Further changes were effected in 2007 with the granting of financial and administrative autonomy to the FIRS following the recommendations of the 'Study and Working Group on Nigerian Tax System' which had been set up in half a decade earlier. These, and other reforms7 represented the first major attempt at shifting focus away from oil to a more sustainable source of revenue, that is, the non-oil sector. Since then, a raft of changes that cut across organisational restructuring of the Federal and State authorities, the enactment of a National Tax Policy, funding, legislation, taxpayer education, dispute resolution mechanism, taxpayer registration, human capacity building, automation of key processes, refund mechanism and several other areas have been effected.

The foregoing would lead to one logical question: why so many reforms? Given the low tax to GDP ratio, it is plausible to assume that the need to address the problem of low tax returns motivated the Nigerian Government to embark on these reforms. The scope of, and

<sup>7</sup> Other highlights of the tax reforms include, but are not limited to, in chronological order, the Raisman Fiscal Commission of 1957; the promulgation of the Petroleum Profit Tax Ordinance No. 15 of 1959; the promulgation of Income Tax Management Act 1961; the promulgation of the Companies Income Tax Act (CITA) 1979; and the Personal Income Tax Act, 2011.

frequency with which tax reforms have been implemented should however, be viewed within the broader context of the structure of Nigeria's economy and the centrality of taxes to the attainment of national development objectives. In specific terms, four main considerations seem to have informed these frequent tax reforms: the need to diversify the revenue portfolio to safeguard against the oil price volatility in the global market; the need for an accurate and reliable determination of the optimal tax rate, since Nigeria operates on a cash budget system, where expenditure proposals and overall fiscal management are anchored on revenue projections; historical overreliance on petroleum and trade taxes while overlooking direct and broad-based indirect taxes such as value added tax (VAT); and the ever-widening fiscal deficit, an ever-present threat to macroeconomic stability. According to [20], the objectives of tax reforms in Nigeria include the need to bridge the gap between the national development needs and the funding of the needs; achieve improved service delivery to the public; improve on the level of tax derivable from non-oil activities, vis-à-vis revenue from oil activities; constantly review the tax laws to reduce/manage tax evasion and avoidance; and improve the tax administration to make it more responsive, reliable, skilful and taxpayers friendly, as well as achieve other fiscal objectives such as managing inflation and improving balance-of-payment conditions. But the fiscal objectives were only a means to an end. The end objectives of the tax policy reforms were to generate revenue; promote growth and development; ensure effective protection for local industries and encourage greater use of local raw materials; promote value addition and greater geographical dispersion of domestic manufacturing capacities; and create jobs. And although specific policy, legal and institutional measures have varied over time, these objectives have remained relatively unchanged.

#### **2.2. Taxation laws and regulations: who taxes what?**

**2. A review of the Nigerian tax system**

Personal Income Tax.

66 Taxes and Taxation Trends

effected.

Income Tax Act, 2011.

7

**2.1. Policy, legal, and institutional reforms: a historical overview**

Policy, legislative and administrative reforms of the Nigeria tax system predate independence and can be traced back to early twentieth century when the then High Commissioner of the [then] Northern Protectorate issued the Stamp Duties Proclamation in 1903, followed immediately thereafter in 1906 by the Native Revenue Proclamation. This latter Proclamation systematised all the pre-colonial taxes by defining taxable rates; and procedures for assessment and collection, as well as penalties for default thus eliminating arbitrariness that had hitherto characterised the Nigerian tax system. It introduced the four certainties essential in tax practice: what to pay, when to pay, where to pay and who to pay to. The same Proclamation was re-issued as the Native Revenue Ordinance in 1917 to cover the Southern territories and by 1927, was applicable in the whole country. The year 1943 was a watershed period in the history of the Nigerian tax system as it witnessed the creation of the Inland Revenue Department (renamed the Federal Board of Inland Revenue in 1958), the precursor to the present day Federal Inland Revenue Service (FIRS). Following independence in 1960, other legal and institutional reforms were effected in 1961 through the establishment of the Federal Board of Inland Revenue (FBIR) and the Body of Appeal Commissioners as the first point of call for tax dispute resolution. In the same year, the Joint Tax Board (JTB) was created with the primary responsibility of ensuring uniformity of standards and application of

Other major reforms to the tax system were effected in 1982 with the establishment of the Chartered Institute of Taxation of Nigeria [24] and 1993 with a review of the composition of the FBIR and establishment of the present day Federal Inland Revenue Service (FIRS) as the operational arm of the FBIR; as well as a review of the functions of the JTB. Further changes were effected in 2007 with the granting of financial and administrative autonomy to the FIRS following the recommendations of the 'Study and Working Group on Nigerian Tax System'

major attempt at shifting focus away from oil to a more sustainable source of revenue, that is, the non-oil sector. Since then, a raft of changes that cut across organisational restructuring of the Federal and State authorities, the enactment of a National Tax Policy, funding, legislation, taxpayer education, dispute resolution mechanism, taxpayer registration, human capacity building, automation of key processes, refund mechanism and several other areas have been

The foregoing would lead to one logical question: why so many reforms? Given the low tax to GDP ratio, it is plausible to assume that the need to address the problem of low tax returns motivated the Nigerian Government to embark on these reforms. The scope of, and

Other highlights of the tax reforms include, but are not limited to, in chronological order, the Raisman Fiscal Commission of 1957; the promulgation of the Petroleum Profit Tax Ordinance No. 15 of 1959; the promulgation of Income Tax Management Act 1961; the promulgation of the Companies Income Tax Act (CITA) 1979; and the Personal

represented the first

which had been set up in half a decade earlier. These, and other reforms7

Tax regulations and laws refer to the embodiment of rules and regulations relating to tax revenue and the various kinds of taxes. A tax administration that encourages voluntary compliance, resolutely and legally enforces compliance, treats the tax payer as partner, rewards pro-tax behaviour and operates in an environment of accountability is a preferred tax system [21].

The federal system of government in Nigeria implies that fiscal power is based on a three-tiered tax structure: Federal, State and Local Governments, each of which has, in principle, different and distinct tax jurisdictions. Specifically, the Federal government taxes corporate bodies while State and Local Governments tax individuals. The Taxes and Levies (approved list for Collection) (Decree, 1998) gives the Federal, State and Local Governments the responsibilities for collecting the taxes and levies listed in, respectively, Parts I, II and III of the schedule to the Decree.

Part 1 of the schedule contains taxes to be collected by the Federal Government. These include: Companies Income Taxes; Withholding tax on companies, residents of the Federal Capital Territory, Abuja and non-resident individuals; Petroleum profits tax; Value added tax; Education tax; Capital gains tax on residents of the Federal Capital Territory, Abuja, bodies corporate and non-resident individuals; Stamp duties on bodies corporate and residents of the Federal Capital Territory, Abuja; and personal income tax of members of the Armed Forces of the Federation, members of the Nigeria Police Force, residents of the Federal Capital Territory, and staff of the Ministry of Foreign Affairs and non- resident individuals.

Similarly, Part II of the Schedule presents taxes and levies to be collected by the State Governments and they include: Personal Income Tax in respect of –Pay-As-You-Earn (PAYE) and direct taxation (Self-Assessment); Withholding tax (individuals only); Capital gains tax (individuals only); Stamp duties on instruments executed by individuals; Pools betting and lotteries, Gaming and casino taxes; Road taxes; Business premises registration fee; Development levy (individuals only); Right of Occupancy fees on lands owned by the State Government in urban areas of the State; and Market taxes and levies where State finance is involved.

wide ranging taxes, levies and rates, to State and Local governments. This may be due, in part, to declining and fluctuating earnings from oil and the need by various tiers of Government

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Tax policy provides a set of rules, *modus operandi* and guidance for all stakeholders in the tax system. Tax policy formulation in Nigeria is the responsibility of the FIRS, Customs Services, Nigerian National Petroleum Corporation (NNPC), and other agencies of government but under the guidance of the National Assembly. A good tax policy needs to satisfy both *efficiency* and *equity* criteria. Any tax policy is, however, continually subjected to pressure and changes. According to [22], the best approach to reforming taxes is one that considers taxation theory, empirical evidence and political and administrative realities and blending these with a good dose of local knowledge and sound appraisal of the prevailing macroeconomic and international situation to produce a feasible set of proposals sufficiently attractive to be

Whereas during the pre- Structural Adjustment Programmes (SAP) era tax policies were aimed at boosting government revenue; ensuring effective protection for local industries and equity in the geographic dispersion of manufacturing activities, the introduction of the SAPs in 1986 witnessed a shift in policy focus to using taxes to boost productivity and competitiveness of business enterprises; promoting exports of manufactures; and reducing the tax burden of individuals and companies. The specific measures introduced included a review of custom and excise duties; reduction of company and income taxes; granting of a wide array of tax exemptions and rebates; introduction of capital allowance; expansion of duty drawback and manufacturing-in-bond schemes; elimination of excise duty; introduction of VAT; and monetizing of fringe benefits and increase in tax relief to low-income earners [23]. More recently, a National Tax Policy (NTP) adopted in 2010 sought to provide a set of guidelines, rules and *modus operandi* that would regulate Nigeria's tax system and provide a basis for tax legislation and tax administration. The 2010 NTP seeks to resolve some inherent problems of the existing tax system such as multiple taxation; uncertainty and leakages in the tax system; lack of accountability of tax revenue and expenditure; inadequate clarity on taxation powers of each level of government and encroachment on the powers of one level or state by another; uncertainty in the tax system and increasing cost of tax compliance due to lack of skilled manpower, inadequate funding, improper delegation of tax powers to third parties; the non-refund of excess taxes to taxpayers, due to the lack of an efficient system and funds; obsolete laws which do not reflect Nigeria's current realities; and the lack of a specific policy direction for tax matters in Nigeria, as well the absence of laid down procedures for the operation of the various tax authorities. The 2010 policy in effect has shifted focus from direct taxation to indirect taxation. Its strategy is to reduce companies' income tax rate from 30 to 20%, top rate personal income tax rate from 25 to 17.5% and a gradual increase in the rate of VAT from the current level of 5%. These strategies are aimed at encouraging investments, creating employment, increasing tax compliance and limiting opportunities for tax avoidance.

to raise own revenue.

**2.3. A review of national tax policies**

implemented and robust enough to withstand changing times.

Part III of the Schedule contains taxes and levies to be collected by the Local Governments and these include: Shops and kiosks rates; Tenement rates; On and Off Liquor Licence fees; Slaughter slab fees; Marriage, birth and death registration fees; Naming of street registration fee, excluding any street in the State Capital; Right of Occupancy fees on lands in rural areas, excluding those collectable by the Federal and State Governments; Market taxes and levies excluding any market where State finance is involved; Motor park levies; Domestic animal licence fees; Bicycle, truck. Canoe, wheelbarrow and cart fees, other than a mechanically propelled truck; Cattle tax payable by cattle farmers only; Merriment and road closure levy; Radio and television licence fees (other than radio and television transmitter); Vehicle radio licence fees (to be imposed by the Local Government of the State in which the car is registered); Wrong parking charges; Public convenience, sewage and refuse disposal fees; Customary burial ground permit fees; Religious places establishment permit fees; and Signboard and Advertisement permit fees.

And to address the hitherto inherent conflict of fiscal responsibilities and powers among the three tiers of government, the 1999 Constitution classifies governmental taxation responsibilities and powers into *exclusive*, *concurrent* and *residual* lists. The National Assembly, is empowered to issue legislation on the taxation of incomes, profits and capital gains, and on matters classified in the concurrent list—particularly those related to the division of public revenue. The State Houses of Assembly may prescribe the collection of any tax, fee or rate, or the administration of a law to provide for such collection by a local government council or any tax, fee or rate not expressly stipulated as being within the authority of the Federal government. The State government is empowered to impose tax on all items in the concurrent list as well as residual matters but to the extent that such laws are consistent with those of the National Assembly.

In sum, the Federal Government is limited to eight specific taxes while the State and Local Governments were restricted to 11 and 20, respectively. However, the Federal government controls most of the buoyant tax handles, accounting for 99% of the tax revenue. The most important tax laws in Nigeria include Company Income Tax Act (CITA), Capital Gains Tax Act and Stamp Duties Act, all enacted in 1990; value added tax (VAT) Act and Education Ac, both enacted in 1993; Personal Income Tax Act (PITA) of 2004; and the Petroleum Profit Tax Act and Information Technology Development Act, both enacted in 2007. In reality however, Nigeria's tax administration environment is fraught with the problem of multiple taxation, which in the extreme compels companies to pay income tax to Federal Government, and other wide ranging taxes, levies and rates, to State and Local governments. This may be due, in part, to declining and fluctuating earnings from oil and the need by various tiers of Government to raise own revenue.
