The Case of an Integrated Tax Administration System

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Chinedu Ezomike

It is no longer news that the Nigerian Government is experiencing an acute reduction in revenue due to the plunge in the international market price of crude oil. As is usually the case when the country encounters such a challenge, there is now a renewed debate on the urgent need to diversify the Nigerian economy. This is a predictable response. Unfortunately, history has shown that we do not learn from such events, as the Government usually forgets the call for diversification once oil prices rebound.

Meanwhile, an analysis of Nigeria’s Gross Domestic Product (GDP) figures shows that the Nigerian economy is already well diversified and the oil and gas sector contributes only about 11% to the GDP. However the sector still accounts for about 70% of the Government revenue and over 90% of foreign exchange earnings. Therefore, the focus should not just be on diversifying the economy but on diversifying the source of Government revenue and the external sector generating foreign exchange for the country.

There has been a renewed focus on developing the solid minerals sector so as to increase the source of government revenue. While this is a laudable idea, the aim should not be to simply extract and export the solid minerals as we currently do with the crude oil. Commodity prices are usually susceptible to shocks in the international markets, therefore exporting the raw minerals is not the long term solution we need, as the country can still be exposed to revenue shortages as is being presently experienced.

A sustainable way of ensuring steady revenue flow for the government is to put in place an effective and efficient tax system which will enhance the efficiency of the tax collection process and encourage voluntary compliance by taxpayers who are currently non-complaint. This is in line with the cardinal principles of taxation which encourage ease of compliance and efficiency of collection. Such a system will, in effect, ensure that taxation becomes the “new crude oil” as far as funding government expenditure is concerned.

The Nigerian tax to GDP ratio is presently about 7% (4% for the non-oil sector). This is abysmal. A review of the tax to GDP ratio in other jurisdictions show that United States has 27%, United Kingdom 39%, France 46% and Sweden 45%. Even African countries, such as Tanzania, 12%, Togo 14%, Ghana 20%, Cameroun 18% and Burkina Faso 11.5%, fare much better than Nigeria. This clearly shows that ours is a grossly undertaxed society and there is a clear need for increased tax collection.

It must be emphasized, though, that the call for increased tax collection is not synonymous with harassing existing taxpayers with ridiculous tax assessments as the tax authorities usually do. The main focus should be to systematically expand the tax base and ensure that more taxpayers are brought into the tax net so that all taxable persons will contribute to the revenue base.

To achieve this expansion, there is need to revisit the Nigerian tax administration system and seek ways to simplify the compliance process.

Integrated Tax Administration System

In 2013, there was a lot of buzz about the imminent implementation of the Integrated Tax Administration System (ITAS). The ITAS is a comprehensive tax administration solution which will enable the tax authorities streamline and automate the tax management processes. If properly implemented, the ITAS has the potential to revolutionize tax practice in Nigeria.

Under the proposed ITAS regime, all monthly and annual tax returns, along with support documentation can be filed electronically. Taxpayers can also make payments and obtain their receipts online. This is quite convenient as taxpayers do not have to make the trip to the tax office to file their monthly returns.

The ITAS will also improve interaction between the Federal Inland Revenue Service (FIRS) and taxpayers as it provides a platform for taxpayers to make tax-related enquiries online and obtain any required guidance or feedback from the tax office at short notice. It will significantly eliminate the persistent challenge of missing documents, such as filed returns and tax receipts, which usually arise during tax review, audit and investigation exercises. During such exercise, the FIRS typically requests the taxpayer to provide documents dating back several years, most of which would have been previously submitted to the FIRS and should ordinarily be in their records. The inability to provide such documents usually leads to additional tax liabilities.

To manage the documentation issue, ITAS system will have an inbuilt document management portal such that once a document is submitted to the FIRS, a unique document number is generated to identify the document. This will ensure that documents are easily retrievable whenever required for review or reference purposes.

The system will also improve the Withholding Tax (WHT) credit management process by eliminating the need for taxpayers to present the WHT credit notes before tax credit is granted. Currently, the FIRS has to issue the credit notes to the customer who had deducted and remitted the WHT. The customer will then distribute the notes to the individual taxpayers from whom the WHT was deducted. The FIRS only recognises the tax credit when the taxpayer presents the WHT note for recording. In practice, however, many companies encounter challenges with this approach as some of the credit notes get missing in the process and resources have to be deployed to keep track of them to ensure collection. Where a taxpayer is unable to present the credit note, the tax credit is forfeited.

Under ITAS, when a taxpayer remits the WHT deducted from its customers, the accounts of all the customers will be credited directly and the tax credit becomes available to the taxpayer for utilization. This eliminates the challenges associated with the current system and the cost of printing and managing the notes will be saved. It will also be possible for taxpayers to log into their account with the FIRS and monitor the remittance of WHT deducted by their customers. Indeed, the ITAS is geared towards automating most of the tax compliance processes and eliminating inefficiencies created by the manual process.

It is expected that the ITAS will introduce global best practices to the Nigerian tax system, as it will simplify tax administration and hopefully stimulate voluntary compliance by taxpayers. It is also expected that the system will assist the FIRS to fully implement the risk-based tax audit system as they can easily extract relevant data from the database which can be used to profile taxpayers based on their past behaviour, and determine the level for non-compliance. The advantage of the risk-based audit system is that the FIRS can effectively deploy resources to specific areas of non-compliance and avoid expending effort on a general non-targeted audit process which can be time consuming with little or no additional tax revenue.

It is unfortunate that the implementation of this laudable project has been delayed until now. Thankfully, the current FIRS Chairman recently indicated interest in revisiting the project. Since taxation by its nature is dynamic, the modernisation and continuous upgrade of the existing tax system should be a priority for any tax administrator.

Implementation of such system in other jurisdiction – General trend for achieving increased competitiveness

Policy makers around the world are increasingly interested in the tax systems of various countries, especially as regards the ease of tax compliance. Indeed, the ease of paying taxes is part of the factors considered in the World Bank’s global competiveness survey. This is measured using various indicators, such as the number of taxes paid, number of hours required for tax compliance and availability of electronic filing system. Improvement in any of the indicators helps economies achieve better competiveness. It goes without saying that the more competitive an economy is, the more likely it is to attract foreign investments, as multinational companies usually consider such issues when deciding where to host their regional operations. In view of this, tax authorities around the world are continually making effort to streamline tax administrative processes and modernise payment systems. This is to ensure continuous improvement in the competitiveness of their individual economies to attract much needed investments.

Generally, tax authorities are using electronic systems to make tax processes easier, more accessible and more reliable for taxpayers. The latest World Bank’s 2015 Paying Taxes Survey revealed that taxpayers are able to file tax returns electronically in about 45% of the countries that were surveyed. In 83% of the surveyed countries, taxpayers are able to complete at least one aspect of their tax compliance process electronically. In 2014, more than 24 countries instituted reforms that made it easier or less costly for firms to file returns and pay taxes and the most common feature of tax reforms globally was the introduction of, or enhancement of electronic filing system. Such changes were implemented in 18 countries including Costa Rica, Cyprus, Mozambique, Spain, Vietnam, Serbia, and Zambia, amongst others. Businesses in these countries now file returns electronically thus spending less time on compliance. The system also increased transparency and limited the opportunity for corruption and bribery.

In Serbia, for example, the government introduced a system that electronically centralised all communication between taxpayers and tax administrators, including filing and payment of taxes. The system consolidated the payment of different taxes into a single account and automated the exchange of data with banks. This significantly reduced administration cost for both business and the tax authority. This is something that Nigeria can definitely adopt, such that a taxpayer’s records can be linked with the bank account through the Bank Verification Number. This will improve the FIRS’ capacity to monitor the compliance level of taxpayers.

It has been observed that the ease of tax compliance has an inverse relationship to the economic growth of any country as inefficient tax systems tend to encourage tax evasion. Countries with such a system usually have a large informal sector and increased corruption within the tax system. It is, therefore, important to continuously review the administrative burden of compliance and seek ways to enhance it. The electronic tax systems, if implemented well and used by most taxpayers, will benefit both tax authorities and the taxpayers as it lightens workloads and reduces operational costs.

Implementation challenges and lessons for Nigeria

Developing countries, such as Nigeria, usually encounter challenges with the implementation of electronic tax systems. The most significant challenges are the absence of adequate IT support infrastructure and difficulty in ensuring adequate taxpayer education and familiarity with the system.

Where taxpayers have limited internet access, low network speeds, power shortages and system failures, the electronic system can be quite slow and unreliable, thereby leading to limited acceptance by taxpayers. In Kenya, for example, the online filing system was introduced in 2009, but it took three years for the system to gain acceptance with taxpayers due to initial challenges with the processing speed of the filing website.

Ensuring that taxpayers and tax officials are properly educated on the use of the system can be a herculean task. Adequate enlightenment plan should, therefore, be made in this regard and the system must be designed to be user friendly for ease of acquaintance by the users. Lastly, proper security protocols must be included in the system to protect the taxpayer information from unauthorised alteration and data theft.

The countries that have successfully implemented ITAS adopted a phased approach where the pilot scheme runs parallel to the old system for some time. This allows problems to be identified and resolved. It also enables the system to improve appreciably before being rolled out to all taxpayers. This is to ensure that the systems is efficient and reliable so that taxpayers will accept it and use it.

Conclusion

The proper implementation of the ITAS in Nigeria will not only improve the tax administration process but has the potential to encourage voluntary tax compliance which will ultimately improve revenue collection. It will also improve the competiveness of Nigerian economy and potentially attract more foreign direct investment, this will enhance the country’s forex earning capacity.

The ITAS is completely aligned with the basic principles of taxation, such as convenience, simplicity, transparency and efficiency. If Nigeria can overcome the hurdles associated with implementing an efficient and reliable tax system, then the tax compliance system will be made easier. This will reduce the barrier to bringing the informal sector of the economy into the tax base and thereby increase revenue collection.

References

1 World Economic Forum – Global Competiveness Report 2015 -2016

2 World Bank Group’s Paying Taxes Report 2016 – Ten years of in-depth analysis of tax systems in 189 economies – A look at recent developments and historical trends

3 World Bank Group’s Paying Taxes Report 2015 – The global picture – The changing face of tax compliance in 189 economies worldwide

– Ezomike, is Manager, Tax, Regulatory and people Services, KPMG