Fighting Tax Evasion with Renewed Vigour

Obinna Chima writes on the Common Reporting Standards, an initiative expected to clamp down on tax evaders and raise revenue for public expenditure

With a tax to Gross Domestic Product (GDP) of about six per cent, which is one of the lowest in the world, the federal government has continued to take concerted steps towards raising non-oil revenue in the country.

The negative impact the decline in global oil prices had on the country’s revenue about two years ago also reinforces the need to pay greater attention to the non-oil sector, in order to provide to grow the economy.

“We have the tax to GDP ratio of six per cent, one of the lowest in the world. And with all the cooperation of encouraging companies to pay tax, it will support what we are doing to increase our GDP, improve amount of debt to take and improve our ability to fund our projects and get our economy going. This is fundamental,” the Minister of Finance, Mrs. Kemi Adeosun explained recently.

The drive to increase tax revenue made the federal government to introduce initiatives such as the tax amnesty programme – Voluntary Assets and Income Declaration Scheme (VAIDS)- which is driven by the Federal Inland Revenue Service (FIRS). The scheme, which provides a time-limited opportunity for tax debtors to regularise their tax status by truthfully declaring, ends on 31 March, 2018.

Owners of undeclared offshore assets are equally certain to be tracked through a variety of multi-jurisdictional agreements to which Nigeria is signatory. Among these are Automatic Exchange of Information (AEoI), which kicked off on January 1.

Nigeria had entered into Automatic Exchange of Tax Information (AETI) with some foreign countries, including the United Kingdom (UK), particularly on overseas assets owned by Nigerians.
This arrangement enables tax authorities in Nigeria to receive information, even without requesting, from tax authorities in other countries.

In addition, the federal government has started working on modalities for the implementation of the Common Reporting Standards (CRS), which will deliver taxpayers’ information to government directly from commercial banks. The full implementation of the CRS, expected in the coming months, is expected to alsoenable the government receive information from accounts domiciled in countries by Nigerian tax residents.

CRS Explained

The CRS is a standard for automatic exchange of bank account information on individuals and certain types of entities. All countries that have implemented the standard will be required to automatically exchange this information on an annual basis. In August 2017, Nigeria took a step towards implementing the standard by signing the Multilateral Competent Authority Agreement (MCAA) on the CRS.

Data from the Global forum suggests that information exchange can be a very effective tool in tackling tax evasion and avoidance. For example, 32 countries surveyed by the Global forum had reported additional tax revenues of up to $2 billion between 2012 and 2014 as a result of information exchange.

Apart from catching tax avoiders, information exchange has also been reported to have a deterrent effect. This is where people start to disclose and pay tax on income that they would normally hide because they realise that they could be found out and penalised. The Global forum estimates that this deterrent effect has already increased tax revenues by $55 billion.

Implementing the CRS, according to the Associate Director, Tax and Regulatory Services Unit, PwC, Seun Adu, will allow the country to automatically receive information on the bank accounts held in other countries by Nigeria tax residents.
Presently, the list of countries Nigeria can obtain information on bank account held by its citizens under this arrangement are about 95. Some of them include the United Kingdom, Netherlands, Belgium, Japan, and China.

It also includes several of the popular offshore financial centres such as Bermuda, Cayman Islands, Luxembourg, and Mauritius. Ghana, Nigeria’s next door neighbour has fully implemented this policy.
All the banks in each of these countriesare expected to collate the required information and send to their tax authorities. The relevant tax authorities will then collate the information that relates to Nigeria (and other countries that they have agreed to share information with) and share.

Similarly, Nigerian banks will also be required to share information on the bank accounts held by individuals that are tax residents (and in some cases citizens) of other countries with the FIRS. The FIRS will then automatically share this information with these other countries.
For this to happen, Nigeria should have implemented the CRS and activated exchange relationships with the relevant countries.
The information to be shared include the details of the bank, the tax identification number of the owner of the bank account, the balance (or average balance depending on the rule in the country sharing the information) in the account as at the end of the period etc.

In Hong Kong, under the CRS penalties vary from fines to imprisonment, from six months up to three years, theDirector Client Relationship at TMF Singapore, Sophia Lim disclosed.
Lim confirmed that Singapore takes an equally stringent view on the policy.
“If convicted they can be liable to a fine or imprisonment, depending on the seriousness of the breach.”

Unofficial penalties can be just as severe. Non-compliance can tarnish a corporate reputation, and lead to loss of confidence amongst customers. Global exchange and access to information increases reputational risks from non-compliance of companies and financial institutions, as the information becomes public faster than ever before and it’s spread globally from day one, Lim pointed out

Driving Tax Compliance

To the Partner, Tax and Regulatory Services Unit with PricewaterhouseCoopers (PwC), Nigeria, Esiri Agbeyi, when the CRS is fully implemented in the country, all banks would have to submit information about their taxpayers’ information, identity numbers and bank verification numbers (BVN), among others to the tax authorities.

With this, the tax authorities can then share such information with any other country that has signed up to the CRS.It is also expected to drive tax compliance in the country.
She explained: “And if they share that information with that country, automatically, that country has to share that information with Nigeria.

“So, it is exchange of information across borders. Nigeria signed up to it in August 2017 because they would need a lot of information to drive the Voluntary Assets and Income Declaration Scheme (VAIDS).”
She explained that the next step required under this arrangement was for Nigerian banks to acquire the technology to drive the CRS for easy collection of data as well as for the tax authorities to have similar technology that they can use to submit such data.

“One of the key requirements is security. So, Nigeria is not there yet. It will take some time to get there, because not all the banks are aware of CRS.
“So, maybe in the next two years, we might have Nigeria fully take on the CRS. Ghana was among the first African countries to sign up to this. So, Ghana will be submitting information already to the authorities this year.
“There is going to be that free flow of information and on the back of that, the tax authorities will come after those who have not taken advantage of the amnesty period provided by VAIDS to prosecute them.”

She pointed out that the country’s low tax base was a major reason for the high interest rate in the country.
“Government is looking to raise taxes from six per cent tax to GDP ratio, to about 15 per cent, because ours is abysmally low when compared with other countries.
“One of the ways they have thought of doing this is through VAIDS. We don’t have much people as we should have in the tax base. There are a lot of high net worth individuals who do not pay taxes.
“That is the key target of the government and as we progress, it is going to go around to the entire informal sector,” she added.

For Adeosun, Nigeria’s policymakers must set the benchmark against its peers, like Mexico and other oil producers with a diversified economic base.
According to her, with initiatives such as the CRS, the aim of the federal government is to get the non-oil sector of the economy which accounts for around 90 per cent of GDP to contribute significantly to government revenues.
“Improving non-oil revenues is something we are working hard on. We are rolling out measures to get more people into the tax net,” the minister said.

“Our focus on infrastructure investment is essential to delivering an enabling environment for business, and our population. We cannot abdicate this responsibility. Our debt strategy (will) deliver the capital we need for infrastructure investment.
“Achieving a full reset will take even longer, but we are seeing strong, green shoots of success. We must think long term to address the fundamental challenges facing our economy.

“Establishing a 30-year financing portfolio provides the basis for long term infrastructure funding, which will, in turn, provide a benchmark for the private sector to extend its own financing tenures. Establishing long term funding will enable us to build the infrastructure that we, and our children, will benefit from for the next 50 years”, she added.
To Adu, if the CRS becomes effective, the tax authorities will still need to develop the capabilities to analyse the information and identify real cases of tax evasion.

“Without this ability, obtaining the information could very well be useless. It is likely that the tax authorities will need to use and develop data analytics capabilities to be able to analyse the large amounts of data that they would receive. They will need this to be able to deduce relevant insights very quickly,” he noted.