Elebutu: Lowering Tax Rates Attracts More Investments

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Kunle Elebute is the Senior Partner, KPMG in Nigeria and Chairman, KPMG Africa. He has over 36 years of professional experience advising clients in the private/public sectors in Nigeria, West and Sub-Sahara Africa. In this interview on Arise Television, he spoke extensively about how Nigeria can attract more investments into the country, the need for the government to step back from doing so many things and create a space for private sector operators to lead in areas they have better expertise, among other issues. Nume Ekeghe provides the excerpts

With Nigeria’s revenue still largely dependent on oil, what can the government do differently to make taxation a major source of revenue as well as exploring other alternatives?

You know, every question on tax always start with a tax to Gross Domestic Product (GDP) ratio of six per cent. For me, it is rhetoric, unfortunately. But fundamentally, if you really want to get tax level to increase, you have to grow the economy. When the economy is not growing, you can’t expect the tax level to increase. So we need to really get back as a country and say to ourselves what is the minimum growth rate we need to drive this economy. I’ll give you an example: After Tiananmen Square in China in 1989, the Chinese government decided that so as not to have a repeat of what happened, minimum growth rate would be eight per cent. And they achieved eight to 10 per cent for about 25 years and transformed the economy. Fundamentally, because it took many people out of the low-income economy to middle-class and they had much more to pay taxes. That was one aspect. Another major aspect is the issue of trust. Taxpayers need to see what they are using their money to do. That is because if you are using the money to clear expenditure or finance elephant projects, then why shouldn’t we pay tax? In that sense, it is granted as a civic duty and everybody must pay tax. But the reality is that countries where the political leaders or those at the helms of affairs do not use tax money to grow the economy, would find that in such situation, trust will be broken. And for Nigeria, that is the first step. Lagos State government over the last 20 years has tried very hard and improved the trust situation significantly. I could remember very well in 1999, when Bola Tinubu became Governor, the Internally Generated Revenue (IGR) was about a billion naira, but today, as at last count, it has gone to over N30 billion. And you see what is happening in Lagos in the last 20 years? They still have a lot of work to do, but there has been a lot of transformation around the way the city has developed over time, using mainly taxpayers’ money. So to recap, if there is no growth, you won’t see an increase in tax rate and you can’t tax businesses that are not doing well. When a company is making losses, it will make tax not work. And you can carry losses forward for a number of years, which means that if you make profit the following year, you are recouping and still will not pay full taxes. To cut it short, many countries use taxes to drive investments because low taxes means that it affects investments. And finally for me, we have to move away from the way we do our budget. This is because fiscal policy for me is about how we grow the economy; how we drag the economy to be attractive for investment and how do we use that investment to ensure that we can create more revenue sources and also to get people to pay more taxes. We have always focused on appropriation. So, every year the National Assembly prepares the budget and after a long debate, it turns into an appropriation bill. Many countries have moved away from the Appropriation Bill, into more of a Financed Bill, which reflects the fiscal policy of the government, which includes just numbers, how we are going to spend, and how we are going to drive revenue. But if you want to make amendments to the tax law, you don’t have to wait until amendments start, you can use the Finance Bill every year, then treat the tax law regularly so that you can actually have revenue sources clearly in the Finance Bill; drive revenue sources and it’s a more balanced document for everybody to understand and read because there you have the revenue side; that’s the fiscal policy, you have the spending side based on recurrent and capital expenditure. And of course, one day, the oil revenues that we have today, will not be there, so we need to prepare for the long haul when the revenues from under there are no longer available.

 

 

In 2017, the federal government introduced the Voluntary Assets and Income Declaration Scheme (VAIDS), which fell short of its target. Why do you think this program failed?

 

 

I think it failed because I don’t think that it was properly defined on exactly what they want to achieve and how they intended to achieve it. I think it was rushed and again it was targeted at those people that have very high income as opposed to where you have the bottom of the pyramid where you want to increase the base. For me, I don’t think it was properly thought through, nor properly implemented. And some of us knew up front that this thing wasn’t going to derive the numbers that they were looking for, so that’s one. Coming back to broadening tax base, when you say broadening the tax base, you want people at the bottom of the pyramid to pay more taxes. Now clearly, in many countries, if you are earning below the poverty level, you shouldn’t pay taxes. Now the only way you help people who have nothing to survive to move up the ladder is that you must grow the economy. If you grow the economy, to about six per cent per annum, compounded in 10 years, you will double the GDP. If you grow at 10 per cent per annum, in six years you will double the GDP size. So, if you grew the economy, the people who are at the poverty level will move up the ladder, and the more they move up on the income ladder, the need to pay taxes. And that is where the population is. But those people at that bottom also, expect to see returns. They must see what the tax money is being used for. Primary healthcare for example, improved education, improving water availability, community road networking, security etc. And if my income increases and I see those things happening, I will greatly pay taxes, and this is what improving the tax base means.

There has been a recent debate about Value Added Tax (VAT) and if it should be increased. What are your thoughts about this?

 

VAT is direct tax and it’s supposed to help tax consumption at the source of spending. So, if I can afford to go to a restaurant and pay N1,000 for a meal, I should be able to pay VAT. So, the person, who buys a car or a bottle of soft drink, would pay five per cent of the worth of the commodity. If I buy a car for N100 million, five per cent of that is a bigger number. The rate is the same, but the amounts you are paying is different based on what you consume. So that is the indirect tax. And in many developed countries, you will find out that indirect taxes are a lot more effective due to the fact that people spend much more money at the point of consumption. Sometimes, people spend more on activities not so noticeable. Take for instance, if I buy shares today, and I sell those shares, there is no capital gain tax on them, the profit that I make on those my shares, may N100 million and no taxes. But if I use that money to buy a car, I will pay VAT. So, VAT captures everybody who spends money at the point of spending. Hence, it is more equitable and effective. VAT also means that you should be able to get tax refunds on things that are reversible. So, we have input tax and output tax. So I want to raise VAT rate to about 12 per cent, you must run it like a proper indirect tax. You must allow people to be able to apply for refunds when they are due for refunds. So if you want to move the tax rate, you are supposed to move to a proper VAT system, which means that there is a higher tax administrative burden to have a proper VAT system.

 

Do you support the thinking of the presidential candidate of the PDP in the last election that there is need to reduce taxes in order to attract investors?

Yes, clearly if you want make the economy more competitive, tax is another way to attract investments. And therefore, you will look at your tax rate compared with other competing countries and make a decision to be more competitive. Secondly, by lowering tax rate, it brings more investments, people have more income to be able to make investments and also drive up savings, which is important for an economy to grow. And also, you want smaller companies to be able to survive at the early stage of growth, so you lower tax rate. And when they attain a particular threshold, you can then get them to pay higher tax rate. So, there are different ways, but overall, you need to have the fiscal policy that drives growth and investments in an economy. So, if you decide to do tax free period for a number of years or you want to have low taxes for small companies for a particular number of years, or for the informal sector, everything has to be in the context of – this is my fiscal policy; and we want to use the fiscal policy to drive economic growth, further investments and savings in the economy. But if it is not done in that context, then you will get pushed back, and people don’t understand why you are doing what you are doing. Also, if you lower taxes and don’t have a very strong system of tax collection, you could have much more leakages than the case may be. Bring taxing down, hopefully more people can come into the tax system. That is because if it becomes lower, more people who weren’t paying taxes before would start to pay, but you must also put in place a working tax system that would be able to discover those that were not paying before and bring them into the system.

 How much impact does the failure of successive government to pass the Petroleum Industry Bill (PIB) has on the sector?

 It is big because we have gone through a process to draft the PIB to where it is today.  And in any kind of legislation, typically you bring stakeholders into the know of what you want to achieve. So, haven carried along stakeholders for a certain number of years, there is an expectation that the changes that we are recommending would come through in the bill and eventually in the Act. And therefore, companies were prepared to make certain investments because they are going to see a new Act that will drive investment and growth in that sector. So, you here many international companies saying: ‘We have approved certain billion dollars investments, but we are waiting for the PIB to be passed’. So clearly, if you don’t pass legislation, those companies that were prepared to invest, will hold back investment. And not only that, there are also other companies who are outside the country, who are looking inward to say: ‘Will the PIB make Nigeria much more competitive and more attractive, than country Y, X or Z?’ And again there is that issue of competitiveness. And if you are much more competitive than other countries, you will attract new investments to your country and hopefully drive growth, because what you need in any sector is investment. Look at the telecommunication sector for example, even though you only have three or four key players, they keep investing in much more infrastructure, etc.

 

Multiplicity of taxes by different tiers of government, how do we deal with this kind of problem?

I think we will go back again to the fundamentals. If you don’t grow an economy, people will always use all kinds of gimmicks to try and generate revenues rather and it is a shame. It is a real shame because, with lack of resources, political leaders or government agencies want to increase revenue, then you ask yourself, even the revenue they are collecting, what are they using it to do? You are in the port for example, and you want to clear a container, do you know how many agencies at the port that you have to go through? Everybody wants a slice of that container. And by the time the things you imported with the container get in for the consumer, they are not competitive. I know there are all kind of ways that the Joint Tax Board has tried to reduce the multiplication taxes, but fundamentally, until you grow the economy and the economy is growing much faster and more income is being generated by the growth of the economy, this thing won’t stop.

But that is the function of the Joint Tax Board, why haven’t they been able to do that?

Even the Joint Tax Board, you know they sit once a month according to their calendar. But the point is that, they can make a pronouncement, but when a local government chairman says he is going to do XYZ taxes, how are they going to get to him? Who is going to prevent him from doing what he wants to do?  

It took banditry for us to know that there have being illegal mining going on in Zamfara State; believed to be a very poor state. How do we get a situation where the government issues proper licences so that the state can benefit?

I agree with you entirely, but you see, in any economic activity, you have to have regulations; you need to have the ability to enforce compliance and have to be able to ensure that you can attract the right kind of investors into that activity. And if you do so, those investors who have proper governance and they have capital would exploit the resource, and pay the right royalties and taxes as well to those they are meant to pay to. But I don’t understand the whole nature of what is happening in Zamfara, so I can’t speak like I am an expert on the issue, but I have done work in the mining sector before. I have advised a mining client in Ghana several years ago, and it was an open surface mining, six hours away from Accra and it was a well organised activity with the international mining company working with the locals, using their capital in compliance with the mining code and paying taxes.

I spent a couple of weeks in there, I saw how they produce the gold, I saw the security they had, and there were several activities they had that they don’t have expertise but brought in expertise to actually make sure all were done accordingly. You know, anything you do, if you do it in line with global standards, you will attract the right capital. You will attract the right investment, you will bring the right skills and the benefit would be derived by the locals as well as the state absolutely. For example, where you have the oil producing states, are they not deriving the benefits in cash or in kind? Yes. Have they used it to develop their states so that their state reflects the activity in that place? Not so much you will say. Even with what they have, have they shown any difference? So how can they get more allocation when they haven’t shown us what they did with what they are collecting first?

 

What is your take on the 2019 appropriation bill; do you think it is realistic especially with the input of the new minimum wage?

From my understanding, the way we do our budget, we use a benchmark oil price, that is the basis for which we compute almost everything, with the revenue line tied to the benchmark oil price. And of course, we also have revenues from taxes, duties etc. And we then have capital expenditure and recurrent expenditure. The biggest problem we have, I think not just from this budget, but from the previous, is that our recurrent expenditure ratio per capital is so high. I think it is now 75 per cent recurrent and 25 per cent capital expenditure. There is no way that, that kind of ratio can drive growth. There were times when it was 60:40 or 50:50 for example, about 10 years ago. I think Lagos state does 40 per cent recurrent, 60 per cent capital. So because you have an over bloated federal government, the recurrent expenditure is much higher than what should be the case. Secondly, on the capital side, what you have you are going to finance a budget with a massive deficit. That deficit means that you have to go and borrow from the market. And if you borrow from the market to fund your budget, you push up rates, and therefore it is more attractive for banks and other institutions to buy government bonds, than to lend to the real sector. The consequence is that you strangulate the economy. Once that happens, were do you now make the profits to pay the taxes that you want? Where do you now get the capital to import the goods and pay duties that you want to pay to the ports? What now happens; since you strangulate the economy, the revenue forecast you have on the tax side, on the Customs duty side, you won’t meet it. On the oil production side, oil price can affect it, volume of production can affect it, based on whatever happens from the oil producing areas such as vandalisation. So these things again, are the ones that control the budget. By the time you put all these things up, there are too many variables that may not make the budget to meet targets set for themselves. Until we really take a look at the way we spend money as a country, especially on the recurrent side, I am not so sure that any budget will make any meaningful impact. It is going to be very tough for them to achieve the kind of things they want to achieve within the kind of framework with which we operate.

 

What about the inclusion of the N30,000 minimum wage into the budget?

I don’t have a problem with the minimum wage because at the end of the day, the people have to have a living wage. But the point is to make sure that a lot of people earning these wages add value. All of us have staff that we employed; but when you have a staff that you don’t really know why you employ him or her anymore, what do you do? You let them off. But you carry these massive numbers of people, and these also add to the cost of funding the country. And the more you spend on recurrent, the less likely you are going to have economic growth in this economy.

Going forward, what would be your advice to the president in his next four years to really grow this economy in the way that you are anticipating?

I think the government have to step back from doing too many things, and create a space for private sector to take a lead in the areas where they have better expertise. It may sound simple, but it is complex. Why is the government running airports? Globally, no government runs airports any longer. Airport security is the issue they always point as an excuse, but yes, you still have securities in airports globally. But running of airports, management of airports, investing in airports infrastructure, attracting large carriers to come into your country, is not a government activity any longer. Concession the airports, privatise the refineries, concession much mini-airports, concession railways line and give them to the expertise that can run these infrastructure, and can put money into it and run it for 30 or 40 years. That is one space for example. Other space, look at sectors which you will like to attract investors, and approach the investors and ask them what they will like to see to make the sectors more attractive for them. For instance, the auto industry; if you really thing you want to have an auto industry; after all Morocco produces 600,000 cars per annum, what will it take to bring some of the big car manufacturers? A big car manufacturer investing half a billion dollars, into an auto plant is small money for them. It is not a big money and they are not looking for returns in one year or two years, they are here for the long haul. After all, we have big companies like Unilever, Heineken and Guinness, etc. They have been here for 30, 40, 50 years. And as they grow their business, they expand and build new factories. They are not going to go anywhere overnight. In terms of agriculture, we need to have a functioning commodity exchange. It won’t just entail people coming to buy and sell, but all the inputs of the exchange such as your silos, storage, warehouses, your standards, market makers, off takers, etc, and just modernise the whole sector so that agriculture becomes not just a family business, but a real added value agri-business to the economy.