Taxation in the Era of Global Information Exchange
It is common knowledge that Nigeria’s tax to Gross Domestic Product (GDP) ratio is one of the lowest in the world. At under 6%, it is far below the sub-Saharan African average of 20%. Nigeria is reputed to be among the countries in the world with the lowest tax compliance rate as recently corroborated by the American billionaire and philanthropist, Bill Gates, who said without the credibility of the Government, Nigerians will not pay tax. Taxation, being a social contract, is expected to be fulfilled by both parties involved, i.e. citizens pay tax while the Government is seen as using such funds for public good. With the relatively low Internally Generated Revenue (IGR) from taxation across the States of the Federation, it is therefore not surprising that the Nigerian economy is heavily dependent on the oil sector to fund its expenditure. According to the International Monetary Fund (IMF), the oil sector accounts for over 95 percent of export earnings and about 40 percent of government revenues.
As a result of the low income generated by the government across all levels, the Federal Government and some State Governments have resorted to borrowing to fund health, education and other infrastructural projects. The rising debt profile of Nigeria has been generating concern both locally and internationally. The World Bank recently issued a statement urging the Federal Government of Nigeria to reduce its borrowing and tap private investments as an alternative source of revenue that will yield desired economic growth. Bill Gate in a recent interview also confirmed that one of the challenges that Nigeria has is that the amount the government raises domestically is small compared to other countries. In all of these, the resonating message is that government at all levels should increase tax compliance level in order to generate more income to fund infrastructural projects and effectively run the economy.
In an attempt to enhance general tax compliance level in the country, the Federal Inland Revenue Service (FIRS) has established a framework for linking Bank Verification Number (BVN) of taxpayers to their respective Tax Identification Number (TIN). This is also being replicated at the level of State Tax Authorities as well. With the recent introduction of Common Reporting Standard (“CRS” or “the Standard”) in Nigeria, it is very evident that tax authorities across the country will begin to have access to information of taxpayer’s offshore bank accounts and other assets or securities.
Given this development, High Net-Worth Individuals (HNIs) in the country (Nigerians and non-Nigerians) could be subjected to tougher scrutiny by various tax authorities. In particular, HNIs with assets, securities and other forms of investments in countries that are signatories to the CRS will significantly be affected by this development. This is largely due to the fact that individuals are taxable in Nigeria based on their place of residence and worldwide income. CRS can potentially be a game changer in the Nigerian tax space going forward, which then calls for wealthy individuals to re-evaluate their investment holding structures in Nigeria and beyond. In addition, CRS will play a major role in checking the activities of multinational companies especially as it relates to base erosion, profit shifting and transfer pricing.
This piece examines the increased global era of global information exchange and how this development can impact on the taxation of personal income of HNIs and other taxpayers.
Currently, the tax authorities in their aggressive drive for tax collection have devised several schemes to drive tax compliance and enhance tax revenue collection. Integrated Tax Administration System (ITAS) popularly referred to as Project ITAS, increase in Value Added Tax (VAT) rate, online Withholding Tax (WHT) collection, Electronic Tax Clearance Certificate and E – filing platform of the FIRS, are all pointers to integration of technology into the system of tax administration for efficiency and to drive tax compliance.
The most recent effort of the Nigerian Government to improve its tax revenue collection is the adoption of the CRS. The CRS was developed by the Organisation for Economic Co-operation and Development (OECD) in 2014. CRS is an information standard for the Automatic Exchange of Information (AEOI) regarding bank accounts between tax authorities of signatory countries. It serves as an agreement to share information on resident taxpayer’s assets and incomes automatically, in accordance with the standard. Its purpose is to enhance tax administration, collection and discourage tax evasion.
OECD allows the participating countries to determine what accounts are reportable. The term “reportable account” means a jurisdiction’s reportable account or another jurisdiction’s reporting account, depending on the context, provided it has been identified as such pursuant to due diligence procedures, consistent with the annex in place in either Jurisdiction. This means that either jurisdiction may negotiate and determine its own reportable accounts in its agreement.
The adoption of the CRS in Nigeria means that the tax authorities would have access to bank accounts of taxpayers, including details of income earned and transactions carried out by taxpayers outside Nigeria through their bank details. This era of increased exchange of information means that more information is available for the taxman to work with.
Furthermore, the Nigerian Government published its own CRS Regulations in 2019 to, amongst other things, stipulate reporting requirements for financial institutions in the country, and also set a framework for sharing financial data and information among financial institutions across CRS signatory countries. Potentially, there will be no restrictions on the information to be exchanged with the tax administrators, banks and other stakeholders across the world. This development is coming when the Voluntary Assets and Income Declaration Scheme (VAIDS) and Voluntary Offshore Assets Regularization Scheme (VOARS) that were introduced by the Federal Government in 2017 and 2018 respectively are still very fresh in the minds of taxpayers, coupled with the freezing of both corporate and individual bank accounts that followed.
As earlier explained, residents in Nigeria are taxable on their global income, with tax reporting requirements covering assets owned and income made both locally and offshore. This implies that a taxpayer is expected to declare all sources of income in his tax returns in Nigeria and account for tax on such accordingly in the country. With the advent of CRS, incomes kept in foreign accounts, which are excluded by taxpayers from tax reporting in Nigeria, will now be within the purview of tax authorities in the country. Every year, each participating country will automatically exchange with the other country vital information about the taxpayers or tax defaulters as the case may be.
Most importantly, the points discussed above should be of particular concern to wealthy individuals and families, including expatriate employees who are resident in Nigeria. More so, since the provision introduced under section 10(3) of the Personal Income Tax as Amended (2011) would mean that income deemed to be derived from Nigeria is taxable in Nigeria, irrespective of where the income is received and the number of days an individual spend in Nigeria.
There had been recent cases of the tax authorities placing a lien on the bank accounts of taxpayers who were alleged to have defaulted in the payment of their taxes, to which a lot of individuals have raised questions as to the rights of the tax authorities in that regard. In fact, the FIRS has taken a bold step to request that the alleged liability is automatically transferred by the tax defaulter’s bank account to the Federation Account. To this end, the implication of the CRS Regulation is that the tax authorities are now privy to more financial information pertaining to Nigerian residents at home and abroad, such that individuals who fail to declare the true tax position may be assessed to more tax and consequently penalized for default.
There is now an increasing need for taxpayers to pay more attention to how their personal and business affairs are organized both within and outside Nigeria. With the passage of the CRS Regulation, taxpayers should evaluate various investment holding vehicles that can be deployed to minimize their tax footprints globally. Effective bifurcation of personal and corporate accounts is now of paramount importance. Transactions involving taxpayers’ corporate entities should be recorded separately and inflows and outflows of funds should be restricted to the company’s bank account. Source documents issued in respect of such transactions should be properly archived. The documents for purchases and other expenses can be used to create accounting ledgers and journal entries. Essential documents that should be kept include incorporation documents, general ledgers, fixed asset schedule, payroll information, financial statements, company’s policies, etc.
Taxpayers are also encouraged to seek advice from experienced tax professionals on how to manage their businesses going forward such that tax footprints created from business dealings are minimal. Wealthy individuals and families, including expatriates living in Nigeria are also encouraged to carry out tax health checks on their records with a view to ascertaining their tax exposures from all their income sources. The taxation of employment income is solely not dependent on the notion of 183 days period of residency in Nigeria, but on the jurisdiction where the income is generated and other parameters.
In conclusion, the effectiveness of the CRS regulation will be largely dependent on the level of enforcement the tax authorities place on it. Taxpayers may recognize this as business as usual given the outcome of other strategies the government has deployed to generate more taxes from global financial assets. Notwithstanding, it is advisable for taxpayers to be proactive and ensure that their affairs, businesses and transactions are structured in a manner that minimizes tax exposure while at the same time, remain fully tax compliant. Tax administration in Nigeria is about to hit a new high with the era of CRS. It is expected that the tax authorities, now armed with significantly more financial information on taxpayers in the country, will become more aggressive in pursuing tax defaulters.
Emeka Onwuka is a Banker and Tax Adviser