Onwuka: Finance Bill Will Shield the Poor, Small Businesses from Heavy Taxation

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President Muhammadu Buhari, on October 8, 2019, presented The Finance Bill, 2019 (the Bill), alongside the 2020 Appropriation Bill, to a joint session of the National Assembly. The Bill has since been passed by both arms of the National Assembly. In this interview on the ‘Morning Show,’ on Arise Television, a Partner and the Head of Family Wealth at Andersen Tax LP, Mr. Emeka Onwuka, speaks about the benefits of the proposed legislation to the country if signed into law. Peter Uzoho provides the excerpts:

What is The Finance Bill about, what is special about it and how is it different from current tax legislation?

It is interesting and a welcome development. It shows the dynamism with which we are attacking the tax regime in this country. I will say this didn’t come as a surprise to us that are tax advisers. This is because some of the tax issues covered by the new Finance Bill, have been contentious over the years, but this Bill provides clarification. And of course, the big one being the VAT that has been raised to 7.5 per cent. But I will say The Finance Bill is a win-win for the tax payers and the government. For the taxpayers, there are clarifications that have been provided by the Finance Bill. It seeks to improve compliance and the ease at which businesses are being done. On the side of the government, some of changes as well would increase the sources of funding for the budget.

Many also argue that Nigeria has tax compliance problem, simply because of lack of trust. So, how is this Bill going to address the compliance problem?

Like I said, it helps clarify some of the areas that most taxpayers argue with revenue agency. For instance, the tax rate, for the first time, the government has taken the small businesses out of the tax bracket. If your revenue is less than N25 million, you don’t expect to pay taxes today. That is a welcome development, in terms of having to pay 30 per cent, which is the tax rate for corporates. Also, if your revenue is between N25 million and N100 million, you only pay 20 per cent instead of 30 per cent. So, that would encourage compliance and encourage people to come forward and file returns and it will increase visibility for the government as to businesses. This is because that would be the first time most of them would be filing returns. That helps government to keep track of them.

On the issue about compliance, it is a general issue with developing countries because people believe the government gets the money and doesn’t put in place the required infrastructure. Which is why indirect taxes, such as VAT, have been more effective, in terms of sourcing for government funding. But, over time, we believe that as government become more transparent in terms of utilisation of these sources, the taxpayers would be more comfortable to meet their payment. But, we have to bear in mind that even though taxation is a social contract between the taxpayers and government, whereby when you make the payment, you expect the government to also provide, public goods and services, however, taxation is often described as a compulsory and unrequited payments to government. Unrequited in the sense that the service you get from government is not usually commensurate with the payment you make, because government gets the money and takes care of the general public. However, we expect that government will be transparent and be responsive to the needs of the people to drive compliance.

Each time the Minister of Finance talks about this Finance Bill, she talks about incentives for SMEs, but critics of the Bill say they really can’t see those opportunities apart from the fact that the government wants more revenue. What do you think about this?

You know I said it is a win-win for the taxpayers and the government. Let us look at the taxpayers’ side, what are the benefits in terms of how it will affect their business and the way they are currently operating? I talked about the small businesses in terms of taking them off payment of taxes. But the big hit is also the insurance companies. Over the years, the way the tax laws apply to the insurance companies, are meant that they have a minimum tax level of at least 30 per cent of their gross premium as taxable income. But that has been taken off by this regulation. So, there is no limit in terms of how much the tax law would assume their profit to be. Over the years, there have also been limit as to the amount of expenses they can charge to their profit and loss, still talking about the insurance companies.

Now, these two provisions have always made investment in insurance companies unattractive. So, you don’t have a lot of money flowing into insurance. This regulation that is coming at this time the industry is going through recapitalisation is very encouraging. What it means is that the tax liabilities of the insurance companies are going to be down, to a large extent. The VAT as well, today, there is full clarification as to what VAT is applicable to and what it is not applicable to. For instance, most basic food items, the VAT will not be applicable to them, medicine, educational books, and all that. One of my friends said, if one lives like a villager, he or she may be completely insulated from VAT. So, the VAT is applicable to certain types of goods.

Luxury items?
I won’t say luxury items; I would probably say items used by the middle class. But the basic food items are not covered by VAT and medical services. People talk about 7.5 per cent VAT rate, let’s not forget that some years back, VAT was actually taken to 10 per cent, but because of public outcry it was reduced.

But how much will the government gain from that increase in VAT considering that the state takes the bulk of it?
You see, it is all part of the public good. For the average person, all they want is that the government is doing something for them, whether it is the state government or federal government. Another big hit for the government and also the tax payers, is on the new economy, which is the digital economy. Previously, it has been difficult to determine how to tax them, particularly for non-resident companies. These are companies outside the shores of this country, who are selling services into Nigeria, for which Nigerians are buying. These are also goods and services. By our tax laws, they are shielded, because they believe they don’t have a local presence in Nigeria and as such they are not required to file returns in Nigeria or to pay taxes in Nigeria. We all know that, that has become a significant part of commerce today and it means the government is losing revenue, in terms of taxation of goods and services.

That has been brought into the tax bracket with this Finance Bill. Clearly, today, if a company is deriving income from Nigeria, the Minister of Finance has been given the latitude to establish whether that company has significant economic presence in the country and then we expect them to pay taxes in Nigeria. That is a good clarification for the tax payers, because it has been hazy. Also, for government, it is a major source of revenue. Those are the two major sources of revenue for the government through this Finance Bill. Like I said, it is a new economy. On Black Fridays, a lot of Nigerians buy stuffs through the internet that are being delivered into the country and these are entities outside the country that are making monies from Nigeria, which are not taxed here. Globally, it is an issue for different countries and the different countries are responding. I believe part of the objective stated by the government is to align domestic laws with global best practice.

Are there implications for the banking sector and also for the capital market?

Let me take the capital market first. There are certain types of transactions that you do in the capital market today, that you run the risk of double taxation on such transactions, and also run the risk that investors in those assets are taxes in a manner that you don’t want to encourage them to continue to invest. The first one has to do with real estate investment companies. These are special purpose vehicles (SPVs) that the Securities and Exchange Commission (SEC) allows to gather resources from investors, to make investments in real estate assets. Now, under the existing tax laws, because it is a company, it is expected to file with the Federal Inland Revenue Service (FIRS) and pay tax at 30 per cent on the earnings of that fund.

Then, when it distributes the dividend out of that fund as well, they also pay withholding tax on those dividends. You will now see that the investor, had suffered 30 per cent corporate tax, 10 per cent withholding tax on dividend, before going to file his or her own tax return as well. That had been a disincentive to be participate in those listed companies. But this regulation has removed that. Today, the real estate investment companies are recognised as Finance Bill as pass through entities. So, they don’t have to pay the corporate tax of 30 per cent. That is a major incentive to allow people to make sure investments.

The other set of transactions have to do with reversible transactions, whether you are trading equities or whether you are doing debt. Where you do a repurchase transaction, you are actually lending your asset to a counter party for a period of time and you return the asset back. Today, capital gain tax (CGT) and VAT may apply to those transactions because you are actually making a sale, but this Finance Bill now recognises that those transactions are reversible. To that extent, they are now exempted from VAT and CGT and that is a major encouragement for this transaction to hold. And those transactions are those that make the financial market more sophisticated and allows people to do transactions and over time would help increase the size and volume of financial transactions in the market.

Then for the banks, the current exemption of taxes on the interest on financial assets, such as treasury bills and bonds was maintained in Finance Bill, so they don’t run a risk. But we don’t know when that would happen because the current concession would expire about two or three years time. They clarified Stamp Duties on transactions, which is put at N50 per transaction, but now that N50 will apply to transaction above N10,000, also leaving the small customers out of the tax bracket in terms of Stamp Duties. Those types of regulations would improve the ease with which the customers would do business with the bank and ultimately would be beneficial to the banks as well.

What is your take on the public reaction to the Bill?
You know there was a public hearing. The first is that everybody is hanging onto the VAT of 7.5 per cent. However, the government has also given the sweetener in terms of excluding small businesses, which is also good. On one side, they increase the VAT rate and on the other side they have taken the small businesses out. To that extent, I believe we would ultimately accept the 7.5 per cent. Now, there was a public hearing, both at the Senate and House of Representatives. Overall, like I said, for most advisers it was a welcome development. Nothing here came as a surprise.

But there were issues, particularly for the Petroleum Profit Tax, the Withholding Tax that now applies on the dividends of the upstream companies. At the public hearing, there were significant discussions around that. But ultimately, it has gone through the Senate with just minor adjustment. At the House of Representatives, there were some discussions around it. But after all the conversation, the Bill is going to be passed as presented, with just minor adjustment.

One of the major objective of this Bill is to ensure that our tax practice aligns with global best practice. How will you compare the Bill to what is obtained globally?

I just talked about the non-resident companies, which is a big issue across the world, for most of the companies participating in the new digital economy. Also, I talked about the new tax regime for insurance, this is in alignment with global best practice. There are other areas such as requirement for management fees; royalties, where you had to go to NOTA to get approvals and require the minister to sign up on that. That has been taken care of. As long as you will comply with the transfer pricing rules, you may not need to go to anybody to sign anything. Transfer pricing rule in tax states that when you have transactions with two related parties, the tax authorities want to make sure they are done at arms-length and not that you gave concession for such transactions. Which is what is expected globally. You see that the level of approvals and documentations required under the current regime has significantly been reduced.

Are there certain areas that still be improved upon the Bill before it finally becomes law to address the fears of the average Nigerian?

When we talk about the average Nigerian complaining about taxation, I think there are also some explanations on what happened in the past and that got us to where we are now, why tax are not popular and all that. Today, tax collections to expenditure of government is about 20 per cent. That is not what it is supposed to be. Nigeria has the lowest tax to GDP ratio in Africa at about 5.7 per cent. The average for the top 26 countries in Africa is about 17.8 per cent, with Ghana at 15 per cent, South Africa at about 24 per cent and the whole OECD countries is about 34 per cent. The populace need to make payment for the service they expect for the government to provide.

And also the issue of accountability is like the chicken and egg situation, they say oh, people are not willing to pay because the government have not accounted for the level of taxes they are collecting. But the truth of the matter is that people are not holding the government accountable because government is funding most public expenditure from oil revenue. Now, the more people feel that they are paying for government expenditure, they will be able to say whether government is spending those monies wisely or not.

They will be more interested even in governance to make sure that governance level is to the extent that they will have benefits for the taxes they are paying. Granted where we are coming from, we need to progress from where we are coming from. That is why the government is talking about 15 per cent tax to GDP ratio under this Finance Bill and also the measure you are going to get over the years. The only thing I will say is that in this whole process, we have seen the Finance Bill trying to shield the poor and shield the small businesses from heavy taxation, that out of N100 million, you are only paying 20 per cent.

The implementation of the Bill needs to be done in such a manner you will achieve the objective of physical equity and also alignment. The issue is that until the execution, that is when you know whether it has achieved the objectives or not. But we will back the government, because where we are coming from, we still have a long way to go in terms of increasing the level of taxes being paid. For instance, Lagos is leading because of IGR collections in the whole country, they are doing almost N36 billion in terms of internally generated revenue (IGR). But the average tax being paid by Lagosians today is about N30,000. The maximum tax rate today in Nigeria for personal income tax is about 24 per cent, and if apply the percent relief of 20 per cent, the effective tax rate for personal income tax today is about 19 per cent.

As a matter of fact, I was telling some of my younger colleagues that when we started this practice in the last 80s, early 90s, personal income tax was about 55 per cent in this country, but today is effectively about 19 per cent. I believe that over the years, the tax fund has been done in a manner to encourage people to comply. Tax rate today for corporate tax is 30 per cent, some years back it was 45 per cent, it came down to 40 per cent and then 30 per cent. But with the new Bill it is now 20 per cent for companies under N100 million and zero for companies under N25 million. Now, I believe that they have given enough incentives for people to willingly comply to the tax regime. And in that whole process we can move from where we are today to what they expected in terms of taxation funding public expenditure.

What are the likely challenges that you see with regard to tax collection administration in Nigeria?

I think over the years there have poor visibility in terms of economic activities and economic players. But I can tell you that in the past two or three years the data available to revenue is relative high than what they had about five years ago. For instance, the bank verification number (BVN), is able to see all your transactions in the banking industry and that is a very major step. Apart from that also, a lot of financial transactions today are being done electronically.

So, there are significant data available to bring more people into the tax bracket. And you know there were issues some months ago about blocking accounts of customers in banks, it was because of the data that they have. So, I believe that tax administration and implementation will be a lot easier because of the data that we have, because it is also a digital economy in terms of information. What is then left is that there should be proper coordination from FIRS to the entire revenue service of the states through the Joint Tax Board. The FIRS has done a lot over the past few years, in terms of the information that they have, all they need is to map this information to individuals and entities because most companies are not even filling returns in the first place.

In terms of their annual returns to the Corporate Affairs Commission are not even being filed, not to talk about going to the FIRS to file. So, the FIRS is doing their beat. Now the different internal revenue bodies across the states, in term of the quality and capacity, it differs. But the Joint Tax Board is the entity that helps to harmonise the effectiveness of them. So, the FIRS with the Joint Tax Board will need to ensure that all the states are almost at par in terms of the quality of administration and ensuring that the Finance Bill is implemented as intended. Otherwise, if it is not implemented as intended you may still have situations where there are a lot of discretionary levies and interpretation and also application. And that will not support the acceptance of the Finance Bill as a Bill that is improved in terms of the tax laws ultimately.

The organised private sector is kicking against the Bill. They object to the part of the increase in VAT, saying it will erode the purchasing power of persons. And also the association of small business owners in Nigeria are saying the timing wasn’t proper. Do you think these persons are over reacting?

To be honest, I think its a bit of overreaction but people are entitled to their views and I cannot say my own view is superior to theirs. But I always want to deal with facts. Did the Finance Bill increase the corporate income tax rate? No. Did the Finance Bill reduce the corporate income tax rate for certain companies? Yes. Did the Finance Bill consider the small businesses in the new regulation? Yes.

The only thing people are hanging on to is VAT. I keep saying, what is the level of VAT paid in other countries versus what we are paying in the country today? What is the level of collection? On the average in Africa, about 51 per cent of tax revenue comes from tax of good and services. Like I said earlier, if you live like a villager, you are completely insulated from VAT. So, if you are consuming goods that VAT apply to, then you suffer that.

You a former MD/CEO of the defunct Diamond Bank, which has since merged with Access Bank. What is your assessment of that process?

I left Diamond Bank in 2011, that was about almost eight years ago. There have been two CEOs after me, and I think 7 to 8 years is a long time for me honestly not to have the details to the operations of the institution and as to the transactions they have taken. I don’t have the full details, if it is available to me, it is also available to you as any other person in the market. But Diamond was a fantastic brand and a fantastic institution and it was one of the strongest banks in this country.

The bank that carved a niche as the dominant SME player in this market and also the fastest growing retail bank in the industry. I believe that was why the franchise was attractive to Access Bank. Access Bank has largely been a corporate institution and I think the merger with Diamond bank and Access Bank will strengthen the new institution and also for the benefit of the general banking public.