Tackling tax evasion through technology
The financial shock occasioned by the falling oil and gas revenue which the federating states rely on for financing their annual budgets, has again brought to the fore, the contentious issues of economic viability of some states, revenue allocation, managing internally generated revenue for states and local governments, as well as widening the income tax base upon which these taxes are levied. With a fairly large population, and with more than 55% of the population aged between 16 and 65 years, a goldmine for generating income tax revenue has already been set before the various State Internal Revenue Services to tap into. On the face of it, therefore, the state governments have no excuse relying on the Federal Government for monthly handouts. However, unfortunately today, many excuses are being presented by the income tax sell-side machinery for not living up to their billing, ranging from absence of voluntary compliance behaviour from the mostly self-employed taxpayers, to the lack of social contract between the state and the working class citizens as a result of failure to provide the social amenities that justify tax payment. The effect has been the inability of the government to redistribute income and invest in health, education and infrastructure. Not only that, the ratio of capital expenditure to GDP for almost all the states is declining continuously, meaning that the capacity to grow the tax base is being further eroded and this will not augur well for the achievement of vital economic stabilisation goals.
But then, are these problems peculiar to Nigeria as a developing country? Can these problems be turned around rapidly the same way banking and voters identification issues were addressed recently? Are there also efficient and effective models that have been adopted elsewhere that the State Tax Administrators can adopt in order to leapfrog the challenges of collecting tax revenues? As a teacher and a practitioner looking at the matter with a fresh pair of eyes, serious consideration was given to the thoughts of adopting cheap and simple to use technologies that would help governments to achieve their budget finance objectives. It is enthralling that having espoused modern technology in the process of verification of voters in the 2015 general elections, cleaning up of ghost workers in the civil services, as well as the eradication of identity theft in banking through the use of biometrics, the tax authorities have not applied the same technology to personal income tax collection. Perhaps the perceived tardiness in reforming personal income tax collection is due to the way it is administered in Nigeria. Although the Personal Income Tax Act specifies the tax rates, it is the responsibility of the respective States to collect the taxes due.
On the international scene, issues bothering on tax evasion and avoidance moved to the front burner of discourse after the 2007 financial crisis, although, many of the initiatives on addressing the problems focus on tax avoidance by corporations, and not personal income taxes. In February 2016, G20 Finance Ministers endorsed the OECD initiative in implementing the information technology driven Base Erosion and Profit Sharing Project (BEPS), which enables governments to close gaps in existing international rules that allow corporate profits upon which corporation taxes are levied to disappear, or to be artificially shifted to low or no tax jurisdictions where companies have little or no economic activities. About 90 countries including Nigeria, are currently involved in the development of multilateral instruments to speed up the process of effecting the new rules which will involve change to the existing Companies Income Tax Act. According to the OECD, it is estimated that by the time the new IT-driven BEPS framework takes effect in June 2016, up to $240 billion representing almost 10% of global corporation tax revenues that are currently being lost annually to complex tax avoidance schemes, will start streaming into the government purses, especially that of the developing economies that rely on these corporation tax receipts for funding social and developmental programmes. So why are an IT-driven solutions not being applied to solve the problem of avoidance plaguing personal income tax collection?
In Nigeria, corporation tax accrues to the Federal Government exclusively and are, therefore, of little effect in addressing the revenue shortfall facing the federating states from inability to generate personal income tax revenues. The issue of evasion of personal income taxes which are levied on self-employed and employees is huge. In theory, every employer is expected to act as an agent of the State Internal Revenue Service for the purpose of remitting taxes deducted from their employees’ monthly pay to the Treasury on a Pay-As-You-Earn (PAYE) basis. However, each State government is at various degrees of efficiency in collecting these revenues. Except for Lagos State, all the other states rely on the monthly allocation from the central government to finance their budget. For individuals in the unofficial sector of the economy that are running their mostly unregistered businesses, trades, professions and vocations, it seems like the state governments have virtually given up on collecting these revenues on self-assessment basis. So what could be done to address the problem without reinventing the wheel?
In order to drag all working class into the personal income tax net, it is advisable that the Joint Tax Board implements a national tax card that captures all the bio data of all individuals in a central database. If possible, the National ID card scheme could be expanded to hold electronic data with minimum duplication about individuals not the least, annual income, health, police, crime, and tax records. With these, individuals residing within the country can be uniquely identified for tax and credit purposes. This is not the first time it is being done in Africa. The implementation of bio metric smart card with several applications was one of the conditions given by IMF in approving a bailout for Ghana in 2013 as it has been noticed that tax evasion is a major cause of revenue leakage for African governments.
It is important that the Joint Tax Board spearhead this reform so that each individual, irrespective of where they are based in Nigeria, will have one unique tax reference number. Since it is biometric, it will automatically be impossible for an individual to hold more than a card in a lifetime. The records held can then be shared amongst the various State Inland revenue Services for tax collection purposes, and also to reduce the incidence of double taxation within the country. As it is done in other jurisdictions, the Joint Tax Board should make it a criminal offence for any employer to hire anyone without a National Insurance Number. Essentially, such national tax number should be made a condition precedent for owning a bank account for anyone who is more than 16 years of age. This will make it easy for state tax investigators to track down and prosecute evaders.
Finally, as we are living in an information age, it is important that the Joint Tax Board becomes more vibrant and keep abreast of the latest technologies that can make life easier for the taxpayers from the comfort of their homes. A very good example might be the use of smart phones that require no electricity whatsoever. If these issues are well addressed, there may be no need to increase tax rates in the medium term as increase in compliance will automatically increase the tax revenues. As majority of the working citizens would have been automatically captured in a national database, it will be possible for fiscal policies to be more effective. Subsidy payments to indigent citizens can be effectively directed since the government can quickly identify citizens who are living below poverty lines. Also, governments can be able to investigate or query taxes underpaid by citizens who live ostentatious lives. As the country has got the advantage of volume in terms of population, perennial the issues of inability to pay wages, and inability to channel monies towards developmental projects will receive some respite.
• Posi Olatubosun, FCCA, teaches Accounting and Finance at Birkbeck College, University of London.
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