Thread by @AndersenTax_NG

Welcome to our twitter conversation thread, please retweet to enlighten someone, like & Comment.

Topic: - Effective taxation of the Nigerian informal sector
#Taxation #Nigeria

andersentax.ng/effective-taxa…

1.The Nigerian tax authorities have been making efforts aimed at increasing the level of tax collections and improving government revenue generation from taxation. #Taxation #Nigeria

2.This is spearheaded by the Federal Inland Revenue Service (FIRS) and the other State Internal Revenue Services #Taxation #Nigeria

3.The authorities have initiated different schemes including several tax amnesty programs to encourage non-complaint taxpayers to come forward and declare their taxes #Taxation #Nigeria

4. which will make them included in the tax net. Despite these efforts, the general level of tax compliance in Nigeria is still quite low. #Taxation #Nigeria

5.The recent International Monetary Fund (IMF) country report shows that only about 10million people, out of a labor force of about 77million people, are registered for taxes in Nigeria. #Taxation #Nigeria

6.This low level of tax registration certainly creates a narrow tax base from which the Government is able to collect taxes and therefore impacts Government’s ability to generate revenue through taxes. #Taxation #Nigeria

7. It also places significant burden on the existing taxpayers who in some instances, already have a high level of compliance, as the tax authorities continues to focus on these known taxpayers for audits and tax drives. #Taxation #Nigeria

8.The informal sector -The informal sector refers to the economic activities that function with limited government regulation and usually unstructured. #Taxation #Nigeria

9.They typically operate at a low level of organization, with little or no division between labor and capital as factors of production. #Taxation #Nigeria

10.The informal sector consists of micro, small and medium scale enterprises including traders and artisans and constitutes a significant portion of the Nigerian economy. #Taxation #Nigeria

11.There has been a lot of focus on the fact that Nigeria’s tax to GDP ratio of about 6.1% is quite low and appears to remain unchanged despite all the efforts of the tax authorities to improve collection. #Taxation #Nigeria

12. Given the significant size of the informal sector in the economy, it is safe to say that the tax to GDP ratio will not significantly improve until this huge and untapped section of the economy is effectively subjected to tax. #Taxation #Nigeria

13.Challenges of taxing the informal sector - The biggest challenge is that most of the businesses operating in the informal sector do not keep proper records of their day-to-day transactions. #Taxation #Nigeria

14. It means that they do not maintain proper books of account which should enable them produce audited accounts and compute the appropriate tax payable for the period. #Taxation #Nigeria

15.The operators in that sector are usually more focused on improving and growing their businesses rather than keeping proper records #Taxation #Nigeria

16. It is also common occurrence for them to mix their personal funds with that of the business. #Taxation #Nigeria

17. This includes using the same bank accounts for both business and personal transactions, subsidizing the business with personal loans and taking money out of the business for private use without proper documentation. #Taxation #Nigeria

18.This makes it difficult for an independent party to accurately evaluate the financial position of the business in order to determine the amount of tax payable. #Taxation #Nigeria

19.The tax authorities have been making efforts to reach some players in this sector using their bank transactions and other sources of information to profile them and assess them to tax. #Taxation #Nigeria

20.However, there is a level of arbitrariness in the way the tax authorities subject them to tax. #Taxation #Nigeria

21.Given that proper records and audited accounts which the authorities typically rely on to determine the tax payable are not available, it becomes a question of judgement on a case-by-case basis. #Taxation #Nigeria

22.This creates uncertainty and reluctance to engage with the authorities, as they cannot be sure of the outcome of such engagement. #Taxation #Nigeria

23.Many players in the informal sector did not participate in the amnesty programs because they were not clear on what documents the authorities will require in ascertaining their tax position. #Taxation #Nigeria

24.This can invariably expose them to punitive tax assessments and endless audits. #Taxation #Nigeria

25.The situation is also compounded by the lack of basic trust between the Government and taxpayers. #Taxation #Nigeria

26.The fundamental social contract, which effectively requires taxpayers to pay their taxes to Government #Taxation #Nigeria

27. while the Government uses the taxes to provide social goods, has broken down and as such, many businesses expend significant resources in providing basic infrastructure to support their business #Taxation #Nigeria

28.. As pointed out by Jim Yong Kim, the President of World Bank Group, “fair and efficient tax systems, combined with good service delivery and public accountability, build citizens’ trust in government and help societies prosper”. #Taxation #Nigeria

29.Suggested ways of effectively taxing the sector - Simplicity and certainty are key principles of taxation. Simplicity advocates that tax should be easy to understand and not complicated, while certainty means that every taxpayer should know exactly how much tax to pay #Nigeria

30. Therefore, one sure way of improving tax compliance in the informal sector is to make it simple, certain and easy to comply with. #Taxation #Nigeria

31.Instead of negotiating with each taxpayer and requesting for support documentations, #Taxation #Nigeria

32. which the taxpayer may be unable to provide, the tax authorities should publish clear guidelines on how they intend to assess taxpayers in the informal sector to tax when they have incomplete records. #Taxation #Nigeria

33.The tax laws already give them the power to assess companies to tax based on presumptive tax or on turnover basis, where the income of the taxpayer cannot be ascertained or records are not kept in such a manner that would enable proper assessment. #Taxation #Nigeria

34.They should therefore exercise this power in a manner that creates a level of certainty for taxpayers in this sector such that they know exactly what to expect when they approach the tax authorities for assessment #Taxation #Nigeria

35.This will improve transparency in the process, reduce the opportunity for negotiations and encourage more non-compliant taxpayers to come forward#Taxation #Taxation #Nigeria

36.The National Tax Policy document advocates for the implementation of a robust framework for the taxation of the informal sector to boost the Nation’s tax revenue base. #Taxation #Nigeria

37.Implementing such a robust guideline for taxation of the sector will help in achieving this objective. #Taxation #Nigeria

38.The current tax system where taxpayers operating in the informal sector are susceptible to multiplicity of taxes and levies by various arms of government makes tax compliance difficult and evasion more attractive. #Taxation #Nigeria

39. A special tax regime properly documented in the suggested guideline can converge all the taxes and levies payable by businesses. #Taxation #Nigeria

40. This can be categorized for various industries and turnover thresholds such that there is certainty that the compliance requirement has been met. #Taxation #Nigeria

41.Such a robust tax system driven by simplicity will promote ease of doing business and entrench a more tax compliant informal sector. #Taxation #Nigeria

42.The challenges associated with taxing the informal sector is not unique to Nigeria, other countries have implemented measures to ensure proper taxation of their informal sector. #Taxation #Nigeria

43.Specifically, Kenya and Tanzania have increased their tax bases with effective taxation of the informal sector. #Taxation #Nigeria

44.Kenya implemented a turnover tax (TOT) in 2008 at a rate of 3% for SMEs with less than 5million shillings but more than 500,000 shillings annual turnover. #Taxation #Nigeria

45.However, it was reported that the tax collected through this measure was less than expected. Based on this, they will replace the TOT with a presumptive tax regime from 1 January 2019.#Taxation #Nigeria

46. The presumptive tax will be determined using indirect methods such as business permit or trading licenses fees and it is expected to break bounds where the TOT failed. #Taxation #Nigeria

47. It will be at a rate of 15% on business permit or trading fees.#Taxation #Nigeria

48.Tanzania has been operating a presumptive tax regime since 2001. From 2005, the presumptive tax was collected through a Block Management System (BMS) by which groups of tax collectors move from building to building to identify SMEs .#Taxation #Nigeria

49. and levy presumptive taxes based on turnover from records or an estimate/presumption of turnover where there are no records available. BMS has been effective thus far. #Taxation #Nigeria

50.Conclusion It is clear that the formal sector alone cannot generate the required level of taxes required to fund the Government and improve the tax to GDP ratio.#Taxation #Nigeria

51. This is simply because the informal sector is a significant portion of the GDP and should be contributing to the tax revenue. It is a well-known fact that the tax authorities cannot audit every taxpayer, therefore effort should be on how to improve voluntary compliance.

52.Thank you everyone who joined in on our twitter conversation , we hope to see you all next Thursday. #Taxation #Nigeria