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Nigeria: Why is it struggling to meet its tax targets?

Nigeria could be facing a fiscal crisis if it doesn’t improve its ability to collect taxes, the authorities have warned.

Nigeria is Africa’s largest oil producer and between 2012 to 2014, the oil sector provided 57% of total government revenue. This fell to 41% between 2016 to 2018.

The government says that value added tax (VAT) and company income tax have been on the increase since 2015.

But a UN report this year showed that in 2018, Nigeria’s estimated VAT gap – the shortfall between potential and actual VAT collections – was one of the largest in Africa.

Nigeria also says it is intensifying measures to collect tax from new revenue streams, such as online transactions. It has said it will ask banks to charge tax at 5% on online transactions, both domestic and international, from January 2020.

A report this year by Oxford University’s Oxford Martin School estimates that non-oil revenues have risen but adds that much of the gain has been wiped out by inflation and currency movements.

How does it compare globally?

According to some estimates, Nigeria has one of the world’s lowest ratios of tax to GDP.

That is the total amount of tax collected as a proportion of GDP – the value of the country’s goods and services.

In 2016, it was at 6%, going by figures from the Organisation for Economic Co-operation and Development (OECD), a grouping of the world’s leading market economies.

That is the latest year for which data is available.

The tax-to-GDP ratio in South Africa was 29%, Ghana 18%, Egypt 15% and Kenya 18%, says the OECD.

The average for OECD members – which includes all the advanced economies – was 34%.

Nigeria’s low tax take

*average of 36 OECD members

Source: OECD data for 2016

The World Bank uses a slightly different measurement of tax take, which does not include most social security payments.

This puts Nigeria’s tax-to-GDP ratio in 2016 lower at just 3.4%.

In 2017, the ratio did improve to 4.8%, according to figures provided to us by the Nigerian authorities.

We don’t have a figure for 2018, but it is worth pointing out that 15% is the level which the World Bank says is necessary to achieve economic growth and poverty reduction.

How do you improve tax take?

Many other developing countries have a low tax-to-GDP ratio and recent data indicates that about 60 countries fall below the 15% threshold.

Bernardin Akitoby, an assistant director in the IMF, says a typical advanced country has a tax to GDP ratio of around 40%.

Mr Akitoby says there is no one-size-fits-all solution to increase the tax take – but there are a few lessons that can be drawn from countries that have been successful in the past:

  • a clear political mandate to tackle low levels of tax payment
  • a simpler tax system with a limited number of rates and exemptions
  • using taxes on goods and services
  • boosting tax collection by using new technology

The IMF says more comprehensive tax reform in Nigeria could help increase the tax-to-GDP ratio by about eight percentage points.

About Oluwadamilare Funsho

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