By Omodele Adigun
“What power and authority does Nigeria have over an American company in America to go and be charging Nigerian VAT?” This is a poser by Mr Taiwo Oyedele, Partner, PwC, onTax and Regulatory services, while exploring the complexities surrounding the imposition of Value Added Tax (VAT) on e-commerce.
According to him, what Nigeria needs to do is to first study digital economy; borrow from the initiatives of the advanced nations that are into it. “But how can we do it? I think ultimately, we will get to the point where the world will cooperate. We need the world to cooperate to solve digital economy problems.” In this interface, he shares his views on sundry tax matters.
Excerpts:
What prospect does VAIDS have in achieving its set targets?
The Voluntary Asset and Income Declaration Scheme (VAIDS) has a very good prospect but actual success will depend on its implementation. There must be a buy-in by all the key stakeholders – including National Assembly, state governments, and the public.
Does the FIRS have the strong will to prosecute and jail culprits?
To prosecute and jail culprits requires more than the FIRS. The most important factor is political will by the Executive at the highest level both at the federal and state levels. In addition to this, the justice system must work effectively to ensure that fairness and quick dispensation of justice including appropriate sanctions for established violations in line with the law.
The scheme will not be implemented by FIRS alone, it is in collaboration with all 36 states internal revenue authorities. There is a structure in place to ensure transparency in terms of taxes collected under the scheme by relevant tax authorities and the utilization of the funds. Declarations made will be independently verified and validated against other sources of information.
What are the likely challenges of the scheme?
I think the biggest challenge is key stakeholders pulling in different directions especially the National Assembly or state governments. There is a proposed bill to grant amnesty for corrupt proceeds currently in the House of Representatives. The bill should be designed to complement the VAID scheme rather than be in conflict with it as this discourage people from participating in the tax scheme. The other big challenge is how to convince Nigerians that when they pay the tax it will not be stolen by politicians but I think there has been some progress in the fight against corruption to partly address this concern.
Can Fowler repeat Lagos feat at FIRS?
The prospect of Mr Fowler’s replicating what he did at LIRS at FIRS. I will say yes. Yes, because his record was very clear. He raised the tax revenue in Lagos by over 500 per cent within a period of eight years. That is remarkable by any standard. But when you go to FIRS, it is a very different issue. Now at the state level, you are dealing with pretty much personal income tax, a bit of Capital Gain Tax, but nothing major. If you are looking at Nigeria, Lagos is the most formal state of safety in the whole country. Which means, majority of those living in Lagos are likely to be captured within the tax net because of the fact that they are in Lagos. They have access to the internet, they can listen to TV; you can see them on the road and stop them when they drive. If you imagine that, you then go to some villages let’s say my village. It is almost impossible to even get data from them.
And FIRS issues are more complicated. From dealing with Transfer Pricing to dealing with Petroleum Profit Tax; to dealing with Value Added Tax, Corporate Income Tax, Capital Gain Tax, and you are also dealing with companies. Many of them operate in many countries. So it brings out the issue of international dimension to tax compliance.
Whereas if you are dealing with an individual in Lagos,, you don’t have to worry about any international issues , unless they are expatriates. For Mr Fowler and any other tax authority in Nigeria to do well, they have to, first and foremost, see their role as bigger than just tax collectior. It should not be a tax collector who is collecting taxes. To have a sustainable tax system, you look at the entire tax system itself.
Nigeria Tax System is crying and begging for reforms. From the survey we conducted, people said they struggled to comply with Withholding Tax. This was even the person who wanted to pay tax. He did not know whether he should deduct five per cent or 10 per cent because the confusion has been created by the taxes. Now that if that person makes mistake, you then come and punish him with penalties and interest. He doesn’t want to do it next time. Or they do it wrong always whether you punish them or not because the question is, the issues are not clear.
Our tax to GDP ratio is very low at only about 8 per cent. Worldwide, and even for countries around Africa, we are looking at 25 per cent. So if we are looking at moving from eight per cent to, say, 25 per cent, that is 300 per cent increase. We shouldn’t make the process of paying tax too complicated. Otherwise, that does not support the objective we are trying to achieve. The haphazard approach that we have always adopted towards tax matters is not going to help any of us. Now that we know that we have to face tax as our new oil, we have to do so in a way that will not inhibit businesses and create roadblocks for growth. But rather, it will help us to generate, not only, revenue, but to achieve sustainable development that will increase the living standard and ensure that we create more employment, generate revenue for infrastructure, and then that way, we can be a happy people essentially.Policy makers, be they law makers, be they executives should be aware of these issues, and we can start dealing with them politically. So overall, we can be successful at the centre with Mr Fowler there, but we have to do things differently. We can not maintain the status quo and suddenly expect that some magic would happen.
E-commerce tax
It is difficult to deal with digital economy, e-commerce inclusive. Let me give you a scenario: take Amazon for example-if you want to order something from Amazon, you can open your computer now or your phone, just log on to the internet. And you can order. Now let’s say you order handset. The handset in Nigeria is liable to VAT. But Amazon is not a Nigerian company. It is supposed to charge VAT. They don’t even know whether there is VAT in Nigeria and they are not even interested. The phone is $50. They have not put VAT on it.
Now let’s look at origination and destination principle, which is fantastic. So the destination of that mobile phone is Nigeria, so VAT should be collected in Nigeria. But who should collect it? Nigerian tax authority says Amazon should have charged it. So the tax official should go and collect from Amazon. So if you are lucky, you can get a Visa to where Amazon is. When you get there, you will be lucky to come back to Nigeria because you have crossed your jurisdiction. What power and authority does Nigeria have over an American company in America to go and be charging Nigerian VAT? You can never enforce that law. So the other option is, well let’s go to my friend who ordered the phone.
You say bros, you ordered a phone and there is no VAT on it. So can we collect the VAT? Imagine the millions of Nigerians in that situation. The cost of trying to collect that tax will be more than the tax they want to collect. That means that one tax officer must be aware of that your phone, he must know where you live, how much you paid. Maybe get the cost from MasterCard. That is another ball game because MasterCard would say I have Confidentiality agreement with my customer. I cant just release their information. Let’s say they manage to get it. They then now fine you: can you pay VAT? You say sorry, I don’t even know there is VAT.
So it is almost impossible to deal with it. But that is not only issue with e-commerce. There is a bit of them that can still be handled in a way that is pragmatic. So if you look at the likes of MultiChoice, what they are doing essentially is digital economy or e-commerce. We have some of those of card companies. Look at Interswitch, for example. It is a Nigerian entity. Even MasterCard and Visa have some form of presence in Nigeria. So what Nigeria needs to do is to first study digital economy: What does it mean? In which different areas do we have it? What are the issues, difficulties in collecting taxes? What is the best practice that has been adopted around the world? Even the largest and the most powerful economy in the world, the US, is still struggling with this digital economy. But they have gone a little bit ahead of the rest of us. So we can then borrow from some of their initiatives. But how can we do it? I think ultimately, we will get to the point where the world will cooperate. We need the world to cooperate to solve digital economy problems. Such that, Amazon, for example, the US would ask them, when you are selling, find out the country you are selling to, charge the VAT. We would transfer the money to Nigeria because we know it belongs to Nigeria. But that is a long way off.
Multiple taxes
It is not the multiple rates in itself that is the problem, the biggest problem is to define where an item falls into. So if today, I say we are having this conference, I know you supply bottled water. Can you sell bottled water to us so that we can use it at this conference? You said, yeah! Why not. And you brought bottled water. First, I want to ask you, is there Withholding Tax? It is impossible to answer that question within our legal framework. It says if what you are doing is ordinary course of business, I should not deduct Withholding Tax. I say sir, what is your business? You said your business is buying and selling water. Is that ordinary? Is it not ordinary? I say well, are you not the one that manufactured the water?
But nobody manufactures water, we only buy bottled water and sell. So it becomes complicated. So when you finished answering those ones, we now said what rate should we apply? And someone would say, this guy is like a consultant o; another one would say this guy is like a contractor. He has a contract to supply the water. And I say there is no contract because you just told the guy verbally. And I now said you don’t need a written agreement for there to be contract.
These are issues we have seen in real life. Another say, oh, this guy that supplied the water is an individual. The rate for an individual is different from when it is a company. And when you even finished dealing with the rate, you said where should I remit to? They said if it is an individual, remit to the state where the guy is resident. I now ask: Bros, where are you resident? I usually come to Lagos, sometimes I live in Ibadan. During Christmas, I go to the North. So where should I remit to? I don’t want to make a mistake. These are genuine people who want to do the right thing. Like I said, Withholding Tax is not supposed to be complex. We can rewrite the rules; people do it all over the world. We had a training for our staff across Africa recently. Some guys from Kenya were saying to us: The way we do it is, in fact, if a company is registered with tax authority, you dont deduct Withholding Tax from them because, it means the tax authority has their record.. By the way, Withholding Tax is an advance payment. People who don’t have tax registration in their invoice, when they send it to you, you must deduct Withholding Tax so that you can send their data to the tax man, so that they can follow up on them. And the rate is not as confusing. Guess what! As soon as you pay like this and you remit. Automatically the account (of receiving tax authority) is credited. This one that we spend six months, two years looking for credit note for Withholding Tax, people laugh at us because, these are the things that should be happening in 1814.