National Tax Policy

National Tax Policy

1/26/2010

 

National Tax Policy with input from the exposure of the original draft document to stakeholders
Final Draft submitted to the Federal Executive
Council
 

National Tax Policy

With input from the exposure of the original

draft document to stakeholders

Final Draft submitted to the Federal Executive

Council

National Tax Policy for Nigeria

Final Draft submitted to the Federal Executive Council

Final Draft to Federal Executive Council 2

Table of Contents

Sections Pages

1. Overview

2. Overriding Philosophy

2.1 Definition of Taxation and Revenue and

Importance of Taxation in Revenue Generation

2.2 Distinction between Revenue and other components of Revenue

2.3 Sustainable Development and Healthy Competition as the overriding

Philosophy of the National Tax Policy

2.4 The Role of Fiscal Federalism

2.5 Objectives of the Nigerian Tax System

2.6 Features of the Nigerian Tax System

3. Guiding Principles for Stakeholders

3.1 The Executive Arm

(a) Presidency

(b) Federal Executive Council in general and the

Ministries of Finance Education and Information

in Particular

(c) National Economic Council

(d) National Council of States

(e) State Governors

(f) State Executive Council in general and the

Commissioners of Finance, Education and

Information in particular

(g) Local Government Chairmen

(h) Local Government Councils

3.2 Legislative Arm

(a) National Assembly

(b) State Houses of Assembly

3.3 Judiciary

3.4 Tax Authorities

3.5 Joint Tax Board

3.6 Tax Payers

3.7 Professional Bodies, Tax Practitioners and Consultants

3.8 Relationship between Stakeholders

4. Taxation as a Tool for Wealth Creation and Employment

4.1 The role of taxation in Wealth Creation and Employment

4.2 Variation of Tax Rates in Response to Economic

Developments

4.3 Shift from Direct to Indirect Taxation for Economic Growth

4.4 Special Arrangements to Attract Investments

(a) Tax Free Zones

(b) Tax Incentives

(c) International and Regional Treaties

(d) Creating a Competitive Advantage

5. Tax Administration

5.1 Intelligence and Information Gathering

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5.2 Registration of taxable persons

5.3 Filing and Returns Processing

5.4 Payment Processing and Collection

5.5 Record Keeping

5.6 Audit and Investigation

5.7 Enforcement of Tax Laws (Evasion and Avoidance)

a. Rewards for Compliance

b. Sanctions for Non-compliance

5.8 Operation and Funding for Tax Refunds

5.9 Automation of Processes

5.10 Accounting for Tax Revenue Collected

6. Fiscal Dispute Resolution (Appeal) Mechanisms

6.1 Between Federal and State Governments

6.2 Between State Governments

6.3 Between State and Local Governments

6.4 Between the Executive and Legislature

6.5 Between the Executive, Legislature and Judiciary

6.6 With Taxpayers

7. Institutionalising Tax Culture in Nigeria

7.1 Overview and Philosophy

7.2 Concept of the Unique Taxpayer Identification Number

7.3 Institutions to drive Tax Administration and Tax Policy

(a) Ministries of Finance

(b) Revenue Authorities (Autonomy, funding, Structure,

Processes, Automation, Staffing, Capacity Building etc)

(c) Academia / Educational Institutions

(d) National Assembly

(e) Auditor General’s Office

7.4 Elimination of bottlenecks and leakages in the System

7.5 Identification of Governments’ Revenue that are presently not being collected

7.6 Accountability for Tax and Other Revenue collected

7.7 Utilisation of tax revenues collected and manner of communication to the tax

payer

8. Conclusion

List of Appendices

1. Existing Tax Legislation

2. Strategy for implementation of the National Tax Policy

3. State Policy on Taxation (recommended for inclusion in the Nigerian Constitution)

4. Issues requiring Consensus

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CHAPTER ONE

OVERVIEW

The National Tax Policy seeks to provide a set of guidelines, rules and modus operandi that

would regulate Nigeria’s tax system and provide a basis for tax legislation and tax

administration in Nigeria.

The National Tax Policy is an initiative of the Federal Government of Nigeria which is being

driven by the Federal Ministry of Finance on the basis of the report from a Study Group in

July 2003. The Study Group was inaugurated on 6

and make appropriate recommendations towards entrenching a better

improved

In January 2004, a private sector-driven Working Group was constituted to review the

recommendations of the Study Group. Both groups (The Study and Working) addressed

macro and micro issues in tax policy and administration. Among the macro issues

discussed were the drafting of a National Tax Policy, Taxation and Federalism, Tax

Incentives and Tax Administration generally. Their recommendations were further reviewed

and commented upon by various stakeholders.

The reasons for reform and the decision to develop a National Tax Policy could therefore be

traced back to the structure of the existing tax system and some of its inherent problems

such as:

th August, 2002 to examine the tax systemtax policy andtax administration in the country.

exercise of the powers of taxation to the detriment of the taxpayers who suffer multiple

taxation and bear a higher tax burden than anticipated;

the increased demand to grow internally generated revenue, which has led to the

created uncertainty and room for leakages in the tax system;

insufficient information available to taxpayers on tax compliance requirements, which

investment climate in Nigeria. Elimination of multiple taxation is therefore of major

concern at all levels of Government;

multiple taxation by Government at all levels, which impacted negatively on the

lack of accountability for tax revenue and its expenditure;

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powers of one level / State by another;

lack of clarity on taxation powers of each level of Government / encroachment on the

of revenue officials to third parties, thereby creating uncertainty in the tax system and

increasing the cost of tax compliance;

lack of skilled manpower and inadequate funding, which led to the delegation of powers

use of aggressive and unorthodox methods for tax collection;

funds;

the non refund of excess taxes to tax payers, due to the lack of an efficient system and

Nigeria’s current realities; and

the non-review of tax legislation, which had led to obsolete laws, that do not reflect

down procedural guidelines for the operation of the various tax authorities.

These and other problems plaguing Nigeria’s tax system have not been adequately tackled

for many years. One of the reasons for this was Government’s heavy reliance on revenues

derived from oil, as a result of which little or no attention had been given to revenue from

other sources, such as taxation. However, there is now a renewed commitment by the

Federal Government to diversify the economy by growing the non-oil tax revenue in order to

develop a stable and sustainable revenue source to finance developmental projects.

Following from the above, it is evident that the tax system required reform. Although there

had been several reforms in the past, these reforms were not pursued under any policy

direction and, in some cases, were carried out in an uncoordinated manner. This informed

the decision of the Study and Working Groups (referred to above) that there should be a

National Tax Policy that would provide a direction for Nigeria’s tax system and establish a

framework that all stakeholders would subscribe to and to which they would be held

accountable. It is in line with this, that the National Tax Policy is set out below.

the lack of a specific policy direction for tax matters in Nigeria and the absence of laid

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CHAPTER TWO: OVERRIDING PHILOSOPHY

2.1 Definition of Taxation and Revenue and the Importance of

Taxation in Revenue Generation

The National Tax Policy is a document, which is essentially about taxation and other

ancillary matters connected with taxation. It is therefore a proper premise to begin with a

discussion on what constitutes taxation and distinguish it from revenue, while situating its

role in the context of revenue generation.

Taxation is basically the process of collecting taxes within a particular location

regard,

persons, entities, transactions or properties to yield revenue”. It has also been defined as

‘the enforced proportional contributions from persons and property, levied by the State by

virtue of its sovereignty for the support of Government and for all public needs”.

. In thistax has been defined as “a monetary charge imposed by the Government on*

Taxes may also be defined as a "pecuniary burden laid upon individuals or property to

support government expenditure. A tax "is not a voluntary payment or donation, but an

enforced/compulsory contribution, exacted pursuant to legislative authority" and is "any

contribution imposed by government”, whether under the name of duty, custom excise, levy

or other name. Taxes are therefore defined as a financial charge or levy imposed upon an

individual or legal entity by a State or a component of the State. A tax is usually a monetary

charge on a person’s or entity’s income, property or transaction and is usually collected by a

defined authority at the Federal and State Level.

Taxes may be direct or indirect and may be imposed on individual basis, on entities, on

assets and on transactional basis. In Nigeria, taxes are imposed on the following bases:

(i) On Individuals

1. Personal Income Tax – imposed on the income of all Nigeria citizens or

residents who derive income in Nigeria and outside Nigeria

2. Development Levy – a flat charge imposed on every taxable person typically

within a State

(ii) On Companies (Corporate Entities)

*

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1. Companies Income Tax – imposed on the profits of all corporate entities who

are registered in Nigeria or derive income from Nigeria, other than those

engaged in petroleum operations;

2. Petroleum Profits Tax – imposed on the profits of all corporate entities

registered in Nigeria or who derive income from oil and gas operations in

Nigeria;

3. Education Tax – imposed on all corporate entities registered in Nigeria;

4. Technology Levy – imposed on selected corporate entities

(telecommunication companies, internet service providers, pension

managers, banks, insurance companies and other financial institutions within

a specified turnover range) in Nigeria to support nationwide development of

technology infrastructure and capacity.

(iii) On Transactions

1. Value Added Tax – imposed on the net sales value of non-exempt, qualifying

goods and services in Nigeria;

2. Capital Gains Tax – imposed on capital gains derived from sale or disposal of

chargeable assets; and

3. Stamp Duty – imposed on instruments executed by individual and corporate

entities in Nigeria.

4. Excise Duty – imposed on the manufacture of goods within the Government

territory collected by the Nigeria Customs Service

5. Import Duty - imposed on the import of goods into the Government territory

collected by the Nigeria Customs Service

6. Export Duty – imposed on the export of goods outside the Government

territory collected by the Nigeria Customs Service

(iv) On Assets

This includes taxes, such as property tax and other such taxes imposed on land or landed

property.

The above list illustrates the different bases upon which taxes may be imposed, as

discussed above.

Having provided a working definition of taxation, there is a need to differentiate taxation from

revenue for a proper understanding of the role of taxation in the development of the Nigerian

economy. This is particularly necessary, as there is usually the misconception that every

form of revenue obtained from the public is a tax.

Revenue is defined as income received from all activities engaged in by the receiving entity.

In Governmental terms, revenue is the entire amount received by the Government from

sources within and outside the Government entity. In Nigeria, Government revenue includes

proceeds from sale of crude oil, taxes (including import and excise duties), penalties,

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interests, fines, charges and other earnings received from Government investments (bonds,

dividends e.t.c.), and the like. Revenue therefore encompasses the entire gamut of

Government income, which is realised and available for expenditure by Government within a

particular fiscal year or period.

Taxes are therefore, a sub-component of Government revenue, but they are not the only

revenue item, which is internally generated by Government. Other sources of internal

revenue include fees, rates, levies, fines, tolls, penalties and charges. Taxes are however a

major contributor to Government revenue and ideally should be a major source of revenue.

In discussing taxation, there are usually four (4) “R”s linked with taxation and its purposes,

namely:

(i) Revenue – it is generally believed, that the main purpose of taxes is to raise revenue

for use by Government;

(ii) Redistribution – taxes may be used to transfer wealth from one section of the society

to another;

(iii) Repricing – taxes may be used to address externalities i.e. fiscal policies may be

used to affect some area of the economy, which cannot otherwise be done; and

(v) Representation – this is historical and implies that taxes are imposed to assure

citizens of representation in the Governance of the society. In this regard, rulers

impose taxes and citizens demand accountability in return.

Of the above, revenue generation is viewed as the primary and most important role of

taxation. Taxation is however not only a means of revenue generation for Government, it

can also be used to stimulate other sources of Government revenue and develop other

areas of the economy from which Government can realise revenue.

2.2 Distinction between Taxation and other components of

Revenue

A further but brief discussion may be necessary on the distinction between taxes and other

internal revenue items such as charges, levies and penalties. Such other revenue items are

not usually income or transaction based, but may be imposed for the use of utilities or

infrastructure, or the right of way or simply imposed on certain category of persons, activities

or persons within a particular area. As a definition of taxation has been provided above, a

working definition of similar items is provided below;

(i) Charge – a charge is an amount paid for the use of goods, services or infrastructure

provided by the Government;

(ii) Fee – a fee is a payment for the labour or services provided by a public body, such

as a Government entity or agency. Examples of fees include payments for use of

utilities and for obtaining Government documents such as passports and visas.

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(iii) Fines – these are sums of money imposed by the Government as penalties for an

offence or indiscretion by a person within the jurisdiction of the Government.

Examples of fines include Court fines, fines imposed for traffic violations,

unauthorised usage of Government property e.t.c.

(iv) Penalty – this is similar to a fine and is usually an amount paid or forfeited for not

meeting a particular condition or fulfilling an undertaking. Examples of penalties

include payments for late filing of returns, or the late or non-provision of information

at the time required to Government agencies.

(v) Rates – these are usually imposed on property or other assets and are usually

determined with reference to the value of the property or in relation to some other

thing. Examples of rates include tenement rates and rates on shops and kiosks.

The above is not intended as an exhaustive definition of the above concepts, but merely a

working guide to enable a proper distinction between taxes and these other components of

Government revenue. In practice, there may be little distinction between what constitutes a

tax or charge or fine, as these concepts can sometimes be interchangeable, however, it is

still necessary to keep in mind the distinction as set out above.

It has also been noted, that under the current structure of Government in Nigeria, taxes at

the Federal and State level are usually more efficiently collected and utilised than most of

the other revenue sources highlighted above. However, unlike other revenue items, tax

officials do not exercise custody or control over taxes, which they collect and are not

involved in the allocation or expenditure of the taxes.

This distinction between those who collect and those who utilise is important for control

purposes and also because the manner of utilisation of revenues collected impacts directly

on the ease with which such revenues are collected.

2.3 Sustainable Development and Healthy Competition as the

overriding Philosophy of the National Tax Policy

Sustainable development is development that meets the needs of the present without

compromising the ability of future generations to meet their own needs. In this context

sustainable development refers to the pattern of revenue generation, which is able to meet

the needs of the present generation of Nigerians, without negatively impacting the ability of

future generations to meet their own needs. Generally, taxation is looked upon as a

sustainable source of Government revenue due to the stability and certainty of the tax

system. Unlike other sources of revenue, taxes are constantly available in so far as

economic activity is carried on in the society. Recent developments in the global and local

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economy which have significantly impacted Government revenue has directed focus on

taxation as a sustainable source of income.

It is in line with this that the National Tax Policy intends to create awareness on the

importance of the role, which taxation can play in securing a stable flow of revenue for the

Government. Nigeria is currently viewed as a mono-product economy with significant

reliance on oil revenue due to historical developments in the Nigerian economy. However,

taxation has been identified as an alternative to oil revenue and a more reliable source of

revenue. The tax policy shall therefore promote and encourage a shift in focus from non-tax

revenue to tax revenue by Governments at all levels of the Nigerian economy.

Following from the above, the tax policy shall also promote and encourage healthy

competition amongst tax and revenue authorities in Nigeria at the Federal and State level to

facilitate rapid development of the tax sector in Nigeria. The focus of the competition shall

be to maximise tax revenue within the jurisdiction of each Government in line with

Constitutional and statutory provisions. It is expected that there would be increased

collaboration as a result of the need to grow tax revenues by each level of Government and

that improved collaboration would enhance tax yield – between and amongst Federal, State

and Local Government authorities.

The concept of sustainable development and healthy competition shall be upheld as

underlying philosophies in the development of Nigeria’s tax system. It is however important

to note that even as healthy competition is encouraged, this should be balanced with the

need to have an effective and efficient tax system. Several jurisdictions have different ways

of striking that balance. In Nigeria, that balance will be achieved by ensuring that those ratios

that drive allocation of revenue collected from any source has built in mechanisms for

rewarding and recognising arms of government that demonstrate effective utilisation of

revenues, investment promotion, infrastructural development and economic activity amongst

others.

2.4 The role of Fiscal Federalism

Fiscal Federalism is expected to play a major role in Nigerian tax policy and administration.

In this regard, it is intended that the concept of Fiscal Federalism would be the common

thread holding the National Tax Policy together. Nigerian tax policy would therefore uphold

the application of fiscal federalism in the generation and expenditure of revenue by

Government at all levels in accordance with the tenets of the Nigerian Constitution. There

should be strict adherence to the tenets of fiscal federalism, which will include the basic

understanding of which revenue functions and agencies are best centralised, which should

run concurrently and which are better placed under the sphere of decentralised levels of

Government.

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In this regard, it is expected that the Tax Policy and other tax legislation, would resolve the

issue, of who collects what, how it is collected, who controls what is collected, how is what is

collected shared, who is responsible for spending what is collected and who is ultimately

responsible and accountable to the tax payers for the revenue collected and its expenditure.

The Tax Policy would provide a workable and acceptable platform which should be adopted

by all tiers of Government for the proper application of the doctrine of separation of powers

in relation to taxation. It is believed that adherence to these principles which would be

discussed in the National Tax Policy would bring an end to disputes on the limits and powers

of the tiers of Government in our Federation on fiscal matters. It will also bring clarity and

certainty to tax administration and the entire Nigerian tax system.

In putting together a National Tax Policy, it was paramount to uphold the concept of

Federalism, as practiced under the Nigerian Constitution. The present structure of taxation

as stipulated by the Constitution of the Federal Republic of Nigeria reflects the three-tier

system of Government at the Federal, State and Local Government levels. Under the

Constitution, each tier of Government has been granted powers and responsibility in respect

of the imposition and collection of taxes.

The 1999 Constitution of the Federal Republic of Nigeria places the responsibility for

legislating on taxation on Income, Capital Gains and Stamp duty on the Federal

Government. It also places collection of taxes on the concurrent legislative list, enabling the

Federal Government to delegate administration or collection of taxes as it pertains to

taxation or duty on a) capital gains, incomes or profits of persons other than companies; and

b) documents or transactions by way of stamp duties, to the State Government.

At the same time, the constitution places the responsibility for legislating on the collection of

taxes, fees and charges that can be collected by the Local Government on the State

Governments. Other than that specifically stated in the exclusive legislative list, activities that

would ordinarily attract taxes, fees and charges (forms of levies) are placed squarely as part

of the responsibilities of the Local Government Council – in the 4th schedule. To check on

the possibility of multiple taxation, the constitution is clear on giving responsibility to the

Federal Government in the case of State Governments, and to the State Government in the

case of Local Governments. Extracts from Part D of the Second Schedule of the Constitution

is presented below–

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7. In the exercise of its powers to impose any tax or duty on -

(a) capital gains, incomes or profits or persons other than companies; and

(b) documents or transactions by way of stamp duties.

the National Assembly may, subject to such conditions as it may prescribe, provide

that the collection of any such tax or duty or the administration of the law imposing it

shall be carried out by the Government of a State or other authority of a State.

8. Where an Act of the National Assembly provides for the collection of tax or duty

on capital gains, incomes or profit or the administration of any law by an authority of

a State in accordance with paragraph 7 hereof, it shall regulate the liability of

persons to such tax or duty in such manner as to ensure that such tax or duty is not

levied on the same person by more than one State.

9. A House of Assembly may, subject to such conditions as it may prescribe, make

provisions for the collection of any tax, fee or rate or for the administration of the Law

providing for such collection by a local government council.

10. Where a Law of a House of Assembly provides for the collection of tax, fee or

rate or for the administration of such Law by a local government council in

accordance with the provisions hereof it shall regulate the liability of persons to the

tax, fee or rate in such manner as to ensure that such tax, fee or rate is not levied on

the same person in respect of the same liability by more than one local government

council.

Taxation in its strictest sense is much broader than tax on income, capital gains and stamp

duties. It also covers tax on property, consumption and products, hence the source of

confusion and legal action which has not helped in the development of the tax regime in

Nigeria. Pending cases in the Courts may help decide conclusively on related matters.

Suffice it to say that the prevailing position is that the Federal Government ultimately has

overriding authority on taxation matters with some latitude to State Governments to

introduce taxes, fees and charges (collectible by the Local Governments) in those areas that

do not conflict with the position of the Federal Government.

Governments at both Federal and State Government levels have used the omnibus clause in

section 4 of the Constitution to address gaps identified in the taxation system. Section 4

clearly gives the State Government the ability to enact laws in the interest of peace and good

governance, but also the Federal Government the same powers to enact laws in the interest

of peace and good governance, with the proviso that where there is a conflict, the laws

enacted by the Federal Government prevail.

The Nigerian Constitution generally allows the state and local government’s broad discretion

in establishing fees, charges, or fines as previously defined. These revenues (fees, charges,

or fines) should be seen as collected:

(1) for the privilege of engaging in certain activities; or

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(2) in order to regulate a particular activity or

(3) for the purpose of imposing penalties.

In some cases--such as many user charges, admission fees, and some regulatory fees--the

payment is closely linked to the cost of providing a particular service to an individual

beneficiary or regulated party. In other cases--for example, certain environmental or

regulatory fees--the payment may not be directly related to the costs associated with

particular participants, but more loosely related to a discrete group of participants or an

industry. In some situations, the payment may not relate to direct regulation per se, but

rather to broad social costs associated with particular activities--for example, environmental

mitigation fees. Ideally, some link must exist between these payments and the related cost to

governments in order to avoid it progressing to a "tax." Fees or charges must be based on

some established relationship between the amount of the payment, on the one hand, and

the costs associated with the regulation of an activity or the provision of a good or service,

on the other. Similarly, penalties must be considered reasonable given the specific incident

of noncompliance. If a sufficient relationship, or "nexus," is not established between the fee

and costs of provision or regulation, the charge is considered a tax. This is an area for which

legislation is required to conclusively make this distinction.

An example of this difference lies in the distinction between the tenement rate and the

property tax. They are not and should not be confused as one and the same thing.

Tenement rates are typically linked to charges by the local authorities for the provision of

public services to residential dwellings including multi storey, multi flat dwellings with multiple

owners which may be owner occupied or rented. Property tax on the other hand is a tax

based on the value of a house or other property. In Nigeria, the constitution provides for

tenement rate, while Property tax is still a new concept in the tax system. Similarly, there is

scope to have Environmental taxes, fees, charges or fines, none of which exist today.

in conclusion, the National Tax Policy recognises that the Federal Government through the

National Assembly is empowered exclusively to impose taxes on incomes, profits and capital

gains and on documents of corporate organizations and governments (stamp duties), while

each State Government is empowered to collect those taxes from individuals resident in their

respective States as may be determined by the National Assembly. The taxes imposed by

the Federal government include Companies Income Tax, Personal Income Tax, Education

Tax, Petroleum Profits Tax, Capital Gains Tax, Value Added Tax and Stamp Duties. Apart

from income taxes, State Governments, through their Houses of Assembly are also

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empowered to impose, fees, levies and rates collectible by them and Local Government

Authorities in their respective states.

Every person involved in tax administration, tax payers, Consultants, tax and revenue

officials, all agencies of Government involved in raising and collecting Government revenue,

those involved in Governance, the Executive, the Legislature, Judiciary and every Nigerian

citizen or resident is hereby invited to subscribe to the National Tax Policy.

2.5 Objectives of the Nigerian Tax System

The Nigerian tax system is expected to contribute to the well-being of all Nigerians and

taxes, which are collected by Government should directly impact on the lives of the citizens.

This can be accomplished through proper and judicious utilisation of the revenues collected

by government.

In line with the above, there are certain objectives, which the Tax System is expected to

achieve. These objectives include:

2.5.1 To promote fiscal responsibility and accountability

One of the primary objectives of the National Tax Policy is to create a tax system,

which ensures that Government transparently and judiciously accounts for the

revenue it generates through taxation by investing in the provision of infrastructure

and public goods and services. Where this in place, Nigerians would have a tax

system that they can fully relate to and which is a tool for National Development.

2.5.2 To facilitate economic growth and development.

The overriding objective of the Nigerian tax system shou