The Nigerian Government has been faced with the challenge of raising its tax revenue to a level that is reflective of the economic activities in the country. With the fall in crude oil prices, taxation has become a critical source of Government revenue. To this end, on 1 July 2017, the Federal Government of Nigeria introduced its second tax amnesty programme in two years – the Voluntary Assets and Income Declaration Scheme (“VAIDS” or “the Scheme”). The Scheme was a time-limited opportunity for taxpayers to regularize their tax status relating to prior periods in exchange for clemency from overdue interests and penalties and the assurance that they will not face criminal prosecution for tax offences.
The VAIDS initiative which ended on 31 March 2018, was expected to help improve Nigeria’s Tax to Gross Domestic Product (GDP) ratio which currently ranks very low (at just 6%) compared to other jurisdictions, even in Africa. It was believed that VAIDS will encourage, hitherto, non-compliant taxpayers to become fully compliant especially as the Government has made it clear that it was gathering actionable intelligence that can be used to prosecute tax defaulters who fail to take advantage of the amnesty window.
As Governments at all levels begin to evaluate the success or otherwise of the Scheme, what is clear is that the Nigerian tax environment cannot remain the same going forward. While the Scheme may not have achieved its revenue target of $1billion, it succeeded in raising tax awareness in Nigeria to an all-time high. For the first time, many economically active people who were not perturbed about taxation started seeking guidance on what they needed to do to improve their tax compliance level.
To sustain this momentum, it is important for tax administrators to continue with the tax awareness efforts and also create efficient tax systems to make tax compliance easier. It is not enough to urge taxpayers to be more compliant, certain inherent issues such as lack of fairness, certainty of tax treatments, transparency and accountability should be addressed as they contribute to non-compliance. Also, taxpayers should ensure their financial affairs are well structured and appropriate records are kept to easily ascertain their tax position when required. Some of the key considerations for building sustainable tax systems have been evaluated below:
Maintaining proper books and financial records
One of the major challenges faced by taxpayers in taking advantage of VAIDS was lack of proper records and books of accounts. This was prevalent among the Micro, Small and Medium Enterprises (MSME) that did not see the need to invest in accounting systems and processes required to maintain proper records of account. As a result, when the affected MSMEs attempted to conduct self-reviews to determine their correct tax position as a first step towards participating in VAIDS, they were unable to complete the process due to insufficient records of their past business activities. This brought to fore, the importance of book keeping as the first step towards tax compliance. Important historical information on sales, purchases, inventories, expenses, assets acquisition, unutilized credits, loans etc. are all very essential in ascertaining tax position for any given period.
Also, in the event of a tax review or audit, the taxpayer’s records are the main source of information required for a tax official to ascertain the correctness or otherwise of the tax computations and filed returns. Where a taxpayer has been remitting taxes over the years but has no sufficient records to demonstrate this, additional liabilities may crystalize during an audit. This can be quite unfair but the taxpayer has the responsibility of maintaining historical tax and accounting records required to demonstrate compliance level at any time.
It was also observed that some large organizations do not have adequate document retention policies for tax purposes. Since there is a statute of limitation of six (6) years in Nigeria, it is expected that organizations should have document retention period of at least six (6) years. It is even advisable to retain certain important documents such as filed tax returns, bank records and audited accounts for more than six (6) years, as this will assist in minimizing future tax risks in the event of any future enquiries that fall outside the statute of limitation.