ACCORDING to International Financial Reporting Standards, certain attributes are necessary to ensure that information provided in financial reports is useful to its users. These qualitative characteristics are: ease of understanding; relevance; comparability and reliability. For any information to be considered as reliable certain attributes must be present including faithful representation, substance over form and completeness. These attributes are applicable to all forms of information whether in the private or public sector and regardless of the intended users.
The Federal Inland Revenue Service (FIRS) recently reported that it has closed the 2012 fiscal year with a total collection of N5.007 trillion (N4.628 trillion in 2011). This was described as the highest cumulative tax collected in the history of the FIRS which is significantly higher than the budget of N3.635 trillion. This of course looks like a good performance based on “what was” but the question is - do we know what “could have been”?
Out of the total collection N1.806 trillion came from non-oil taxes (N1.557 trillion in 2011) which means oil taxes contributed N3.201 trillion or circa 64%. Given that the FIRS collected N4.628 trillion in 2011, how come the total budget for 2012 was reduced by a whopping N1 trillion to N3.635 trillion? Although a budget is simply a plan but it must be sufficiently challenging to drive performance. It appears we either do not fully appreciate the principles of budgeting or we deliberately ignore them to set targets that we are almost guaranteed to exceed. Take Capital Gains Tax (CGT) for example, based on the information available on the FIRS website the budget for 2012 was a paltry N2.8 billion while a sum of N8.9 billion was collected. Going by the budget, with CGT at 10% it means the federal government expected a total taxable capital gains of N28 billion for the whole year for all chargeable transactions by all corporate entities and residents of the FCT. This looks to me like a possible gain from the sale of a single property in one of the major cities like Lagos or Abuja. Not sure if this is reconciled with any information from the land registry and disclosures in annual reports.
Compared to the conservative 2012 budget for all taxes the actual collection is a sterling performance of N1.372 trillion or 38% over budget. On the other hand, if you compare this against the collection for 2011, it is only a marginal increase of N369 billion or 8% which includes the windfall from oil. It will be more appropriate to set the budget at an appropriate level which may be revised during the year based on any significant changes to the budget assumptions such as changes in crude oil price. This way we will be able to distinguish real performance from accidental occurrence.
Further analysis shows that compared with the N715.4 billion collected in 2011, Companies Income Tax (CIT) returned N847.5 billion in 2012. On the surface this appears commendable but there is no sufficient information to conclude. The additional value required from the tax report is in the area of useful information regarding the factors or reasons for an increase or a decrease in tax collection. For instance, the UK tax authority (HMRC) publishes a monthly bulletin of the latest receipts figures showing historical receipts for all taxes on a monthly and annual basis with appropriate commentary. Some of the commentaries in the January 2013 bulletin include the quantified impact of changes in tax rates, adjustments for tax credits payable to companies, increase in oil price which impacted on the related tax revenue such as VAT, and specific economic conditions whether favourable or not.
If we put this in perspective, the FIRS should be telling us about the impact of changes in the tax laws, revenue forgone due to tax waivers and other incentives granted during the year, impact of exchange difference, VAT refunds due to taxpayers and tax credits including outstanding withholding tax credit notes, unutilised capital allowances, tax losses, and so on. The current performance system within the FIRS may encourage sub-optimal behaviours if refunds due to taxpayers are not removed from collections made by each tax office to ensure a faithful representation.
The impact on the economy of incentives should always be quantified. For instance we should be able to state how much of VAT income we have given up due to exemption on basic food items. VAT revenue is an indication of economic activities so the information is useful for planning. Changes in revenue should be explained – is it due to industry specific issues such as the significant loan loss provisions which the CBN asked banks to make a few years back. Do we know how much we generate from SMEs and the informal sector? What we should celebrate is increase in voluntary compliance rather than the mere fact that actual collection exceeded budget.
The pattern of tax collection should also be reflected in the tax budget. In 2002, the budgeted CIT collection was N201 billion for Quarter 2 while actual collection was N289 billion. In Quarter 4 the budget was the same at N201 billion while the actual was N156 billion. This does not appear right since majority of companies have December 31 year-end date and will be filing their returns in June, one would expect the CIT budget for the second quarter to be more than in any other quarter.
In view of the above, the conclusion of the FIRS regarding the tax collection for 2012 stating that - "This performance reflects the Service’s unwavering commitment to its vision of making taxation the pivot of national development" may have to be revisited.
Beyond the numbers we must also ensure that we are encouraging the right attitude and professional behaviour with the tax authority. Other performance benchmarks such as how long it takes to collect WHT credit notes should be regularly reported. Self assessment or voluntary compliance level should be regularly measured as reflected by tax audit take as a percentage of total collection from year to year. It is an indictment on the taxman as much as it is on the taxpayers if collections from tax audit keep on increasing from one year to another. Many states such as Lagos collected a lot from tax audit in past years but unfortunately they expect this to continue. Once you finish plucking the low hanging fruits, you must be prepared to climb the tree if you want more.
Other revenue agencies like the Nigeria Custom Service, Postal Service, State IRS, and other agencies should also do the same. The report by the tax authorities should contain information about how much they have paid as commissions to various agents. It is true that we have come a long way but the fact is that we still have a long road ahead to travel. If we take only one step forward when we could have taken a giant stride then we lose the opportunity to maximise our potential.
Taiwo Oyedele is a Partner and Head of Tax and Corporate Advisory at PwC Nigeria.
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