On Wednesday July 15, 2015, Chairman of Nigeria’s Federal Inland Revenue Service (FIRS) Mr. Samuel Ogungbesan hosted an Economic Confidential Editorial team in his office. During the over two hours encounter, Ogungbesan answered questions on wide range of issues on tax situation and the economy in general. Enjoy the reading.
Many Nigerians were excited about the huge revenue declared by the FIRS, N1.8trillion in the first six months of the year, despite the shortfall in the global economic phenomenon, how were you able to make that happen within six months?
Let me just say that there really is no magic about it, I mean, we’ve not gone outside of the country to borrow ideas, the fact is that we have been part of this system for many years and if you look back, do a trend analysis of our collections, you will see that the structure of the Nigerian economy is what determines how much we are able to bring in.
Yesterday, we were with the Statistician General who was saying that 50% of the operators in the economy are represented by the informal sector and the informal sector is not captured by us because we are not the ones administering enterprises in respect to income taxation in respect to the individual except the Federal Capital Territory. So you have the 36 state governments doing their own collection of income taxes as well. Now, why don’t you back that portion out of the calculation of GDP because you need to know the GDP of the country to be able to determine tax payable to know revenue estimation? Just like if you want to talk about VAT now, you must talk about aggregate level of consumption, I mean in relation to all the sectors: what is this sector contributing to the economy; then you use your 5% VAT to calculate and have an idea of how much VAT can come in.
For income taxation, it is about GDP and then you say 50% of the contributors of the GDP of Nigeria are in the informal sector being managed by a different group of people. Yet they go and set target based on 100% for us? Something is wrong there. The way the Nigerian economy is structured, from January to May every year, you won’t get much from the companies. Why? It is because most companies prepare audited accounts to December every year. Eighty percent of Nigerian companies adopt December as their financial year. The law allows them six months period of grace to prepare the accounts but it says not later than that due date which is 30th of June, all returns must be filed. That is exactly what has happened in this case. All companies were rushing to file their returns. That is just one reason but there are others.
When we came on board in March this year, remember we have been part of the system ourselves so we knew what was wrong and what we thought was needed to do to bring improvement in the tax system or the tax administration arrangement year. We thought we needed to do some tinkering with our organizational structure; a situation where every tax administration function is done at one location- raising assessment, collection, company tax audit, tax enlightenment is too much for one head. The tax controller is a technical man, all he knows is the provisions of the law but he may not be good at debt collection. That is a job you can give to some other experts. He may not also be good at talking taxation or how to encourage.
There are people who know something about change management, who also know something about cultural realignment, who can help us build that culture to make sure that whether he is working as a tax administrator or later as an ordinary citizen, the taxman retains the culture of tax compliance. You can see that it requires some expertise in that area as well. So, what my management team did was to create an audit function. If you are the one being sent to look at the books, making assessment and collecting the taxes, audit independence somehow may have been compromised. Give it to a different set of people whose job is just to audit the company. These ones just do risk analysis? They go there and do their job not influenced by anything. The important thing is do the right thing, correct what is wrong like if there is additional assessment to be collected, collect it and we move on but don’t make anything punitive. For debt managers, their only job will be to keep an eye on outstanding debts. We now have 10 regions and all of them are discussing taxation but different topics at different regions. The critical thing at the end of the day is creating awareness.
Since the new government has come in, and it is talking about change, the change here at FIRS is about changing our attitude, repositioning ourselves, working with the taxpayer. We can’t do tax administration all by ourselves as we need stakeholders to partner with us, to help us. I am not going to seal up business premises anymore, but I am going to take my money which you owe me. I am going to use the instrumentality of the platform of the law to do collection. Why do I want to close your business when if I close your business, the tax I am looking for will not come in while you are not doing your business either. But if I say you know what? If I tell the bank, don’t let this tax payer operate this account like what we did to the likes of Arik and the rest of them when they couldn’t even buy fuel because they cannot operate their account. They came back to us and said “please don’t close down our business, I say okay, how much you want to pay? Give me your cash flow projection and of course, I know how much comes in everyday. FIRS, banks and the company will then sign a memorandum of understanding with a kind of agreement that every month, this banker must collect this amount and pay into our account. If there is a default, I cancel the whole thing.
Does FIRS have powers to freeze bank accounts of defaulting companies?
Yes, the law permits us to do it. And in any case these things are all administration. Another thing we are doing concerns court cases that have been on for almost 19 years and have become intractable. The law is not very clear on some issues. In those days when we used to have MoU for equity operations, the law says, if the price of oil goes beyond a particular level, the Minister of Petroleum will do certain things. It is in a bid for government to have bigger take but when prices began to increase many years ago, the minister did not take required steps.
It is all about which price should we take for the purpose of accounting: is it the realizable price? You know when you buy in bulk, we sell to you at reduced price, e.g., I sell to you at $10 per barrel, but when you take outside the country, you go to the international market, it can be at $15 per barrel, but midway on the seas, you decide to sell at stock price, which could be $12. Now, there are three different prices: the price you bought from Nigeria, stock price still on the way, you don’t know what the price will be over there, when in actual fact, the realizable price is $15. For the purpose of accounting, which price will you take? So that MoU now says, this is the price that will be adopted for the purpose of accounting for the revenue but the minister never did anything.
So we have a lot of issues, what price are they using to account for FAAC? Is it posted price? FIRS says no, I want realizable price and then we go to court because the law says we could take either but the minister must make a statement on that. But here minister has not said anything and so it has become controversial and we need to go to court. Going to court however, the case keeps lingering. If we the taxmen cannot resolve it, is it the judges that will? They will only look at the fine lines of the law, not the technicality.
Is that the reason why you are advocating for simplified tax law?
Yes, that is one of the reasons. Let’s simplify our laws so they can be understood in simple English language and this should cut across all the taxes. Take imported services for instance. We never used to have that definition in the law until 2007 when we introduced it while reviewing the tax act. Imported service is a service rendered in Nigeria by a non resident to a business in Nigeria. It is better to have clear understanding between us and our taxpayers as that will improve the tax administration system tremendously. That is why we want to introduce the new organizational structure to make sure that people who will be communicating this message are well grounded and will help us communicate this message to the taxpayers.
So far, we are doing well. For the company import tax you must have been reading in the newspapers in the month of June that Nigeria Liquefied Natural Gas (NLNG) contributed a lot. Aggregate of tax collection from January to date is what gave us that N1.8trillion. In actual fact it is N1.97048 trillion as at the end of June. This is as a result of Custom’s collection and some others. This collection in June is the highest collection by FIRS in its history in a single month. The total collection for June is N746 billion.
What accounted for the huge collection in June?
I have told you a lot of reasons: One, that is the month all companies are filing their returns; I told you we did some restructuring, keeping closer eyes and tab on some critical functions; and then lastly NLNG alone paid close to N300 billion in June. NLNG has been paying in the past like two hundred and something million, et.c. Two years ago, it was MTN alone that paid almost N120 billion but that same company today is struggling to even pay N80 billion and that says a lot. People will say the telecom companies are doing fine but it isn’t easy for all of them now because of the cost of doing business. Government is trying to make sure that the things that can reduce some of these costs like multiplicity of taxes on the telecom companies.
Does the new method of tax collection through the instrumentality of the banks also have influence on the higher rate of collection?
It is a whole gamut. Again, we are trying to collect tax revenue up front like if you are travelling by air, you buy your ticket, that element is inherent in that bill you are paying. The law before now says that after the airlines collect, they can hold the money for about 21 days but now we want to collect our money immediately. We want to extend that to the telecoms as well as power sector.
Looking at the amount of collection done in June, an economist will say the economy is doing well, because the reflection of doing well over there is the taxes you have collected, but is it so? June is gone now because companies are getting more compliant, but what is going to happen in July when they have all submitted returns? In those months when you are not expecting filing, you are only looking at those remaining 20-25% of companies that have other months of accounting dates and what you then rely on largely is consumption tax but the economy is such that people are not empowered with cash to consume, that means no VAT from them. The Chartered Institute of Taxation was to organize a mandatory programme for its members in Ibadan, Oyo State. The story was that many members had not received salaries so were unable to attend. They even asked for credit facilities to be able to attend! That shows us how bad things are because that means purchasing power is low and if this is so, something is going to give way in VAT collection.
January to March had low level of activity because of fears over the election and this gave rise to low level of collection because no one was consuming except food mainly and people were saving their money. Secondly, there was no construction activity. Companies like Julius Berger were laying-off staff. When I saw their returns, I knew something was wrong. They were not doing anything. I was reading a report about the development in the oil industry and it says for three months, America did not buy oil from us and even India reduced its purchase by 35% in June! These are serious issues. Crude oil is not doing well; everyone is looking to increase non-oil revenue. If there are no activities, we also cannot enforce taxes as only the living will pay tax. A man who can’t feed cannot discuss taxation as it can be only done at a time of prosperity. As chairman, I tell the members of the Joint Tax Board (JTB) that internally generated revenue (IGR) can only be discussed at the time of prosperity.
Following falling oil prices last year, Nigerians started talking about increasing the tax revenue but the reality as you have analysed is that it is difficult. If things are not moving how do more taxes get paid? What then is the hope for this country? What can we do now?
There are potential areas. If you don’t know your tax payers, can you go after them? That is why the banks started the Know Your Customers (KYC) initiative. We in tax administration need to know who our tax payers are. The fact that we don’t have a central tax system for this country is a problem. We can still run fiscal federalism and yet have a central system. All we need is to have MoU to work together. You keep the information about individuals and I keep those about companies. Those companies are the ones employing the individuals so why should we not share information?
Maybe it is an issue of trust?
Good. Some tax administrators at the state level don’t trust the centre so what the centre should do is to make sure that it is able to work well with the states to create trust and confidence. When we were doing sales tax administration up to 1993 all of us put together in a period of six years collected N2.6billion! But we started VAT in 1994 and in the first year alone, we made N8.7billion. In togetherness lies our strength. Come on, let us share data. That was why we started the idea of Tax Identification Number System (TIN) platform. This is supposed to pull together all tax payers in Nigeria. Since then, only Edo State has been able to register 80,000 taxpayers in their domain and if the election register is anything to go by, the number of eligible voters there are at least over one million. Some states have not even began the implementation of TIN registration. Lagos has a huge tax payer base but they are not on that system. We don’t have to be suspicious of ourselves.
You asked where is the future and I say there are potentials! All that government needs to do is partner with the informal sector. With the rebasing of the economy now, various new sectors have emerged so it is for government to partner with those SME operators. If you do not invest in those areas, it will be difficult to go back and say I want to take something from them. We started off with the development banks, what that will offer is loan availability at considerable low rate of interest and there is moratorium period of about 18 months.
Nollywood is one of such new areas, which government is actively supporting in form of grants from the Sure-P. Are you getting taxes from them?
Again, individuals are the ones in Nollywood, not limited liability companies that is why I said though government has been helping them the investments have to be structured. When we started FIRS tried to partner with the sector because we wanted them to organize well- register, have a registration certificate which would qualify you to access the loan. Government gave about N300 billion then but they couldn’t access it. But you see, if there are institutional rigidities, let us break this wall so operators can access the funds. That is when we would have the liberty to go to them and say, guys it is payback time. I don’t know what has happened to that fund but I hear that government is helping them well now, but how, in what manner?
There are so many Nigerians working outside the country and doing well in their endeavours. Is FIRS getting tax remittances from them using the instrumentality of the bilateral and multilateral treaties?
Those guys are Nigerians but resident over there and taxation is done based on residence. You may be a Nigerian but if you are working in the UK, as long as you spend more than 183 days in a year there, you are a resident of the other country. It is the same here with other nationalities. For the purpose of taxation, they pay tax here and not to their home countries. That is the way our own law is also structured. Nigerian government doesn’t know the people you are talking about; they have no TIN in Nigeria, how can they be your taxpayer? Somehow, we will get there in future.
My prayer is that our colleagues at the state level will at the end of the day be able to deliver on the TIN registration requirement. We met with the Central Bank of Nigeria (CBN) and we requested of the Governor to make sure that they can issue a directive that individuals or corporate entities that have bank accounts should not be allowed to operate those accounts without their TIN. It is not a dream, it is happening in other places we want information to be able to do tax administration about anybody.
There are various regulations already in place to ensure tax compliance. For instance, no contractor could be given a job without producing evidence of paying ITF levies. Is it not working yet?
No it isn’t. It is just the few who are paying taxes that come forward to ask for tax clearance certificate. I say to you, that I don’t know my tax payers! A man who I don’t know, how will I give him tax clearance certificate? No, I only need to know those who are qualified to pay taxes. That is as individuals within the FCT earning income. I should know them but I don’t. Many of them are in the markets, in the underground economy and I can only know them if they interact with the banks and I can get information from the banks.
Even at that, we went to the markets, got consultants to help us interact with the market men and women, educate them on how to prepare books of accounts, but for Nigerian business, you need to talk to them every day an once you think you are done and move on to another, by the time you go back to the first, it is back to square one! It is the nature of our country. That is why we need cultural realignment not just for us tax administrators, but for everyone. The attitude of the people out there is: I provide my security I provide my water and generate my power. Why are you disturbing me about taxes?” That is why I said we are the face of the nation; we are the ones they see. You are doing a great job by publishing the monthly figures from Federation Account. Remember why we started publishing these details of collection in the early 1990s? We wanted citizens to challenge their governors and local government chairmen about what they do with their money. But it is not enough that we show these figures here because citizens still don’t know how government spends their money.
When you were publicly unveiled as Chairman of FIRS, you looked like a smiling taxman and we wondered how long that would last. You talk to people no one wants to comply, do you think a tax man can retain his smile?
I actually want the tax payer to smile when he is paying. He should be happy to and have no frown on his face. It is on the face of tax payers that I want to see smile.
Where did I get the idea? I raised the topic of pay-as-you-earn (PAYE) with a taxman from Paris during training in France some years ago. I wanted to know how it was managed in his country. He wondered what PAYE meant and said they did not have it in his country. So I asked: you mean you do not use employers as agents of collection? He told me that there were “about 27million tax payers in France and we know all of them”. I was shocked! The system does it for them. In June, the system will run a profile on everyone and do the calculations and projections on what the individuals earns. Barring any instability in prices, they can project how much is expected in taxes. The last line on the tax assessment form says in the event that there is any income which has not been put here, the individual has a duty to disclose it because if it is discovered eventually, there will be heavy penalty. They make a projection to the end of the year hoping there will be no significant changes.
The guy I was discussing with went online using his card and keyed in his information. In a few minutes, he had paid his tax and was smiling! He was happy to pay it! Why? He did not have to queue up in the tax office to pay. I say it is possible here too. Someone called me one day and said “you guys are working. I was reading the newspaper now and just scanned the barcode in your advert and it took me straight to FIRS website where I saw how I can pay his taxes online!” He was smiling and if he has his card to pay, he does it with ease. When the taxman doesn’t frighten you anymore, you see him as a friend and are happy to go file your returns. It isn’t about me. When you are happy, it is because you know where the money government is collecting will go to. But above all is technology; I want the tax payer to know that we will not take a kobo above what he is expected to pay. That is trust.
Taxpayers complain of multiplicity of taxes. How are you trying to address it?
Multiplicity of taxes is the bane of our economy, everyone knows that but where did we go wrong? It all started during the military when we started having ideas from some of these revenue contractors. As far as FIRS we are concerned, we do not recognize them. The states engaged them ostensibly to shore up their internally generated revenue (IGR) base. The likes of Olushola Adekanola and the rest of them started it, but our then chairman knew that it was a dangerous trend. In 1998, we pushed for a decree outlaw their practices. Their tool at that time was engaging touts who blocked major roads with spikes and prevent people from moving. Decree 30 of 1998 proscribed that action as unlawful and says you can employ police to clear them off the road.
Politicians came in 1999 and the new political environment saw the rebirth of this bastardization. Federal government has only about eight taxes in its stable and states have about 13 while local governments have about 22. As at the last count when IMF was doing its survey, states had increased the number of levies and taxes to 69 from 13. How do you manage this? A company like MTN, Airtel moving equipment from Lagos to Maiduguri, will face challenges of levy collectors in Ibadan for instance thus inhibiting movement of goods and persons. Before we knew it, the practice caught like wild fire with these thugs blocking trunk A roads to collect such levies. Unfortunately, we allowed that to fester. What was not understood was that as these companies were paying levies, it was appearing in their books as expenditure item. At the end, the Federal government suffers because such levies increase expenses with the result that net profit is compromised and with low net profit, you pay less tax. In other words, some states and local councils have taken their own money upfront and will still come to Federation Accounts Allocation Committee (FAAC) and share revenue. Incidentally, government didn’t do the analytics very well to realize it was a dangerous trend.
Are you trying to address that?
Yes, it is being addressed. That was one of the things we gave to the last administration. The government set up a committee of six governors representing the 36 states of the federation, with Governor Ibrahim Dakwambo of Gombe chairing. At the end of the day, government brought in the Council of States too to see what they have done. I think the bill is now with the Attorney General of the Federation office.
So to your question, it has been agreed that for all those states that had already introduced some form of new taxes or levies approved by their houses of assembly, there is nothing that can be done for now. States that have not done that can also do the same but generally, I think they brought down such taxes and levies from 69 to about 30 and though still much is an improvement. We have a new bill now which will eventually go to the now 8th Assembly for ratification.
Generally, how would you assess the journey so far?
We have started a good journey and we ask God to give us the strength to land it. Not all who started a journey that ends it but I have seen the journey of the white man and it is a successful story all way. If its working there, here we don’t have a choice, but we must work together. If we say we want to do it this way, and the states are not agreeing, we will still be getting the same zero answer. I need them and they need me. I told them “I can help you do personal income tax administration. You focus on road taxes let me do it for you. I have the data here, when I finished my own audit, you go and bring your people again to audit the same books I just did? You are disrupting their business and that would not make them want to trust us. If starting up, you and I go together to conduct audit and while I look at the corporate element, you look at the individuals. At the end of the day, they know that we are not coming back again, that will improve trust. If taxpayers don’t trust us, no matter what we say we will do, you are not winning.” They must trust you and feel free to come to you.
I believe soon, I will have to beg some of these development partners to engage the governors for us since governors are the ones that appoint the chairmen of revenue boards they do their bidding. If they direct them to work with us, it makes it easier. We also need to meet Mr, President on the matter. Canada does fiscal federalism like ours, but they the provinces and the centre are working together. All the provinces is one central tax administration. It is easy for one man to speak for your country, but we are not there yet. Anytime we raise it, we get objections.
The more reason why states and FIRS should even work together is the fact that when so-called experts are calculating tax to GDP ratio for the country, you hear a lot of people saying oh, it is 7.5% or, 8.5% and it is the lowest in Africa, but they are ignorant people. They leave out the income taxes collected by the 36 states governments and only focus on that of the Federal Capital Territory. What calculation are you doing? The day we made it known to the former Finance minister, Ngozi Okonjo-iweala, she said oh!” That was where it ended. But if we get information from states every month, at the end of the year, we gather everything, add it to corporate incomes, get everything done together and say today, tax to GDP is about 16.5%. Still some people wonder, “where is he getting his figures from?” They don’t know we have the data from all the states since one state cannot calculate that alone without information from the other 35 plus the centre. I need someone to preach that message of working together, it is by doing it together that you can have information about even your own tax payers there.