Tax Strategy: Which Came First? The Chicken or The Egg?

The classic causality dilemma of which came to the world first between the chicken and the egg has been with us since ancient times. The question is no easier to answer today than it was at the time of the Greek philosopher Aristotle. In the lives of the ancient philosophers (as translated in 1825), François Fénelon quoted Aristotle as saying during the latter’s life time (384-322BC) that: “If there has been a first man, he must have been born without father or mother –which is repugnant to nature. For there could not have been a first egg to give a beginning to birds, or there should have been a first bird which gave a beginning to eggs; for a bird comes from an egg.”

The question of the chicken and the egg is still relevant today in many areas of our lives. It is the classic circular reference that we routinely run into in Microsoft excel and yet we constantly need to navigate it to get results. Those charged with policy formulation on taxation will need to consider this question. Those States who appear singularly obsessed with increased Internally Generated Revenue (IGR) will also need to consider this question.  

How do you raise the funds for sustainable development of your milieu? Increase taxes? Increase the tax net aggressively? It appears these are the most obvious strategies employed by the many IGR consultants plying their trades in Nigeria. Yet there is an alternative strategy. The tax man could benefit from an environment that spurs many businesses and have low unemployment rates. The catchment area for tax is larger in this second scenario. Many countries have successfully increased their tax collection via a regime of low taxes, economic freedom and private property rights.

Singapore is a classic example. I wonder why those at the helm of policy formulation and tax administration have never followed this latter path. Our corporate tax rate of 32% (when education tax is included) is close to the upper limit for the United States (39%). It is higher than that of the United Kingdom (23%), Netherlands (25%) and Australia (30%). Among the quintet of Brazil, Russia, India, China and South Africa, only Brazil has a marginally higher corporate tax rate of 34%. Russia’s upper corporate tax rate is 20, that of India is 20%, China’s is 25% and South Africa’s is 28%. These are the BRICS countries that we seek to be at par with in 2020! Today, there is hardly any country doing business directly. Businesses are conducted via legal vehicles (companies) owned by individuals. The country gets the glory for the wealth associated with these companies. This is why a discerning tax policy should not seek to muzzle businesses and increase cash collection. We should understand that a business must be nursed before you seek to tax it. It is for these reasons that our tax compliance laws must be strengthened to make the business man more effective. Value Added Tax and Withholding Tax returns every 21 days means every business must outsource the role or create a specialist to do these tasks no matter the size of the business.  All these increase the cost of doing business significantly.

Last year, the Revenue introduced a regulation that does not agree with specific provisions of the Companies Income Tax Act (CITA) on how to file self-assessment returns.  CITA allows a taxpayer filing self-assessment to pay its taxes in six monthly installments. Effectively, the Revenue now wants this done at once. Hopefully, knowledgeable taxpayers will challenge this. The many audits and investigations conducted on businesses (some covering the same period that were previously treated) by the Revenue on companies known to be relatively compliant is a drain of the resources available to the tax man.  The strategy for tax collection appears to be collecting more from those who are willfully compliant and leaving those who are not. This needs to change. Tax collection should be risk based. Follow up more only with willful defaulters.  

There is a case for the Federating States in Nigeria to fix their own personal income tax rates. This way, a State which wants to attract more residents could lower its tax rate while that which feels overstretched, can increase its tax rates.  This is one of the things that make the United States great. States could determine their own rate for the corporation tax due to them.  

So which comes first in tax?  The tax or the business?  In crafting a sustainable tax strategy, the policy makers must solve this dilemma. To collect more taxes, or to spur more businesses?

Eben Akinyemi, an Associate of the Institute of Chartered Accountants of Nigeria, is a Partner at the transactions and tax advisory firm, Stransact Partners.