VAIDS as a variable tool for increasing states’ Internally Generated Revenue (IGR)

VAIDS as a variable tool for increasing states’ Internally Generated Revenue (IGR)

By:

Francis Chavwuko Okoro, FCA, ACTI
Principal Partner,
F.C. Okoro & Co.
(Chartered Accountants)
59 Hospital Road, Ekpan
08129506733

What is VAIDS
The acronym ‘VAIDS’ stands for Voluntary Asset and Income Declaration Scheme. VAIDS was formally launched in Nigeria by the then Acting President, Professor Yemi Osinbajo, GCON through the signing of an ‘Executive Order’ on 29 June 2017.

It is a time- limited opportunity for partially-compliant and non-compliant tax payers to regularize their tax status relating to previous periods (a 9 month period commencing in 1 July 2017 to 31 March 2018). Taxpayers, utilizing this window of tax amnesty, by fully and honestly declaring previously undisclosed assets and income, will benefit from the forgiveness of overdue interest and penalties on the assessed principal tax liability. Also, there is the assurance that they will not face criminal prosecution for tax offences or be subject to tax investigations. It is a taxpayer’s voluntary disclosure programme. It is interesting to note that the Federal Ministry of Finance has interfaced and gotten commitments to have access to data from the following corporate bodies: CAC, FIRS, SEC, CBN (BVN of commercial banks’ customers), Remita, NIBBS, FRSC, NCAA, Land Registry from some states, etc. It will be extremely difficult for tax evaders to escape.

The essence of VAIDS
The Federal Government of Nigeria, through the Federal Ministry of Finance (FMoF), in collaboration with the Federal Inland Revenue Service (FIRS) and the Joint Tax Board (JTB) introduced this program for the following reasons:

Progressive tax system practiced in Nigeria
Nigeria’s tax system is progressive in nature and it is based on global best practice that places emphasis on fairness. The progressive tax system as practiced in Nigeria connotes a tax in which the tax burden increases in proportion with the income levels. As fallout of the above, it is only in formal employment that this principle of proportionality inherent in the progressive tax system has been considerably achieved. The same cannot be said of those in self-employment such as professionals and some companies that easily evade tax due to the difficulty of the tax authorities to ascertain their true income. So, VAIDS seeks to extend the tax net to this category of taxpayers.

Very low Tax to GDP ratio
Nigeria currently has a tax to GDP rate of 6% and this is about the lowest in the world when juxtaposed against that of other countries. In terms of comparison, Ghana has 15.9%, Indian 16% and South Africa 27% respectively. This ratio on its own establishes a compliance gap which VAIDS seeks to bridge.

Curtailing tax evasion
The adoption of the ‘carrot and stick’ approach in VAIDS is to encourage taxpayers to faithfully declare their assets and income which will, in the long run, curtail tax evasion activities such as the use of complex structures in transactions; keeping of two sets of accounting records, non- payment of Capital Gains Tax (CGT) on asset disposal, etc.

Enhancing compliance through voluntary disclosure
It is not arguable that the number of tax compliant taxpayers in Nigeria as at May 2017 as reported by the Minister of Finance, Mrs Kemi Adeosun, is a far cry from the 81 million economically active taxpayers as estimated by the Joint Tax Board (JTB). With VAIDS, the Federal Government seeks to enroll at least 4 million new taxpayers and increase the level of compliance for the 14 million already registered.

Tackling illicit financial flows and global tax evasion
The Nigerian Government has, in recent times, secured the co-operation of a number of nation states in its quest to repatriate funds due to it. It is on record that Nigeria has the highest level of illicit financial flows in Africa and to forestall this, numerous agreements have been signed with a number of nations. These agreements provide for the Automatic Exchange of Information (AEI). Also, the newly implemented Common Reporting Standards (CRS) will enhance the sharing of banking information across borders. There’s also the Country by Country Reporting Standard (CCRS) that the Federal Executive Council (FEC) approved Nigeria’s participation on 16 August 2016. The CCRS will provide tax authorities with greater transparency into issues of operations of multinational companies, increased detection of profit sharing and other tax evasion strategies. So, due to the avalanche of multilateral agreements and commitments entered into by Nigeria, of a necessity, a programme such as VAIDS had to be designed to drive compliance with the letter and spirit of these agreements.

Revenue diversification
The economic shock that was brought about by the volatility in price and production quantity (due to the unrest in the Niger Delta in 2015/ 2016) of crude oil have made the Federal Government to devise means of diversifying its revenue base by relying more on non- oil revenue of which tax is a substantial part of. In order for it to have a wider spread, the Federal Government carried the states along in the coverage of VAIDS because of the apparent weak Internally Generated Revenue (IGR) capacities prevailing in most states of the Federation.

Timeline of VAIDS
– VAIDS is expected to last for 9 months from 1 July 2017 to 31 March 2018. There is presently no assurance of extension and renewal of the terminal date.
– 1 July 2017- 31 December 2017: Taxpayer will only be required to pay the principal liability due as a result of voluntary declaration of assets and income. However, penalty which is legally due on the principal tax at the rate of 10% and related interest charges of 21% per annum respectively will be waived.
– 1 January 2018 – 31 March 2018: VAIDS compliant taxpayer will enjoy limited benefits such as the payment of the principal tax and a pro-rated (month by month) of interest charge of 21% per annum.
In both cases, VAIDS compliant taxpayers will not be prosecuted for tax evasion and there will be maintenance of confidentiality of information.

Taxes Covered by VAIDS

1. Federal taxes
– Company Income Tax
– Transaction taxes: Withholding taxes (WHT) and Value Added Tax (VAT)
– Petroleum Profit Tax
– Tertiary Education Tax
– Capital Gains Tax on disposal of assets
– Stamp Duties
– National Information Technology Development Levy

2. State Taxes
– Personal Income Tax (Pay As You Earn and Direct Assessment)
– Property Tax where applicable (Land Use Charges)
– Stamp Duties

Those eligible for VAIDS

1. Companies
– Those with understated revenue
– A company that maintains two separate accounting records
– Those that under- declare staff cost
– Those that do not remit PAYE, VAT and WHT deducted from employees/ directors and vendors to the relevant tax authorities.
– Those not yet in the FIRS tax net

2. Individuals
– An entertainer who earns endorsement fees
– An employee who earns income from a side business
– A Nigerian resident person who earns foreign rental income
– An expatriate employed in Nigeria with the bulk of his earnings credited to his/ her offshore account.
– Individuals that have been under- declaring income for the past years
– Individuals that are not yet in the tax net.

Increasing States IGR through VAIDS
– Effective grassroots publicity and enlightenment on the essence and benefits of VAIDS by the various State Boards of Internal Revenue (SBIR). SBIR can recruit local canvassers to complement the Community Liaison Officers (CTLOs).
– Initiation of a very strong collaboration with professionals such as Accountants, Tax Practitioners, Lawyers, Surveyors, Architects, etc. Professionals can help in the education of taxpayers and also leverage on their clientele contacts to drive maximum compliance with the Scheme.
– Intelligence gathering of local information on residents of the state. Information to be mined and achieved include: those of political office holders, land registry, Ministry of Town Planning records, profile of business ventures held by high net worth individuals. In trying to gather data to complement the ones to be provided by the Federal Ministry of Finance, attention should be paid to the 80/20 Pareto principle by first concentrating on high net worth individuals which are obviously few but more revenue can be generated from them.
– Inter- state collaboration: States with not too developed Boards of Internal Revenue can collaborate with other states like Rivers, Lagos, Kano, etc. that have been adjudged by the Executive Secretary of JTB, Sir Oseni Elamah to have robust platforms for data gathering and mining. Such collaboration would enhance the capacity of the State Boards of Internal Revenue to gather relevant data on tax payer.
– Setting up a VAIDS department: The State Boards of Internal Revenue should go beyond putting up a VAIDS help desk to setting up a fully resourced VAIDS department. This department, which should be managed by an experienced tax professional, will coordinate all VAIDS activities that will enhance the number of taxpayers keying into the Scheme. Also, it will manage post VAIDS litigation and prosecution.
– Circularising letters advising high net worth individuals and taxpayers on the importance of voluntary declaration of VAIDS and its attendant benefits. Such letters should also contain the consequences for not taking advantage of the amnesty VAIDS provides for the regularisation of taxpayers’ tax positions.

– The political will exhibited by the various State Governments, especially when ‘Politically Exposed Persons’ (PEPs) come into the radar, will largely determine the increase in revenue as a result of VAIDS.

Closing quote
‘We don’t need new taxes. We need new taxpayers, people that are gainfully employed, making money and paying into the tax system. And, then we need a government that has the discipline to take that additional revenue and use it to pay down the debt and never grow it again’ – Marco Rubio