Tunde Fowler, Executive Chairman, FIRS

Tunde Fowler, Executive Chairman, FIRS


For the Record: Nigeria’s Fowler makes case for VAT, economy digitilisation


The Executive Chairman, Federal Inland Revenue Service (FIRS), Tunde Fowler, First Vice Chairman of the United Nations International Committee of Tax Experts; Chairman, African Tax Administration Forum (ATAF) in a recent address to the Special Meeting of the United Nations’ Economic Council (ECOSOC) on Taxation and Digitalisation of the Economy and the Taxation of ODA-Funded Projects in New York, opened a fresh frontier on Value Added Tax, VAT debate, digitalisation and why the Committee of Experts on International Cooperation on Tax Matters is uniquely placed to take account of the views of both developed and developing countries, in shaping debate on these issues. Excerpts…

Your Excellency, the Vice President of the Economic and Social Council; the Assistant Secretary-General for Economic Development and Co-Chair of the Committee of Experts, Mr Eric Mensah; the second Co-Chair Miss Carmel Peters; my colleagues – tax experts of the Committee; members of the civil society, distinguished ladies and gentlemen.

I’m indeed very honoured and pleased to be able to exchange some ideas and thoughts on the topic today – ‘The Taxation and Utilisation of the Economy and the Taxation of ODA Funded Projects’. Talking from the perspective of someone who is from what some people call developing countries or developing economies, you find out that the similarities are actually  more than our differences.  What you discuss when you discuss with experts on taxation, we are discussing with professors and with those who have more knowledge than some us to exchange certain ideas.

So, I am going to give a story line. First of all I’m going to go through the overview of what I am going to try to compress and condense within ten to fifteen minutes.  I am going to talk about the digital tax initiatives, the Nigerian digital economy,  tax administration challenges  and, of course, taxation of Official Development Assistance – Funded Projects.

In going through this overview, I am going to highlight a few issues. First of all, I’d like to speak a little bit about Africa. Africa is said to have 30% of the world’s natural resources but still remains the poorest continent in the world. Today I am going to be addressing you partly as an economist,  partly as a psychologist, a politician, business executive and then a tax administrator. 

To have an effective tax system on a developing economy you need to be a little bit of all of the above. The President of Ghana is what I would call an ambassador for taxation. He has constantly spoken about the need for effective taxation across not only Ghana but also Africa. We have found out over a period of time that the only way to ensure sustainable economic and social development is through taxation.

Let me take you down memory lane. In the 1980s when we were students od economics  they told us that, depending on the economies of scale, that is where you should be in terms of your costs of production.  A lot of African countries found in commercial quantities natural resources from oil to gold and tin – what you could think of you could find it on the African continent.

So while we were busy selling the natural resources, the other developed countries of the world were actually reforming their tax process and we found it quite easy to drill a hole and out comes oil. In the particular situation of Nigeria in the 1970s we found out that what we generated in oil was more than sufficient to fund the government activities at that point in time. 

Our Head of State at the time said that money was not our problem, our problem was how to spend it.  And a lot of African countries fell into the same situation until we found out that we do not control the prices of these products. We exported crude oil, we exported unrefined gold, and we exported everything in a crude form. By the time it came to market we found out that the price was determined somewhere else.

Base on my little experience that I was fortunate to have, after my degree in economics I was an intern for one of the top five hundred companies in New York. This company happened to deal in female jewellery and accessories. To my surprise,  I found out that the actual gold content and the other minerals used to create this jewellery only accounted for 20% of the sale value of the products.

I found out that regardless of how much we put in in terms of raw materials was very minimal in the final product, and of course the profits of that product.  I also happened to have the advantage of being sent to an advertising company.  I asked the person who I was working with, “Why should I go and work with an advertising company?” He said, “You will learn something.” I never forgot that.  They took me through a process they called AIDA (Attention, Interest, Demand and Action) whose job was to make sure that we can sell our products.  If they came up with a campaign and we cannot sell our products that meant we’ve added no value.

I was extremely delight when the Secretary-General said that the United Nations has taken a position that those involved in  consumption played a very vital role in the cycle of business. When we are looking at where value is added we forget the regions where the consumption takes place.  Unfortunately, most developing countries are more on the end side, the consumption side than the manufacturing side or even the innovation stage.

And that all boils down to the story of the economies of scale. If you look at the major items that are being produced and sold, 90% of them are sold in developing economies.  They are invented in a developed economy and sometimes they are manufactured in a developing economy, then shipped back to the developed economy for final processing and then sold to the rest of us.  Of course where you do not make any profit, you do not get any taxes.

In terms of taxing approaches, a lot of countries have come up with individual strategies to ensure that they get some tax revenue from the digital economy.  For example, India applies a six per cent equalisation levy for specified services provided by non-residents.  The Argentine government requires a foreign supplier to register for VAT in  Argentina. The city of Buenos Aires applies a levy through a Withholding Tax mechanism whereby debit and credit card companies are required to withhold three per cent of the net amount of any payment remitted to them.

As countries continue to search out appropriate policies to ensure that they are not left out of this game of tax revenue, you will find out that the developed countries treat it a bit differently. If we look at the issue of Apple and Ireland, the other members of the European Union (EU) found out that Ireland, in giving certain tax benefits, had an undue advantage for business and the EU insisted that Apple should pay EUR13 billion as tax. Now the question is: Who looks after the tax revenue from developing countries or economies?

I am glad to say that from my short time at the UN, I can see that the UN not only has the interest of developing economies at heart, but also ensures that there is a free and fair playing ground when it comes to issue of tax revenue.

If we look at the main aim of the Addis Ababa Action Agenda  – I want to highlight just two or three. One is mobilisation of additional domestic public finance and ensuring that it is spent transparently and effectively, encouraging a shift in the financial sector towards long-term investment and sustainability, and facilitating development cooperation to support  the implementation of the agenda, particularly in plugging funding gaps. The funding gaps that we  note are those that these economies need for development.

I will take you through the Nigerian picture. Nigeria was a country and still is a country that produces about two million barrels of oil per day, which is quite a lot of money.  With a population of 170 million it does not really end up being a lot of money.

I will use the example of a movie. I was watching this movie  which had a married  gentleman and a bachelor. The bachelor said he was going to bet his friend $50 and the married man said he was not going to bet because his $50 was not the same as the bachelor’s $50.  The bachelor asked how the married man’s $50 is different from his. The Married man said that his $50 had to take care of his wife, his children and other family expenses. Whereas the bachelor’s $50 only looked after him alone.

That is the way we see it when it comes to tax revenue.  The Thabo Mbeki Panel reports that $50 billion is lost annually to from tax revenue from the African continent. Now to some developed countries $50 billion may not seem like very much but when you look at the comparison, $50 billion in a developed economy may help you repave a road, it may help you update your hospitals, $50 billion may help you buy more modern fire-engines. But in an economy where you have no roads, where you don’t have adequate healthcare,  where you don’t have fire-fighting equipment or enough police vehicles, $50 billion means a whole lot more.

A lot of developing economies do not really believe that they can get out of the situation they are in.  That is why I’m going to highlight the Nigerian example. With technology, in the last twelve months, we have been able to increase our tax revenue base by 800,000  corporate accounts.  From 2015 to 2017 we grew our non-oil tax revenue by it accounting for 64.3% of total revenue from 42.8%  between 2012 and 2014.

So, basically we have moved away from an oil dependent revenue source to a non-oil revenue source. At the same time we have focused on VAT.  VAT continues to be the fastest growing tax type in the world and I was quite amazed when the UAE spoke about introducing VAT. For an area that is not known for thinking about tax initiatives, they are actually thinking of bringing in VAT to generate more revenue. 

Nigeria has tried to make sure that we start to generate  sufficient revenue in VAT and we have put in place technology that will make sure that we capture all the VAT available.

 Let me give a brief idea of the growth in VAT over the last three years. In 2015 we collected N767 billion, in 2016 we collected N828 billion and in 2017 we collected N972 billion, which represents a growth of about 25%.  At the rate of this growth we see VAT being the largest tax type, in terms of value, that we will generate as a country.  And I think this also applies to a lot of other developing economies. 

We achieved this because, first of all we do have the political will in terms of our bosses – the Presidency and our colleagues in the Ministry of Finance in helping us ensure that we can meet these needs. In terms of the international collaboration that we have in terms of generating VAT we have  had a very good cooperation. We have had good cooperation with the judges in terms of the court system and just recently we were able to win a judgement over of Vodacom in the case of VAT liability for a non-resident company.

I’m just saying these things to ensure and to encourage other members of developing countries that you just have to try and I am sure that it will work. Nigeria also signed several tax treaties  such as the OECD convention of Mutual Administrative Assistance in Tax Matters which provides assistance in tax collection  and, of course, we shall continue to seek the assistance of our treaty partners to collect such taxes from the tax residents and remit the same to Nigeria.

We are also quite aware that a lot of countries have interest in signing tax treaties, especially with developing countries.  And the question one should ask is that why are you so interested in signing tax treaties with developing countries but when it comes time to issue visitors visas you are a bit reluctant. I think that we should tie both together. If they believe that we are important enough to sign trading or tax treaties with, they should also believe that we are important enough to be granted visas when we want to come to visit or to carry out business.

Other challenges that developing economies have  is that we have a large informal sector and we have a poor tax culture. That poor tax culture derives from the fact that we relied for so long on the sale of natural resources and we didn’t look inwards to look at the issue of productivity and also ask the citizens to make tax payments; either for political reasons, or you want to win an election so you decide you want to cancel Personal Income Tax or you decide not to tax the voters at all.

The developed countries had gone through this period before and, simply put, you may try to win an election by saying you will reduce the taxes or not charge any new taxes in a developed economy.  But at the end of the day, when push comes to shove, if they voters do not pay there are consequences. In developing economies, at least in Nigeria, I can say that not one person has been sent to jail for tax evasion which is quite different from the developed countries.

So, what I am saying is that we all know that we have a role to play.  We rely on the United Nations, we rely on the OECD and others to help us along. But we are not unmindful of that we also have to play our part and make sure that we do our own part.

There is also a dearth of skilled manpower and poor laws but I was very happy to note that the UN Committee on Taxation is willing and able to help developing countries in going through tax treaties before they are signed. 

 Another issue of significance is the issue of illicit financial flows which in a large part involves multinational enterprises.   I was quite shocked when I did some research because people talk about corruption, especially in developing economies.   But 70% of the illicit financial flows actually relate to base erosion and profit shifting by multinationals. Only 30% relates to corruption. So if we could get the 70% in it would mean a world of difference to most developing economies. Now that is not saying that we promote corruption; no we don’t.

One thing that we are glad about is that we saw the changes happening in the US and even at very minor levels. A friend of mine told me that if you want to pay cash into somebody’s bank account you could not do it. Now it is the owner of the account who can pay into his or her bank account. Now they are making sure that all financial activities are traceable; in a lot of developing countries they are not because transactions are largely cash based.

Most African countries have an average of 40%  of multinationals within their economies and they also account for close to 40% of their tax revenue.  If these multinationals are involved in tax planning, which basically relates to base erosion and profit shifting, I don’t see these developing economies are going to get out of this problem.

Now when we look at the use of technology in the extractive industries there are driverless trucks, there are chips in cars and you no longer need any human intervention. Many things can be done off-shore and if do not find ways to tax all these services we will find ourselves in a deeper hole when it comes to revenue generation.

In terms of taxation of Official Development Assistance – Funded Projects, I have a very simple way of looking at it. Aid is nice, assistance is good but paying the correct amount of tax is best.   I think that when you provide aid without an incentive for the receiver to show any changes you are actually more damage to that economy. When it comes to the aid that is just given, at times they want it to be tax deductible.

I will give a little example. You send a team of experts to any developing country to build a hospital or to build anything that has the need for some technical input.  We accept that the structure is nice and you find out that sometimes giving certain services is more of a problem in the future than if that service was done directly by the person who received it.

People like being helpful. As a young man somebody wanted to give me a ride and where I was it was very convenient for me to take two buses.  The person said he is going along my way and he can drop me along my way.  He dropped me along the way but where he dropped it was almost impossible to get another bus. So I would have been better off waiting at the bus stop to take two buses to my final destination. That’s the way I sometimes see aid.  

In a review of the multinationals  and the taxes tied to these, I did a study some years back in Lagos and I found out that the numbers of expatriate staff of this sector accounted for 6%, but in terms of tax revenue they accounted for 8%. Based on the salaries paid to them, they are also entitled to repatriate this through the Central Bank of Nigeria in foreign exchange. So at the end of the day, sometimes you really wonder whether having  them, in terms of finance, is to the advantage of the receiver or not.

Like I said before, assistance is acceptable, assistance is appreciated but actual tax payment is the issue that I think most developing countries would prefer.

I would like to thank you once again fro giving me this opportunity to make this presentation. I had a meeting yesterday with the capacity building committee of the UN  which gave a very detailed presentation. I would like to use this forum to request that the political leaders, especially in these developing economies,  be told that the only way out is through taxation and let them understand that donor aid will not be there forever and  assistance will not be there forever. At the end of the day their future is in their hands.

Looking at Nigeria as an example, we have come into reality to understand that the only way for economic and social development is through taxation and I believe that, as we have come to do it, most developing countries can also do it.

I’d like to thank you for listening and giving me this opportunity. Thank you and God bless.


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