INSIGHT: Nigeria’s Voluntary Assets and Income Declaration Scheme—a Post-mortem!

The Voluntary Assets and Income Declaration Scheme in Nigeria was intended to provide a “time-limited opportunity for taxpayers to regularize their tax status relating to previous tax periods” (i.e., the preceding six years of assessment) .

Taxpayers were required to fully and honestly declare previously undisclosed assets and income, and would obtain the following benefits in exchange:

• waiver of interest and penalty charges;

• exemption from facing prosecution for tax offenses;

• immunity from tax audit; and

• option of spreading payment of outstanding liabilities over a period of three years, as may be agreed with the relevant tax authority.

Taxpayers who failed to take advantage of the Voluntary Assets and Income Declaration Scheme (“VAIDS” or “the Scheme”) would, inter alia, be liable to settle the principal sum due (including the interest and penalty charges), liable to prosecution for tax offenses, and subject to a comprehensive tax audit by the relevant tax authority.

The Scheme ended on June 30, 2018, devoid of the fanfare that heralded its introduction one year earlier (via the Executive Order No 004 of 2017,the “EO”): originally intended to run from June 1, 2017 to March 31, 2018, the Scheme was extended by a further three months based on recommendation and request by stakeholders.

The Rationale

Prior to the introduction of the Scheme in 2017, Nigeria was among those countries with very low tax to gross domestic product ratio at 6 percent (FIRS—VAIDS FAQs), compared to other developing countries like Ghana and India at 16 percent each, and more developed economies like South Africa at 27 percent, and the OECD average of 34 percent.

Based on the Joint Tax Board statistics, as at May 2017, the total number of taxpayers in the country was about 14 million, out of an estimated 70 million who were economically active (FIRS—VAIDS FAQs).

Consequently, the Federal Government of Nigeria (“FGN”) introduced the Scheme to, among other aims:

• tackle the problem of illicit financial flows and tax evasion;

• raise the level of tax awareness and voluntary compliance post-VAIDS; and

• generate the sum of US$1 billion to fund key infrastructural development.

Impact and Challenges

At the Chartered Institute of Taxation of Nigeria’s (2018) annual conference, the Vice President of Nigeria noted that the country recorded an increase in the number of taxpayers over the last year by five million, principally attributable to the awareness created by VAIDS; while the sum of about US$98 million (30 billion Nigerian naira) had been realized as at June 24, 2018.

Although the actual earnings from the Scheme to date may be a paltry 10 percent of the amount estimated to be realized, given the three-year time limit granted for qualified applicants under the scheme to completely liquidate their agreed tax liabilities, it may be premature to take the amount as the total proceeds realized from the Scheme.

Nonetheless, could the Scheme have generated more revenue than the amount realized? Has the tax compliance culture in Nigeria today improved compared to what it was 12 months ago prior to the introduction of the Scheme?

Some of the key factors which may have been responsible for the relatively poor performance of the Scheme are discussed below.

Putting the Cart before the Horse

Sensitization plays a key role in creating awareness of any proposed government activity. For example, the State of Pennsylvania in the US commenced sensitization of taxpayers about its tax amnesty well before the launch date. Thus, while Act 84 of 2016 was signed into law in July 2016, with a provision for tax amnesty, the scheme only took off in April 2017, and lasted for 60 days till June 2017.

The State had estimated generating $100 million from the amnesty, but exceeded this target by realizing the sum of $114.5 million at the end of the exercise in June 2017. In effect, while the sensitization lasted for about 10 months, the tax amnesty itself was only for two months!

While the Scheme was launched in July 2017, government only commenced active public awareness campaigns and workshops on it around November 2017, four months after the launch! This could have been avoided with proper explanation of the execution and adequate planning, involving a pre-launch sensitization across all the states of the federation pre-July 2017.

Trust Issues

Given that the EO by which VAIDS was introduced was adjudged to have the force of the law, stakeholders expected a complete adherence to its provisions. On the contrary, the Federal Inland Revenue Service’s (FIRS”) initial position was that rather than grant full waiver of the interest and penalty accruable on the principal tax liability, it would only comply if the applicant filed under VAIDS on or before December 31, 2017 (FIRS—VAIDS FAQs).

This position heightened the already existing trust deficit in the tax administration and cast doubt as to the sincerity of the government to honor the express provision of the EO. Although the FIRS appears to have softened its position subsequently, the initial grandstanding damaged the perception of the Scheme with potential applicants.

The other angle to the “trust” issue was whether the FGN was going to respect its promise to treat as confidential taxpayers’ personal wealth information, voluntarily provided by the latter to the tax authorities, and use it only for the purpose of VAIDS. There were concerns as to whether such information would be leaked to other government agencies or be used for tax prosecutions, post-VAIDS.

Unfortunately, these fears could not be completely allayed while the Scheme lasted. This “trust” issue could have partly accounted for the relatively low success rate of the Scheme.

Therefore, a critical success factor for such a scheme in future is for those implementing it to respect the provisions of the enabling law or regulation to the letter, and to provide a better guarantee of the confidentiality of information obtained.

Ill-timed Extension

The extension of the deadline for the Scheme was only made public in April 2018, after the initial deadline date of March 31, 2018 had passed. The FGN should have closed the Scheme as planned on 31 March, 2018, reviewed the factors for its dismal performance, and, learning from these mistakes, designed an entirely new scheme.

Any planned extension of the deadline of similar scheme in future should be publicized before the expiration of the scheme, so that the increased enthusiasm expressed as the deadline approaches is sustained on extension.

Goal Alignment and Seamless Collaboration Among Authorities

VAIDS was understood to have been designed by the Ministry of Finance (“MoF”), while the FIRS and the respective State Internal Revenue Service (“SIRS”) were to execute it, given that they are the (tax) revenue collection agencies of the federal and state governments.

However, other government agencies such as the Revenue Mobilization, Allocation and Fiscal Commission (“RMFAC”) refused to recognize the EO on VAIDS on the “tax audits” allegedly conducted by RMFAC to verify the tax exposures of some companies in select industries.

The apparent confusion in tax administration as to who has authority over federally-collectible taxes between the FIRS and the RMFAC was a significant drag factor which militated against the successful implementation of the Scheme. For example, while the FIRS was willing to grant waiver of interest and penalty on the principal liability if the application was made under the Scheme, RMFAC would not grant any such waiver on whatever additional liability it (RMFAC) assessed on a taxpayer.

Government agencies and departments must share a common vision and goal about any initiative launched by the FGN and pull together in the same direction to achieve the goals of such initiatives as VAIDS.

Ease of Participation

VAIDS was designed to be a user-friendly and easy to apply for Scheme, such that Nigerians in diaspora would file online, from their locations across the globe. However, in reality the online platform experienced significant downtime. It is difficult to estimate the number of would-be applicants who could possibly have taken advantage of the Scheme, but for the inability to apply online.

Planning Points

A major lesson for the authorities is that preliminary assessment for such programs as VAIDS must be well articulated pre-launch, including the design of a tested and functional IT platform.

Also, active public engagement should start prior to the launch date, and the program must be designed and driven by the tax authorities.

Where such scheme is designed by other government agency than the tax authorities (in this case by the MoF), then the MoF and the FIRS must set up a joint team that will design the implementation steps for the program and wield the necessary powers to execute it post-launch.

The jury is out whether the FGN will make good its threat to “name and shame” or “prosecute” tax defaulters who failed to take advantage of the Scheme after its expiration.

Ayo Luqman Salami is a Partner, and Isah Yusuf Aruwa is a Manager with KPMG Professional Services, Lagos, Nigeria.
The authors may be contacted at: ayo.salami@ng.kpmg.com; isah.aruwa@ng.kpmg.com