Nigeria’s new Voluntary Offshore Assets Regularization Scheme requires taxpayers (individuals and corporate bodies), with offshore assets and income which they have failed to declare for tax purposes in respect of the preceding 30 years of assessment, to regularize their tax position. Taxpayers are required to declare these assets within a year from the commencement date of the Executive Order.
The Nigerian President, Muhammadu Buhari, signed the Voluntary Offshore Assets Regularization Scheme Executive Order (Order No 8) into law on October 8, 2018. The Order authorizes the Attorney-General of the Federation and Minister of Justice to set up a Voluntary Offshore Assets Regularization Scheme in Switzerland ("VOARS’’ or “the Scheme”).
In the 2018 National budget, the government resolved to increase the tax-to-GDP ratio from 6 percent to 15 percent. The VOARS appears to be one of the initiatives designed to achieve this objective.
Requirements for Taxpayers
Any defaulting taxpayer that intends to participate in the Scheme must voluntarily make full, honest, complete and verifiable disclosures of their offshore assets and income through the proposed Voluntary Offshore Assets Regularization Facility in Switzerland (“VOARFS”).
Such taxpayers will pay a one-time levy of 35 percent of their offshore assets in lieu of all outstanding taxes, penalties and interest.
The Order also requires such taxpayers to pay a 2 percent facility access fee and submit to the compliance procedures that the Swiss authorities may prescribe.
Benefits of the Scheme
The participants in the Scheme will be entitled to certain benefits, which include permanent immunity from criminal prosecution for tax offenses and offenses related to the declared and regularized offshore assets, waiver of interest and penalties and exemption from tax audit.
However, any defaulting taxpayer who fails to take advantage of the opportunity provided by the Scheme will be subject to audit and investigation and liable to pay the principal tax liability, inclusive of interest and penalties, at the end of the one-year grace period.
This article will focus on the gray and contentious issues that the VOARS has triggered since its announcement.
Currently, there is no law in Nigeria that imposes tax on offshore assets. Taxes are paid on income and chargeable gains on disposal of assets. It is, therefore, difficult to understand the legal basis for the imposition of the one-time levy of 35 percent on declared offshore assets.
The only logical explanation is that the levy will apply to income, which has not been declared for tax purposes previously, but is now held in cash and illiquid assets. This is similar to the tax reforms initiated by the U.S. government in December 2017, under the Tax Cuts and Jobs Act (“TC&JA”), to encourage U.S. companies to repatriate trapped funds in Europe after paying a one-time levy ranging from 8 percent to 15.5 percent (compared to the reduced corporate tax rate of 21 percent) on such repatriated funds.
One might be tempted to assume that the utilization of one rate by Nigeria is aimed at addressing the loophole created under the TC&JA, where some companies were alleged to have shifted their trapped funds from cash to illiquid assets to benefit from the lower rate of 8 percent applicable to illiquid assets.
However, there is a concern with the rate, which is higher than the current corporate tax rate of 30 percent and effective tax rate of about 19 percent for individuals. This high rate may certainly act as a disincentive to the achievement of the desired objectives.
It is, therefore, imperative that the Nigerian government considers the adoption of a discounted rate to broaden participation.
Nigerian tax laws exempt offshore investment income earned by individuals and corporate bodies from tax if such income is repatriated into the country through approved channels.
Individuals can also enjoy exemption from tax on offshore income earned from vocational activities, such as sports, music, art and teaching, provided that such income is paid into a foreign currency domiciliary account.
Consequently, the Order can only apply in respect of such offshore income that has not met the above conditions. The Nigerian government has recently concluded a tax-amnesty program—the Voluntary Assets and Income Declaration Scheme (“VAIDS”). Though there is no available information as to whether the program met its target revenue of $1billion as of the time of writing (November 2018), there is a high likelihood that some taxpayers might have taken advantage of the Scheme, which covered a look-back period of six years.
The contentious issue is therefore whether the participants under the VAIDS program will now be required to report their undeclared income for the remaining 24 years, given the assurances already provided by the government under the Scheme!
The VOARS does not indicate whether the one-time levy of 35 percent will be paid in a lump sum or on an installment basis. Demanding a lump sum payment will certainly not provide any incentive for defaulting taxpayers to take advantage of the Scheme, given the potential amounts involved.
The TC&JA requires U.S. multinationals to pay the deemed repatriation tax over eight years. Similarly, the VAIDS program allowed defaulting taxpayers to pay voluntarily previously undeclared taxes over a three-year period, subject to the discretion of the tax authorities.
Government will need to introduce an installment payment system to make the Scheme attractive. There is also the issue of the facility access fee of 2 percent, which certainly needs to be reviewed.
The Nigerian government deserves commendation for attempting to diversify the economy by growing tax revenue.
However, it is important that voluntary compliance with tax laws can only happen where government is seen to comply with the extant laws and also properly account for the tax receipts.
There are already concerns that Executive Order No 8 may have been signed to target the opposition parties. Government must, therefore, do everything to address such concerns. Hopefully, the proposed regulations on the VOARS will provide clarity on the gray and contentious matters highlighted above.
The need to reform the Nigerian tax system has become more urgent than before. Government can start this process by enacting into law the various tax amendment bills that are currently pending with the National Assembly.
It is also interesting to note that many countries are now moving away from the worldwide taxation system to a territorial system, in which only income earned within their jurisdictions is subject to tax in those jurisdictions. Why should Nigeria be different?
The Nigerian government is desirous of growing its tax-to-GDP ratio. The expectation, therefore, is that government will be aggressive in ensuring compliance with the Scheme.
Taxpayers need to proactively engage with the Federal government to explore possible revisions to the Scheme in light of the concerns raised in this article.
It may also be important to engage with qualified and reputable tax consultants to assess any potential exposure arising from the VOARS and agree on the basis for settling computed liabilities.
Adewale Ajayi is a Partner with the Tax, Regulatory and People Services Practice of KPMG in Nigeria.
He can be contacted at: email@example.com