Voluntary Tax Disclosure Programs and Their Role in Nigeria

A voluntary tax disclosure program (the program, or VDP) is typically designed by tax administrators to encourage taxpayers—either individuals or corporate bodies—to disclose and fulfill their past tax obligations without the imposition of penalty and interest on the taxes now disclosed. Such programs have been adopted by more than 40 countries including Canada, the U.S., India, Indonesia, and more recently Nigeria.

According to the Organization for Economic Cooperation and Development (OECD), they can be grouped into two categories—permanent and temporary programs. The temporary programs are often new and short-term, while the permanent programs are mostly in existence for some time and offer a permanent opportunity for taxpayers to correct their situations. For example, Canada has had a VDP that allows taxpayers to come forward and correct inaccurate or incomplete information that they have not reported during previous dealings with the Canada Revenue Agency, without penalty or prosecution (for more on the Canadian VDP see below).

In this article, we examine the advantages and disadvantages of the VDP, its applicability in other jurisdictions, and provide recommendations to the Nigerian Federal Inland Revenue Service (FIRS) on the best possible way of generating revenue through a VDP.

Penalties Applicable in Nigeria’s Tax Space

The tax legislation in Nigeria ordinarily imposes sanctions in the form of penalties on taxpayers if they fail to meet their tax obligations. Different sanctions apply to various types of taxes and circumstances. For instance, any company that fails to file an income tax return within the time specified will be liable to a penalty of 25,000 Nigerian naira ($60) in the first instance and 5,000 naira for each subsequent month in which the failure continues. A penalty of 10% of the amount not remitted and interest at the bank lending rate from the date the tax becomes payable is also imposed on taxpayers who fail to remit the appropriate amount of income tax due within the specified period.

There are also penalties for default in rendering taxpayers’ tax obligations in other categories of taxes, including personal income tax, stamp duties, value-added tax, capital gains tax, petroleum profit tax and transfer pricing (TP). It is worth noting that a punitive measure introduced in 2018 by the TP Regulations is the penalty imposed on taxpayers who fail to comply with TP obligations, such as where a taxpayer fails to file its TP declaration and/or disclosure form on or before the due date. The penalty for each offense is not less than 10 million naira which appears to be the highest amount of penalty imposed on any tax obligation.

Programs in Nigeria

In recent years, Nigeria has introduced some programs to encourage voluntary disclosure by taxpayers. One such program is the Voluntary Assets and Income Declaration Scheme (VAIDS), introduced in June 2017 by an Executive Order. The VAIDS offers defaulting taxpayers the opportunity to regularize their outstanding tax obligations from financial years 2011 to 2016. To the taxpayers, the benefit of VAIDS included the waiver of penalties, interest and criminal prosecution. However, the benefit of the program to the government included increasing the country’s tax-to-GDP ratio from 6% to 15% by 2020, bringing more people and organizations into the tax net, which will in turn increase tax revenue, encourage tax compliance and awareness, and discourage tax evasion.

The Nigerian government also introduced another program for 12 months in October 2018, the Voluntary Offshore Assets Regularization Scheme (VOARS), for the sole purpose of giving taxpayers with offshore assets the opportunity to declare them for tax purposes regardless of the legitimacy of the source.

In the area of tax revenue, the VAIDS contributed to the budgeted revenue of the government, as it was reported that out of the 4 trillion Nigerian naira generated in 2017, the country collected 20 billion naira out of the target 305 billion from the VAIDS.

However, the collection from the VAIDS was about 6.6% of the target, which indicates poor performance of the program. Among the factors that contributed to this low achievement are insufficient and unreliable data to track tax defaulters, lack of sufficient and well-trained staff to carry out effective tax administration and revenue collection, massive corruption among tax officials and administrators, lack of political will by the government to pursue tax defaulters, and a lack of public trust in the judicious use of the funds derived from the program. However, the introduction of the program still resulted in around a 36% increase in the taxpayer database, from 14 million to 19 million taxpayers, as of 2018.

Upon the introduction of the TP Regulations, the FIRS released a public notice which granted relevant taxpayers up to Dec. 31, 2018, to fulfill all pending obligations relating to TP with the benefit of waiving penalties and interest to any taxpayer that complied within this period; the FIRS witnessed considerable voluntary compliance in the filing of TP returns from financial years 2013 to 2017.

This program offers the FIRS a large database of taxpayers from which to carry out an independent risk assessment of the voluntary disclosures made and select appropriate taxpayers for TP audits. This initiative assists the FIRS in saving time and costs, as it may ordinarily require considerable resources to identify defaulting taxpayers, some of whom may also not accept the penalty imposed on them and seek to take legal action.

How Successful has the Program Been in Other Jurisdictions?

Many countries across the world, including Italy, Canada, Australia, Indonesia, India, and South Africa, have implemented different VDPs as part of their efforts to increase government revenues, improve tax compliance and encourage the repatriation of foreign assets by offering generous tax incentives and immunity from prosecution.

Evidence shows that some of these countries have achieved laudable outcomes from their various VDPs, while others have failed to generate the expected results.

Indonesia, for example, launched its nine-month tax amnesty program in 2016, bringing in more than $330 billion worth of assets declared and involving more than 745,000 taxpayers. The program was reported to have boosted government tax revenues in Indonesia by 3.6% year-on-year in 2016, and also assisted in funding infrastructure spending and keeping the fiscal deficit within the statutory limit of 3% of GDP.

Canada also has in place a VDP which is regulated by the Canada Revenue Agency (CRA) and which allows non-compliant Canadian taxpayers to correct or make changes to tax returns. The program also allows Canadian taxpayers to disclose information that has not been previously provided to the CRA when the tax returns were filed, without penalties or criminal prosecution for tax default. The number of voluntary disclosures being made continues to grow, with more than 19,000 disclosures made in the 2014–2015 financial year, which, according to the CRA, represented a 21% increase in disclosures over the 2013–2014 financial year.

In 2018, Canada made changes to its VDP to reflect a two-track system between the general and limited VDP for income tax. While the former program mirrors the previous VDP, the latter only provides relief from criminal prosecution, as taxpayers will still be charged with penalties and full interest.

In the case of South Africa, the government has also implemented tax amnesty programs at different times from 1995 to 2016. The South African Revenue Service initially introduced a tax amnesty and exchange control amnesty that ran from June 2003 until February 2004 that allowed a waiver on all interest and exchange control penalties before February 28, 2003, as well as a waiver on all taxes due before March 1, 2002. The amnesty program implemented in 2003 resulted in additional government tax revenue of 2.9 billion South African rand ($196 million) from about 69 billion South African rand of the wealth declared.

A South African VDP that ran from November 2010 to October 2011 was subsequently implemented, aiming to provide an opportunity for tax defaulters to disclose their tax defaults and obtain relief from penalties and interest on unpaid taxes. The country also launched a Special Voluntary Disclosure Programme (SVDP) from the period of Oct. 1, 2016 to Aug. 31, 2017 to encourage non-compliant taxpayers to report unauthorized offshore assets and income, as well as reduce penal exposure to exchange control violations and administrative penalties.

However, this SVDP is unlikely to generate additional revenue like the earlier programs, because tax defaulters evade tax while anticipating additional future amnesties. The frequency of tax amnesties is a challenge to the success of voluntary tax disclosure in South Africa because non-compliant taxpayers do not see the need to take advantage of the present VDP if the program will no doubt recur in the future. This is also evidenced in Italy which carried out 27 tax amnesty programs in 20 years under different names and rules.

Advantages of Voluntary Disclosure Programs for Taxpayer and Tax Administration

VDPs offer several incentives to the taxpayer and the tax administration. To the taxpayer, whether individual or corporate, these programs generally provide non-compliant taxpayers with an opportunity to come clean concerning previous tax affairs and voluntarily pay their tax arrears, while complying with their tax obligations. Those who take advantage of these programs also enjoy reduced penalties and interest charges for tax default, as well as some form of protection from prosecution for tax offenses.

Another advantage of using VDPs in some jurisdictions is the reinstatement of certain tax benefit programs. For example, in Canada, those who voluntarily disclose previous tax information using the VDP enjoy the reinstatement of some benefits such as the Canada Child Benefit, goods and services tax/harmonized sales tax credit, and Registered Retirement Savings Plan benefits.

While a VDP permits taxpayers to regularize previously undisclosed tax affairs, it also benefits tax administrations, not only by the recovery of taxes due for previous years but also taxes that would arise in the future, as a result of the regularization of the taxpayer’s affairs. VDPs, whether as part of general law or designed as special programs, offer tax administrations the opportunity to increase tax revenue at a reduced cost—for example, through fewer audits, litigation, and criminal proceedings, and increased voluntary compliance in future by taxpayers that have come forward through the program. A VDP is also used to increase the tax-to-GDP ratio of countries, control tax evasion, and tackle the issue of illicit financial flows.

Limitations—are Tax Administrators on the Losing End?

While permanent and temporary VDPs are used as revenue-raising tools to bring former non-compliant taxpayers into the tax net, tax administrators generally believe that the use of these programs is unwise because the short-term benefits of collecting additional tax revenue are outweighed by long-lasting adverse effects on future compliance. A VDP has the potential of weakening incentives for tax compliance in the long run and leading to higher tax evasion.

The frequent implementation of these programs can have undesirable incentive effects, as it leads to expectations for future additional voluntary tax disclosures which negatively affect tax compliance levels, because taxpayers who pay their taxes fairly regard these programs as unfair policies which only protect and benefit the interests of non-compliant taxpayers. Voluntary disclosures therefore become detrimental in the long-term, as they significantly reduce the compliance incentive for honest taxpayers, who perceive the programs as violating the principles of equity by rewarding errant taxpayers.

When considering the implementation of voluntary tax disclosure programs, the OECD emphasized the need for tax administrations to ensure that their voluntary tax disclosures do not negatively impact existing levels of compliance. According to the OECD, if there is a perception that tax evaders can secure terms through these programs that leave them better off than those individuals who declared all their income from the outset, levels of non-compliance may increase.

A further challenge of the VDP is that it is usually regarded as an indicator of the inability of a tax administration to enforce its laws. Consequently, voluntary disclosure has the potential of reducing the credibility of the government implementing the program, as well as the justice of the tax system.

There is also the concern that the existence of voluntary disclosure increases the number of individuals who evade taxes. Tax evaders face uncertainty about the probability of being detected and penalized for tax evasion. This uncertainty reflects, for example, a certain probability that due to whistle-blowers, or better information exchange with tax havens, information will be disclosed to tax administrators about offshore accounts.

Evidence has shown that the lower the probability of detection, the more taxpayers evade taxes in the event of a VDP, and vice versa. There is therefore the possibility of non-compliant taxpayers voluntarily disclosing the tax evasion they committed where the detection probability is high. However, under a VDP, as long as the detection probability remains low, non-compliant taxpayers do not attempt to come clean and voluntarily disclose taxes they evaded with the aid of offshore accounts.

The benefits of VDPs must be therefore weighed against the potential costs. A tax administration should implement a VDP only if such a program is associated with lower administrative costs. Where this is not the case, tax administrators tend to be on the losing end.

The administrative costs incurred by tax administrators are lower when they assess evaded taxes as a result of voluntary disclosure, as opposed to a situation in which the tax administrators have detected the tax evasion themselves. The government incurs administrative costs for each tax evader it detects due to the auditing of tax returns and the collecting of information from offshore banks. For tax administrators, these costs are significantly higher than the costs that a tax evader incurs when preparing a voluntary disclosure.

Tax administrators have to investigate to detect all foreign accounts and assets and obtain detailed information on the movements of funds from offshore banks. The tax evaders, on the other hand, either have all this information already available or can easily request it from their banks. It is therefore necessary that tax administrators offer voluntary disclosure only when a disclosure reduces the administrative costs related to assessing taxes of evaders to generate tax revenue without overburdening the tax administration.

Recommendations to FIRS

There is no doubt that many countries offering VDPs have frequently met with little or no success after the initial program. As explained above, in a country where taxpayers expect the future recurrence of additional VDPs, they have an incentive not to disclose their tax defaults and pay current taxes, as evidenced in the case of South Africa and Italy.

Nigeria has attempted several VDPs within the past few years; taxpayers may expect that there would be future additional programs in which they can participate and may therefore not see the need to pay their current taxes. It is, therefore, necessary for the FIRS to ensure that taxpayers perceive the VDP as the only opportunity for them to make amends for past tax offenses, as well as seeing the program as an intention of the government to exercise more stringent measures in catching up with tax defaulters to make the program effective and avoid higher tax evasion.

To have a successful VDP in Nigeria, the FIRS also needs to strengthen existing tax enforcement mechanisms in the country. As discussed above, research has shown that the higher the probability of detection, the lower the evasion of taxes by taxpayers. Consequently, in the event where there is a higher probability of detection of past tax evasion for taxpayers in a VDP, a VAIDS participant who discloses previously unreported income will have more difficulty concealing such income in the future. The enhanced enforcement measures not only increase the number of participants in the program but also reassure honest taxpayers of the government’s resolve to apprehend future tax defaulters.

The effectiveness of VDPs may also depend on the type of government in power, and may be hindered by the absence of political trust which has been seen as a major driver of tax compliance. For example, the lack of political will to eradicate corruption within Nigeria’s tax administration prevents some taxpayers from participating in VDPs due to the negative perception they have of the government. In addressing this issue, the government needs to ensure that there is transparency and accountability in public finance to encourage voluntary tax compliance by taxpayers.

Going Forward

Taxpayers need to evaluate their tax obligations and ascertain their level of compliance from time to time. The government, on the other hand, will be required to determine the benefits and costs of introducing any program and ensure that the benefits outweigh the costs before implementing such programs.

It is equally important for the government to evaluate whether the programs introduced in the past meet its required objectives, and to use the programs introduced in other jurisdictions as a learning point. However, before adopting the program of another jurisdiction, several factors must be considered to ensure its success. These factors include the size and characteristics of the economy, types of taxes in that jurisdiction, and the level of technology used by the tax authorities there.

Finally, the government should also bear in mind that for a program to yield the desired outcome, the perceived benefits to the taxpayer must be realistic. This is likely going to be an important criterion to the taxpayer before choosing to take advantage of such a program.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Olakunle Odesanya and Aimée Dushime are Senior Advisers in the Transfer Pricing Services practice of KPMG Advisory Services.

The authors may be contacted at: olakunle.odesanya@ng.kpmg.com; aimee.dushime@ng.kpmg.com