By Efe Etomi and Elvis E. Asia[*]
Nigeria’s tax to GDP ratio at 6% is about the lowest in the world. Unlike other African countries, for example South Africa with a GDP ratio of about 26%, Nigeria has been unable to use taxation to increase government revenue. Many reasons account for this. The major one is the discovery of crude oil. The over reliance on revenue from crude oil has led to the abandonment of the non-oil sectors and taxation. There was simply no incentive for revenue drive from other sectors.
Other reasons include lack of transparency and tax leakages; lack of independent and competent institutions; the general attitude to payment of tax as a result of the failure of government to provide basic infrastructure; lack of data; challenges in tax enforcement; low Value Added Tax rate (VAT); the lack of clear e-commerce taxation regulation and practices; conflicting and complex statutory provisions; and challenges with taxation in the informal sector of the economy.
With the fall in crude oil prices from around 2014, focus shifted to the non- oil sectors for revenue generation. Consequently, the government introduced various programs and regulations aimed at ensuring tax compliance and recovery. The recent initiatives in this regard include tax amnesty, appointment of banks as agents of the taxpayer and amendment of transfer pricing regulations.
Whilst it is conceded that drastic measures are expedient in fixing Nigeria’s dysfunctional tax system, some of these attempts are not without legal and practical implementation challenges. Attempt is made here to highlight the details of these measures with brief review of their legal implications.
The Voluntary Assets and Income Declaration Scheme (VAIDS).
VAIDs was a tax amnesty scheme introduced in 2017 through an executive order. Under the program, government waived interests and penalties as well as granted immunity from prosecution in return for honest and complete declaration of assets and income . . The program initally ran for a period of 9 months commencing from July 2017 to March 2018, butwas later extended and ended in June 2018.
The program was generally regarded as successful. However, given the complex and disorganized tax regime in Nigeria, the ultimate goal of VAIDS, which is tax compliance, may not be achieved in the end. There is need for the tax authorities to have requisite capacity in data mining. Government must ensure simplification of tax compliance through legal reforms. The program does not solve the issue with the general apathy to tax payment. There must be economic growth and prosperity for taxation to thrive. In a country with vast natural resources, but with little or nothing to show for it, taxation is a hard sell.
Appointment of Banks as Agents and Freezing of Accounts
The Federal Inland Revenue Service (FIRS) recently commenced the appointment of banks as agents of defaulting taxpayers with a directive that their accounts be frozen until the defaulting taxpayer beomes compliant. This has generated a lot of debate in Nigeria.
The FIRS has the power of substitution by which it can appoint any person to be the agent of a taxpayer and request the agent to pay the tax liability from any money held for the taxpayer. The extent and circumstances in which this power can be exercised is not clear and is open to abuse. Even when it is successfully challenged, the damage would have been done by the time the account is released.
Under Nigerian law, a tax is not payable until it becomes final and conclusive. Thus, where the taxpayer has objected to an assessment, or appeals against it, this power cannot be exercised in respect of the part of the assessment disputed. The banks have no way of knowing whether the tax has become final and conclusive at the time of receipt of the appointment, and consequent freezing of the account. This may lead to breach of the contractual duty owed to the customer.
There is also the constitutional implication under section 44 of the Nigerian Constitution, as amended. By virtue of section 44, individuals and companies have the right to be heard before they can be deprived of their property. A freezing order predicated on the power of substitution would appear to be contrary to this fundamental right guaranteed by the Constitution.
The directive to the banks faces another hurdle. It deprives the Tax Appeal Tribunal and the Courts of their statutory and constitutional power to determine tax disputes. This is more like the tax authority resorting to self- help and it is open to legal challenge.
The effect of a freezing order on the overall business environment is unimaginable. Nigeria needs to take a cue from South Africa. There is a similar provision under section 179 of the South African Tax Administration Act however the South African Revenue Service has clarified that the power can only be exercised where a penalty amount is due for two-months after the issuance of the penalty and there is no ongoing dispute regarding the penalty
New Transfer Pricing Regulations
Income Tax (Transfer Pricing) Regulations 2018
Transfer pricing regulations were first introduced in 2012 pursuant to the power of the tax authorities to disregard artificial transactions with a view to counteracting the effect of such transactions. The ultimate goal of the regulation was to ensure that the price at which related entities transact amongst themselves comply with arm's-length principles. This is to prevent tax avoidance and evasion strategies that deny the country of tax revenues.
The regulations require connected taxable persons to disclose, declare and prepare transfer documentations on controlled transactions. There are also provisions on advance transfer pricing agreements and safe harbour. The major issue with existing regulations was that there were no clear penalties for non-compliance, hence, the Income Tax (Transfer Pricing) Regulation, 2018 which commenced on 12 March 2018.
The new regulation attempts to capture international trends in transfer pricing regulations. The regulations introduced the following changes:
The changes introduced by the regulations, including the requirement to prepare a Master File and local File; TP considerations for intra-group services; Capital-rich low function companies; and introduction of a cap on tax deductibility for royalty payments, are consistent with the 2017 updates to the OECD’s TP Guidelines and some provisions contained in the African Tax Administration Forum’s (ATAF) Suggested Approach to drafting TP legislation.
The regulation is far reaching. Though it attempts to reduce compliance burden on smaller companies, there is doubt as to whether some of its provisions can be enforced without substantive legal amendments.
Income Tax (Country by Country Reporting) Regulations 2018
The Income Tax (Country by Country Reporting) Regulations 2018 is dated January 2018 but was only released to the public around June 2018. The objectives of the Regulation is to provide tax authorities with information about Multinational Enterprises’ (MNEs) global activities, profits, and taxes to better assess international tax avoidance risks, improve transparency in the tax practices of the MNEs, and prevent tax evasion or avoidance through base erosion and profit shifting.
The regulation is intended to give effect to the Country-by- Country Multilateral Competent Authority Agreement signed and ratified by Nigeria in 2016. Under the regulation, an Ultimate Parent Entity (UPE) of an MNE Group with Consolidated Group Revenue of N160 billion must file a Country-by-Country (CbyC) Report with the FIRS. The CbyC Report is required to be filed not later than 12 months after the last day of the Reporting Accounting Year of the MNE Group. Under certain conditions a Constituent Entity which is not the UPE would also be required to file a CbyC Report with the FIRS within the time specified. Failure to file the report attract a penalty of N10,000,000(Ten Million) in the first instance and N1,000,000 (One Million) for every month in which the default continues.
The Regulation will aid the FIRS in the scrutiny of transfer pricing declaration, disclosure and documentations filed by MNEs. On the other hand, it increases the compliance obligations of companies in Nigeria and may give rise to increase in transfer pricing disputes.
The regulation seems to have a retroactive application. Though it was recently released, it nevertheless applies from 1 January 2018.
Voluntary Offshore Assets Regularization Scheme (VOARS)
The Nigerian President signed an executive Order on 8 October 2018 on The Voluntary Offshore Asset Regularization Scheme (VOARS). The Order stipulates that persons owning assets abroad should declare the asset within 12 months and pay a onetime levy of 35% or the applicable taxes due on the asset plus interest and penalties. The benefit to taxpayers who take advantage of the scheme include immunity from prosecution for tax offences and illicit offshore assets. The scheme is open to all persons, entities, and their intermediaries, holding offshore assets. Persons already under investigation for financial crimes or other corrupt practices in respect of such offshore assets are not eligible.
This is the most recent attempt at expanding Nigeria’s tax base, increasing revenue, combating money laundering and tax evasion. The lack of data and requisite intelligence, which defeats most tax drives in Nigeria, may affect the success of the scheme.
There is also the issue of its constitutionality, as the VOARS Order appears to create a tax liability.  Furthermore, VOARS, like VAIDS, is an extra statutory concession, has no legal basis and taxpayers cannot rely on the doctrine of estoppel for the assurances and guarantees made under the scheme. Furthermore, they apply to taxes over which the states have jurisdiction to collect, for example personal income tax. This further compounds the unresolved constitutional issues on the practice of true federalism in Nigeria.
It is very important to note that, although it appears that the government intends to get Nigerians and other taxpayers to pay taxes on offshore assets generally, it is opined that this can only apply to Nigerian residents and companies who have offshore assets or to Nigerians or companies who acquire these assets from income generated in Nigeria. Under Nigerian tax law, only residents are taxed on global income and unlike countries like the United States, citizenship simpliciter does not confer taxation rights on Nigeria. This means that Nigerians or companies who are not resident in the country and who acquire offshore assets from income generated abroad cannot be bound by the executive order.
Nigeria needs to overhaul its entire tax machinery to increase its tax base, generate more revenue, diversify the economy and bridge the gap in tax to GDP ratio. The country also must invest in data collection, intelligence gathering, enforcement institutions and leverage on technology. Ad hoc measures, as we have seen in recent times, may not fix the substantive problems and are open to challenges and abuse. While some of the tax initiatives are necessary, the country must be circumspect in enforcement. There is a need for the substantive review of tax laws, which will guarantee certainty in tax treatment. A tax regime based on discretion by tax authorities and executive orders with doubtful legality cannot give the requisite confidence to foreign investors.
 In sub-Saharan Africa, the lowest VAT is about 15%. Nigeria decided to have a shift from direct taxation to indirect taxation in its National Tax Policy of 2012. The plan was to reduce income taxes and increase Value Added Tax. This has not materialized.
 The idea of tax amnesty was proposed by the Organization for Economic Cooperation and Development (OECD) in 2010. Since then, many countries have implemented it including South Africa, India, Indonesia, Greece, Turkey etc.
 No. 4 of 29 June 2017. Available online at http://pwcnigeria.typepad.com/files/vaids-executive-order.pdf
 For the period 2011- 2016.
 See VAIDS frequently asked questions on https://vaids.gov.ng/ .
 In this regard, The Federal Inland Revenue Service (FIRS) and the Ministry of Finance are collaborating with various agencies and tax authorities at both Federal and State levels to create an accurate financial profile of Nigerian tax payers. The Federal Government of Nigeria recently signed the Income Tax Country-by-Country Reporting (CbCR) Regulations, which gives effect to the Country-by-Country Multilateral Competent Authority Agreement (MCAA) that was earlier signed and ratified in 2016. Government also hope to benefit from the UK’s Unexplained Wealth Order (UWO).
 Section 31 of the Federal Inland Revenue (Establishment) Act, 2007 (FIRS Act)
 There are similar provisions empowering the FIRS or States Board of Internal Revenue to appoint an agent under Section 49 of the Companies Income Tax Act (CITA), Section 50 of the Personal Income Tax Act (PITA), and Section 41 of the Value Added Tax Act (VATA).
 A tax becomes final and conclusive when it is not objected to within 30 days or appealed within 30 days of notice of refusal to amend the assessment. See paragraph 13 of the Fifth Schedule to the FIRS Act and the case of FIRS V. Chi Chi & Mark Limited (2012) 8 TLRN 43.
 See Andersen Tax,” FIRS Notice to Freeze Taxpayers’ Bank Accounts: Administrative Ingenuity or A Mere Testing of the Waters?”. Available online at https://drive.google.com/file/d/1vL6OjBJP2wE73x_hzH79oHiqbdSq1PEZ/view
 See The Income Tax (Transfer Pricing) Regulations, No. 1, 2012.
 Various enactments in Nigeria give the FIRS and the State Boards of Inland Revenue Services the power to disregard artificial transactions. See for example section 17 of the Personal Income Tax Act as amended, section 22 of the Companies Income Tax Act , section 15 of the Petroleum Profit Tax Act, s and ection 20 of the Capital Gain Tax Act.
 Executive orders are legal implementation tools and nothing more. Executive orders cannot become an instrument of tax legislation. Any executive order which seeks to legislate, rather than implement the law, will be open to challenge on constitutional grounds. It is in this respect that questions have been raised as to the legality of these orders.
 See Taofeeq Abdulrazag “A Tax System of many Colours that our Country made for us”, (2017) The Gravitas Review of Business and Property Law, Vol. 8 No. 4, pp 149- 150
[*] Efe Etomi is a partner andElvis. E. Asia is a Senior Counsel in the Lagos office of Chief Rotimi Williams’ Chambers. Mrs Etomi can be contacted on email@example.com. Mr. Elvis can be contacted at firstname.lastname@example.org.