ECONOMY - 16 JUL 2017

VAIDS: Tax Amnesty or Tax-Free?

VAIDS: Tax Amnesty or Tax-Free?
The Acting Vice President, Professor Yemi Osinbajo has acted as the public face of the VAIDS scheme so far.

Nigerians do not pay their taxes. Or at least, too few do. In 2016, Nigeria’s tax authorities collected $20 billion from just 12.5 million people – out of a 50 million workforce. At roughly 6% of GDP, Nigeria’s tax-to-GDP ratio is one of the lowest in the world. Most startlingly, just 214 people pay more than ₦20 million in annual taxes. Of these, only one is outside Lagos.

Faced with lower for longer global oil prices and a growing need to increase non-oil revenues, the Federal Government (FG) is looking to change this pattern through the recently launched Voluntary Assets and Income Declaration Scheme (VAIDS). Under the scheme, anyone who voluntarily declares and discloses previously untaxed assets or income will avoid the usual penalties and interest charges and will not be prosecuted.

The VAIDS includes all taxable entities – companies and people, both home and abroad – and all relevant taxes. Notably, the program is in two phases. The first, to 31st December 2017, is the lenient phase as repentant evaders will receive complete immunity from prosecution and audit, avoid interest (usually 21% per annum), and penalties which can be as soft as 10% of the undisclosed amount and as severe as mandatory forfeiture of the asset. The second phase runs from the end of 2017 to March 2018 and under the principle of “less forgiveness for those who delay”, you will be liable for interest on overdue tax balances.

Such tax amnesty programs have worked elsewhere. Earlier this year, Argentina announced that citizens had declared $117 billion in undisclosed assets, bringing in nearly $10 billion in extra government revenue. In India, 350,000 people were added to the tax net as the scheme raked in over $1 billion.

Nigeria hopes for similar results.  

 

Indonesia leads the way

Of all the countries to have implemented tax amnesty programs, Indonesia may offer us the most insight. The country has a higher tax-to-GDP ratio (10%) but ranks lowest in its region and is also quite corrupt. By the time its tax amnesty period ended in March 2017, $350 billion undeclared assets had been brought to light. That is 40% of the country’s GDP, 4x annual tax revenue, and 90% of its money supply. From this, the government collected just under $10 billion, less than its target of $12.5 billion.

The low yield is mainly because of the incredibly generous terms offered to evaders: 2% tax rate if declared early and only as high as 10% if reported right at the end. Despite this, the scheme can be counted a significant success due to the sheer number of defaulters now in the tax net. 800,000 evaders revealed themselves in Indonesia, compared to 350,000 in India. But beyond leniency, political will played a crucial role. The amnesty program was championed by Sri Mulyani Indrawati, the country’s finance minister who was effectively driven into exile during her previous stint on the back of her ambitious fiscal reforms. This time, she pushed them through and the country is laughing all the way to the bank.

 

So, can Nigeria emulate Indonesia?

The odds don’t look good. Despite his notable role so far, it is unclear whether Acting President Yemi Osinbajo will be championing the VAIDS or whether he or Kemi Adeosun, Nigeria’s Minister of Finance, has the political clout to fully implement a project likely to burn many in Nigeria’s ruling class. And should they forge ahead, insistent on taking no prisoners, the most culpable may not consider their threats credible. Put simply, tax amnesties work if evaders believe there is a high risk of being caught after. This encourages them to exploit their temporary immunity. Should Nigerians believe that it will be business-as-usual when the window closes, very few are likely to come forward.

Aware of this, the FG has two ways of demonstrating its credibility. Firstly, it is planning a “Name and Shame” program to publicly reveal the identity of evaders who ignore this clarion call. Presumably, it would be similar to how banks publicly shamed their debtors some years back, and we all know how that all turned out. Secondly, our regular emergency heroes – “international experts” – will be on hand to help the FG trace assets held by Nigerians. In fact, a lot may hinge on international influence: Nigeria has signed a range of multilateral agreements aimed at easing the cross-border transfer of citizens’ financial information. This is crucial as most undeclared assets sit abroad. In Argentina, for example, 80% of assets declared were overseas. This time, Nigeria could do with a helping hand from the international community.

Ultimately, one would hope that a mix of moral suasion and FG credibility would convince evaders to come forward. Niggling concerns persist though. The statute of limitations for tax investigations is six years, meaning that evaders only need to worry about undeclared assets from the last six years. Given Nigeria’s long history of corruption, this is likely to leave out most of the loot. Meanwhile, not all tax evasion is malicious. Nigeria does not have a proper tax culture and people are not particularly familiar with tax filing. This may be problematic for those willing to come forward but fearful of providing inaccurate information. The relevant tax authority will help them calculate the amount of tax to be paid, but only after filling out a form that requires those precise details.

 

Dear Tax-payer 

Even with all the uncertainties, the VAIDs is an important first step in creating a tax culture in Nigeria. Moreover, the initial target is modest – just $1 billion, less than 5% of current annual tax revenues. To put it in further context, Nigeria has already raised $1.5 billion and $300 million in Eurobonds and Diaspora bonds so far this year.

Nevertheless, like in Indonesia, the Ministry of Finance is eyeing the long run revenue impact. It still hopes to increase tax-to-GDP ratio to 15% by 2020 and VAIDS is critical to that. VAIDS could also cause a meaningful change in Nigeria’s social contract. Taxes lie somewhere between social duty and fiscal benefit; building a nature of taxpayers could give citizens a tangible stake in economic matters, changing how they engage with politics and policy. 

Nigeria’s culture makes one cynical about even the most well-intentioned policy and without confidence in the credibility of tax enforcement after the amnesty window, people have little incentive to come forward. One option is to get Nigerians to sign up by convincing them of the social and economic benefit of living in a tax-paying country. Maybe then the VAIDS would not be in vain.     

Kitan Williams

Kitan Williams

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