A. Options for Revenue Mobilization in Nigeria¹

Low non-oil revenue mobilization is affecting the government’s objectives to expand growth-enhancing expenditure priorities, foster higher growth and employment, and comply with its fiscal rule which limits the federal government deficit to no more than 3 percent of GDP. There is significant revenue potential from structural tax measures. A broad-based and comprehensive tax reform program is needed in the short and medium term to address these objectives and generate sustainable revenue growth by broadening the bases of income and consumption taxes, closing loopholes and leakage created by corporate tax holidays and the widespread use of other associated tax expenditures, as well as creating incentives for the sub-national tiers of government to raise their own source revenues.

B. Current Tax Effort

1. Relative to peers, Nigeria has one of the lowest revenue-to-GDP ratios. Between 2011 and 2017, a sharp decline in oil revenues led to consolidated government revenues falling from 17.7 percent to 5.1 percent of GDP (Figure 1). During this period, non-oil revenue stayed relatively stable at about 3 and 4 percent of GDP, although with an accelerating decline in 2016–17. In particular, the corporate income tax (CIT) decelerated by 0.1 percent of GDP and value added tax (VAT) by 0.2 percent of GDP relative to 2011. Comparing Nigeria’s tax structure with those of a selected sample of advanced, emerging, and developing economies, none of its domestic tax collection showed a promising performance. Nigeria raised the least revenue of all comparators and at 5.3 percent of GDP in revenue in 2016 was significantly below the sample’s 22 percent of GDP average (Figure 2). In most countries, excises alone raise 3.6 percent of GDP.

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Revenue Trends and Composition

Citation: IMF Staff Country Reports 2018, 064; 10.5089/9781484345481.002.A001

Source: IMF staff

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Nigeria and Comparators: Revenue Mix and Performance, 2016 or most recent year

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 064; 10.5089/9781484345481.002.A001

Source: WEO, except for Egypt (GFS), Malaysia, Mexico (OECD).

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2. Nigeria has a significantly higher revenue potential. Recent empirical work shows that internationally, there is a tipping point in the relationship between tax capacity and growth. A minimum tax-to-GDP ratio of 12 ¾ percent is associated with a significant acceleration in the process of growth and development, and likely with changes in social norms of behavior and state capacity (Gaspar at all, 2016). Taxation is not an end in itself, but an instrument for advancing citizens well-being as part of a well-functioning state.² Tax is a core part of state-building and constitutes a visible sign of the social contract between citizens and the state, enshrining the principle of revenue-for-service. Estimates of tax potential from the literature (Fenochietto 2013, IMF 2017b) suggest that a non-oil tax capacity of 16 to 18 percent would be optimal for a country with Nigeria’s economic structure and per capita income levels. This estimate implies space for additional tax collection of 12 percent of GDP.

3. The authorities have made a key development objective raising the non-oil revenue to GDP ratio³ to 15 percent by 2020. Both the ERGP published in March 2017, which seeks to keep the fiscal deficit within the boundary established by the Fiscal Responsibility Act, and the draft 2018 Budget emphasize this revenue target. Increasing non-oil tax revenue would be realized through a series of tax administration initiatives (improving tax compliance, broadening the tax net, employing appropriate technology) combined with tax policy reforms (strengthening tax legislation, introduction of tax on luxury items, and other indirect taxes to capture a greater share of the informal economy).

4. This chapter analyzes key features of the Nigerian tax system and administration, and suggests there is significant scope for broad-based and comprehensive policy and administration reforms. Achieving higher revenue performance depends heavily on building capacity in tax administration to gain control of the tax system, complemented by targeted tax policy reforms being implemented in parallel—as also demonstrated by the experience of countries that implemented successful reforms over the past 15 years (Akitoby et al, 2018). Staff will argue that in the short term, the tax reform should include broader use of revenue-productive excises (such as alcohol, tobacco products, fossil fuels, and mobile phone air use), and placing a moratorium on new business tax holidays; followed by decisive steps to transition toward a broad-base consumption VAT at a higher rate, an all-embracing rationalization of expenditures, and a reform of personal income and property taxation in the medium term.

C. Tax Administration Reforms

5. The very low tax collection rates in Nigeria are a direct reflection of weaknesses in revenue administration systems and a high level of systemic noncompliance. Despite successful initiatives to bring in a significant number of new corporate and self-employed individuals (over 530,000 new corporate registrations were made during the first quarter of 2016—a 67 percent increase), these efforts have not delivered expected revenue. Of 1.5 million registered corporations, only 522,000 could be matched (as of May 2016) to any type of data available within the Federal Inland Revenue Service (FIRS), and only 77,000 filed VAT returns in 2016—suggesting an active taxpayers’ population of only 5 percent. For CIT, the active taxpayers were 5.6 percent of the registered taxpayers, while for personal income tax (PIT) they were less than 2 percent (Table 1). Data on payment compliance is incomplete, but it is generally believed to vary between 15 and 40 percent for VAT.

Table 1.

Nigeria: Registered Taxpayers (2016)

Source: International Survey on Revenue Administration (ISORA)

Table 1.

Nigeria: Registered Taxpayers (2016)

Type of tax	No. of registered taxpayers	No. of active taxpayers	Percent active (percent total)
PIT	761,057	14,823	1.95
CIT	1,003,010	56,329	5.62
VAT	1,505,831	77,082	5.12

Source: International Survey on Revenue Administration (ISORA)

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Table 1.

Nigeria: Registered Taxpayers (2016)

Type of tax	No. of registered taxpayers	No. of active taxpayers	Percent active (percent total)
PIT	761,057	14,823	1.95
CIT	1,003,010	56,329	5.62
VAT	1,505,831	77,082	5.12

Source: International Survey on Revenue Administration (ISORA)

6. Recent reform measures have sought to strengthen revenue collection at the federal level through information technology improvements and by expanding the number of registered taxpayers. FIRS has implemented technology initiatives such as online portals for assessment and payment of stamp duties (e-stamp) which has dramatically reduced the time to register a company, the processing of tax clearance certificates (e-TCC), and the automation of withholding tax remittances by MDAs. The Integrated Tax Administration System (ITAS) project had also been completed following its deployment in a majority of tax offices, although a major test for success remains that it also be actively used for compliance management FIRS has also continued to expand the taxpayer register, and has taken steps to create a specialized collection enforcement function and improve the integrity of the audit process. It also continued to improve staff capacity and infrastructure. Importantly, these measures are strengthening the foundation of tax administration, yet compliance levels across all levels of tax payments remain low. The strategy of relying on strengthened collection efforts and one-off initiatives (such as the Nigerian Voluntary Asset and Income Declaration Scheme, VAIDS⁴) as a first level intervention may not be that effective in delivering higher revenues sustainably.

7. Additional revenue could be raised in the short term with tax and customs administration measures, including by:

• Strengthening the Large Taxpayers Offices (LTOs). Organizationally, it will be important to protect the investments Nigeria has made in implementing taxpayer segmentation principles and allow the LTOs to focus exclusively on the administration of large tax payers.⁵ Other measures include: (1) cleansing of taxpayer data in the LTO; (2) updating taxpayer ledgers in ITAS and deactivating dormant taxpayers; (3) strengthening audit and enforcement capacity by recruiting additional staff into the LTOs supported by a well-established mentoring program (thus relying less on external auditors doing audit work); and (4) by making full use of the recently—deployed ITAS to support the collection and audit functions. A comprehensive independent review of the ITAS system will be necessary to assure completeness of deployment, and identify major strengths and areas in need of improvement, including strategies for transitioning fully to the automated system.

• Initiating large scale data analysis and cross matching⁶ using the Taxpayer Identification Number (TIN) and the Unified Taxpayer Identification Number (UTIN) as part of a broader compliance management framework. Data analysis and cross matching offers real potential for enhancing revenue, reducing both administrative and compliance costs, and strengthening the working relationship between the FIRS and the Nigerian Customs Service (NCS). Developing a repeatable data matching methodology for deployment, initially for a small group of data sets, will be needed. This should be supported by legislative, policy and procedural changes to support long term data acquisition and management. This would also require further capacity development, better coordination, and progressively increasing data capture and analysis, was well as integrating the results into information systems and operational process, in particular risk assessment.

• Recovering tax arrears (such as, unremitted withholding of PAYE). The stock of arrears has grown significantly and as of mid-2017, it stood at N 1.4 trillion—N1.2 trillion of which were attributable to large taxpayers. Early wins could thus be made by targeting large and medium taxpayers for migration into ITAS, fully utilizing the debt management module, and implementing a well-resourced collection and enforcement compliance improvement plan to validate arrears, institute collection measures, and enforce difficult debt, including debt owed by public agencies. Staff estimates that additional minimum revenue yields of N150 billion could be generated in 2018 only from these measures.

• Improving filing and payment compliance. In the short term, the focus would need to be on outreach initiatives for dormant registered taxpayers to motivate them to start filing and paying taxes and actively sending bulk reminders to taxpayers shortly before the filing dates. Data analysis and cross-matching can help identify taxpayers with active economic activities.

• Improving integrity and putting in place appropriate management controls in customs. Stakeholders report widespread “irregular practices and payments” that have a negative impact on revenue flows and investor confidence. Implementation of a comprehensive integrity strategy that is anchored in a strategic plan would help improve ease of doing business and improve revenue. At a minimum, these measures could yield N15 billion in additional revenue in 2018.

D. Reforming the VAT System

8. The VAT in Nigeria raises 0.9 percent of GDP in revenue, which is notably smaller than the 3.8 percent of GDP collected by ECOWAS peers. The VAT yield has stagnated at this level for more than a decade. By comparison, for the same period the average revenue collection was 3.6 percent of GDP for the group of emerging and developing economies, 4.4 percent of GDP for the group of lower-middle income countries, and 4 percent of GDP for the member states of the Southern Africa Development Community (SADC). The VAT rate of 5 percent is also very low compared to a regional average of 16.8 percent.

9. The Nigerian VAT does not have the features of a modern consumption tax. The current system disallows credit on capital goods and services, making it a gross product VAT (and de facto, a turnover tax) which penalizes investment and makes Nigerian manufacturing and related sectors uncompetitive relative to foreign suppliers of goods and services. The lack of a VAT registration threshold, coupled with a large informal sector, implies that the number of potential VAT taxpayers is very large—making it difficult for the tax authorities to monitor and control effectively. While hard data is not available, it has been suggested that filing compliance levels are between 15 to 40 percent. Importantly, the lack of a registration threshold in combination with limited input tax credits encourages taxpayers to continuously lobby for VAT exemptions.

10. Over time, extensive exemptions have substantially narrowed the VAT base. Exemptions now include commercial vehicles, all farming inputs including capital equipment, all medical and pharmaceutical products, some services, educational material, and basic food items. The many exemptions and the very low compliance rate have contributed to a low VAT revenue productivity⁷ of 0.16 percent in Nigeria compared to averages of 0.4 percent in relevant comparators.

11. A reform of the VAT in Nigeria would primarily aim to transform it into a system that generates revenue predictably and efficiently, and grows as its base (consumption expenditures) expands with economic development.⁸ A modern VAT would embed features such as:

• Allowing input tax credits for intermediary inputs and capital expenditures. A proper VAT with a functioning input tax credit could neutralize business’ motivation to lobby for direct and indirect tax preferences, portrayed as compensatory measures for the inability to offset input tax credits against output tax.

• Introducing an annual turnover threshold (for example, of US$40,000) for VAT registration so that only larger companies and persons that make supplies of goods and services are subject to VAT, and thus small and micro businesses are excluded.

• Having a comprehensive base that includes in principle all goods and services, using only a few and well-targeted exemptions⁹. The VAT is an ineffective mechanism for addressing concern about vertical equity (Cnossen 1982). Exemptions should only be provided for the public provision of non-commercial goods and services; and for technical reasons, when certain supplies are difficult to tax under a credit-invoice VAT and when the compliance and administrative burden associated with taxing small businesses does not justify the revenue raised. The experience of other countries has showed that streamlining exemptions could immediately and lastingly increase revenue—as for example in Uganda, where revenues went up by 1 percent of GDP after streamlining exemptions during 2013–14, or in Rwanda, whose tax-to-GDP ratio increased by 2.9 percent between 2010–14, in part due to revisions of the investment code in 2012 to reduce exemptions (IMF 2017).

• Introducing a single positive rate consistent with revenue targets, with a zero rate on all exports.¹⁰ Depending on the revenue target, Nigeria could choose a single rate in the range of 10–15 percent—which would still be below ECOWAS average of 16.8 percent. Based on worldwide experience, a one percentage point increase in the VAT rate could raise on average 0.4 percent of GDP in VAT revenue. Depending on the final design of the system, a 5 (10) percent VAT rate could collect 2 (4) percent of GDP only if the compliance rate (currently at 25 percent) is significantly improved (Table 2).

Table 2.

Nigeria: Potential VAT Revenues by Compliance Levels

Source: IMF Staff Calculations.

Table 2.

Nigeria: Potential VAT Revenues by Compliance Levels

VAT Rate	25%	30%	35%	40%	45%	50%	55%	60%	65%	70%
5%	0.8	1.0	1.2	1.3	1.5	1.7	1.9	2.0	2.2	2.4
6%	1.0	1.2	1.4	1.6	1.8	2.0	2.2	2.4	2.6	2.8
7%	1.2	1.4	1.6	1.9	2.1	2.4	2.6	2.8	3.1	3.3
8%	1.3	1.6	1.9	2.2	2.4	2.7	3.0	3.2	3.5	3.8
9%	1.5	1.8	2.1	2.4	2.7	3.0	3.3	3.6	3.9	4.2
10%	1.7	2.0	2.4	2.7	3.0	3.4	3.7	4.0	4.4	4.7

Source: IMF Staff Calculations.

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Table 2.

Nigeria: Potential VAT Revenues by Compliance Levels

VAT Rate	25%	30%	35%	40%	45%	50%	55%	60%	65%	70%
5%	0.8	1.0	1.2	1.3	1.5	1.7	1.9	2.0	2.2	2.4
6%	1.0	1.2	1.4	1.6	1.8	2.0	2.2	2.4	2.6	2.8
7%	1.2	1.4	1.6	1.9	2.1	2.4	2.6	2.8	3.1	3.3
8%	1.3	1.6	1.9	2.2	2.4	2.7	3.0	3.2	3.5	3.8
9%	1.5	1.8	2.1	2.4	2.7	3.0	3.3	3.6	3.9	4.2
10%	1.7	2.0	2.4	2.7	3.0	3.4	3.7	4.0	4.4	4.7

Source: IMF Staff Calculations.

E. Excise Taxation

12. Excises on alcohol, tobacco, fossil fuels, motoring and environmental degradation (such as littering and pollution) are among the most import pillars of tax revenue systems around the world. Several considerations underpin the wide use of excise taxation: (a) excises on smoking, abusive drinking, and environmental degradation are imposed to internalize the external costs (physical, financial, psychological) that consumption of such products and activities impose on the society, in this way promoting an efficient allocation of resources; (b) excises on items of luxury consumption and airtime may be used to promote progressivity in taxation; (c) excises on motor fuel and motor vehicles can be rationalized as proxies for the cost of government-provided road services and the external costs (pollution, congestion) imposed on other people; and (d) the marginal cost of collecting excise duties is much lower than that of all other taxes, including the VAT.

13. In Nigeria, excises yield little revenue and do not fulfil their role in internalizing the negative external costs of use or consumption. At current levels, excises contribute less than 2.3 percent of total tax revenue or about 0.04 percent of GDP—a situation which contrasts sharply with comparator countries where excise duties contribute on average 12.3 percent of total tax revenue (more than 5 times higher than Nigeria or 3.2 percent of GDP (Table 3). On a comparative basis, it should be possible therefore to triple or quadruple excise tax collections in Nigeria.

Table 3.

Nigeria: Excise Collections (2016) and Selected Countries (2014)

Note: Following OECD, excises are defined as the sum of taxes on specific goods and services (5120) plus taxes on the use of goods and the performance of activities (5200) plus pollution levies, listed under other taxes (6000) minus customs and import duties (5123). Source: Nigerian authorities; comparator countries – budget documents; Commonwealth and other countries – OECD, Revenue Statistics 1965–2014.

Table 3.

Nigeria: Excise Collections (2016) and Selected Countries (2014)

Countries		Total Tax, as percent of GDP	Excise Duty Revenue, as percent of
			GDP	Total Tax
	Nigeria (non-oil)	4.1	0.1	2.3
Comparator countries
	Ghana	15.3	1.7	11.0
	Kenya	19.5	2.9	14.9
	South Africa	27.9	3.5	12.2
Commonwealth
	Australia	27.6	3.2	11.4
	Canada	31.9	2.9	9.2
	United Kingdom	32.5	2.4	7.3
Others
	United States	26.4	2.3	8.7
	Turkey	30.0	6.4	22.4

Note: Following OECD, excises are defined as the sum of taxes on specific goods and services (5120) plus taxes on the use of goods and the performance of activities (5200) plus pollution levies, listed under other taxes (6000) minus customs and import duties (5123). Source: Nigerian authorities; comparator countries – budget documents; Commonwealth and other countries – OECD, Revenue Statistics 1965–2014.

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Table 3.

Nigeria: Excise Collections (2016) and Selected Countries (2014)

Countries		Total Tax, as percent of GDP	Excise Duty Revenue, as percent of
			GDP	Total Tax
	Nigeria (non-oil)	4.1	0.1	2.3
Comparator countries
	Ghana	15.3	1.7	11.0
	Kenya	19.5	2.9	14.9
	South Africa	27.9	3.5	12.2
Commonwealth
	Australia	27.6	3.2	11.4
	Canada	31.9	2.9	9.2
	United Kingdom	32.5	2.4	7.3
Others
	United States	26.4	2.3	8.7
	Turkey	30.0	6.4	22.4

Note: Following OECD, excises are defined as the sum of taxes on specific goods and services (5120) plus taxes on the use of goods and the performance of activities (5200) plus pollution levies, listed under other taxes (6000) minus customs and import duties (5123). Source: Nigerian authorities; comparator countries – budget documents; Commonwealth and other countries – OECD, Revenue Statistics 1965–2014.

14. The excise taxation base in Nigeria is relatively narrow. The federal government taxes only tobacco products and alcoholic beverages, independent of alcohol content, at a rate of 20 percent (Table 4). Petroleum products are not taxed, while states tax motor vehicles. Other products, such as non-alcoholic beverages, fruit juice, and telephone recharge cards, had been subject to a 5 percent excise before their removal in 2009. Following the British tradition, Nigeria does not levy excise duties on imported excisable goods, but subsumes these in the import duty. The draft 2018 Budget presented by the authorities to the National Assembly in December 2017 incorporates revenue assumptions from increases in excises (implied on alcohol and tobacco).

Table 4.

Nigeria: Excisable Goods, Excise and Duty Rates

(Percent)

Note: It is assumed that the Port Development Surcharge and the Comprehensive Import Supervision Scheme are calculated, along with the Levy, on the CIF value of imports plus the import duty. Source: Nigerian Customs Service

Table 4.

Nigeria: Excisable Goods, Excise and Duty Rates

(Percent)

Duty or tax	Cigarettes	Beer	Wine	Spirits	Tax base
Importation
Import duty (ID)	20%	Prohibited	20%	20%	CIF value
Levy	50%	N/A	50%	50%	CIF + ID
Port Development Surcharge	7%	N/A	7%	7%	CIF + ID
Comprehensive Import Supervision Scheme	1%	N/A	1%	1%	CIF + ID
Total effective duty at import	89.60%	N/A	89.60%	89.60%	CIF + ID
VAT	5%	N/A	5%	5%
Total effective duty and tax on CIF value	94.10%	N/A	94.10%	94.10%
Domestic
Excise duty	20%	20%	20%	20%	Unit cost
VAT	5%	5%	5%	5%	Unit cost + Excise
Total effective duty on pre-tax value	26%	26%	26%	26%

Note: It is assumed that the Port Development Surcharge and the Comprehensive Import Supervision Scheme are calculated, along with the Levy, on the CIF value of imports plus the import duty. Source: Nigerian Customs Service

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Table 4.

Nigeria: Excisable Goods, Excise and Duty Rates

(Percent)

Duty or tax	Cigarettes	Beer	Wine	Spirits	Tax base
Importation
Import duty (ID)	20%	Prohibited	20%	20%	CIF value
Levy	50%	N/A	50%	50%	CIF + ID
Port Development Surcharge	7%	N/A	7%	7%	CIF + ID
Comprehensive Import Supervision Scheme	1%	N/A	1%	1%	CIF + ID
Total effective duty at import	89.60%	N/A	89.60%	89.60%	CIF + ID
VAT	5%	N/A	5%	5%
Total effective duty and tax on CIF value	94.10%	N/A	94.10%	94.10%
Domestic
Excise duty	20%	20%	20%	20%	Unit cost
VAT	5%	5%	5%	5%	Unit cost + Excise
Total effective duty on pre-tax value	26%	26%	26%	26%

Note: It is assumed that the Port Development Surcharge and the Comprehensive Import Supervision Scheme are calculated, along with the Levy, on the CIF value of imports plus the import duty. Source: Nigerian Customs Service

15. A reform of excise taxation in Nigeria would strengthen its revenue-raising efficiency and externality-correcting properties. Relevant measures would include:

• Converting ad-valorem excises on alcohol and tobacco to specific (and higher) rates indexed for inflation to reflect the external costs of consumption and production. In line with international practice, tobacco excises could be more than doubled in real terms, imposed at NGN 100/pack of cigarettes of 20 over a three-year period (with equivalent duty for other tobacco products). Alcohol excises could be linked to alcohol content (beer, wine, and spirits) and increased in value. For example, doubling the excise duty on beer would align it with the current Kenyan excise burden.

• Recognizing the role of environmental charges in increasing resource efficiency and revenues. This could be achieved by introducing specific consumer charges on the use of plastic shopping bags, plastic bottles, aluminum cans, and incandescent light bulbs (for example, a waste packaging charge of NGN 5 per plastic bag). To compensate for the cost of global air pollution (carbon dioxide, methane, nitrous oxide) and its contribution to climate change, a low-rate excise charge of NGN 10/liter could be imposed on all fossil fuels (gasoline, diesel and kerosene)

• Contributing to the cost recovery of road transport infrastructure. In addition to air pollution, road users create multiple externalities in the form of road damage, particularly by heavy trucks; congestion, which carries an implicit tax on labor; and noise and accident costs. Consumers would make better decisions regarding their use of the road network if such costs were internalized in the price of fuel—for example, by introducing an additional motoring fuel duty on gasoline and diesel products (NGN 10/liter on leaded gasoline and diesel fuel, NGN 5/liter on unleaded gasoline). Since kerosene is mostly used by poorer households for cooking, heating and lighting, kerosene could be exempted from this additional excise duty on motoring.

• Improving tax progressivity by increasing excise duties on luxury goods and air time. This could be achieved by increasing excise duties and motor vehicle license fees on cars (new and imported) and proceeding with preparations for introducing a low charge on mobile phone use (airtime) on call minutes and SMS.

• Providing a level-playing field for the internalization of external costs by levying excise duties at equal rates on domestically produced and imported goods. A reform of excise taxation would correct the current policy of subsuming excise on foreign goods in the import duty. This would make the protective function of the tax system the exclusive prerogative of the import duty regime, while allowing excise duties to serve an allocative function regardless of whether the products originate domestically or from abroad. As elsewhere, VAT should be imposed on the excise (and import) duty-inclusive value of excisable items.

16. Converting ad-valorem excises into a specific rate system is supported by both theoretical and practical considerations. Economic theory favors the correction of externalities through specific duties over ad-valorem taxation as the external costs on the society of smoking, drinking, motoring, and polluting are independent of the underlying products’ sales price. In practice, excises provide the authorities with the opportunity to increase revenues without major administrative costs associated with a new ICT system development or the hiring of additional staff. As specific duties require only counting (e.g., cigarettes) or measuring strength (alcoholic beverages) or volume (e.g., of motor fuels), they pose no contentious valuation issues relating to unit cost or unit value at the manufacturing or the import stage. To preserve the real value of excise revenue, specific duties would need to be indexed for inflation through annual adjustments.

17. Gradual excise duty increases at prevailing ECOWAS levels could yield revenues of 2.5 percent of GDP in the medium term, and of about 4 percent of GDP in the long run. In the medium term, a comprehensive review should be made of all taxes, duties, levies and charges on road transport, broadly defined. Such a review should have regard not only for revenue-raising efficiency aspects and externality-correcting issues, but also for distributional incidence aspects (as discussed in the chapter 2 on the distributional aspects of fiscal reform). The review should be undertaken in cooperation with the Nigerian States and the Federal Road Authority.

F. Rationalization of Tax Incentives

18. The extensive use of tax holidays, reduced rates, and generous allowances have eroded revenues from CIT, which only yielded 1 percent of GDP in 2016. Despite imposing a relatively high statutory rate of 30 percent¹¹, Nigeria’s CIT efficiency, as measured by the ratio of CIT revenues to the product of GDP and the corporate tax rate, is 0.03 when calculated with respect to the non-oil economy only, and 0.06 when CIT revenue is compared to total economy GDP. These values are significantly below the 0.07 ECOWAS average and the 0.13 average for the group of emerging and developing economies (Figure 3), indicating that Nigeria’s corporate tax base has been eroded by tax expenditures.

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Nigeria and Comparators: CIT Productivity

Citation: IMF Staff Country Reports 2018, 064; 10.5089/9781484345481.002.A001

Source: WEO, GFS, OECD. Note: Nigeria (Total) and Nigeria (Non-Oil) calculated based on statutory rate of 30 percent and: i) total corporate income tax revenues in percent of total GDP for the former; ii) non-oil corporate income tax revenues in percent of non-oil GDP for the latter.

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Table 5.

Nigeria: Partial Estimate of Tax Expenditures

Source: Report of the Inter-Ministerial Committee on the Review of Duty Waivers, Exemptions, Concessions and Incentives (May 2016)

Table 5.

Nigeria: Partial Estimate of Tax Expenditures

Partial Quantification of Tax Expenditures
(billion Nairas)	Import Duty Waivers/Concessions	VAT Waivers/Concessions	Pioneer status (non-oil companies)	Pioneer status (non-oil companies)		Total	%GDP
				CIT	Duty waivers
2011	78.5	52.5	15.74	5.3	0.3	152	0.24%
2012	128.5	47.1	77.86	4.8	0.3	259	0.36%
2013	46.1	24.3	107.73	17.3	2.1	198	0.24%
2014	87.7	22.9	18.22	24.7	3.0	156	0.1%
2015	162.8	80.9		14.6	2.3	261	0.27%
Total	503.6	227.8	219.5	66.7	8.0	1026

Source: Report of the Inter-Ministerial Committee on the Review of Duty Waivers, Exemptions, Concessions and Incentives (May 2016)

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Table 5.

Nigeria: Partial Estimate of Tax Expenditures

Partial Quantification of Tax Expenditures
(billion Nairas)	Import Duty Waivers/Concessions	VAT Waivers/Concessions	Pioneer status (non-oil companies)	Pioneer status (non-oil companies)		Total	%GDP
				CIT	Duty waivers
2011	78.5	52.5	15.74	5.3	0.3	152	0.24%
2012	128.5	47.1	77.86	4.8	0.3	259	0.36%
2013	46.1	24.3	107.73	17.3	2.1	198	0.24%
2014	87.7	22.9	18.22	24.7	3.0	156	0.1%
2015	162.8	80.9		14.6	2.3	261	0.27%
Total	503.6	227.8	219.5	66.7	8.0	1026

Source: Report of the Inter-Ministerial Committee on the Review of Duty Waivers, Exemptions, Concessions and Incentives (May 2016)

19. Nigeria offers several types of tax incentives and allowances. The income tax system has generous incentives in the form of tax holidays of 3 to 5 years for pioneer industries and products, complete exemption of tax at the federal, state and local level for companies under the free zones regime, and various waivers and reductions by presidential decree or as embedded in the CITA for preferential sectors (NIPC 2017). Without coordination between measures, in practice some of these incentives are likely to overlap and be redundant.

20. The authorities intend to rationalize Nigeria’s endemic use of tax incentives as one of the strategies of increasing non-oil revenues, which is a timely development. An Inter-Ministerial Committee was constituted in January 2016 and tasked with undertaking a review of tax expenditures resulting from 52 types of incentives being implemented by the Federal Government through its agencies (NCS, FIRS and NIPC). The Committee’s preliminary findings based on a partial quantification of expenditures indicate that between 2011 and 2015, the government conceded N1 trillion, or 1.28 percent of GDP to the granting of only four types of incentives: import duty waivers/concessions/grants, VAT waivers/concessions/grants, and pioneer status—separately for non-oil companies and oil companies – which carries tax holidays of 3 to 5 years. The largest share of incentives came from the granting of import duty waivers, which represented almost half of the total cost of incentives (Table 4). Importantly, these estimates do not include incentives granted by Government under existing laws such as the Corporate Income Tax Act, Personal Income Tax Act, Petroleum Profits Tax Act, or the Minerals and Mining Act, on which the Committee could not obtain data, but nevertheless suggest that the size of expenditures is likely considerable.

21. A systematic review of tax expenditures, ideally accompanying the annual Budget, would help quantify the cost of incentives and identify ways to improve the fairness of the tax system and recover lost revenue. The scarce availability of corporate taxpayer-level data would need to be considerably improved to undertake such an assessment. Cost-benefit analyses of tax incentives would also allow determine which incentives provide a net benefit to the economy. Generally, there are better options for low income countries’ effective and efficient use of tax incentives for investment than tax holidays and income tax exemptions (IMF 2015):

• Mechanisms such as investment tax credits and accelerated depreciation generally yield more investment per dollar spent than tax holidays and income tax exemptions, which tend to be fiscally costly for the country and often redundant;

• Tax incentives targeted at export-oriented sectors and mobile capital appear to be more effective, while those targeted at sectors producing for domestic markets or extractive industries generally have little impact;

• Enabling conditions (such as good infrastructure, macroeconomic stability, and rule of law) are critical for effectiveness and efficiency, as are the good governance of incentives and transparency—the granting of tax incentives should be rules-based and consolidated under the authority of the Minister of Finance.

22. While the justification for tax incentives is to change relative prices, profits and costs to steer investment in a desired direction, if granted almost to all sectors of the economy their efficiency is diffused and make little difference in attracting investments. Streamlining tax expenditures in the short term would require placing a moratorium on the introduction of new profit tax incentives, followed in the medium term by a rationalization of granted expenditures. The expansion of the tax base will afford to the gradually alignment of CIT rates to the current international average of approximately 25 percent for non-extractive industries, which in itself would help reduce pressures for tax incentives from the business community.

G. Revenue Mobilization at the Sub-National Tiers of Government

23. The federal tax reform initiatives need to resonate similarly at subnational level with view to raising own revenues from well-designed taxes. Property tax and personal income tax, both of which are applied at the states and local governments level, are key instruments to not only raise revenue but also redistribute wealth. Relying more on these taxes would create space to reduce the multiplicity and cascading of small charges at state and local government level, which businesses regard as an impediment to their competitiveness and survival. Streamlining and simplifying small taxes will help to not only reduce the cost of doing business in Nigeria, but also increase the efficiency of revenue mobilization by allowing subnational revenue services to focus their collection efforts on more productive taxes.

24. Property taxation could provide a stable revenue base for local governments. Well-designed and properly administered property taxes are considered fair since they are imposed on property owners whose properties appreciate due to improvements in local roads, sewage and trash services funded by enhanced collections. It is a progressive tax in that property tax incidence primarily rests on property owners. Property taxes may also induce more efficient land use. In addition, property taxes are good local taxes as they are levied on an immobile tax base: those who pay the tax also live in the jurisdiction where the local government services are provided. Staff estimates that property taxes could help raise [0.5] percent of GDP in revenue in the medium term, with gradual wins as the underlying cadaster and property valuation structure are gradually put in place.

25. Personal income taxation could also make a greater contribution to Nigeria’s tax effort. Modernizing and simplifying the tax regime are key to fulfilling this objective, and at a minimum require: (i) consolidating personal allowances into a single tax-free threshold that would simplify the system, improve distributional fairness and progressivity, and reduce the compliance burden; and (ii) simplifying the list of exclusions from employment income and streamline exemptions to broaden the base. Compliance efforts would also need to be significantly strengthened. According to the Joint Tax Board, 10 million people are registered for PIT purposes in all the states of the federation including the Federal Central Territory of Abuja, of which 4.6 million or 46 percent are registered with the Lagos State Internal Revenue Service (LIRS). This indicates that only an average of 153,000 or 1.5 percent are registered in each of the remaining states. It also suggests a huge vertical imbalance of tax bases in Nigeria. The narrow PIT tax base should be contrasted with a labor force of 77 million (2015) meaning that only 13 percent of potential taxpayers are registered.

H. Conclusions

26. There are opportunities for efficiency- and growth-enhancing reforms of Nigeria’s tax system. Medium-term revenue wins from tax policy reforms, reinforced by a strengthened tax administration, could be considerable—yielding an additional 3.4 percent of GDP from VAT reforms, 1.6 percent from excises, 2.1 percent from the rationalization of tax expenditures, and 0.9 percent from efficiency gains and the taxation of property at the sub-national tiers of government. These would allow Nigeria to approach its true tax potential and help meet its development objectives.