Nigeria can generate N20tn income if govt isn’t lazy – Oyedele, West Africa Tax Chief at PwC – Punch Newspapers

Nigeria can generate N20tn revenue if govt isn’t lazy – Oyedele, West Africa Tax Leader at PwC – Punch Newspapers

The Fiscal Policy Partner and West Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele, shares his thoughts with TUNDE AJAJA on the African Continental Free Trade Area, the tax regime in Nigeria and other interesting issues

The African Continental Free Trade Area was scheduled to start on January 1, but between then and now, nothing significant has changed in terms of intercontinental trade, has it really started?

That’s an interesting question. It was supposed to start in July 2020 but because of the COVID-19 pandemic, it was pushed forward to January 1, 2021. So I would say what has happened basically is largely ceremonial; a take-off ceremony to recognise and acknowledge that Africa has decided to be united, particularly in terms of trade. However, to operationalise it requires a lot more than that. For example, you need Customs to be trained, you need to update your rules, your import duty and tariffs and then you have to move to non-tariff barriers, some of which have to do with local content requirements, and some of them require that we amend some of our laws. For example, we have laws that permit only Nigerians to do one thing or the other and that is not allowed under the treaty. Don’t forget that Nigeria also ratified the agreement. So, officially we have taken off, but I think it would take some time before we start seeing it come to life in terms of the practical experience.

With the rising spread of COVID-19 and the fact that Nigeria still had trade dispute with Ghana just last year, when is it likely to take off fully?

Unfortunately, COVID-19 is a challenge, so it makes prediction even more difficult because it depends on how this second wave plays out, and some people are saying there could be a third wave before we get vaccines to go round for us to have communal immunity. Before we get to that point, anything else can happen. We can even shut the borders and stop air travels because of COVID-19. But assuming things don’t get worse than they are, there would be two factors, and one is the political will. You can sign a treaty and you may not believe in it, or you may believe in it and there are different interests within your country pushing in different directions. That way, it would take longer, but if every country is committed to it, I would say before the end of the year we should begin to see real results, particularly in the area of tariff barriers, free movement of people, investment, services and non-trade barriers.

There are people that are still sceptical about the prospects of the AfCFTA, but the World Bank said sometime in June 2020 that this treaty presents a major opportunity to bring out 30 million people out of extreme poverty and to raise the income of 68 million others who live on less than $5.50 per day. These are very lofty projections; do African leaders have the political will to actualise these projections?

We can do a lot more than that, if you look at the experience of some regional integration that have worked, like the Association of South-East Asian Nations or the European Union, which is even an extreme example. They have been extremely successful. Trading within the EU is about 70 per cent, but even if you say theirs is too extraordinary and you look at what you have in North America or in Asia, the result has been a lot better than even the World Bank’s projection for Africa. So, I think we can easily raise a lot more than that out of poverty. We can create economic prosperity if we implement the agreement with good intention and sincerity. Take Nigeria as an example, we should not have to even export crude oil anymore if we get our acts together. I did an analysis recently and I found that the number one item that about eight of the top 10 countries in Africa import is petroleum product. So, why are African countries importing refined petroleum products from Europe and other continents; why are they not importing from Nigeria since we are closer? We should be able to refine our crude oil and sell to Africa, that way we make more money. They also would make more money because they pay less for freight. It’s a win-win for Africa and that is just one example. There are so many other areas where those opportunities abound.

There are about eight Regional Economic Communities on the continent already, what becomes of them when the treaty takes off fully?

The AfCFTA has made provision for that. As of today, some of these regional communities have developed, to a very large extent, beyond where AfCFTA is starting from. So the idea is that if you have your sub-regional communities and the level you are is better than where AfCFTA is, you continue to do both. So, for example, in ECOWAS, you can go to Ghana without a visa, but AfCFTA is not yet at that level, so ECOWAS would continue with free movement of people, but ultimately, the idea is to get a the level where the African integration would develop better than all the sub-regional communities and therefore they disband those sub-regional communities because there would be no need for them anymore. How soon it will happen, I cannot tell, but that is the ultimate objective.

The treaty provides that countries would accord products from other countries treatment no less favourable than their domestic products, how do we reconcile that with the smuggling of products from non-African countries into our country, like rice from Thailand coming into Nigeria through Niger Republic?

This is a major concern for many people. That risk is there, but whether that risk would materialise depends on the political will of every country involved. There is something called ‘Rule of Origin’. Normally, if every country is honest, the scenario you painted should never happen. The ‘Rule of Origin’ specifies that you must add a lot of value within Africa, and that threshold is sometimes as high as 70 per cent in terms of materials, labour and other things. So, that rice would not qualify. Therefore, if Benin Republic is honest, when that rice comes into Nigeria, it should attract all duties and charges because it’s not a product from Africa, but if Benin Republic is insincere, they can repackage the rice and pretend like it was produced in their country. I’m hoping that won’t happen because this AfCFTA will not work if people start playing games like that. In terms of smuggling, one problem that AfCFTA would solve is that if the product is coming from another African country, there is no import duty, so there is no need for you to smuggle it. Just take such goods to the ports and clear them. I don’t see AfCFTA complicating our border problem. It’s likely to improve it, not make it worse. We would have teething problems but over time we would get over them and the right thing would be done by every country involved. I’m positive about it.

Nigeria imports most of its goods and is largely a consumer, what should Nigeria do differently so it doesn’t become a dumping ground under this treaty?

I think the starting point for Nigeria is for us to acknowledge and accept that we cannot do everything. Sometimes, I think our national strategy is faulty. We want to produce everything. Not even China or the United States is producing everything. So, Nigeria has to look for its area of competitive advantage. I gave an example earlier about oil and gas. Nigeria is actually a service economy because the percentage of our Gross Domestic Product that is service is more than 50 per cent. So, whether you are talking about banking, legal services, accounting or entertainment, those are the areas we should start from and take advantage of. Infrastructure would take time to build. So, let us start with our strength so we can start benefitting from this treaty, while on a long term we work on how to compete in other areas, particularly manufacturing.

If we focus on services, there is the possibility that the treaty may stifle domestic manufacturing sectors that are not regionally competitive, don’t we stand the risk of becoming a dumping ground for such products?

The AfCFTA treaty does not ask any country to implement the treaty 100 per cent from the first day. You can decide to protect the critical sectors in your country for a given number of years. That is allowed under the treaty. So, Nigeria can identify any sector it prefers and then progressively relax the protection over time. So, you are right; the risk of dumping is there but again they did a very good job with the treaty by having provisions for every country to protect what is most important to them pending when they would get to a level they could compete.

Nigeria has over 41 million Micro, Small and Medium-sized Enterprises and due to issues like power, their cost of production is high. Even if we defer that aspect of our trade relations, will they compete when we open eventually?

If you want to protect the MSMEs, what you do is that despite the AfCFTA, you still continue to impose duties on those products coming from abroad so that they are not preferred than the ones produced in Nigeria; and you are right that we can’t delay the take-off of that aspect forever, otherwise, the treaty would be meaningless. The delay is supposed to give you enough time to address your local inefficiencies. That is why I agree with the provisions under the treaty, which allows you to protect certain sectors for a period of time and progressively address your inefficiencies. Do you know it is even against common sense that a product produced in another country (with freight, demurrage, clearing and other things) is cheaper than the one you produce next door? It’s an indictment on that country. It means you are inefficient and you need to address those issues.

Do you think this would make us get serious?

I believe this is a wake-up call for us, otherwise, we would be drowned in the AfCFTA. If we don’t do anything different, other countries would leave us behind. Some countries are already going to Ghana to establish their manufacturing plants and the target market is Nigeria. If we don’t wake up on time, more and more of that would happen. People would just set up manufacturing facilities in neighbouring countries, produce there so they could meet the ‘Rule of Origin’ and bring them to Nigeria. That is the only concern I have and I do believe that the conversation has started. There is an action committee on the implementation of AfCFTA and I think the work they are doing is good. They are having a lot of engagements, maybe we would get there very soon. The next phase of the implementation is where you need the political will. Sometimes, you need collaboration with the private sector to come together to do those things. In our own case, that was why I said we need to have a list and say which ones we should focus on first. My honest view is that Nigeria will gain a lot more from trying to leverage our strength in services, entertainment and oil and gas than trying to compete with South Africa in manufacturing. I don’t think we can even compete with Ghana in terms of manufacturing. For us, competing in manufacturing is a long-term goal, maybe in another 10 years. The UK makes a lot of their money from services and we know Germany is the giant of manufacturing in Europe and they are also doing well. Nothing says your economy can only do well based on manufacturing. Let us focus on our strength.

If it has worked for the UK to focus on services and Germany on manufacturing, is it a standard principle that would also work in Africa, because it seems manufacturing might have an edge here?

It’s not a golden rule. Today, China manufactures for the whole world and they don’t even have a treaty with half of the world. What they did was to devise ways of producing items at the lowest cost possible and maybe the quality is not too bad. Even in the US, some of the things you see there are made in China, not to talk of what you see in Africa or Nigeria. So, let’s start with our strength and develop our infrastructure.

Given that every country cannot be honest, are there sanctions for African countries that package or present foreign products as their own product?

Certainly, there are different bodies to look at issues like that. One of them is the Body of Ministers and of course you have a higher level where you have the Heads of Governments on the continent. So, when something like that happens, it will be investigated and there would be sanction against that country. We are hoping that we won’t be using the stick. Let us say everybody plays their part, but again you can’t really tell, which is why you have that framework to try and prevent the abuse from taking place.

There are also fears that the treaty would lead to loss of regulatory autonomy and at the moment Nigeria is struggling to implement its laws, what do you foresee when the treaty takes effect fully?

I’m not a fan of this regulatory autonomy. I think it’s just the sense of pride. Apart from that, it doesn’t mean anything. So, the United Kingdom got out of the European Union and they said, okay now we have control over our laws. But when they were within the EU, they had control, they were very influential within the bloc and they benefitted significantly. They were the financial sector headquarters for Europe and almost the rest of the world, but they are losing all those advantages now. So, I would say at the end of the day, it doesn’t matter to me that someone can get to Nigeria without getting a visa; I’m interested in if we can allow them to come and invest because that is what impacts lives. As the biggest economy in Africa, Nigeria is big enough to be the one to even influence those policies. In fact, I think it is the other countries in Africa that should be worried about us, not us being worried about the rest of the continent. We are big enough and we have the resources and human capacity to be able to drive those initiatives so we don’t get the short end of the stick. Overall, I don’t think that would be a problem.

Despite being the biggest economy and the most populated, Nigerians are poorly treated in some of these smaller African countries, like neighbouring Ghana, but there is no consequence. Does it not seem like our size has not conferred so much respect and advantage on us?

It’s not the fault of those countries, it’s our fault. There are things you will not do to the United States or its citizens because you know there would be consequences. So, the Federal Government has the duty to make sure we are respected. However, I think, fundamentally, the way a country’s citizens are treated abroad is a function of two things; how they treat those citizens in their own country and the leadership. For example, look at the ongoing National Identity Number registration exercise and how Nigerians are being treated as slaves. There is no dignity in the way they are being treated, just to register for NIN. In their own country! Same Nigerians would go to the embassy of a country in Nigeria and they would be treated as if they are worthless and nobody says anything. So, if in your own country, you treat your citizens with no respect, others would take a cue from you and do same to them. Only one American was kidnapped and America sent its security operatives to come and rescue the person, whereas our farmers were killed in their own country and the government said they did not obtain permission to go to their farm. So, if you don’t treat your citizens with respect, why should anybody respect them? Also, when those countries don’t respect your citizens, they know you would do nothing because they don’t take your leadership seriously. So, to be honest, I don’t blame those countries. I blame Nigeria for not reacting the way it should.

The maritime sector is another aspect where the government has failed, why has it been impossible for them to get it right in that sector because ordinary scanners that should facilitate operations at the port are non-existent?

One has to do with policy and the other has to do with vested interests. There are people who benefit from our crises, like the chaos in that sector. For them, they don’t want the system to work, because if it works, they lose the money they make. That is where leadership and policy should come in. Why do we allow these people to continue exploiting us? You mentioned scanner; you can scan a container in a few minutes and it would pick everything inside the container. Therefore, you don’t need someone who physically removes the items and you don’t lose some of the items. Some of those containers are loaded using machines, so when they do a physical inspection, the container may not take the items when returning them. Also, people spend time going from one regulator to another. The agencies were asked to harmonise, they refused. There are all manners of people asking for bribes before the container eventually leaves the port. When you finish with all the complications in the ports, evacuation from the ports is another ‘rocket science’. I think it was the Financial Times that said it would cost about $3,000 to ship a 20-feet container from China to Lagos and you can spend $4,000 from the port to some other locations within Lagos. But if you want to address those issues, it is not rocket science. Look at Dubai. You can develop a port in Nigeria that will be so efficient and there would be nothing that gets to the port that would take 48 hours to clear. All of that could be private sector investment because it would be viable. You cannot build a port and run into a loss, because Nigerians won’t stop importing and exporting. There are people who now bring their goods to neighbouring countries and from there they move them in because they just don’t want to deal with Nigerian ports. The government should provide the right environment and allow these issues to be a thing of the past.

There have been unending complaints about multiple taxation, but the government keeps denying it. Do you think the issue is exaggerated or it’s as bad as reported?

I think the issue of multiple taxation is not well understood in Nigeria. Many stakeholders, including some people in government, private sector players and even some professionals, don’t understand it. The starting point in multiple taxation is to recognise that you don’t have to name it tax and if I’m the one paying, it doesn’t even matter to me if you call it a tax or charge or levy or fee. I don’t care what name you call it, so long as you asked me to pay an amount that I would rather not pay, it is a tax to me. The problem is that people in government would say it’s not even a tax people are paying and they are just complaining. The second point is to look at what we call informal taxes. There are taxes that people are forced to pay that is not in any law. A lout would cease your motorcycle, remove the side mirror of another ‘danfo’ (yellow bus) or they would carry the wares of people who sell things in the open market or roadside. At the end of the day you are forced to pay the lout a certain sum and there is no receipt for it. It doesn’t go to the government, and as far as I’m concerned, they are making you pay tax and that is why we call it an informal tax. What the government needs to do is to identify those formal and informal taxes. First, they need to amend the laws and repeal many of the old tax laws that don’t make sense. Look at Kaduna State, they used technology to put an end to the payment of tax in cash, and their revenue went up by more than 200 per cent; from N13bn to N44bn. That is in about one or two years. So, the fact that people pay in cash is a problem.

What is the first solution we should look at?

Amend the constitution to limit the number of taxes that federal, state and local governments can respectively impose. I have recommended that it should be a single digit, not more than nine. So, if you already have nine taxes and you think about taxing the ozone layer, then go and repeal one to be able to introduce the new one. If we adopt that approach, we would solve the problem. Otherwise, I can tell you it is a real problem for businesses in Nigeria today.

There was a time the government muted the idea of imposing tax on luxury items, like private jets and yachts, what is your view of that proposition?

I think it’s a political issue. It’s politically correct to think you can generate a lot of money from the luxury tax, but you really cannot. What it does is to make the public happy that you are imposing a tax on the rich people. If you use private jets as an example, you can count how many private jets are in Nigeria; let’s say they are less than 200. Out of the 200, I can guarantee you that more than half are on lease. They didn’t buy them outright. So, if you want to impose a tax on it, they would simply tell you it’s on lease and not theirs outright. If you say you want to tax them whenever they fly, how many times do they even fly those jets? Let’s say all of them pay you N1m for every flight. How much will you generate, N200m in a month and in a year, you generate N2.4bn. That does not solve our problem. If you want to impose a tax on imported wine, which is another item people talk about. How much is that going to generate? I’m not against the luxury tax, I’m just saying it will not solve our problem. I do not even see us generating N1tn from luxury tax in Nigeria in a whole year even if they introduce it. It will raise your revenue a little bit but it will not solve your problem. To solve Nigeria’s revenue problem, you need something that would give you like N20tn a year.

Do we have the capacity to generate that?

Yes, we have the capacity to generate more than that. As of today, from all the tax authorities, we generate around N7tn. South Africa, from personal income tax alone, generated N11tn equivalence last year. Personal tax income tax in Nigeria is just N1.3tn.

We have the population, where is the problem coming from?

The problem is that we are not enforcing the taxes we have, particularly for the wealthy people; I mean the middle class and the upper class. When I say wealthy people, I’m not talking about billionaires, because there are not many of them. I’m talking about people who have about N10m to N50m or people who are worth N30m and about N200m. There are many people in that category. In South Africa, if you earn N2m or less in a year, you are completely exempted from personal income tax. So, from their top 60,000 citizens, they collected about N6tn equivalence. This means the money that South Africa makes from 60,000 citizens is more than the entire revenue of the Federal Inland Revenue Service and all the internal revenue services in the 36 states combined. So, Nigeria’s money is there but we are just lazy. If you take property tax as an example, take a state like Lagos as an example. You can make money and hide it but you cannot hide your property. So, 70 per cent of people who have properties in Lagos are not even registered for personal income tax. How is that difficult to do if the government wants to do it? So, we are not ready. If we are, Nigeria’s problems are not too complicated, especially in terms of the economy. So, we can generate more than N20tn in a year if we are ready and we do the right thing.

Apart from laziness, what other factors make Nigerians to not want to pay tax?

Distrust is a big issue, but in other parts of the world, they take consolation in the fact that the tax they pay is the reason they have free health care, power supply, security and good roads, so it makes it less painful. But in Nigeria, you pay your tax and you have to fix your road, provide security within your estate, generate your power and water and other things you have to do yourself. That in itself makes it difficult for people to want to pay tax. The other part is that Nigeria is not using what I would call tax intelligence and data. The major reason why people pay taxes in many developed countries is that they don’t have a choice. There are countries today where they say you don’t need to file your returns because everything is monitored. As you use your credit card, the government is getting the data. So, you buy a car, you can’t drive it until you go and register it. Who registers it? Government. You buy land. Who gives the title? Government. You want to travel abroad, where do you get a passport from, it’s from the government. So, you also own a bank account, and the government has full sight of everything. What they do in countries where they are serious about tax is to collect those data and they connect the dots. So, if a family has two cars and one house, they have three children, they have travelled abroad before and they have a child in a school in the US or UK and they buy foreign exchange from the CBN to pay bills. The government would then collate all the information. If the government looks at their tax return and it shows that in a month they only earn N1m, they would have questions to answer. Let’s say in that same year they bought a car worth N50m, where did the money come from? When you connect the dots through data, it reduces the ability of people to hide and not pay tax. So, you force them to pay and when they don’t pay, use the full weight of the law on them. I have been a tax practitioner in Nigeria for about 20 years and I have yet to hear about one person that has gone to jail for not paying taxes. So, it’s a big problem.

In a recession that Nigeria is in currently whereby people’s purchasing power has been eroded and there is high inflation, do we need a strict tax regime?

All you need to do in a period like this is not to overburden people who are already paying rather, you need to focus on those that are not paying. People who have the ability to pay and never pay are the ones you go to. If you start using data today, you can raise Nigeria’s tax revenue by more than 200 per cent. Kaduna State has demonstrated it and they have not even done half of what is possible and we are already seeing the result. Customs made more money in a period of the pandemic when there was border closure than where there was no closure. So, Nigerian Customs can easily make N10tn a year if it does the right thing. Just use technology to cut down smuggling and corruption and you see your revenue go up like magic, the same thing for the states and FIRS.

IMF has said Nigeria’s fiscal problem is low revenue and not high debt but many Nigerians feel otherwise. How do we reconcile these?

I think it’s always a question of whether you say the cup is half full or half empty. Both of them are correct. Given that our revenue is very low, it makes our debt to be unsustainable. In the first or second quarter of last year, we spent 99.2 per cent of government revenue to service debt. Who does that? If we can raise our revenue to about 15 to 20 per cent of GDP, our debt would be very small because, by debt to GDP, we have one of the lowest in the world. So, the two factors responsible for our problem are low revenue and high rate of borrowing. You would see that many governments around the world would borrow at one to two per cent, whereas until recently, we used to borrow at double digits. So, your rate of borrowing is too high, your revenue is too low, therefore you spend almost all your revenue to service debts and it’s not sustainable. Therefore, whether you say we have a debt problem or revenue problem, I think it is semantics; we have both problems.

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