Cablegate: Nigeria: National Tax Policy Elicits Mixed Responses

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RR RUEHMA RUEHPA
DE RUEHOS #0341/01 2411422
ZNR UUUUU ZZH
R 281422Z AUG 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0137
INFO RUEHUJA/AMEMBASSY ABUJA 9804
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E.O. 12958: N/A
TAGS: EFIN ECON PGOV NI

SUBJECT: NIGERIA: NATIONAL TAX POLICY ELICITS MIXED RESPONSES

1. (SBU) Summary: Nigeria's Draft National Tax Policy (DNTP)
proposes sweeping reforms to the current tax system, including a
shift from direct to indirect taxation; a simplified tax regime; and
centralized tax authorities at the federal level. The private
sector considers the formulation of a national tax policy a positive
development in the Federal Government's effort to improve business
environment while Lagos State fears it will hurt state coffers and
undermine the formal market economy. End Summary.

More Indirect Taxation, Centralized Tax Authority
--------------------------------------------- ----

2. (U) The Presidential Committee on Tax Policy recently released
its Draft National Tax Policy (DNTP). The Committee, which included
the Minister of Finance and the head of the Federal Inland Revenue
Service, proposed a shift in focus from direct taxation to indirect
taxation by lowering the corporate tax rate from 30 to 20 percent
and lowering the personal income tax rate from 25 17 percent and
gradually increasing the value added tax (VAT) rate from 5 to 15
percent by 2009. The DNTP also recommends centralizing tax
authority at the federal level to reduce multiple taxations and to
improve tax administration. The Ministry of Finance would have more
tax oversight and coordinate tax policy. The National Assembly will
have the power to change tax rates, and a Joint Tax Board
(comprising of federal and states tax agencies) will administer
personal income tax across the states. The Committee recommended
the eventual inclusion of the National Tax Policy (NTP) in the
constitution as well as its comprehensive review every three years.

DNTP Contains "Oddities"
------------------------

3. (SBU) Russel Eastaugh, Director Tax Services,
PriceWaterhouseCoopers Ltd., told EconOff on August 14 that the DNTP
contains a plethora of tax "oddities", including a two percent levy
on corporate profits for a "Police Fund", which Eastaugh says will
add to the effective costs of doing business in Nigeria and could
undermine the DNTP's overriding objective of reducing multiple
taxation to encourage investment. In Eastaugh's view the corporate
income tax also contains opaque incentives like the "pioneer
industry tax exemption" which gives a tax holiday of up to five
years to companies deemed "vital to Nigeria's national interests".
According to Eastaugh, although consultant firm KPMG and the
International Monetary Fund (IMF) informally provided inputs
throughout the drafting process, the Committee did not formally
engage the services of tax experts.

VAT Increases to Hurt Lagos State Formal Economy
--------------------------------------------- ---

4. (SBU) Eastaugh said the proposed VAT increases would end up
hurting commercially advanced states like Lagos. Ade Ipaye, Lagos
State Special Adviser on Taxation and Revenue, told EconOff August
21 that the additional gain from VAT would not be commensurate with
the revenue lost from income tax reduction. (Lagos State keeps 100
percent of the personal income tax collected in the state.) Lagos
State Government (LASG) is challenging in the Supreme Court the
Federal Government's (FG) power to administer a VAT in all 36
states.

5. (SBU) Because VAT effectively constitutes a consumption tax in
Nigeria, VAT increases would hurt manufacturers, retailers, and
consumers operating in the formal economy, Ipaye said, fearing that
retailers and consumers would shift to the informal economy to avoid
paying the VAT. Jide Mike, Director General of the Manufacturing
Association of Nigeria, told EconOff August 15 that the proposed VAT
would only add to already soaring business costs.

New Tax Policy Will Improve Business Environment
--------------------------------------------- ---

6. (U) Eastaugh said a National Tax Policy, with the right
formulation and administration, would improve Nigeria's business
environment. Although the DNTP contains some weaknesses, the
concept of a simplified and centralized tax framework was a good
starting point. The Committee's effort to solicit stakeholder

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inputs was laudable, he said. Linking sensible tax policies with
administrative efficiencies will be a challenge as will changing the
mindset that non-oil taxes do not play an important rle in the FG's
revenue base.

7. (SBU) Comment: A national tax policy, properly crafted,
professionally administered and equitably enforced, would
undoubtedly help improve the business environment. Those are big
challenges since Nigerian politicians and bureaucrats are accustomed
to an ineffective tax system propped up by proceeds from the oil
industry. This tax plan appears to be a step in the right
direction. End Comment.

Blair

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