If we look at the main aim of the Addis Ababa Action Agenda – I want to highlight just two or three. One is mobilisation of additional domestic public finance and ensuring that it is spent transparently and effectively, encouraging a shift in the financial sector towards long-term investment and sustainability, and facilitating development cooperation to support the implementation of the agenda, particularly in plugging funding gaps.
The funding gaps that we note are those that these economies need for development.
I will take you through the Nigerian picture.
Nigeria was a country and still is a country that produces about two million barrels of oil per day, which is quite a lot of money. With a population of 170 million, it does not really end up being a lot of money.
I will use the example of a movie.
I was watching this movie which had a married gentleman and a bachelor. The bachelor said he was going to bet his friend $50 and the married man said he was not going to bet because his $50 was not the same as the bachelor’s $50. The bachelor asked how the married man’s $50 is different from his. The married man said that his $50 had to take care of his wife, his children and other family expenses. Whereas the bachelor’s $50 only looked after him alone.
Thabo Mbeki report
That is the way we see it when it comes to tax revenue. The Thabo Mbeki Panel reports that $50 billion is lost annually to from tax revenue from the African continent. Now to some developed countries $50 billion may not seem like very much but when you look at the comparison, $50 billion in a developed economy may help you repave a
road, it may help you update your hospitals, $50 billion may help you buy more modern fire-engines. But in an economy where you have no roads, where you don’t have adequate healthcare, where you don’t have fire-fighting equipment or enough police vehicles, $50 billion means a whole lot more.
A lot of developing economies do not really believe that they can get out of the situation they are in. That is why I’m going to highlight the Nigerian example. With technology, in the last twelve months, we have been able to increase our tax revenue base by 800,000 corporate accounts.
From 2015 to 2017, we grew our non-oil tax revenue by it accounting for 64.3% of total revenue from 42.8% between 2012 and 2014.
So, basically we have moved away from an oil dependent revenue source to a non-oil revenue source. At the same time we have focused on VAT. VAT continues to be the fastest growing tax type in the world and I was quite amazed when the UAE spoke about introducing VAT. For an area that is not known for thinking about tax initiatives, they are
actually thinking of bringing in VAT to generate more revenue.
Nigeria has tried to make sure that we start to generate sufficient revenue in VAT and we have put in place technology that will make sure that we capture all the VAT available.
Let me give a brief idea of the growth in VAT over the last three years.
In 2015, we collected N767 billion, in 2016 we collected N828 billion and in 2017 we collected N972 billion, which represents a growth of about 25%. At the rate of this growth, we see VAT being the largest tax type, in terms of value, that we will generate as a country. And I think this also applies to a lot of other developing economies.
We achieved this because, first of all, we do have the political will in terms of our bosses – the Presidency and our colleagues in the Ministry of Finance in helping us ensure that we can meet these needs.
In terms of the international collaboration that we have in terms of generating VAT, we have had a very good cooperation. We have had good cooperation with the judges in terms of the court system, and just recently, we were able to win a judgement over of Vodacom in the case of VAT liability for a non-resident company.
I’m just saying these things to ensure and to encourage other members of developing countries that you just have to try and I am sure that it will work. Nigeria also signed several tax treaties such as the OECD convention of Mutual Administrative Assistance in Tax Matters which provides assistance in tax collection. And of course, we shall
continue to seek the assistance of our treaty partners to collect such taxes from the tax residents and remit the same to Nigeria.
We are also quite aware that a lot of countries have interest in signing tax treaties, especially with developing countries. And the question one should ask is that; why are you so interested in signing tax treaties with developing countries, but when it comes time to issue visitors visas you are a bit reluctant? I think that we should tie both together. If they believe that we are important enough to sign trading or tax treaties with, they should also believe that we are important enough to be granted visas when we want to come to visit or to carry out business.
Challenges of developing economies
Other challenges that developing economies have is that we have a large informal sector and we have a poor tax culture. That poor tax culture derives from the fact that we relied for so long on the sale of natural resources, and we didn’t look inwards to look at the issue of productivity and also ask the citizens to make tax payments; either
for political reasons, or you want to win an election, so you decide you want to cancel Personal Income Tax or you decide not to tax the voters at all.
The developed countries had gone through this period before and, simply put, you may try to win an election by saying you will reduce the taxes or not charge any new taxes in a developed economy. But at the end of the day, when push comes to shove, if the voters do not pay, there are consequences. In developing economies, at least in
Nigeria, I can say that not one person has been sent to jail for tax evasion which is quite different from the developed countries.
So, what I am saying is that we all know that we have a role to play. We rely on the United Nations, we rely on the OECD and others to help us along. But we are not unmindful of that we also have to play our part and make sure that we do our own part.
There is also a dearth of skilled manpower and poor laws. But I was very happy to note that the UN Committee on Taxation is willing and able to help developing countries in going through tax treaties before they are signed.
Illicit financial flows
Another issue of significance is the issue of illicit financial flows, which in a large part involves multinational enterprises. I was quite shocked when I did some research because people talk about corruption, especially in developing economies. But 70% of the illicit financial flows actually relate to base erosion and profit shifting by multinationals. Only 30% relates to corruption. So, if we could get the 70% in, it would mean a world of difference to most developing economies. Now that is not saying that we promote corruption; no we don’t.
One thing that we are glad about is that we saw the changes happening in the US and even at very minor levels. A friend of mine told me that if you want to pay cash into somebody’s bank account you could not do it. Now it is the owner of the account who can pay into his or her bank account. Now, they are making sure that all financial activities
are traceable; in a lot of developing countries they are not because transactions are largely cash-based.
Most African countries have an average of 40% of multinationals within their economies, and they also account for close to 40% of their tax revenue. If these multinationals are involved in tax planning, which basically relates to base erosion and profit shifting, I don’t see how these developing economies are going to get out of this problem.
Now, when we look at the use of technology in the extractive industries, there are driverless trucks, there are chips in cars and you no longer need any human intervention. Many things can be done off-shore, and if we do not find ways to tax all these services, we will find ourselves in a deeper hole when it comes to revenue generation.
In terms of taxation of Official Development Assistance – Funded Projects, I have a very simple way of looking at it. Aid is nice, assistance is good, but paying the correct amount of tax is best. I think that when you provide aid without an incentive for the receiver to show any changes, you are actually doing more damage to that economy. When it comes to the aid that is just given, at times, they want it to be tax deductible.
Between tax and foreign aid
I will give a little example. You send a team of experts to any developing country to build a hospital or to build anything that has the need for some technical input. We accept that the structure is nice, and you find out that sometimes giving certain services is more of a problem in the future than if that service was done directly by
the person who received it.
People like being helpful. As a young man, somebody wanted to give me a ride, and where I was, it was very convenient for me to take two buses. The person said he was going along my way and that he could drop me along my way. He dropped me along the way but where he dropped it was almost impossible to get another bus. So, I would have been better off waiting at the bus stop to take two buses to my final destination. That’s the way I sometimes see aid.
In a review of the multinationals and the taxes tied to these, I did a study some years back in Lagos, and I found out that the number of expatriate staff of this sector accounted for 6%, but in terms of tax revenue they accounted for 8%. Based on the salaries paid to them, they are also entitled to repatriate this through the Central Bank of
Nigeria in foreign exchange.
So, at the end of the day, sometimes, you really wonder whether having them, in terms of finance, is to the
advantage of the receiver or not.
Like I said before, assistance is acceptable, assistance is appreciated but actual tax payment is the issue that I think most developing countries would prefer.
I would like to thank you once again for giving me this opportunity to make this presentation. I had a meeting yesterday with the capacity building committee of the UN which gave a very detailed presentation. I would like to use this forum to request that the political leaders, especially in these developing economies, be told that the only way out is through taxation and let them understand that donor aid will not be there forever and assistance will not be there forever. At the end of the day, their future is in their hands.
Looking at Nigeria as an example, we have come into reality to understand that the only way for economic and social development is through taxation and I believe that, as we have come to do it, most developing countries can also do it.
I’d like to thank you for listening and giving me this opportunity.
Mr. Fowler, First Vice Chairman of the United Nations International Committee of Tax Experts, Chairman, African Tax Administration Forum (ATAF), and Chairman, Federal Inland Revenue Service, delivered the paper at the Special Meeting of the United Nations’ Economic Council (ECOSOC) on Taxation and Digitalisation of the Economy and the Taxation of ODA-Funded Projects, recently in New York.