Professional Documents
Culture Documents
63801
Impact of Multiple-
Taxation on Africa Trade Policy Notes
Competitiveness in Nigeria
Note #16
Nihal Pitigala and Mombert Hoppe
Public Disclosure Authorized
March 2011
Introduction
and second largest economy after South addition to continuing scant electricity
Africa. By virtue of its size, improved supply, multiple-taxation is one of the major
economic management and strong economic impediments to doing business in Nigeria
growth in Nigeria would generate (FIAS, 2008, DFID, 2008).2
substantial prospects for growth and
The Nigerian Federation comprises three
spillovers for the whole West African
tiers of government—the federal
region. But the challenges facing the country
government, 36 State governments and the
are formidable—despite its oil wealth and
Federal Capital Territory, and 774 local
sustained economic growth during the last
governments. The exact number of ‘taxes’
decade, more than half of its population still
levied on businesses seems to vary
lives in poverty. Given the low employment
Public Disclosure Authorized
Port Development
as Ministries, Departments and other Levy, 16.0%
Net VAT, 15.6%
Prior to the 1990s, the Russian Federation was characterized by a system of complexity that
resulted in levies and charges at different levels of government, which amounted to approximately
100 different taxes. Reforms initiated to deal with tax avoidance began with a reduction of the
corporate tax rate from 35 percent to 24 percent and a flat-rate small business tax. Other tax
reforms included replacing separate taxes for pensions, social insurance, medical insurance and
unemployment with a unified, lower social insurance tax rate; and eliminating most small
nuisance taxes and tax privileges. Between 2001 and 2003, income tax revenues under the flat tax
system increased by 28 percent in the first year after reform and by more than 80 percent within
three years after reform as compliance increased and economic growth expanded the tax base.
The main elements of reform initiated by Tanzania in 2003 were the abolition of “nuisance taxes”,
the flat rate development levy and of business license fees for enterprises below a certain size, and
capping the latter for larger enterprises. According to a Poverty and Social Impact Analysis of the
World Bank (2006), Tanzanian businesses recorded a 14 percent decrease in tax burden overall.
Within this, medium businesses recorded 11 percent less tax, and small businesses 36 percent less
tax. The reforms were particularly beneficial in remote regions where many firms have seen a
reduction of 28 percent in total taxes paid. All councils were enterprising in replacing income lost
from the development levy and market dues by intensifying collection of taxes that remained on
the permitted schedule.
In the Hashemite Kingdom of Jordan, the tax regime comprised a complex array of taxes and fees
on commercial activities, including hundreds of nuisance taxes, many disguised as fees that were
promulgated through dozens of laws and different government agencies. In an attempt to reduce
the burden on the private sector and reduce the administrative costs to the Government of Jordan,
in 2009, embarked on an ambitious fiscal reform program to eliminate such nuisance taxes and
unify them through a flat corporate income tax regime. A temporary tax law entered into force in
January 2010 unifying several categories of taxes making Jordan more attractive for foreign
investment.
Russia, Tanzania, and Jordan, where tax the administrative and compliance costs
revenues actually increased as a result of associated with the implementation of
these simplifications (see box 1). multiple taxes. The Russian Federation,
Tanzania, and Jordan, all provide example
Ideally, the government should undertake a of eradicating multiple taxes through rapid
top-down reform from the Federal level that and comprehensive reform programs.
reduces and clarifies responsibilities of tax
authorities at lower levels of government, Alternatively, the federal government could
while addressing the issue of revenue initiate pilot reforms of “willing” State and
distribution among the three tiers of Local jurisdictions with the aim of revenue
neutrality, increased transparency, and number of beneficiaries that nevertheless
simplicity. Such an approach could be seem to be very well connected politically.
supported by disbursement of funds from the
federal government towards the state level Improve transparency in the tax system. A
and municipal level to cover any ‘shortfall’ well understood tax system eliminates the
of revenues.9 Alternatively, simplification chances of corruption and harassment by tax
and the introduction of single municipality officials and consequently of non-
taxes could help in reducing the number of compliance by tax payers. A critical step
taxes, while keeping revenue constant. would be to publicize the tax payer rights
Demonstrating beneficial effects could then and responsibilities. Specifically, there is a
lead to be replication through a gradual need to provide adequate awareness to
approach to roll out reform across the rest of taxpayers on the list of approved taxes at the
States. Such an approach would also permit federal, state, and municipal level to check
reform-minded States to compete for arbitrariness in assessment by properly
investors and businesses though the defining the tax base, tax rate and other
simplicity and transparency of their tax aspects of tax administration – and to
systems. establish an independent yet powerful
complaint body that taxpayers could turn to
Eliminate mobile levies. To achieve when treated in violation of their rights.
competition among states for investors
through improvements in the business These reforms would increase economic
climate or simplifications in the tax system, efficiency and reduce inequalities in the tax
however, it will be critical that the federal burden between states and between small
government, in collaboration with the state and large enterprises. They would also
governments, enforce a single economic make enforcement simpler. Eliminating
space in Nigeria by abolishing all kinds of double taxation of specific tax bases,
fees and levies on mobile factors and reducing the total number of taxes paid,
removing roadblocks on internal traffic. increasing transparency as to how and what
Such a measure would likely meet to pay, and facilitating procedures for filing
substantial resistance from municipal taxes, will be essential to reducing the high
governments and related lobby groups that compliance costs in terms of man hours that
are currently benefiting from these were identified by our study. Streamlining
arrangements and close coordination with and simplifying the tax system would reduce
the States. Starting strict enforcement of the regressive nature of the current tax
such policies on selected priority corridors system that puts additional burden on
first could help create strong support from agricultural companies, small companies,
civil society that could create a and companies in remote areas of Nigeria. It
counterweight to vested interests of a limited would directly benefit those companies that
are the potential engine of growth and are
9
The methodology for calculating such shortfalls likely to create the largest number of jobs,
would have to be agreed beforehand. particularly the small- and medium-sized
companies. Additional efforts could be waste and increase Nigeria’s standing and
undertaken to reduce trade-related political leverage in the region. Fiscal
compliance costs by simplifying and making revenue losses resulting from tariff reform
payments more transparent. Given the could be addressed by specific
delays in obtaining duty and VAT refunds, compensation mechanisms that have been
the introduction of alternative systems by used elsewhere. For example, the EU has
the Federal government, such as suspension compensated Burundi and Rwanda through
schemes, could bring down companies’ a trust fund for revenue losses incurred
capital costs of funds that are currently tied when acceding to the CET of the East
up in federal accounts. African Community.