Ibi Oja/ The Market Place

The High-net-worth individual in the market place and Voluntary Compliance

Introduction

The Nigerian economy has over the past 6 decades depended mostly on oil as its main source of revenue generation for the country with proceeds from this devolving to the sub-nationals as beneficiaries through the Federal Account Allocation Committee (FAAC) even though we have several other sectors that can bring in better revenue or ensure the country has a type of fruit basket income streams. The country has relied on oil as its staying stream of income from when it was $1.57 to a barrel of oil to recently when a barrel of oil is now $48.71 (Business Day Survey) This survey ranks Nigerian crude as one of the countries with the highest cost of crude production today even though the cost of crude oil production in 1961 was $1.57 according to the National Bureau of Statistics.

The reliance on crude oil export rather than on tax to fund government budget translated to 54.9 per cent of all Federal Government Revenue between 2012 -2022 originating from the sale of crude oil (Central Bank of Nigeria 2023(CBN). One of the major consequences of this reliance on oil by Nigeria according to the International Monetary Fund (IMF) is that, Nigeria currently has one of the lowest tax to GDP ratios in the world which is standing at 8.57 per cent as at 2022 (UNU-WIDER 2023) and it is mostly used to service and reduce the country’s debt profile . (Reuters2022, 2023)

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Taxing the rich

There has been so much talk about taxing the rich and all over the world it is said that the rich have either been able to avoid paying accurate taxes either by avoiding through tax planning or by evading tax payment which is a crime. Either way most high-net-worth individuals do not declare their income accurately nor do they subject themselves to filing of their returns which is a strict liability nor do they pay their taxes as and when due.

The term high-net-worth individual is a technical term used in the financial services industry for people who maintain liquid assets at or above a certain threshold. Typically, they are defined as holding financial assets valued over US$1 million and $5 million and for Nigeria the sum of N28.7m which is an equivalent of $70,000 thereabout is projected as the base annual income an high net-worth individual must earn to be so called in 2024. (Wikipedia)

The broad definition of HNWI’s is individuals with wealth in excess of US$1 million (OECD). However this term takes on a totally different meaning in the context of Africa, this is due to the per capita income which is very low and the fragmentation of the information sources which makes it subject to country specific definitions. (Tanzi 2012) Also because different African countries operate either a national or sub-national structure, while some others may operate a unilateral system of government, tax collection structure are bespoke to meet this different structures.

Taxing Structure in Nigeria

Nigeria operates a three tier system of government and the revenue generation system is also structured along those lines. This is with the Federal Inland Revenue Service (FIRS) being charged with taxes levied on companies and the Value Added Tax (VAT) at the Federal level. The various State Internal Revenue Service (SIRS) spread across the 36 States and one established in 2015 in the Federal Capital Territory (FCT) are mandated by law to levy taxes on individuals using the residency rule to determine which State the taxes are due. The Local Government also have taxes and levies due to them at that level as stated in the Taxes and Levies Approved List for Collection Cap T2 Laws of the Federation of Nigeria (Amended in 2011)

The Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under the current Nigerian law, taxation is enforced by the 3 tiers of Government, i.e. Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection) (Amended in 2011). Of importance at this juncture however are tax regulations pertaining to investors both foreign and local in a class also known as the high-net-worth individuals.

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Currently little is known about high-net-worth individuals (HNWI’s) taxation in Nigeria due to the peculiarity of the Nigerian tax structure, the existence of political will or lack of same by the various State Governor’s, as well as the ongoing harmonisation of the tax laws which has created a form of bubble where States and there IRS seem to be holding their breath while waiting for the proposed harmonization. Also most states are still building capacity in the categorization of individuals in this bracket, as well as implementation and enforcement of the existing laws. In Nigeria politically exposed person’s (PEP) are automatically categorized as HNWI’s.

Though matters of income tax are governed by the provisions of the Personal Income Tax Act (PITA), the collection framework may differ depending on the State and most State’s look up to Lagos to lead due to the success of the structures, processes and innovative approach the Lagos State IRS has deployed over the years.

The importance of tax regulations cannot be over-emphasized, as the law is clear on the fact that most transactions by individuals with Ministries, departments, or government agencies cannot be concluded without evidence of tax clearance. i.e. a Tax Clearance Certificate to certify that all taxes due for at least the immediate three preceding years of assessment have not only been adequately assessed but fully paid up.

However there's no firm definition of the amount that qualifies one to be categorized as a High Net-Worth Individual as some institutions may define the range differently depending on different set of parameters.

In this era of decline in the price of the crude oil, as well as the larger world veering away from the production and use of fossil fuel in line with the Sustainable Development Goals (SDG’s). This is because the use of fossil fuel releases carbon dioxide into the air, also called greenhouse gas which is responsible for global warming. Due to this identified major challenge the 2030 Agenda which outlines bold steps to transit the world to a more sustainable and transformative options. (SDG. 7.1- 7.3, 12.c.1)

So as a country it is important that we begin to structure the economy and diversify our revenue streams to embrace options that are not solely crude oil based.?

The individuals classified as High-Net-Worth Individuals in Nigeria has witnessed significant evolution, from the traditional classification which was made up majorly of individuals in manufacturing, oil and gas to the inclusion of new kids on the block within the last 2 decades spanning new sectors like banking, fin-tech, music industry, influencers, event planners, skit makers as well as players in the informal sector.

It is said that 1% of the population make up the High-Net-Worth Individuals in Nigeria. However the reality is that data gathering and accuracy of those data’s gathered is not only important to determining the actual number of HNWI’s in the country and in each state but it is key to ensuring they declare their income from all sources, are registered as taxpayers and that they go on to pay adequately and embrace voluntary compliance.?

We know that ensuring compliance of the HNWI’s mostly lies within the purview of the State IRS rather than the Federal government, so compliance strategies must be developed by the various State internal revenue service to leverage on the 1% of their residents who make up this category of individuals and tax them appropriately. It is a known fact that the tax laws are Federal legislations and this gives the various State governments taxing authority over individuals who are resident in their States. It also gives the individuals power to assess themselves to tax using the Self Assessment option or be assessed to tax via the Pay-As-You-Earn (PAYE) or Direct Assessment (DA).

The Personal Income Tax Act (PITA) (As amended by Act No.20 2011) charges each and every individual resident in any of the 36 States and the Federal Capital Territory (FCT) to declare their income from ALL sources honestly.

The provision of Section 85 of the Personal Income Tax Act Cap P8 (PITA) (As amended by Act No.20 2011) makes it mandatory for anyone transacting with respect to any of the activities listed under paragraphs (a-u) and ‘v’ which goes on to establish that the list provided is not limited to what has been listed in Section 85(4) but includes transactions as maybe determined by government from time to time.?

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People can become high net-worth individuals through inheritance, or it can be built over the years through strategic investments or smart financial planning. In recent times we have also seen people who do not fall into any of the above criteria’s but are musicians, actors or producers and due to a music or movie hit they find themselves in this category, as do politically exposed persons (PEP) who come into huge contracts or wealth. The traders who import Swiss lace in Gutter market in Lagos Island, the importers of building materials such as nails or roofing sheets, sewing accessories ?or those who are distributors for Fast Moving Consumer Goods (FMCG) in the markets such as cigarette, sugar and so on, but who have over the decades hid within the shadow economy but are only glimpsed when a Lagos party beckons and they adorn their Italian custom made heavy jewellery sets or unearthed during evaluation of their palatial structures doting the Ikoyi or Lekki landscape. They are the High Net-Worth Individuals in the informal sector traders of which I discussed in my earlier series on ibi oja/ the market place.

For tax purposes High Net-Worth Individuals pose a very significant challenge to the taxing authority because of the complexity of their affairs including but not limited to their revenue contribution and the opportunities that they have for aggressive tax planning and its impact on voluntary compliance.

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This makes issues of early detection of their aggressive tax planning schemes, prevention of such and the strategies the taxing authorities use in addressing these challenges a going concern. Some of the challenges of the tax authority are lifting the veil of the complex corporate, trust and legal structures under which the High Net-Worth Individual safe guards their income to ensure the tax authority is unable to assess income based on accurate information, because in most cases this categories of taxpayers do not willingly declare all their streams of income.

So the tax administration has to not only be innovative and professional in evaluating the fine lines to enable better management of the risk involved in the use of tailor made arrangements and bespoke tax schemes. But they have to be knowledgeable of the tax planning or evading schemes.

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Suggestions for identifying and taxing HNWI’s;

·??????? It is important that tax authorities invest in setting up a directorate charged with addressing issues pertaining to High Net-Worth individuals, and enable inter-agency synergy amongst the various Ministries Directorates and Agencies (MDA’s) right from the Local Government all the way to the Federal and incorporate other critical organisations like the Passport office, Tenders Board, Corporate Affairs Commission (CAC) Procurement Ministries and customs as provided in Section 86 of PITA. Operating as a single ecosystem or unified entity

·??????? Simplify compliance process because the easier it is to transact with government MDA’s, the more information is available to profile both potential taxpayers and existing taxpayers who have over the years under declared or evaded tax payment.

·??????? Create a D.I.Y portal where individuals can input their multiple payer ID’s to create or apply for a unique identifier which will assist in data cleansing which will ultimately translate to accurate database and increased revenue.?

·??????? Creation of a legal framework that is appropriate to deal with the complex cases of High Net-Worth Individuals in this sector and collaboration with financial institutions by leveraging on the provisions of Section 86 PITA to request for financial statements where necessary.

·??????? ?Create a reward system where high-net-worth individuals who want to voluntarily declare assets, income and? previous taxes unpaid are given a time frame to do so without any punitive measures ( i.e VAIDS) and the revenue authority should follow up consistently on a yearly basis.

·??????? The Taxing authority having the required political will or backing of the Federal or State Government to see the matter to a logical conclusion, starting from filing of returns as and when due and prosecution of non filers as filing is a strict liability.

·??????? The tax authority must explore some form of co-operative compliance and must create structures that engage and which can leverage on international co-operation. Both at the operational and strategic levels.

·??????? Surveys and research must be carried out as a continuum in this sector to isolate, enumerate, segment and asses appropriately all the business owners in the formal and informal sector and separating them into their different income and tax brackets.

·??????? The State governments in collaboration with their revenue authorities may provide incentives or rebates of a sort to the identified high-net-worth individuals and businesses in the informal sector with a view to them embracing formalisation and registration and ultimately voluntary compliance

·??????? The government and revenue authority must as a continuum, invest in a variety of grass root media engagements, advertisements and enlightenment. Speaking on the benefits of tax payment and the simplified processes available to them.

·??????? Set up a credible and secure whistle blowing system to allow independent people give information without fear of exposure.

·??????? The various State Governors MUST enable the revenue authority by vesting their political will to back the revenue authorities. This is by ensuring they speak on importance of tax payment in conversations with ALL stakeholders and let everyone know their stand on matters pertaining to tax. Tax MUST be established as sacrosanct and not discretionary.

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Benefits of identifying and taxing the HNWI’s adequately

·??????? What this does is it helps nil out silos and creates a 360 view of ALL transactions engaged in by taxpayers in this category. We cannot overestimate the importance of data gathering, data analytics and data accuracy in this conversation.

·??????? This also improves tax collection and it ultimately reduces the inefficiencies and corruption plaguing the tax system.

·??????? It establishes an accessible, secure and credible cradle to grave database of ALL transactions linked to an individual.

·??????? A fair and equitable tax system where everyone is assessed and pays according to their social standing and income.

·??????? Administrative bottlenecks are reduced due to the collaboration amongst the government MDA’s.?

·??????? It enhances efficiency of the tax authority due to the robust and accurate data they have

·??????? The information or data collated can be reused or repurposed by the government to bring dividends of governance to the citizenry or residents, while growing the economy and IGR.

·??????? It helps a State become self sustaining as their internally generated revenue not only increases but their informal sector will also add value to their GDP.

·??????? The use of appropriate technology like mobile payment systems, digital wallets and secured online platforms not only bring ease into the business of revenue generation but help with mining of data and accuracy of such data and statistics.

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In Conclusion, I know some may have observed that I did not speak much on carrying out enforcement on the informal sector HNWI’s, even though we know that enforcement is a critical component for compliance. The reason for not emphasising on enforcement on those seen to be HNWI's in the informal sector especially is because even though we may be trying to weed out the businesses and players that do not belong to this sector, we must do it with utmost caution as this base of the economic pyramid which is made up of mixed multitudes is the most sensitive and most volatile of all sectors and it is also highly susceptible to negative or positive economic impacts. So it is important that moral suasion and stakeholder’s engagement must be prioritised in the immediate, by given the players in this field the opportunity to voluntarily honestly declare and giving them the requisite support to legalise their businesses, until such a time when government and the revenue authorities have the requisite data needed to weed the out liars from the informal sector. So in the interim only subtle enforcement is advised and this must be individualised and not carried out on an entire market or trade association. It is important that in enforcing compliance only the non-paying business owner(s) in the market should be enforced.? What this does is to re-enforce the confidence of the taxpaying business owners in the fairness of government or the revenue authorities, while the non paying business owners understand that there’s no hiding place for the golden goose.?

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