In our last edition of InsideTax publication, we explored the concepts of tax avoidance and tax evasion and the impact of tax leakages on government revenue. We also highlighted some ways through which tax evasion occurs in Nigeria.
In this edition, we will evaluate one common tax evasion scheme – sales suppression and explore the technology-based counter-measures prescribed by the Organisation for Economic Cooperation and Development (OECD).
Perpetrators of sales suppression aim at under-reporting sales and its corresponding profit and income tax liability. Sales suppression also has the impact of under-reporting value added tax. Specifically, sales suppression occurs when taxpayers do not record cash sales or transaction trails are altered or deleted with the use of electronic tools.
Generally, cash sales are considered synonymous with small and medium enterprises (SMEs) that constitute the informal sector. Considering that SMEs contribute more than half of Nigeria’s gross domestic product, one would have expected concerted efforts from tax authorities in tackling leakages from sales suppression in a cash environment. Ironically, we are not seeing this happening. This may not be unrelated to the fact that a large number of businesses in Nigeria are not registered for taxes in the first place. Since a significant portion of unregistered businesses operate in the informal sector, the approach for the informal sector should be geared towards expanding the tax net. This is one of the objectives that the recently launched voluntary assets and income declaration scheme (VAIDS) seeks to achieve.
Meanwhile, as a result of the cashless economy being implemented by the Central Bank of Nigeria (CBN), many business enterprises including SMEs are beginning to adopt technology tools such as online transfers and point of sale (POS) systems for receipt and payment of cash. This could be deemed good news for tax authorities on the premise that business transactions, which could have erstwhile been suppressed under the cash system, should increasingly become easier to track. Be that as it may, it is not yet ’jubilation moment’ due to the availability of electronic tools that can alter evidence of transactions by falsifying the electronic records of POS systems, according to OECD.
The foregoing has made it necessary to identify sophisticated counter measures to combat the menace of electronic sales suppression. The most prevalent counter measure against sales suppression, according to OECD, is data recording technology (DRT). DRT records and secures sales data in real time as the transactions occur and stores such data as tamper proof. Examples of these technologies include electronic fiscal device, fiscal memory device, sales data controller or sales recording module. These tools are able to send transaction data automatically to the tax authorities, connecting cash registers online to their data server systems. This can be on daily or monthly basis. The tax authorities then have the opportunity to access the data from their remote offices for compliance and review purposes. These tools can be used concurrently and are not mutually exclusive.
Austria, Belgium, Hungary and Rwanda have recorded successes adopting these tools. Rwanda introduced electronic cash registers in March 2013 and recorded an increase of 20% in VAT collected on sales in 2015.
The Federal Inland Revenue Service (FIRS) recently took a giant step in this direction when it contacted major taxpayers in some sectors of the economy especially maritime and financial services. FIRS notified the taxpayers of its intention to deploy VAT automated monitoring systems in order to ensure faster and more accurate monitoring, collection and remittance of VAT. The systems are expected to interface with the accounting/database systems of the taxpayers.
We are also aware of a Communication Service Tax Bill under consideration in the National Assembly, which seeks, inter alia, to establish a new type of tax known as communication service tax payable by users of electronic communication services. Under the bill, FIRS is responsible for collection of the tax from service providers. For the purpose of verification of taxes due to government, it is proposed that an agent would be appointed to establish both electronic and physical monitoring mechanisms to monitor, analyze, verify and save all necessary data and information. Service providers will be expected to provide access to their relevant network for this purpose.
The above suggests that the Nigerian government is already thinking and working towards adoption of various forms of electronic tools for the purpose of verifying the integrity of taxpayers’ data and combating possible revenue leakages from sales suppression. Some questions that readily come to mind for this game changing disruption in the Nigerian fiscal space are:
- what is the technology capability of FIRS?
- does current domestic legal framework support this?
- are there existing infrastructure that can be leveraged?
- what is in it for the Nigerian taxpayer?
Taking a critical look at the automated VAT monitoring systems which appear to be in implementation stage, it is unclear if proper consultation with stakeholders was conducted before deciding on implementation of the technology solution. Other points of concern are:
- whether the input-output VAT mechanism has been taken into consideration in this solution
- how sales/transactions that do not materialize will be treated
- whether taxpayers will still enjoy the 21 days period for remittance of VAT since collection and remittance of VAT would be automated
- will the e-filing platform be integrated as part of the system or will taxpayers be expected to file separately under another platform?
- who will bear the cost of integration of the solution to taxpayers’ systems?
- what confidentiality and security issues will need to be addressed?
While we laud FIRS’ efforts of automating tax validation, assessment and collection processes, it is imperative that stakeholders be carried along on all fronts for successful implementation. This will importantly help to allay fears and increase acceptability of this much needed disruption.