IMF: Nigeria Needs A 9% Tax-To-GDP Increase To Boost Revenues
The International Monetary Fund has given the Nigerian government the responsibility of raising the tax-to-GDP ratio by 9% in order to improve tax collections in the face of declining receipts and a rising debt burden.
This is due to the Nigerian government's intention to raise the country's tax-to-GDP ratio, which was 10.86% as of December 2021 and is being pursued by the Federal Inland Revenue Service.
Upon taking over as acting chairman of FIRS, Zacch Adedeji vowed to increase Africa's average tax-to-GDP ratio from 16.5 percent to 18 percent within three years.
According to him, doing so will assure financial sustainability and lessen the nation's dependency on borrowing.
However, the IMF noted that in order to achieve the Sustainable Development Goals (SDGs), combat climate change, and stabilise debt in low-income developing countries (LIDCs), a significant and sustainable increase in tax revenue is necessary.
Given present institutions and economic systems, the organisation claims that increasing the tax-to-GDP ratio by, on average, 9 percentage points is now necessary in order to realise its full potential and enable the state to fulfil its duty more fully.
The Organisation also advocated for improving the design of fundamental taxes (VAT, excises, personal, and corporate income taxes), with an emphasis on expanding the tax base by eliminating inefficient tax expenditures, taxing capital gains in a more neutral manner, and making greater use of real estate taxes.
Improvement in the organisations that oversee tax reform and the tax system is essential for achieving results, it stated. It demands adequate tax policy units to forecast and analyse the effects of tax policies across all economic policy dimensions in Nigeria, increased professionalisation of public officials involved in the design and implementation of taxes, improved use of digital technologies to bolster revenue administrations, and transparency and certainty in how policy and administration are translated into legislation.
“Tax capacity must continue to rest primarily on improving the design and administration of the core domestic taxes. Though important, though ongoing international cooperation on the taxation of the profits of multinational enterprises (MNEs), is insufficient to meet revenue mobilization needs of LIDCs and should not distract from pursuing the wider objective of building tax capacity for development.”
The association claims that in order to manage debt sustainability and reach the Sustainable Development Goals (SDGs) by 2030, LIDCs may need to invest an additional 16% of GDP.
The IMF said that ongoing international cooperation on the taxation of MNE profits has raised hopes for extra revenue, noting that the current debt crisis in several LIDCs has increased the urgency of revenue mobilisation. However, these are predicted to be low for LIDCs.
"While necessary, reforms for revenue mobilisation should focus on the necessity of leveraging fundamental domestic tax policies, there is considerable scope to raise more money in LIDCs, measured by their tax potential," it was written.
“At about 13.2 per cent of GDP on average, tax revenues in LIDCs are well below their 19.9 per cent potential, holding constant economic structure and the quality of institutions. If governmental effectiveness improves to that of emerging market economies, that potential increases by another 2.3 percentage points of GDP.”
It claimed that reforms can result in immediate and significant revenue, increased tax progressivity, and improved incentives when they are adequately backed by political backing and are well integrated across complementing policies and institutions.
Additionally, it advised governments to invest more in tax policy units to help identify and prioritise reforms based on data relevant to their own countries and address challenges that cut beyond tax policy, such as climate change and industrial policy.
The group also emphasised the need for Nigeria's tax agencies to be strengthened, made digital, and free of political influence.
Increasing the use of digital services and procedures, segmenting taxpayers, and managing compliance in a risk-based manner are a few improvements that can have a long-term effect on revenue collections.
"For taxpayers to have confidence in the results of their tax decisions, a clear and strong legal framework is required. The goal is to carefully prioritise and coordinate reforms across all government departments and agencies involved in policymaking," it continued.
