Understanding Nigeria’s tax system

Dealing with ambiguities and contentious issues in the tax system is one way the tax authorities can build confidence in Nigeria's tax system. Chinedu Ezomike, Partner and Head Commercial Practice Group at Andresen Tax Nigeria, joined CNBC Africa to discuss recent judgments from the TASA Pio Tribunal and shed light on the challenges facing Nigeria's tax system. One of the key judgments discussed was the one surrounding pensions. Ezomike explained that a change in the pension reform act in 2014 resulted in a loophole where individuals could contribute extra amounts to their pensions and withdraw the money without paying taxes. This led to a substantial reduction in state revenues, prompting states to challenge the practice. The Tribunal ruled that employers had fulfilled their obligations under the law and were not liable for the taxes employees had avoided. Another contentious issue addressed was the taxation of gratuity. Ezomike highlighted that while the law had been amended in 1996 to exempt gratuity from taxation, there was still confusion due to outdated legal compilations. The Tribunal clarified that gratuity should not be subject to tax, providing much-needed certainty for taxpayers. Looking ahead, Ezomike discussed the challenges posed by the evolving digital economy and the need to adapt tax laws to capture online transactions. He emphasized that Nigeria's tax laws had not kept pace with technological advancements, leading to gaps in regulating e-commerce activities. As the world grapples with digital taxation issues, international bodies like the OECD are working towards a fair solution. In addition to digital taxation challenges, Ezomike also touched on issues with Nigeria's withholding tax system. He highlighted the lack of clarity in definitions and the need for judicial precedents to guide tax enforcement. The importance of clarifying withholding tax regulations and ensuring consistent enforcement to boost compliance and ease the burden on taxpayers. Lastly, the discussion turned to recent proposals to increase value-added tax (VAT) in Nigeria. Ezomike acknowledged the government's need for additional revenue but raised concerns about the timing of the VAT hike amidst a sluggish economy. With a large informal sector that is not effectively taxed, he questioned the impact of raising VAT without first broadening the tax base. The balancing act between increasing revenue and supporting economic growth remains a critical challenge for Nigeria's tax authorities. As Nigeria navigates its evolving tax landscape, clarity, consistency, and adaptability will be key to fostering compliance and building confidence in the tax system. With judicious rulings and proactive policymaking, the country can overcome challenges and create a more robust and equitable tax environment.