September 9, 2019

The Executive Chairman of the Federal Inland Revenue Service (FIRS), Mr. Babatunde Fowler, yesterday said the nation’s tax cash grew from N12, 190.52trillion between 2012 and 2014 to N16, 771.78 trillion from 2016 to 2018. He said the growth represented an increase of 37. 58 per cent. He also insisted that he had grown the tax returns from the Non-Oil Sector by N1, 304.20trillion (21 per cent) from 2016 and 2018. He said the strategies put in place by the FIRS boosted the Value Added Tax (VAT) during the period 2015-2017, which led to approximately 40 per cent increase over 2012-2014 collections. He said the poor shape of the economy accounted for a drop in the nation’s tax revenue. He insisted that he had performed well within the mandate given to him by the administration of President Muhammadu Buhari. It was learnt that there was disquiet in the Presidency over Chief of Staff to President Abba Kyari’s query to Fowler because he was allegedly not directed by the President to do so. Fowler made these clarifications in an August 19, 2019 response to the query. He said: “I refer to your letter dated 8‘” August, 2019 on the above subject matter and hereby submit a comprehensive variance analysis between budgeted and actual collections for each main tax item for the period 2012-2018 as requested (see appendix 1). “Your letter stated that actual collections for a 3-year period were significantly worse than what was collected between 2012 and 2014. Total actual collection for the said period was N14, 527.85 trillion, while total actual collection between 2016 and 2018 was N12, 656.30trillion. “The highlight of these collection figures was that during the period 2012 to 2014, out of the N14, 527.85 trillion, oil revenue accounted for N8, 321.64 trillion or 57.28% while non-oil accounted for N6, 206.22 trillion or 42.72% and during the later period of 2016 to 2018 out of the N12, 656.30 trillion, oil revenue accounted for N5, 145.87 trillion or 40.65% and non-oil revenue accounted N7, 510.42 trillion or 59.35%. “FIRS management has control of non-oil revenue collection figures while oil revenue collection figures are subject to more external forces as highlighted below. “From the above, the non-oil revenue collection grew by N1, 304 20 trillion or 21% within the period 2016 to 2018. Kindly note that the total budget collection figure during 2012 to 2014 stood at N12, 190 52 trillion compared to N16, 771.78 trillion for the period 2016 to 2018 which represent an increase of 37.58% “ Fowler gave the details of how the economic recession and drop in oil production accounted for the variance in the budgeted and actual revenue collection. He added: “Please note that the variance in the budgeted and actual revenue collection performance of the Service for the period 2016 to 2018 was mainly attributed to the following reasons: “The low inflow of oil revenues for the period especially Petroleum Profit Tax (PPT) was due to fall in price of crude oil and reduction of crude oil production. Notwithstanding government efforts to diversify the economy, oil revenues remains an important component of total revenues accruable to the Federation. “The price of crude oil fell from an average of $113.72, $110.98 and $100.40 per barrel in 2012, 2013 and 2014 to $52.65, $43.80 and $54.08 per barrel in 2015, 2016 and 2017. “There was also a reduction in crude oil production from 2.31mbpd, 2.18mbpd and 2.20mbpd in 2012, 2013 and 2014 to 2,12mbpd, 1.81mbpd and 1.88mbpd in 2015, 2016 and 2017 respectively.“The Nigerian economy also went into recession in the second quarter of 2016 which slowed down general economic activities. Tax revenue collection (CIT and VAT) being a function of economic activities were negatively affected but actual collection of the above two taxes were still higher in 2016 than in 2012 to 2014. “During the years 2012, 2013 and 2014, GDP grew by 4.3%, 5.4% and 6.3% while in 2015, 2016 and 2017, there was a decline in growth to 2.7%, -1.6% and 1.9% respectively. The tax revenue grew as the economy recovered in the second quarter of 2017.” The FIRS chairman said the agency had increased the revenue from Value Added Tax (VAT) from 2015 to 2017, which led to approximately 40% increase over 2012-2014 collections. He said: “It is worthy of note that strategies and initiatives adopted in collection of VAT during the period 2015-2017 led to approximately 40% increase over 2012-2014 collections “In 2014, the VAT collected was N802billion, compared to N1.1trillion in 2018. The increase is attributable to various initiatives such as ICT innovations, continuous taxpayer education, tax enlightenment, etc. embarked upon by the Service. “Furthermore, it is pertinent to note that when this administration came on board in August 2015, the target for the two major non-oil taxes were increased by 52% for VAT and 45% for CIT. Notwithstanding the increase, FIRS has in line with the Federal Government’s revenue base diversification strategy has grown the non-oil tax collection by over N1.304trillion (21%) when the total non-oil tax collection for 2016-2018 is compared to that of 2012-2014. “I am confident that our current strategies and initiatives will improve revenue collections and meet the expectations of government.” A source in government said: “The Chief of Staff acted on his own without any directive from the President. If you look at the tone of the query, there was nowhere he said ‘I am directed’. This was why the Presidency came out to clarify that Fowler is not under investigation. “The position of the government is that such observations on revenue are not within the purview of Kyari, whose portfolio is unconstitutional. It is the business of the National Assembly to raise such a query.”   Source: Sundiata Post

Summary On 19 July 2019, the Organisation for Economic Cooperation and Development (OECD) released its report on harmful tax practices across various jurisdictions. The report indicates that Mauritius which had previously been identified as a jurisdiction with harmful tax practices no longer has such harmful tax practices. Specifically, the Mauritian “Partial Tax Exemption Regime”, which was introduced in 2018 to replace the harmful “Global Business Licence Regime” has now been declared not harmful. Details In 2015, the OECD introduced the Base Erosion and Profit Shifting (BEPS) framework, which aims, among other things, to tackle international tax avoidance, which is facilitated by the shifting of profits from high paying tax jurisdictions to low paying tax jurisdictions. As part of the BEPS Project, the OECD periodically identifies tax regimes, which have features that can facilitate BEPS, and have the potential to unfairly impact the tax base of other jurisdictions. Such features are referred to as “harmful tax practices”. Prior to now, the OECD ruled certain Mauritian tax regimes as harmful and recommended the abolishment of such regimes. These regimes included the Global Business Licence Category 1 (GBL 1) companies and Global Business Licence Category 2 (GBL 2) companies. GBL 1 granted Holding Companies certain treaty benefits such as an 80% deemed foreign tax credit, which reduced the effective tax rate of such companies from 15% to 3%. On the other hand, GBL 2 granted tax exemption to companies. A number of businesses had benefitted from the Mauritian tax regime by setting up Mauritian Holding Companies with little or no economic substance in Mauritius. Effectively, such companies were able to reduce their effective tax rates significantly because of the favourable tax regime in Mauritius. To address the OECD’s concerns, Mauritius abolished the GBL Regimes in 2018 and introduced a Partial Exemption Regime, which provides for an 80% tax exemption on specified passive income of Global Business Corporations (GBCs) in Mauritius. A tax credit is generally preferred to an exemption as this gives dollar for dollar savings in tax rather than tax savings at the effective tax rate. Thus, the new regime is less favourable and ensures that the GBCs paid some tax in Mauritius on their global income. Upon a review of the Mauritian Partial Exemption Regime, the OECD has now declared the Mauritian Partial Exemption Regime as not harmful as the regime complies with the OECD’s standards. Mauritius also introduced substance requirements for companies seeking to enjoy the 80% exemption. These requirements include that a GBC must, at all times, carry out its core income generating activities in, or from Mauritius by employing (either directly or indirectly) a reasonable number of suitably qualified persons to carry out the core activities and the GBC is expected to have a minimum level of expenditure proportionate to its level of activities. However, despite the positive reviews of the OECD, the European Union Code of Conduct Group (EU COCG) had flagged the Mauritian Partial Exemption Regime as harmful in February 2019. According to the EU COCG, the Mauritian Partial Exemption Regime does not have adequate substance requirements in terms of treatment of outsourcing activities. In response to the EU, the Mauritian Prime Minister, recently announced that the Mauritian tax laws would be amended to stipulate conditions that must be satisfied where a company seeking to enjoy the Partial Exemption Regime outsources its core income generating activities. These conditions include that the Company must demonstrate adequate monitoring of the outsourced activities, the outsourced activities must be conducted in Mauritius; and the economic substance of service providers must not be counted multiple times by different companies when evidencing their own substance in Mauritius. However, these changes have not been passed into law yet. Implication With the recent report, Mauritius is no longer on the list of jurisdictions with harmful tax practices. However, given the EU’s reservations on the Mauritian tax regime, Mauritius is still making amends to its legislation to eliminate harmful tax practices. Thus, companies with EU investments need to monitor the changes in the Mauritian tax and regulatory space to enable them make informed business decisions. In addition to this, businesses that have traditionally used Mauritian companies for tax planning purposes should seek relevant professional advice, as there may be an urgent need to restructure their Mauritian entities to ensure that they meet up with the new substance requirements.   Source: Mondaq