The International Monetary Fund has charged the federal government with growing tax revenues by 9 percent of GDP amid declining revenues and rising debt levels. This follows the Federal Inland Revenue Service, an arm of the Nigerian government’s decision to raise the country’s tax-to-GDP ratio from its December 2021 level of 10.86 percent. Upon taking office, Zacch Adedeji, the acting chairman of FIRS, made a commitment to increase the tax-to-GDP ratio to 18 percent within three years, which would put it above the average for Africa of 16.5 percent. This, he said, will lessen the country’s need for foreign aid and keep its finances stable.
In a document titled “Building tax capacity in developing countries,” the International Monetary Fund (IMF) noted that a substantial and sustainable increase in tax revenue is necessary for low-income developing countries (LIDCs) in order to achieve the Sustainable Development Goals (SDGs), which tackles climate change, and stabilise their debt levels. Given the current institutional and economic systems, the organisation maintains that increasing the tax-to-GDP ratio by an average of 9% points is now necessary to realise its full potential and enable the state to fulfil its role more effectively.
More transparency in its administration and policy is needed.
It also suggested enhancing the design of key taxes, which include value-added tax, excises, and both personal and corporate income taxes, with an emphasis on tax base widening through revising inefficient tax expenditures, more equitable taxation of capital income, and greater utilisation of real property taxes. It added that the key to successful tax reform is strengthening the institutions that regulate the tax system. There needs to be more transparency and certainty in how administration and policy are translated into law, as well as more professionalisation of public officials involved in tax planning and execution, enhanced utilisation of digital technologies to bolster revenue administrations and more.
Furthermore, enhancing the efficiency with which the most fundamental domestic taxes are structured and administered is the primary focus for bolstering tax capacity. International cooperation on taxing the earnings of MNEs is essential, but more is needed to cover the revenue mobilisation needs of LIDCs, and it should not detract from the broader goal of enhancing countries’ tax capacities to promote economic growth. The agency estimates that LDCs may need to spend an extra 16% of GDP on the SDGs by 2030 and debt sustainability management.
Financial crises in several LIDCs necessitate revenue mobilisation.
IMF noted that the urgency of revenue mobilisation has increased due to the current financial crisis in several LIDCs and that increasing global cooperation on the taxation of the profits of MNEs has generated prospects for extra revenue. Nevertheless, it is expected that these will have a minimal impact on LIDCs. It was suggested that, although necessary, reforms for revenue mobilisation should focus on the imperative of leveraging key domestic tax policies. Additionally, it was stated that there is a great possibility to collect additional revenues in LIDCs, as indicated by their tax potential.
Tax revenues in LDCs are significantly lower than their potential of 19.9 percent, coming in at an average of 13.2 percent of GDP; this is when the economic framework and the quality of institutions are held responsible. This potential rises by an additional 2.3 percentage points of GDP if governmental efficiency is brought up to the level of that of nations with emerging markets. It was added that when changes are supported by appropriate political buy-in and appropriately integrated across complementing policies and institutions, they can bring about swift and actual revenue, improved tax progressivity, and enhanced incentives.
Investment should be made in tax policy units to improve its framework.
Lastly, it also recommended governments invest more in tax policy units to help with issues like climate change and industrial policy that cut across jurisdictions and require consideration during the policymaking process. The organisation also emphasised the importance of preventing political interference in Nigerian tax agencies and the necessity to digitise and strengthen them. Reforms that can have a lasting effect on revenue collections include greater utilisation of digital services and procedures, taxpayer classification, and risk-based compliance management. A clear and solid legal framework is required for taxpayers to feel confident in their tax outcomes. It also stressed the importance of prioritising changes and coordinating efforts among government entities.