Against the background of Nigeria’s protracted economic crisis characterised largely by sharp revenue shortfalls, particularly as a result of severe decline in oil export earnings, the Memorandum of Understanding (MOU) signed between the Federal Internal Revenue Service (FIRS) and the Lagos State Internal Revenue Service (LIRS) to drive improved tax administration and compliance by both agencies could not have come at a more appropriate time.
Maximising the still substantially untapped potential of non-oil tax revenues to break the unhealthy dependence of the economy on earnings from the petroleum sector with its inherent destabilising price volatility has become imperative within the context of what is clearly an economic emergency that the country has been grappling with, especially in the last decade.
As explained by the executive chairmen of the FIRS and LIRS, Mr Muhammad Nami and Mr Ayodele Subair, respectively, the overall objective of the collaboration between the wo entities is to improve tax administration on their part by reducing tax compliance cost and enabling ease of doing business in the country. The imperative of close tax administration cooperation between the Federal Government and Lagos State, the country’s industrial, commercial and financial nerve centre has been long realised. Thus in 2001, the then Lagos State Board of Internal Revenue (BIR) had organised a tax retreat in Lagos, in conjunction with the FIRS, to forge a closer working relationship between the two in the discharge of their separate but interrelated mandates.
Throwing light on the necessity for the MOU entered into by the two agencies, Nami said “the cooperation would enable the two authorities to work as a team in sharing relevant information that would assist both parties in their tax administration and enforcement roles as it would also provide capacity building between both tax authorities”. And according to Subair, the initiative was informed by the realisation of the fact that “Tax compliance and good governance are expected to co-exist as the indivisible social contract that binds citizens and governments anywhere in the world”. This implies that it is not just enough to improve the efficiency of tax collection, this must necessarily be accompanied by delivery of concrete dividends to tax-compliant citizenry.
The MOU indicates that a joint FIRS/LIRS Audit and Investigation Team (AIT) will be set up to conduct a collaborative joint audit or investigation exercise within a given timeframe. In the words of Nami, “We will carry out a joint audit and investigation as a team, we will also conduct an automatic exchange of information for the gathering of data for the purpose of tax administration. With that information we will be able to carry out tax administration seamlessly”. Through leveraging on their existing distinct competencies in tax administration to cooperate in the areas of information exchange, harmonisation of an integrated tax system and joint tax audit or investigation, the two entities aim to optimise tax revenues to the federal and Lagos State governments, respectively.
It is noteworthy that systematic and sustained tax reforms have already had salutary effects on the revenue performance of the federal and Lagos State governments in recent years. For instance, Nigeria’s tax revenue performance rose by 56% in 2022 to N10 trillion ($22 billion), reported to be the FIRS’s highest attainment so far. In 2021, the FIRS deployed a new automated tax administration system that has boosted tax collection with non-oil taxes now accounting for more than half of total taxes collected. The agency collected N5.27 trillion tax revenue in 2019, a figure which dropped to N4.95 trillion in 2020 due to the combined effects of the COVID-19 lockdown and economic recession but rose to N6.4 trillion in 2021.
In its case, Lagos State, the country’s highest tax revenue earner, earned N390.46 billion in tax revenue in the 2021 financial year and as of the 2nd quarter of 2022, the state earned N256.13 billion in personal income tax. Lagos State is widely reported to record the highest Internally Generated Revenue (IGR) among states in the country and this is largely a function of continuous tax administration reforms over the years since 1999.
However, the tax administration collaboration should encompass more states working with the Federal Government to maximise the gains from such cooperation. Other states such as Oyo, Rivers and Kano can generate far higher tax revenues than they are currently doing if they embrace necessary reforms.
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