Business Competitiveness in Nigeria: CHANGE or INSANITY?
I have been asked by several people as to why Nigeria is challenged from realizing its full potentials as an investment destination, especially some who believe that I have a bias towards some of the ideals of the apostles of CHANGE.
While I agree that “change” is different from “miracle” and hence it might not give immediate results, we also need to realise that “change” is a verb and it requires a set of actions. Insanity, however, is doing the same thing over and over, and expecting a different result. So, as part of the change process, what are we really doing to change our status to attract more foreign investments into the country?
Where are we?
In order not to be accused of joining the array of overnight Nigerian “beer parlour” economists, I will like to place reliance on the annual reports of two respected global institutions – the World Bank and the World Economic Forum. I have summarized the rankings from these organisations in Table 1 and Table 2.
Based on the two rankings:
• Nigeria shows a steady decline from 2008 to 2014 on both rankings.
• Nigeria shows a marginal improvement in 2016 when compared to 2014 on both rankings
• Nigeria is not an attractive Top-5 investment destination in Africa, based on both rankings.
• Africa’s Top-4 countries are consistent on both rankings. This means that …”if you are there, you are there…”
If the rankings had been produced in Nigeria, one could label such reports as being the handwork of “wailing wailers” or “yesterday’s men”. Since the reports are coming from credible organisations, then we must all take the reports very seriously.
How did we get here? How can we get out of here?
As a Nigerian, while it is a bitter-pill to accept that South Africa is ranked higher on both rankings, despite our self-appointed tag as the biggest economy in Africa based on GDP size (not even GDP per capita), it is sad that countries such as Rwanda, Botswana and Mauritius are occupying Top-4 positions in Africa on both rankings.
While trying to analyse the reports, I was able to pencil down eighteen (18) issues that, in my personal opinion, could have contributed immensely to the poor rankings that Nigeria got on those two reports. These issues should be part of the focus of the President Buhari’s administration, especially Ministry of Finance and Ministry of Investments, Trade & Industry (MITI). The issues include the following:
Delays in the Company Registration process: Incorporation of companies is the primary function of the Corporate Affairs Commission (CAC), a government agency under the Ministry of Investments, Trade & Industry. At different times, many of the supervising ministers have announced to the world that incorporation can be done in one day. On the average, it still takes an average of about 24 days to complete a simple company incorporation at the CAC. The issuance of the certificate of incorporation is also sometimes delayed due to “server problem” or “faulty printer”. In many top-ranked countries, it takes less than a day to incorporate a company. In most developed nations, you can even make a preliminary search for the proposed company name online (to check name availability) and then submit your applications with necessary payments online. This is where we need to get to.
• Annual Filing Requirements needs improvement: Annually, CAC threatens company promoters that thousands of companies on their register will be delisted. But really, what is the real consequence for not filing annual returns for a Company? Nothing! So, what can the government do? If the Company’s Incorporation Number (CIN) is used as a major field in setting-up the bank accounts and all bank accounts are suspended if they default in filing annual returns, then there might be an incentive to file returns. However, the process of filing annual returns with the CAC needs improvement. Companies should be able to file their returns directly from the CAC’s portal, upload necessary documents and e-signatures, in addition to making all necessary payments directly on the portal.
• Registration of Foreign Investments: The Nigerian Investment Promotion Council (NIPC) regulations require the registration of foreign capital with the NIPC. This is another bottleneck in the company set-up process, which can be embedded as part of the normal CAC registration.
• Certificate of Capital Importation: As part of the Exchange Control regulations, any repatriation of dividends or interests will only be approved if there is a Certificate of Capital Importation (CCI) that is obtained within 24-hours of bringing the capital into Nigeria. NIPC registration is sometimes required to process the CCI. In many instances, company executives become aware of this CCI requirement when they want to pay dividends to their foreign investors, sometimes 2-5 years after the initial investment by the investor. This means that the investment is somehow trapped as some (or most?) bankers are usually indifferent to the customer’s plight.
• Online Company Checks: In order to enhance business partnerships and alliances, CAC needs to make it easy for prospective investors (or business partners) and other stakeholders to be able to check the basic profile (shareholders, directors, historical shareholding changes, historical changes in directorship, share capital structure, company secretary, filing status, etc.) of registered companies from the CAC portal, at a fee.
• Complexity of Company Taxes, especially for SMEs: While I agree that tax computation is not one of the easiest tasks to do anywhere in the world (hence the need for chartered accountants and tax practitioners), many countries have simplified the process for the SME operators in their countries. As is typical for most SMEs, they are usually sole-proprietorships, partnerships, family businesses and private closely held companies, usually with no developed business structure where there is an in-house tax accountant. In some countries, taxation of SMEs (based on the specific definition of SME for tax purposes) is computed as a fixed and pre-defined percentage of their revenues (e.g. 6% of revenues). This proposal can be implemented without any change to our current tax laws. This makes it easier for SMEs to compute their taxes and comply with the tax laws. It also makes it easier for the tax agencies to audit such SMEs (using their bank statements, WHT information, etc.) who constitute a large nominal portion of the tax payers. This will ensure voluntary compliance and increase tax revenues.
• Multiplicity of Taxes: I was invited by some potential investors to present a paper on the investment opportunities in Nigeria, sometime in 2014. During the program, someone asked me to mention the key taxes and levies that they must be aware of. I didn’t know that someone was writing down the list of the taxes and levies I was mentioning. By the time I was done, they asked me how they are expected to monitor and ensure compliance with about 24 taxes and levies (in addition to their business operations). The taxes and levies I mentioned include the company income tax, education tax, PAYE, ITF, Pension, NHF, VAT, WHT, Local Content Levy, NCD Levy, Cabotage Levy, NITDA Levy, NCC Levy, Television license, car park permit, business premises permit, tinted car window permit, Signage permit, etc. Of course, I carefully excluded “area boys” levies which you might not be able to avoid if you have to transport your goods from one location to the other. In most of these taxes and levies, businesses are practically paying taxes on the same or substantially similar tax bases. The Federal Government needs to consider streamlining the “Approved List of Taxes” to ensure that taxes and levies are reduced to the barest minimum.
• Nuisance Taxes: Due to the Federal structure of Nigeria, there are different taxes that are collectable by different levels of government. Businesses, especially those in the urban centers like Lagos, Port Harcourt and Abuja, are inundated with several requests from unprofessional and untrained individuals who have been employed by, usually a local government, to enforce collection of taxes and levies on behalf of the local government. The Joint Tax Board (JTB) needs to develop a process to ensure that only professionally trained personnel are involved in tax assessment and collection at all levels.
• Fixed Assets – Certificate of Acceptance: Companies are required to apply and obtain a “Certificate of Acceptance” from the Inspectorate Division of the Federal Ministry of Industry for any individual assets purchased that is above N500,000. This is required before such Companies can utilize the capital allowances (computed based on the cost and type of the asset) as a benefit to reduce their tax payable. This requirement is of no relevance and creates addition bottleneck (ingredient for corrupt practices) without any real value. This requirement should be discontinued.
• Minimum Tax: Companies are required to pay a “minimum tax” even when they can prove that they made losses during the period under review. However, the law exempts companies who are within the first four calendar years of business commencement, companies with 25% of foreign equity contribution, and companies in agricultural trade or business. While some may even argue that this law is discriminatory (because it does not apply to entities with significant imported equity), the implication of this requirement is that companies are being required to pay taxes out of their capital since they did not make any profit from which taxes are normally expected to be paid from. This discourages investment and increases the risk of failure for companies in periods of low profitability or losses.
• Excess Dividend Tax: The relevant provision of the law is usually interpreted by the tax agencies to levy tax on a company whose dividend exceeds taxable profit regardless of whether the profit being distributed has already suffered tax (as in the case of income already taxed in a preceding year but retained in the business due to cash flow planning, or dividend income received by a holding company) or whether the profit now being distributed is exempt from taxation (such as profit during a pioneer tax holiday). The Federal Government should consider amending the tax laws to specifically exclude taxed profits and profits previously exempted from tax.
• VAT Remittances: Based on the tax laws, companies doing business in Nigeria are required to charge Value Added Tax (VAT) of 5% in their invoices. Businesses are expected to file monthly VAT returns, supported with a listing of the invoices issued during the period, along with the payment of the VAT charged thereon. The implication is that businesses are required to remit VAT based on invoices and not necessarily based on whether the payment has been received from their customer or not. This creates a significant working capital pressure on businesses, especially when there is a one-off huge contract invoice.
• Double Taxation Treaties (DTT): Nigeria currently has double taxation treaties with only 13 countries – Canada, Pakistan, Belgium, France, Romania, Netherlands, UK, China, South Africa, Italy, Philippines, Czech and Slovakia. Netherlands has a wide treaty network with about 110 countries. The UK has treaties with over 80 countries while South Africa has over 60 including treaties with major countries such as the United States. In order to be competitive and encourage investments in Nigeria, Nigeria must seek to expand its double tax treaty network and provide unilateral relief where there is no double tax treaty. In addition, the Federal Government should also review the tax treaties it currently has with the thirteen countries to determine if Nigeria is truly benefitting from these DTTs. Where it is established that Nigeria is not, re-negotiating and amending key clauses of the DTTs should be considered.
• Need to Deploy and Harmonise Processes to Minimise Tax Evasion: Companies should be automatically registered and tracked for tax purposes as soon as they are incorporated. In order to reduce tax evasion, the Federal Government should consider amending the relevant sections of the Companies and Allied Matters Act (CAMA) to require the submission of the Company’s Tax Clearance Certificate (TCC) as part of the annual filing to the CAC. The submission can be done by linking the Company’s tax profile to the CAC database. In fact, the Company’s Incorporation Number (CIN) should be linked to the Tax Identification Number (TIN) that is currently being used by the tax agencies.. In the future, the CIN should be the primary identifier for companies, including for tax purposes. For individuals, their Bank Verification Number (BVN) could be used as their primary identifier for tax purposes. Furthermore, the procedure for withholding tax remittance makes it mandatory for all beneficiaries of withholding tax remittance to have TIN without which the customer will not be able to remit the withholding tax. This means that a non-resident investor who only earns dividend income from share investment in Nigeria is expected to register for income tax. This procedure should be revised to exclude non-residents who earn passive income (rent, royalties and interest) from Nigeria.
• Commencement, Change of Accounting Dates & Cessation Rules in Tax Computation: The relevant tax law (Companies Income Tax Act) prescribes the rules for the taxation of a company during commencement of business, change of accounting date and cessation. These rules create complexity and additional tax burden on tax payers. For example, the commencement rule often leads to double taxation on a company at its early stage. In addition, tax computation becomes complicated where a company changes its accounting date or ceases operation within the first three years of commencement (due to the overlap between the commencement rules and cessation rules). Taxation should be strictly based on accounting period using preceding year basis, as is the norm in developed and fast-growing economies.
• Acute Infrastructural Deficiency: Nigeria produces less electricity than what a German city consumes, despite our huge population. The costs of maintaining the power generators increase the cost of doing business. The logistics of getting fuel for the generators during the frequent fuel scarcity is also a big challenge to businesses. There must be a conscious and well-articulated plan to improve the power situation in the country. Similar challenges exist in transportation and security infrastructures. Investors want to be able to operate their businesses without the risk of kidnapping, armed robbery and now lately, bomb explosions due to the actions of insurgents. Safe roads and reliable airline networks (that will not delay flights for 8 hours without any apology) is also a business enabler.
• Delayed Access to Justice during Business Conflicts: Business investors normally prefer a business environment where they can have easy access to justice in the event of business conflicts and disagreements. There are many business cases that are still in court and still undecided, despite being on for more than five years. The Nigerian judiciary system has endured prolonged delay in the administration of justice, congestion of courts, inadequate infrastructure and lack of timely access to justice, the congestion of prisons with the daily influx of accused persons or suspects awaiting trial, the persistent issue of the holding charge, arrest of suspects’ relatives in place of suspects, the perceived use of torture by the police to extort extra judicial confessions and allegations of corruption against judicial officers.
• Corruption Perception: Nigeria is generally perceived as a highly corrupt country. This tag, irrespective of whether it is correct or not, is a discouragement to some potential investors. While the Economic and Financial Crime Commission (EFCC) has been busy taking several people to court, there has been no single conviction for any high profile corruption case in the recent years. This tends to make it look as if the country is paying lip service to the fight against corruption.
Quo va dis?
Since we have the grand plan of being part of the top 20 developed economies by the year 2020 (or have we moved the target to 2030?), then we need to start focusing on the above mentioned factors of business competitiveness in Nigeria, with a view of eliminating bottlenecks, simplifying and enhancing processes to be more efficient and effective, gradually transform our government agencies to become more business friendly, and ultimately increase our national income through improved trade and higher tax income.
By Oluwole Oluyemi FCA, FCTI, CIA