African Tax Experts Eye $1trn VAT Income

BY COBHAM NSA, ABUJA – A whopping revenue overhang in US dollars is up for grabs by Nigeria and other African countries as Value Added Tax (VAT) from the inflow of over one trillion US dollars expected from infrastructure investments in the continent

This is as the Executive Chairman of Federal Inland Revenue Service (FIRS), Mr Babatunde Fowler warned that ‘double taxation and unintended non-taxation through lack of VAT coordination’ pose the biggest risk to efficient and effective VAT collection in Nigeria.

With the mouth-watering incentive at stake, experts and stakeholders in the continent’s tax sub-sector are excited and already plotting the graph on how to pull together the huge VAT income in the next 10 years.

Converging on the platform of African Tax Administration Forum (ATAF), the stakeholders are in Abuja for the Forum’s Technical Workshop on VAT, and ATAF Executive Secretary, Mr Logan Wort is upbeat the anticipated trillion dollars investment in infrastructure development over the next 10 years will come through because new developments, high rising buildings and construction projects currently dot the continent’s landscape.

He said determined to exploit this huge investment and capture the projected VAT revenue, the ATAF Technical Committee “has noted these developments and commenced work on guidance on VAT issues arising from the construction sector.”

Wort pointed to the 2018 edition of Deloitte’s Africa Construction Trends reports, indicating that Africa had 482 projects, each valued at US$50 million or above as of June 2018, adding that; “In total these construction projects were valued at US$471 billion. This was an increase of 53% of the total value of US$307 billion recorded in 2017.”

According to him, by 2018, Egypt, South Africa and Nigeria ranked as the top three nations in terms of construction projects with Egypt boasting of the highest recorded number of projects, totaling 46 and accounting for 9.5% of African projects.

The ATAF Chief further explained that in terms of value, Egypt also topped in the continent, recording projects worth US79.2 billion, representing about 17 per cent of Africa’s value of projects.

Noting that construction is tangible, Wort however said; “the rise on intangibles is common across the globe and indeed in Africa. We realise that the ‘old way’ of going to a shop to buy a product may not be the most effective way when the same product is available online, and at times, cheaper.”

For him, e-commerce has changed the distribution of taxable activities, and this “poses challenges to the jurisdiction to tax income and alters the balance of taxing authority, and results in the erosion of countries’ tax bases.”

But Wort is worried that e-commerce creates difficulties in the identification and location of taxpayers; identification and verification of taxable transactions; the ability to establish a link between taxpayers and their taxable transactions, thus creating openings for tax avoidance.

Describing cross-border digital trade as “fully-fledged electronic trading, and often automated, phenomenon”, Wort said executing these transactions requires minimal or no human intervention, adding; “It, therefore, follows that the taxation of cross-border digital transactions should preferably be done electronically and with minimal human intervention.

“A withholding tax mechanism by financial institutions through the implementation of a real-time (RT)-VAT system, offers this possibility”, he said.

Addressing participants at the Forum, Executive Chairman of FIRS, Babatunde Fowler spoke against factors that currently portend danger to efficiency and effectiveness in VAT collection across Africa, especially in Nigeria.

He delivered knocks on double taxation and unintended non-taxation through lack of VAT coordination, noting that globally agreed VAT guidelines not only promote interaction between administrations and businesses, but also seek to address some of the concerns raised by experts in the tax sector.

The FIRS boss however warned that in seeking answers to burning tax questions, African countries must closely look at the taxation of digital goods and services. 

He said it has become imperative to acknowledge existing reality where consumers are increasingly looking for products, goods and services from online platforms, adding; “This forms part of the 4th Industrial Revolution, where our civilisation is moving towards digital platforms as a means of facilitating the day-to-day running of businesses and households. 

“It is imperative to understand how this will affect VAT as a tax and how best to mitigate any challenges.”

Fowler also dissected the principal deficiency in modern VAT systems and noted their inability to levy VAT through a simplified collection mechanism without disturbing taxable entities charged with VAT collection.

He said VAT systems operate based on tax policy, administration and the law, hence the need for proper coordination, admitting that VAT systems yet to adapt technology do not provide for adequate levying and collection of VAT revenue on cross-border digital trade.