Nigeria: To Stem Tax Evasion, Experts Seek Tighter Transfer Pricing Regulation

15 January 2021

Tax experts have advised the federal government to tighten regulations around transfer pricing in order to stem the loss of revenue through tax evasion by multinationals operating in Nigeria.

The experts spoke to THISDAY against the backdrop of the revelation by the Executive Chairman, Federal Inland Revenue Service (FIRS), Mr. Muhammad Nami, that over $178 billion (about N5.4 trillion) was evaded by multinationals doing business in the country between 2007 and 2017.

Nami, at a workshop on the effective audit of multinational corporations for domestic revenue mobilisation in Nigeria had stated that many "rich multinational corporations do not pay the right taxes due from them, let alone pay their taxes voluntarily."

Reacting to the huge revenue loss due to the antics of the multinationals, tax experts told THISDAY in separate interviews yesterday that the federal government should tighten regulations on transfer pricing.

A chartered accountant and former Senior Partner at Deloitte Nigeria, Mr. Henry Manafa, said such amount of loss was staggering and would impact the economy negatively.

Manafa advised that "regulations on transfer pricing should be tightened as this presents a major area for tax avoidance schemes."

He also called for thorough auditing in order to ascertain the loopholes exploited in the nation's tax system that could have resulted in such humongous loss.

"The integrity of the tax personnel could also have been compromised. Also, there could be outright non-disclosure or falsification of taxable income by these multinationals," he added.

He, therefore, suggested "a review of the entire tax administration system in the country with a view to close up areas of the law that enabled such practice and institute a rigorous and continuous tax audits that should be performed by competent personnel with integrity."

He also advocated the implementation of "strong sanctions on any incidence of tax evasion without exception."

Manafa, however, said a distinction should be drawn between tax evasion and tax avoidance, stating that the former is an outright crime against the state through refusal to pay the due tax through fraudulent manipulations of records of earnings while the latter is exploiting the tax laws to maximise all available tax reliefs by planning the tax affairs of the organisation.

President, Chartered Institute of Taxation of Nigeria (CITN), Mrs. Olajumoke Simplice, called for an immediate audit of suspected companies and demanded they be punished.

She said: "This is referring to a period of 10 years from 2007 to 2017 and before they could evade such taxes, somebody must have prepared their accounts. So, I believe that what we need to do at this point is audit them.

"Tax evasion is a crime against the nation and in doing the audit, we are not only going to look at how much we have lost, we are also going to look at who are accomplices inputting their figures together that would have amounted so much for the loss and that is a way of putting professionals on their toes.

"Also, in doing their audit, they should also look at the processes that lead to the tax loss. N5.4 trillion is a lot of money and when you look at what that can do for our economy, such multinationals cannot do that in their country of origin."

She suggested that going forward, such multinationals should be reported to their countries for sanctions.

"And if they are reported and fined, it must also be escalated to seek redress and ask them to pay what they have evaded," she stated.

However, Fiscal Policy Partner and West Africa Tax Leader at PwC, Mr. Taiwo Oyedele, said the report from which the figures were attained from also cited that multinationals were more tax compliant compared than domestic companies.

He said: "It is important to understand the comment and the context to which it was made. I believe the FIRS chairman was referring to a report on illicit financial flow and pricing which estimates how much Africa was losing to illicit financial flow and transfer mispricing. And they said Nigeria accounted for the biggest portion, which was estimated at $178 billion.

"That report itself does not say evasion, you can have an illicit financial flow, which is done mostly by politicians, and then you have transfer mispricing, which is mostly done by multinationals and what that means is that if you provide services and you charge from abroad to a Nigerian company and you charge $100,000 and someone would say you shouldn't have charged $100,000 it should have been $30,000 meaning you have overcharged Nigeria entity for it and, therefore, you have reduced the charge that should have been paid to Nigeria."

Oyedele added: "In 2012, Nigeria had introduced transfer taxing regulation and what that means is since 2012, those issues should have been significantly addressed because that way the authorities have a legal framework to try and look at what multinationals are doing and then be able to see if they are paying the right amount of tax."

Chairman of Okwudili Ijezie and Co., a firm of charted accountants, Mr. Blakey Ijezie, noted that it was easy for the multinationals to beat the country's tax system, if they choose to because they employ high quality chartered accountants and tax consultants to handle their accounting and taxation affairs.

Ijezie said most of the professionals employed by the multinationals "are more qualified than the tax administrators in various FIRS' offices. They understand the tax laws and the loopholes embedded in the various laws, and can easily advise their clients on how to avoid additional taxes. I used the word 'avoid' as it is legal to avoid taxes. But it is illegal to evade taxes."

He, however, suggested that tax evasion could be curtailed by establishing more tax audit teams to periodically audit the tax of the multinationals.

"If the companies know that their taxation affairs would be routinely subjected to thorough analysis and audit by the FIRS, they will more likely comply with the taxation laws," he explained.

He suggested that the FIRS should expose its staff to regular training on accounting and taxation, especially on the nitty-gritty of tax audits.

He, however, wondered why the FIRS provided information for a period of 10 years, from 2007 to 2017, without updating it to 2020.

He said: "I wonder why the report did not highlight the amount lost between 2018 and 2020. Has the trajectory been checked? Or is the losing trend still up? Has the loophole that warranted such loses been detected and curtailed? Or does the FIRS not have an up-to-date statistics?"

He called for integrity test on the staff of the FIRS periodically to ensure that they don't collude with the multinationals to arbitrarily reduce the taxes due from them to the federal government.

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