November 9, 2022/United Capital Research

The Federal Inland Revenue Service (FIRS) recently released a public notice highlighting that effective Jan-2023, in line with the 2004 Value Added Tax (VAT) Act, MTN Nigeria, Airtel Africa and all Deposit Money Banks (DMBs) are appointed to withhold or collect VAT charged on all taxable supplies made to them. This would add these companies to the list, which previously included only oil & gas firms and government agencies. With this announcement, the telcos and banks are now mandated to only pay suppliers the invoice amount net of VAT and WHT and then remit the VAT and WHT to the relevant tax authorities.

Nigeria remains severely under-taxed as despite a steady increase in taxation receipts over the past five years, tax to GDP is still c.6.0%, compared to the African average of c.17.0%. The Federal Government (FG) has implemented several initiatives to improve the country’s tax collections. Some of these initiatives include the amendment of Company Income (CIT) Tax law as part of the 2021 Finance Act, which became effective Jan-2022, the application of income tax on income derived by companies from bonds and short-term securities (except for Bonds Issued by the Federal Government) which also became effective Jan-2022, the extension of coverage of Non-Resident Companies (NRC) with significant economic presence in Nigeria, among others. It appears these measures are yielding results as CIT collections have improved 51.3% y/y while VAT collections rose 17.2% y/y in Q2-2022.

Publicly listed commercial banks quoted on the NGX incurred a total of N1.1tn in other operating expenses in 2021, and telcos, MTNN and AIRTELAFRI spent N1.5tn and $850mn respectively in combined direct and indirect expenses in 2021. While not all these expenses incur VAT, we note a substantial portion of them are VAT-liable. As a result, this would deepen the tax pool for the government. We envisage that taxation receipts will improve significantly in 2023 and beyond. This is a welcome development even as the nation’s debt burden widens. However, despite strides by the FG to improve the tax system, taxation in the country still faces several challenges, such as a fragmented tax system characterised by multiple or overlapping taxes, duplicated tax administrations, public apathy to voluntary tax compliance, and inadequate data, among others.