January 24, 2023
As Economists would say, opportunity cost is the benefit forgone when an alternative item is chosen. Therefore, the opportunity cost of paying taxes could be other expenses that may have been settled using the taxes paid or the extra dividend that could have been enjoyed by the shareholders. This then begs the question, why pay taxes when the money can be converted to “other good use”? Realistically, very few people may actually voluntarily be tax compliant except there are incentives or punitive measures attached. Even when there are penalties attached to non-compliance, individuals/companies may see no need to comply where such punitive measures are not enforced.
While tax authorities have sought for more disclosure from taxpayers, the current push to greater tax transparency dates to the 1990s. A project of the Organization for Economic Cooperation and Development (OECD), which was aimed at harmful tax strategies and practices, was refocused in 2001 to expand and improve the exchange of tax-related information among jurisdictions. One outcome of this project is the Multilateral Competent Authority Agreement (MCAA), which seeks to facilitate exchange of information on tax matters. Another outcome of this project is the Country by Country Reporting under Article 13 of the Base Erosion and Profit Shifting (BEPS) initiative of the OECD.
Most tax authorities all over the world have realized that global companies appear to have taken advantage of the loopholes in the tax laws to move significant proportion of their income to tax havens. However, with the recent debate on tax morality, authorities are demanding more transparency in tax reporting by tax payers and companies are being asked to pay their fair share of tax.
In recent time, the Nigerian maritime sector has come under the radar of the tax authorities for possible enforcement actions to scale up tax compliance and increase tax collection. The tax authorities have encouraged taxpayers to comply with relevant tax laws, and devised means to ease compliance obligations. However, not much improvement has been seen, particularly within the maritime sector due to the “invisible” nature of these operators and little or no enforcement by the tax authorities.
The maritime sector is seen as one that is essential to the growth of the Nigerian economy. The crude oil and liquefied natural gas (LNG) explored in Nigeria is transported by sea using vessels majorly owned by non-resident petroleum shipping companies.
Section 14(1) of the Companies Income Tax Act (CITA) is quite clear on the compliance obligation of operators in the maritime sector. It states that “where a company other than a Nigerian company carries on the business of transport by sea or air, and any ship or aircraft owned or chartered by it calls at any port or airport in Nigeria, its profits or loss to be deemed to be derived from Nigeria shall be the full profits or loss arising from the carriage of passengers, malls, livestock or goods shipped, or loaded into an aircraft, in Nigeria”. Consequently, the owners and charterers of these vessels may have tax obligations in Nigeria as a result of their operations within the Nigerian waters.
This article focuses on the role of some of the stakeholders in the Nigerian Maritime Sector in driving voluntary tax compliance.
The Role of the Government
One may ask whether government should completely raise a white flag due to its inability to proactively issue tax regulations to take care of the rapid changes in the business world. Government on one hand wants to increase revenue, and on the other hand distribute wealth. However, they sometimes use taxation to mould behaviour and influence the economy. As is commonly the case, most government pronouncements on tax policies are ambiguous. A modern tax system needs to be coherent with very few gaps to be exploited by tax experts. Ambiguous tax provisions are subject to different interpretations. This provides an opportunity for corporate leaders to plan their tax affairs in a manner that takes advantage of the ambiguity in tax codes. Therefore, calls to act in a socially responsible way on the part of tax payers will only be effective if backed by effective regulations.
In attempt to provide more clarity with respect to tax compliance obligation of non-resident shipping companies in the Nigerian maritime sector, the Finance Bill 2022 introduced an amendment to Section 14 of the CITA by introducing a new subsection (4) which provides that “notwithstanding the provisions of any other section of this Act, where any company files tax returns under the provisions of subsection (3) of this section and does not provide a separate financial statement of the Nigerian operations, for the purpose of filing its tax returns, such company shall submit detailed gross revenue statements of its Nigerian operations, showing the amount of full sums receivable during the period, certified by one of the company’s directors as well as their company’s external auditor and supported with all invoices issued to the relevant customers.”