Achieving Vision 20:2020 Goals Through Effective Taxation

1. Achieving Vision 20:2020 Goals Through Effective Taxation Keynote Presentation by Dr. �Doyin Salami at 13th Annual Tax Conference of the Chartered Institute of Taxation of Nigeria Conference Theme Taxation and the New Global Order

3. Our National Ambitions: Overview of Vision 20:2020

4. Vision20:2020 - Intentions and Objectives

5. National Development Gap- Current Realities Comparing Nigeria with selected countries based on its usefulness to the vision Turkey- 17th economy in the world Poland- 20th economy in the world and Nigeria needs to attain its economic size to achieve the vision20:20 Indonesia- 18th economy in the world and economic characteristics similar to Nigeria

6. Comparator Context Nigeria ranks 41 amongst the top 100 economies in the world Meaning that to attain our vision to join the league of the 20 largest economies, we need to improve our ranking by 22places!!! Poland is presently the 20th largest economy Though, at an annual average of 7%, our growth performance is much improved; the fastest in the past 3 decades; and better than many of the nations presently ahead of us it remains inadequate to achieve the target of overhauling Poland (the 20th largest economy in the world) To attain the economic size of Poland, we have to grow by 13.4%

7. Economic Characteristics Our economy remains bedevilled by the following characteristics � Uncompetitive High Cost Environment Structurally defective Poor human capital capacity Process and Policy Uncertainties

8. Current Realities - Global Competitiveness

9. ....Comparator Metrics

10. ....Current Realities- Ease of Doing Business

11. ....Current Realities - Comparison Metrics

12. ....Current Realities- Infrastructural Gap Ministry of Finance estimates that about US$100bn is required to finance the country�s infrastructural gap Thus requiring an annual infrastructural deficit financing of US$12bn to US$15bn for the next 5- 6years to attain the vision 2020 aspirations � in other words, approximately N1.8trn annually Between 2011 and 2013, Infrastructural deficit financing requirements amounts to about N2,959trn In comparison, proposed FGN capital expenditure for 2011 amounts to approximately N1,005bn. Of this amount critical infrastructure is allocated N347.2bn The involvement of the private sector as the main driver of infrastructural development in Nigeria is thus inevitable if the vision20:2020 ambitions must be achieved

13. .....Infrastructural Gap - Sectoral Gap Power According to the National Planning Commission (NPC) only about 40% of Nigeria�s total population have access to public electricity Estimated daily power generation was about 3,700MW as at year end, 2009, to serve a population of over 150million people Government targets achievement of 16,000MW by 2013 to increase accessibility to 50% Private sector participation needed in generation, transmission and distribution Housing Nigeria has an estimated housing deficit of 16million units in 2010- Cement which accounts for about 40% of total housing materials is being affected by quota allocation, high import taxes, and consequently sharp rises in price ��Slums� � substandard housing and squalor are on increase from 42 milliom in 2001 and 50 million in 2010 Government should compliment private sector effort in housing by reviewing housing policies- taxes on housing materials

14. ....Infrastructural Gap Power Generation Capacity in Comparator Countries Infrastructural Deficit Financing Requirement over the Next 3years

15. Taxation in National Development Most thinking around the role of taxation has centered around resource mobilisation � in other words provision of funds to finance expenditure In Nigeria, in 2009, taxation accounted for 54% of total Federally collected revenue. On average, between 2005-2009, taxation contributed 46% of federally collected revenue Oil Sector provided 30.4% in the half-decade ending 2009 However, across the world there is a limit to which taxation can be deployed in mobilisation of resources Political constraints � who to tax? How much to taxes to levy? Suspect effectiveness of public sector resource utilisation It should be noted that government financing also comes from amongst others: domestic and foreign borrowing, investment incomes, grants, disposal of assets and other non-tax revenues It should be noted that government financing also comes from amongst others: domestic and foreign borrowing, investment incomes, grants, disposal of assets and other non-tax revenues

16. The Nigerian Economy - Current Realities The past decade has seen real GDP grow by an annual average of approximately 7% This is more than double the estimated annual population growth of 3% Though the economy has experienced significant growth over the past decade, its structure remains unsatisfactory. In 2009, economic activity in Nigeria derived from the following sectors: 58.2% of total output is derived from the extractive sectors (Agriculture and Mining) The Secondary Sectors (Manufacturing, Construction and Utilities) account for 9.4% Service sectors contribute 32.3%

18. Current Realities - Structure & Size of the Economy

19. ....Current Realities - Concentration of Income and Unemployment

20. Composition of Unemployment by Age Group

21. ....Current Realities

22. ....Current Realities

23. ....Current Realities- Economic Indicators(Average from 1999-2009)

24. Effective Taxation for National Development

25. Taxation in National Development Its role in economic stabilisation is well established , especially in developed countries Raising taxes to dampen growth and vice-versa Taxation also plays a major role in the provision of incentives to individual and organisations alike � if these incentives are internally consistent and enhancing of prospects, they promote economic growth and development Beyond resource mobilisation and incentivisation, taxation is used to play a role in attainment of equity policies must be geared towards realising optimality in tax revenue through equitable and fair distribution of tax burdens

26. Taxation in National Development Insights from studies of the existence of a direct relationship between taxation and aggregate economic prosperity and growth have not shown a robust association. However, there exists a link between economic growth and marginal tax rate - a unit change in tax rate. It is thus not surprising that, empirical work validates the existence of some form of causality between taxation and the behaviour of individual economic agents

27. �..Summary of Empirical Findings There is little evidence that aggregate rate of economic growth is related to the level of taxation However, there is evidence that growth is higher when corporate income tax is low. Corporate income tax affects both domestically and foreign direct investment thereby spurring growth. Expenditure on Research and Development is highly sensitive to tax incentives. A change in tax mix that increases the importance of consumption taxes relative to income taxes will raise growth. Increases in the personal income tax reduces growth by affecting the decision to choose entrepreneurship and human capital development Bassanini and Scarpetta (2001), a 1% increase in tax-to-GDP ratio can be associated with a direct reduction of about 0.3% in output per capita in the long-run. If the investment effect is taken into account, overall reduction could be between 0.6 and 0.7 percent

28. �Role of Taxation in National Development- Empirical Studies

29. �. Empirical Studies

31. Effective Taxation Generally, taxation intended to attain the following broad objectives: Raise revenue for the government to finance its public expenditure (resource mobilization). Reduce inequalities through redistribution of income and wealth. Influence resource allocation- incentive- through: Increase capital formation and the level of savings which could aid government borrowing and investment financing for the private sector to boost growth. Transfer of resources from the private sector to the government to finance public investment programs. Diversion of private investment into desired channels through grants to attract foreign direct investment. Influencing relative factor prices. Stabilize national income through its impact in managing demand taxation reduces the effect of the multiplier and so can dampen cyclical fluctuations in the economy

32. Tax Performance Federally collected revenue accounts for 87.95% of total public sector revenue in Nigeria � indication of concentration? However, average tax yield on federally collected revenue is 14% and diminishing In the oil sector it is 26% this compares with 7% in the non-oil sector There has been improvement in Tax-take - almost matching growth in nominal economic activity in half-decade ending 2009 Economic activity grew by 17% whilst tax revenues rose 15% However tax revenues significantly more volatile reflecting oil sector volatility

33. Tax Performance in Nigeria

34. Economic Activity and Tax Revenue

35. Performance of Taxation Are we overtaxed The average Nigerian paid approximately N17,062 in taxes in 2009 Amounts to approximately 11% of per capita income in Nigeria In other words, relative to the laffer curve, the tax burden of the average Nigerian is rather low Total revenue not capable of offsetting national debt Thus showing some inefficiency in the tax system Hence, the need to generate higher revenue

36. ....Effective Taxation

37. Effective Taxation - Prerequisites Taxation is a core pillar in a country�s regulatory framework to enhance capital formation and investment in the economy. However, it only attains its full potential when it is situated within the �right� context The right context is defined by � Philosophically consistent articulation and implementation of public policy Clear definition of role and objectives Provision of adequate information about economic �actors� and their requirements

38. ��Effective Taxation Towards Vision 2020 Thus to attain the vision20:2020 goals through effective taxation, we need: Strong political will and good governance. Accountability and transparency in the tax system. A fair and equitable tax system. Broadening the tax bases and flattening tax rates. Lower personal and corporate income taxes. When these are present, taxation becomes able to stimulate production, effectively provide funding for government and encourages equitable distribution of income

39. Pre-requisites of Effective Taxation Public policy framework must demonstrate Government determination to Create incentives which encourage production and leave the private sector to take advantage of the opportunities that arise Concentrate on de-risking the economic environment Improve the cost effectiveness of expenditure Attain transparency

40. Effective taxation towards realising Vision 20:2020 Tax authorities need to Ensure global competitiveness of Nigeria�s tax system Human Capital, policies & processes Devote resources to understanding the economy in which they operate (the limited tax yield in the non-oil sector effectively underscores the lack of appreciation of value-chains in that sector of the economy)

41. �.Role of Taxation in the Development: The Case of Indonesia Prior to the early 1980s Indonesia derived less than one third of its revenue from non oil sources and the bulk of its revenue from crude oil Income and sales tax were subject to multiple rates on narrow bases Corruption and evasion of taxes was high mainly due to the complexities around the tax system Like Nigeria, high oil revenue spurred GDP growth Annual growth was between 7-8 percent from 1970 to 1982 with inflation was less than 10% The oil crisis in the �80s served as an impetus for diversifying revenue sources in order to protect the economy against anticipated shocks. Tax reform was a key element in revamping the economy introduction of a broad based consumption tax policy and the strengthening of tax administration Which reduced distortions caused by previous tax structure and Increased share of tax revenue in GDP for example, sales tax converted to VAT in 1986 increased from 1.5% in 1983 of GDP to 3% of GDP in 1986

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