ASSESSMENT OF CAPITAL GAIN TAX ADMINISTRATION IN NIGERIA: PROBLEM AND PROSPECT. CASE STUDY OF FEDERAL INLAND REVENUE SERVICE (FIRS)(OGUN STATE BRANCH)
1.1. BACKGROUND TO THE STUDY
Taxation is a compulsory levy imposed by the Government on the incomes of taxpayers in a geographical territory in order to defray the expenses of governance. This implies that anybody that generates income must compulsorily pay taxes. There are different types of taxation. These include the personal income tax, company’s income tax, and petroleum profit tax, value added tax and the capital gains tax. Recently, the issue of capital gains tax in the Nigerian has come to the fore. Government, from time to time, has the responsibility of reviewing the tax position as a component of the subsisting fiscal policy for the purpose of meeting given objectives. However, each review naturally elicits mixed reactions from the stakeholders.
Governments in all parts of the world and at all points in history have faced similar challenges when it comes to funding their ambitions to develop their country or state and to give a good standard of living to the masses in their country or state. We do not believe that governments in the past or in today’s developing world are any less rational or farsighted compared to those in today’s developed world. For this reason, in most countries of the world, the primary objective and purpose of taxation is essentially to generate revenue or raise money for government expenditures on social welfare.
The importance of taxation lies primarily in its ability to raise capital formation for development and growth of the economy and also, in assisting in the regulation of consumption pattern resulting in economic stabilization and effective redistribution of income (ICAN, 2009).
If these are the main objectives of taxation, it is therefore highly important to have in place a strong and vibrant tax system, not only at the Federal level but also at the state and local government levels, so as to ensure that the objectives of tax system are achieved.
With the federal government poised to eliminate the budgetary deficit in the coming year, a debate has commenced about how best to direct future budget surpluses. Some voices have called for tax relief while others have emphasized new spending.
In Nigeria the Capital gain tax administration aims and tries to tax each company in the state more effectively. However the level at which the capital gain tax Administration in Nigeria tend to achieve its desired goals and objectives depends mostly on the tax office and the company that is operating in each state, also when an individual or company is been taxed by the federal board of inland revenue (FBIR) such taxpayer is meant to give an accurate information about their gain or income but some go to the extent of forgery in provision of their documents which gives an incorrect information to the board, thereby causing reduction in their tax assessment.
The backdrop to these fiscal policy discussions is a sluggish economy. The consensus view of most economists is that theNigeria economy will continue to struggle with lowers than “normal” or historic levels of economic growth. Low economic growth has broad implications including slower growth in employment, income, and ultimately living standards. This means any debate about using future budgetary surpluses should focus on policy measures that can improve economic growth in both the short and the long term.
One area of policy reform that could contribute to higher levels of economic activity is capital gains taxation. A wealth of research shows that capital gains tax reform can increase the supply and lower the cost of capital available to new and expanding firms, and in turn lead to higher levels of entrepreneurship, economic growth, and job creation.
The primary reason that capital gains tax reform can have these positive effects is related to what economists call the “lock-in effect.” Because capital gains are only taxed upon realization, high tax rates on capital gains can create an incentive for investors and asset holders to retain their current investments even if more profitable and productive opportunities are available. The magnitude of the lock-in effect depends on a number of factors, but a series of empirical studies has found a negative relationship between capital gains tax rates, asset sales, share prices, and other proxies for investor activity.
A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. A capital loss occurs if the value of the asset at the time of sale is less than the purchase price.
Capital gains taxes, of course, raise revenues for government but they do so with considerable economic costs. Capital gains taxes impose costs on the economy because they reduce returns on investment and thereby distort decision making by individuals and businesses. This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.
Capital gains are taxed on a realization basis. This means that the tax is only imposed when an investor opts to withdraw his or her investment from the market and realize the capital gain. One of the most significant economic effects is the incentive this creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available.
Capital gains tax has been justified on the ground that capital gain on assets increases a person or person’s taxable capacity by increasing his power to spend or save. Capital gains are not distributed among the different members of the tax paying community in fair proportion to their taxable incomes, but are concentrated in thehands of property owners and it has been argued that theirexclusion from the scope of taxation constitutes a serious discrimination in tax treatment in favour of a particular class of taxpayers.
Non payment of capital gains tax will create discrimination in favour of property owners that will lead to further reinvestment of those gains in assets thereby perpetuating further severe inequalities in income and wealth as capital gains only accrue to those who own property. Non payment of capital gains tax accruing especially to those in the upper income bracket puts a greater relative burden on the income tax of those who do not enjoy such gains (Ayua, 1999).
In developing countries capital gains tax is a lucrative ground for raising money for purposes of development. In addition, In a (developing) countries like Nigeria there exist large opportunitiesfor the realization of capital gains because of the tendency of rising prices inevitably accompanying a process of accelerated economic development, besides, the process of economic development itself tends to generate capital gains because of the rise in real income, company profits and the value of shares. But as the proportion of wealth held in the form of equity shares of the capital gain arises to the owners of property such as land and real estate. Thus, the taxation of capital gains tax constitute an important fiscal mechanism to plough back a proportion of the increase benefits accruing to the holders of property as a result of a process of development into the developmental funds of public sectors.
There are many types of taxes that are often levied on individual and corporate entities. Capital gain tax is on income derived from the sale of a capital asset. This paper will examine the concept of tax, reasons for taxation, features of a good tax system, nature, arguments against Capital Gain Tax and recommendations for effectiveness of this form of taxation.
1.2. STATEMENT OF PROBLEMS
Whatever arguments are in favour of or againstcapital gains tax, capital gain tax like other type of taxation have been criticized as having a kind of a lock-in-effect on business in the sense that it inhibits the sale of capital assets which have appreciated in value (Brown, 1955). It is also argued that capital gain tax reduces the flow of investment especially in developing countries where there is high need for greater investment mobility (Amatong, 1975). The negative effect on sale of asset will be minimal where capital gains are payable on the value of appreciation, where the tax is not only through sale of asset.
Secondly, There are some challenges in connection with CGT Act one of them being that should the same transaction bear tax consequences in another jurisdiction double taxation is likely to occur. It appears the tax consequences and tax point obligation is the burden of the resident entity. It is not clear how the resident entity will arrange for the funds to meet its tax obligation. The amendment has not made any clarifications when it comes to cases where the shares are listed and traded on a stock exchange on a regular basis, thereby potentially triggering a change in control as result of regular trading. Also, unlike other jurisdictions, no limitation has been provided for under the amendment with respect to companies which are land rich or own natural resources which were/are the main target of taxation.
Thirdly, despite the fact that the existing tax provisions provided for taxation of direct share transfers in Nigeria, there was no specific mechanism in place to enforce collection of the tax on the gain. This has now changed following the amendments made to sum section of the CGT Act whereby a single installment tax payment will be required with respect to gains arising from direct share transfers or interest derived from Nigerian entities. The installment rate applicable is ten percent for resident shareholders and twenty percent for nonresident shareholders. A point to note is that the said installment will be available to the taxpayer as a tax credit for the given year of income at the time of the final tax payment.
Fourthly, Capital gains taxes also contribute to tax avoidance. The level of tax avoidance is the extent to which actual tax revenue collected by a government differed from what would have been collected if every taxfiler paid exactly what is required by law. Tax avoidance has important implications for tax efficiency since resources expended on avoidance could be put to more productive uses.
Furthermore, there are many problems with the management and administration of capital gain tax as presently implemented in Nigeria. Oserogho (2004) posited that the principal problem is that of lack of data or record keeping in order for the tax authorities to be aware of when the capital gain has been made and liable to payment of this tax. This is especially as Nigeria continues to maintain a cash base economy as opposed to an electronic one.
If the potential returns are taxed heavily, the entrepreneur’s motivation is reduced. Hence, high capital gains tax rates may divert innovative, would-be entrepreneurs toward different career paths. The economy is harmed by the reduction in entrepreneurial activity, not only because business and job creation declines, but also because possible improvements to living standards are left undiscovered.
Finally, Nigeria is richly blessed with oil and gas among other mineral resources, but the over dependence on oil revenue for the economic development of the country has left much to be deserved. The inability of the tax system to generate revenue affects the services offered by the government. The Nigerian tax system has not been able to perform the expected role of revenue generation and regulation of income distribution. This stemmed from the structural and administrative defects of the tax system. The machinery and procedures for implementing tax systems are inadequate, resulting into tax evasion and avoidance by most individuals and institutions and the resultant effect of this, is low revenue yield for the development of the country or state.
1.3. OBJECTIVES OF THE STUDY
The capital gains tax is different from almost all other forms of federal taxation in that it is a voluntary tax. Since thetax is paid only when an asset is sold, taxpayers can legally avoid payment by holding on to their assets—aphenomenon known as the "lock-in effect." Today there is an estimated $7.5 trillion in unrealized capital gains thathave not been taxed. Over the past 40 years the appreciation of capital assets has outpaced realized capital gains 40-fold. That suggests that a capital gains tax reduction has the potential of "unlocking" hundreds of billions of dollars ofstored up wealth.
OBJECTIVES OF STUDY
The main objective of this paper is to assess and evaluate the administration of capital gain tax in Nigeria Tax system.
Other specific objectives include:
- Ascertain the relationship of Capital Gain Tax and economic development of Nigeria for the enhancement of the standard of living of the citizens.
- Examine Capital Gain administration with a view to putting in place a good policy of administering the tax system.
- Ascertain whether sharp practices in administration of Capital Gain Tax between the staff of FBIR and assess company contributed to tax evasion.
- Determine how Capital Gain Tax contributes to revenue generation in Nigeria.
- Determine the extentto which Capital Gain Tax has contributed to the steady growth in GrossDomestic Product in Nigeria.
- Identify problems that militate against the use of Capital Gain Tax as revenue generation in Nigeria Tax administration.
- Making recommendations that will assist to increase the revenue generation through Capital Gain Tax.
1.4. RESEARCH QUESTION
Based on this, the following three research questions are formulated to guide
- Is there any relationship between Capital Gain Tax and economic development in Nigeria?
- Examine Capital Gain administration with a view to putting in place a good policy of administering the tax system?
- Are thereany sharp practices in administration of Capital Gain Tax between the staff of FBIR and assess company contributed to tax evasion?
- How Capital Gain Tax has contributes to revenue generation in Nigeria?
- To what extent has Capital Gain Tax contributed to the steady growth in Gross Domestic Product in Nigeria?
- Problems that militate against the use of Capital Gain Tax as revenue generation in Nigeria Tax administration?
1.6. STATEMENT OF HYPOTHESIS
Two hypotheses stated in null forms were formulated to carry out this work.
There is no significant relationship between Capital Gain tax and economic development of Nigeria.
H01: Capital Gain Tax has not contributed significantly on revenue generation in Nigeria.
1.5. SIGNIFICANCE OF STUDY
The most recent study (Speer& Palacios and Lugo &Vaillancourt, 2014) finds that individuals who reported capital gains income incurred, on average, higher compliance costs than those who did not report any such income. Specifically, the direct compliance costs for those individuals reporting capital gains income was, on average, 13.8 percent higher. This provides some sense of the compliance costs associated with capital gains taxation.
This research study, would contribute to the existing literature by focusing on Capital Gain tax reforms and administration of tax policy/laws in Nigeria with a view to identifying the critical problems that are confronting the Nigerian tax system so that appropriate measures could be taken to tackle them.
This study shall set out, a comprehensive analysis of Capital Gain Tax and it laws in Nigeria and it will also consider the ‘dark’ side of professional practice by examining the involvement of FIRS Tax officials in facilitating tax avoidance, tax evasion and corruption in Nigeria.
The result of this study will throw more light on the problems of Capital Gain Tax Administration in Ogun state Nigeria. The special emphasis on the federal Board of Inland revenue (FBIR) will highlight peculiar problems and difficulties in administering the Capital Gain Tax.
Finally this study will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic.
1.7. SCOPE OF THE STUDY
From the foregoing discussion, the research study focus on the Administration of Capital Gain Tax in Nigeria, it also examineit problems and prospect, effect on economy, and income generation in Nigeria, using the Ogun State FBIR as the case study. The period covered by this research enabled the research to be reliable.
Gross Domestic Product of Nigeria covering the period 2002-2011 was obtained to evaluate the extent that taxation has contributed to the steady growth in Gross Domestic Product in Nigeria.
1.8. LIMITATION OF THE STUDY
This research study is limited to detailed study of (FBIR) and the relevant Act setting it up with particular emphasis on the overall administration of the act in Ogun state.
Gathering of relevant data for this study was a hectic task it is also expected that there will be limited mostly in areas of questionnaire distribution answering the question sincerely and returning them (especially the tax officials) due to fear of the unknown.
Also, Financial challengesserves as a deficiency for the research work, and as a result of low financial capability, it was not enough to give us desired results.
1.9. DEFINITION OF TERMS
- Tax: this is defines as a levy imposed by the government against the income, profit orwealth of the individuals and corporate organizations.
- Taxation: is defined by Ogundele (1999) as the process or machinery by which individuals, groups, or communities are made to contribute in some agreed quantum and method for the purposes of the administration and general development of the society they belong.
- Capital Gain/Loss: A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. A capital loss occurs if the value of the asset at the time of sale is less than the purchase price.
- Transfer of Capital Asset: this is defined in relation to Transfer of capital asset includes sale, exchange, relinquishment, or compulsory acquisition of the asset or extinguishment of any rights therein.
- Capital Assets: It is defined to include property of any kind, whether fixed, circulating, movable, immovable, tangible or intangible and whether or not used for the purpose of his business and profession.
- Cost of acquisition:Cost of acquisition of an asset is the value for which it was acquired by the transferor. Expenses incurred for completing title are a part of the cost of acquisition.
- 7. Corporation Tax: All other gains are charged to Corporation Tax. These include gains accruing to a non-resident company onthe disposal of assets situated in the State and used for the purpose of a trade carried on by it in the Statethrough a branch or agency.
- Asset: All forms of property, wherever situated, are assets for the purposes of Capital Gains Tax. Assets include foreign land and buildings (for example, holiday homes and apartments) incorporeal property (for example, goodwill or an option) and any interest in property (for example, a lease)
- Disposal of Asset:Disposal of an asset includes any transfer of ownership of the asset by way of sale, exchange, gift, or settlement on trustees. A part disposal occurs where less than the whole of an asset is disposed of or an interest in an asset is transferred (for example, granting of a lease at a premium).
A loss on a disposal will normally be allowable if a gain on the same transaction would have been chargeable. Allowable losses are set against the chargeable gains of the same year and if the losses exceed the gains, the excess may be carried forward against gains of later years.
Qualifying Asset: The chargeable business asset of the individual which (apart from tangible movable property) he/she has owned for a period of at least 10 years ending on the date of the disposal and which have been his or her chargeable business assets throughout that 10 year period.