Nigeria, others target VAT from $1tr infrastructure investment

Nigeria and other African countries are targeting Value Added Tax (VAT) revenue from the over $1 trillion infrastructure investment coming into the continent

Executive Secretary of the African Tax Administration Forum, Mr. Logan Wort made this known at the ATAF technical workshop on VAT in Abuja on Monday. According to Logan Wort, “over a $trillion dollars is slated for investment towards infrastructure development over the next 10 years… the continent is filled with new developments, high rising buildings and construction projects.”

To tap into this huge investment and squeeze out VAT revenue from it, the ATAF VAT Technical Committee he disclosed “has noted these developments and commenced work on guidance on VAT issues arising from the construction sector.”

Logan quoted the 2018 edition of Deloitte’s Africa Construction Trends report which indicated that as of June 2018, Africa had 482 projects, each valued at US$50 million or above. In total these construction projects were valued at US$471 billion. This was an increase of 53% of the total value of US$307 billion recorded in 2017.

He added that in 2018, the top three countries in terms of construction projects were Egypt, South Africa and Nigeria. Egypt had the highest recorded number of projects, totaling 46 and accounting for 9.5% of African projects. In terms of value, Egypt also topped Africa, recording projects worth US79.2 billion. This accounted for 17% of the continent’s value of projects.

He however lamented that while construction is tangible, “the rise on intangibles is common across the globe and indeed in Africa, we realise that the “old way” of going to a shop to buy a product may not be the most effective way when the same product is available online, and at times, cheaper.”

E-commerce he said has changed the distribution of taxable activities. This he pointed out “poses challenges to the jurisdiction to tax income and alters the balance of taxing authority, and results in the erosion of countries’ tax bases.”

He was worried that e-commerce creates difficulties in the identification and location of taxpayers, the identification and verification of taxable transactions and the ability to establish a link between taxpayers and their taxable transactions, thus creating opportunities for tax avoidance.

Logan stated that cross-border digital trade “is fully-fledged electronic trading, and often automated, phenomenon. The execution of these transactions requires no or minimal human intervention. It, therefore, follows that the taxation of cross-border digital transactions should preferably be done electronically and with minimal human intervention. A withholding tax mechanism by financial institutions through the implementation of a real-time (RT)-VAT system, offers this possibility.”

In his address, Executive Chairman of Federal Inland Revenue Service (FIRS) Mr. Babatunde Fowler said the biggest risk to efficient and effective VAT collection “is double taxation and unintended non-taxation through lack of VAT coordination.’

He state that the globally agreed VAT guidelines facilitates the interaction between administrations and businesses, and are intended to address some of these concerns.

Fowler cautioned that while African countries try to find answers to burning questions, “we need to closely look at the taxation of digital goods and services. Increasingly, consumers are looking for products, services and goods online. This forms part of the 4th Industrial Revolution, where our civilisation is moving towards digital platforms as a means of facilitating the day-to-day running of businesses and households. It is imperative to understand how this will affect VAT as a tax and how best to mitigate any challenges.

The principal deficiency in modern VAT systems Fowler said “is their inability to levy VAT through a simplified collection mechanism that does not burden taxable entities charged with VAT collection. VAT systems operate based on tax policy, administration and the law, hence the need for coordination. VAT systems which have not been adapted to technology therefore do not provide for adequate levying and collection of VAT on cross-border digital trade.”

Increased digitalization and the focus on reviewing related tax standards Fowler noted “promise increased transparency between multinationals and the tax authorities. The VAT systems, if streamlined, should then have a ripple effect in attaining useful data to guide effective tax audits in other areas.”