Nigeria Bucks Trend Of Falling Corporate Taxes - Emerging Market Views

Nigeria Bucks Trend Of Falling Corporate Taxes

Nigeria’s corporate tax rate of 30 percent has not budged in the past decade in contrast to the global trend, as countries lower their corporate tax rates to stay competitive and attract foreign direct investment.

A new study by Ludvig Wier, an economist at the University of Copenhagen, found that between 1985 and 2018 the average corporate tax rate has fallen from 49 percent to 24 percent. The rate is down from 35 percent over the last decade, as offshore tax havens put fresh pressure on nations to lower their corporate tax rates.

The United States recently slashed its Company Income Tax (CIT) rate to 21 percent from 35 percent, joining a crowded party that features Japan and China, where corporate tax rates have fallen by about a quarter since 2003.

The UK is gradually reducing the corporate income tax from 30 percent in 2007 to 17 percent in 2020.

The global fall in corporate taxes mirrors an intense competition for capital investments, and economists and tax experts are of the view that Nigeria is long overdue for a reduction in its CIT rate to attract Foreign Direct Investment (FDI) and reflate a flailing economy.

Nigeria’s nominal CIT rate is 30 percent, (although the effective rate is sometimes lower), which means it is double the rate in Mauritius (15 percent), which is un-coincidentally the continent’s most competitive country and the 45th most competitive globally, according to the 2017-2018 Global Competitiveness Index of the World Economic Forum.

Africa’s two largest economies after Nigeria, South Africa (28 percent) and Egypt (22.5 percent) also have lower corporate tax rates and attracted more FDI flows.

While Nigeria could only muster a paltry $981.75 million, South Africa pulled some $3.2 billion in FDI last year, while Egypt attracted a record $7.4 billion.

Nigeria’s high corporate tax rate has not translated to higher tax collections, as a tax to GDP ratio of 6 percent is one of the lowest globally. That is mostly because of a poor tax paying culture that thrives on weak regulatory enforcement.

Still licking the wounds of a scathing recession in 2016 that crimped consumers’ disposable income, ate into corporate profits and curbed foreign direct investment, Yomi Olugbenro, a partner and head of tax at Deloitte thinks if Nigeria reduced corporate taxes at this time, it will be a smart move, not only to attract FDI but to stimulate consumption and reflate the economy.

“By reducing corporate tax, individuals and companies have more cash to spend. The economic impact of that extra cash will be telling, because Nigerians’ propensity to consume is 0.7 per N1 naira,” Olugbenro said.

Reacting to the global decline in corporate taxes, Olugbenro said “Corporate tax rates are also falling because of the high cost of collection for direct taxes, and that is why indirect taxes like VAT are more preferred these days, as collection is less cumbersome and cheaper.”  The reductions are also aimed at attracting FDI, he added.

Despite exiting recession, Nigeria’s 1.95 percent first quarter 2018 GDP growth is below the average population growth rate of 2.8 percent, implying that the economy has gone nowhere in per capita terms. Per capita income is forecast by the IMF to fall every year through 2023. The economy is forecast to expand 2 percent this year following a disappointing 0.8 percent growth in 2017.

“We are an emerging market trying to attract badly needed FDI, but because our tax rate is as high as 30 percent, we are not as competitive as the nations with lower rates,” a person familiar with the matter said on condition of anonymity.

“If we had a viable tax strategy, perhaps corporate taxes would not have remained stagnant for over 10 years,” the person said.

A review of the corporate tax rate may be on the cards, however, according to Taiwo Oyedele, a partner and head of tax at Price Waterhouse Coopers (PWC) who said a tax amendment bill designed to rid Nigeria of obsolete laws, and has been approved by the Federal Executive Council, could see corporate taxes lowered.

“The bill recommended a reduction in CIT to 25 percent,” Oyedele said by phone. “Beyond reviewing the rates, however, the most important thing is to simplify the tax payment process. That’s the focus around the world,” Oyedele said.