VZCZCXRO0731
RR RUEHMA RUEHPA
DE RUEHOS #0341/01 2411422
ZNR UUUUU ZZH
R 281422Z AUG 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0137
INFO RUEHUJA/AMEMBASSY ABUJA 9804
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 02 LAGOS 000341 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR AGAMA 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
STATE PASS EXIM FOR JRICHTER 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOJ FOR MARIE-FLORE KOUAME 
TREASURY FOR RHALL, DPETERS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV NI
 
SUBJECT: NIGERIA: NATIONAL TAX POLICY ELICITS MIXED RESPONSES 
 
¶1. (SBU) Summary: Nigeria's Draft National Tax Policy (DNTP) 
proposes sweeping reforms to the current tax system, including a 
shift from direct to indirect taxation; a simplified tax regime; and 
centralized tax authorities at the federal level.  The private 
sector considers the formulation of a national tax policy a positive 
development in the Federal Government's effort to improve business 
environment while Lagos State fears it will hurt state coffers and 
undermine the formal market economy.  End Summary. 
 
More Indirect Taxation, Centralized Tax Authority 
--------------------------------------------- ---- 
 
¶2. (U) The Presidential Committee on Tax Policy recently released 
its Draft National Tax Policy (DNTP).  The Committee, which included 
the Minister of Finance and the head of the Federal Inland Revenue 
Service, proposed a shift in focus from direct taxation to indirect 
taxation by lowering the corporate tax rate from 30 to 20 percent 
and lowering the personal income tax rate from 25 17 percent and 
gradually increasing the value added tax (VAT) rate from 5 to 15 
percent by 2009.  The DNTP also recommends centralizing tax 
authority at the federal level to reduce multiple taxations and to 
improve tax administration.  The Ministry of Finance would have more 
tax oversight and coordinate tax policy.  The National Assembly will 
have the power to change tax rates, and a Joint Tax Board 
(comprising of federal and states tax agencies) will administer 
personal income tax across the states.  The Committee recommended 
the eventual inclusion of the National Tax Policy (NTP) in the 
constitution as well as its comprehensive review every three years. 
 
 
DNTP Contains "Oddities" 
------------------------ 
 
¶3. (SBU) Russel Eastaugh, Director Tax Services, 
PriceWaterhouseCoopers Ltd., told EconOff on August 14 that the DNTP 
contains a plethora of tax "oddities", including a two percent levy 
on corporate profits for a "Police Fund", which Eastaugh says will 
add to the effective costs of doing business in Nigeria and could 
undermine the DNTP's overriding objective of reducing multiple 
taxation to encourage investment.  In Eastaugh's view the corporate 
income tax also contains opaque incentives like the "pioneer 
industry tax exemption" which gives a tax holiday of up to five 
years to companies deemed "vital to Nigeria's national interests". 
According to Eastaugh, although consultant firm KPMG and the 
International Monetary Fund (IMF) informally provided inputs 
throughout the drafting process, the Committee did not formally 
engage the services of tax experts. 
 
VAT Increases to Hurt Lagos State Formal Economy 
--------------------------------------------- --- 
 
¶4. (SBU) Eastaugh said the proposed VAT increases would end up 
hurting commercially advanced states like Lagos.  Ade Ipaye, Lagos 
State Special Adviser on Taxation and Revenue, told EconOff August 
21 that the additional gain from VAT would not be commensurate with 
the revenue lost from income tax reduction. (Lagos State keeps 100 
percent of the personal income tax collected in the state.)  Lagos 
State Government (LASG) is challenging in the Supreme Court the 
Federal Government's (FG) power to administer a VAT in all 36 
states. 
 
¶5. (SBU) Because VAT effectively constitutes a consumption tax in 
Nigeria, VAT increases would hurt manufacturers, retailers, and 
consumers operating in the formal economy, Ipaye said, fearing that 
retailers and consumers would shift to the informal economy to avoid 
paying the VAT.  Jide Mike, Director General of the Manufacturing 
Association of Nigeria, told EconOff August 15 that the proposed VAT 
would only add to already soaring business costs. 
 
New Tax Policy Will Improve Business Environment 
--------------------------------------------- --- 
 
¶6. (U) Eastaugh said a National Tax Policy, with the right 
formulation and administration, would improve Nigeria's business 
environment.  Although the DNTP contains some weaknesses, the 
concept of a simplified and centralized tax framework was a good 
starting point.  The Committee's effort to solicit stakeholder 
 
LAGOS 00000341  002 OF 002 
 
 
inputs was laudable, he said.  Linking sensible tax policies with 
administrative efficiencies will be a challenge as will changing the 
mindset that non-oil taxes do not play an important rle in the FG's 
revenue base. 
 
¶7. (SBU) Comment: A national tax policy, properly crafted, 
professionally administered and equitably enforced, would 
undoubtedly help improve the business environment.  Those are big 
challenges since Nigerian politicians and bureaucrats are accustomed 
to an ineffective tax system propped up by proceeds from the oil 
industry.  This tax plan appears to be a step in the right 
direction.  End Comment. 
 
Blair