We have an explosive population growth rate in Nigeria:   Over 60% of our 180m people are under 30 years old. When we have a vibrant group like that, you can imagine the consequences. It can either be a boom or doom depending on how we manage it. Engaging these youths meaningfully becomes a task that we must collectively deal with or we are doomed.

Unemployment is a major issue today. And each year, millions more enter the unemployment market. We need jobs in Nigeria!!!  We all know that government per se, do not have the capacity to create the jobs that we need to engage our youth. Government creates the enabling environment that enables those who know how to create jobs to create jobs. SMEs create jobs for countries and economies, it will not be different for Nigeria.

So, each time we think of the demographic structure in Nigeria and its consequences, we should ask ourselves how the SME sector is doing. If the SME sector is doing well, we will deal with the issue of unemployment. If it does not do well, we will not address the issue of unemployment.

That is why the private sector, therefore, must be enabled to help us deal with the issue of unemployment and its consequences. This is the reason my colleagues and I came up with the philosophy of Africapitalism which is a call on the private sector to play its role in helping in helping to catalyze and develop the continent and also the economy of our country in a manner that is sustainable.

We have for some time looked up to governments to provide and to donor agencies for solutions but it is time the private sector participated and played our role in economic development. The question is:  is the private sector in Nigeria ready for this? The answer is yes, we are. We are trying but there are things we cannot do on our own and that is why it is a collaborative journey – government and private sector working together to address these issues.

The issue of multiple taxations and business regulation is very serious and one that we must address as a country to make progress.

What our SMEs/Entrepreneurs are saying

I have decided to approach this conversation from two practical perspectives.As some of you may be aware of, in 2010, I founded the Tony Elumelu Foundation (TEF) to help democratize and institutionalize luck, help empower Africa’s youth, and help enhance the competitiveness of the African private sector.

In December 2014, I further committed $100m to identify, train, fund, mentor and create access to important networks for 10,000 African entrepreneurs from all 54 African countries over a 10-year period; this initiative represents the largest endowment exclusive to African entrepreneurs in the world. So far, we have empowered 3000 of Africa’s most passionate, ambitious and innovative entrepreneurs.  Now, we have just concluded the 3rd cohort and about to commence the 4th on January 1st, 2018.  We decided to sample these entrepreneurs to find out their challenges.

Additionally, our book “Africans Investing in Africa: Understanding Business and Trade, Sector by Sector”, produced in a joint partnership between the Tony Elumelu Foundation (TEF) and the Johannesburg-based Brenthurst Foundation founded by Jonathan Oppenheimer, highlights the difficulties connected to doing business in Africa as it relates to government policies. It addresses the critical issues affecting doing business on the continent as well as the role of government in enacting the right regulations and policies for the creation of more conducive business climate.

Government must realise that, as important as investing in critical infrastructure is, equally, the task of dismantling the visible and invisible barriers that stand in the way of business and entrepreneurship: red tape, high bureaucracy, intellectual property piracy, land tenure issues, protracted legal processes, asset security, stifling business regulations and so on.

In 2015, the Tony Elumelu Foundation conducted a survey of nearly 2,000 Nigerian start-ups drawn from the participants of the Tony Elumelu Entrepreneurship Programme. The survey sought views on the enabling environment and key constraints to MSME growth. Our insights from that exercise highlighted the following core constraints:

    high taxation;

    multiple taxations; and

    inconsistent government policies

In our survey, tax issues ranked first in constraints to doing business. 79 percent of SMEs reported that the most important incentive needed from the government was tax relief/reduction, a sentiment echoed by 90 percent of the startup accelerators and incubators surveyed. As an entrepreneur with interests in diverse sectors of the economy, I have experienced first-hand the challenges. I also have my own first-hand experience on how multiple taxes and levies in the country affect our ability to become competitive and attract global private capital seeking investment destination.

Taxation

Let us begin with the issue of taxation: we all know how critical taxation is to the development of any economy. In an ideal society, it is through taxation that the government covers its administrative costs; provide public goods such as defence and social security; and assure citizens of basic services and vital social amenities. Taxation is an important fiscal policy tool, often used by governments to guide the direction of the economy and to stimulate economic growth. At a fundamental level, taxation forms the basis of the social contract between the state and its citizens whom typically expect that the government will use this tax for their benefit.

At 6%, Nigeria has one of the lowest tax to GDP ratios in the world, a figure that reflects that such a social contract may be broken or non-existent in Nigeria.  It is also important to note that this situation of a low tax to GDP ratio is perpetuated by a historical dependence on oil revenue: Until now, a comprehensive tax reform has been relegated to the backburner as the country remains reliant on oil gains. But it appears we have a paradox: On one hand, entrepreneurs and SMEs report to be beleaguered by the problem of high and multiple taxations but on the other hand, government figures reveal a low tax/GDP ratio.

The critical question becomes, what accounts for this discrepancy? Upon closer analysis, there is indeed no paradox as the incidence of high/multiple taxations feeds and fuels the cycle of low tax revenues. The SMEs and startups who formally register their businesses are hard-hit by high and multiple taxations, rarely survive: Studies reveal that 95% of SMEs die within twelve months in Nigeria.  For the other businesses, it is a huge disincentive for them to formalize their operations as they expect unbearable taxation, which feeds and eventually results in a low tax base.

According to the Financial Times, Nigeria’s informal sector accounts for 65% of its GDP, the highest in sub-Saharan Africa. However, the majority of these businesses choose to remain informal because of the huge tax burden and multiple taxations they foresee if they formally register. Many businesses in Nigeria pay taxes at the federal, state and local government levels. This excludes the several levies, fees, fines and penalties that we are made to pay in business.

According to the Manufacturers Association of Nigeria, some states enforce as many as 97 different taxes, levies and charges that they impose on business. It is easy to see some of the negative effects of such a system. We must strive to make Nigeria a more conducive place to do business by eliminating some of these tax bottlenecks impeding business entry, growth and expansion.

Multiple business regulations

Like taxation, multiple business regulations pose a core challenge for business in Nigeria.  To achieve national prosperity, we must strengthen the productive capacity of MSMEs by reducing regulatory burdens faced by the organized Nigerian private sector.  This will enhance our nation’s prospects of achieving long-term sustainable growth and development that is all-inclusive.

Up until recent times, there were several laws, policies and regulations constraining the ease of doing business in Nigeria. From registering businesses to getting building permits and to the exports and imports of goods, these regulations persist.

The presence of over 10 government agencies supervising exports and imports of goods from the country forced many exporters to resort to smuggling their goods to neighbouring countries like Ghana where freighting is cheaper and unhindered by officials. The result of this is that yams exported from Nigeria end up being about 60 cents or $1 dollar more expensive than those from Ghana in the international markets, making ours less competitive.

 Because of this, Ghana’s busiest Airport, Kotoka International Airport alone exports an average of 25,000 MT yearly while Nigeria’s Murtala Mohammed International Airport exports an average of 16,000 MT yearly. This situation clearly illustrates how man-made bureaucratic regulations can greatly undermine our economic competitiveness and quest for economic diversification.

 Thankfully, the Buhari-Osinbajo administration has recognized these issues and have in recent times been bullish about improving the ease of doing business in Nigeria. In the past few months, several reforms have been introduced to improve the ease of doing business. They include the following:

– new businesses can now be registered online within 24 hours;

– visa-on-arrival is now being implemented at our international Airports;

– the processes for registering property have now been streamlined;

– the number of agencies at Nigerian ports have been streamlined to allow ease of entry and exit of goods and people.

Two important executive bills have been passed into law; Collateral Registry Bill and Credit Services Bureau Bill, both of which have the purpose of increasing access to credit for SMEs.  It was therefore not too surprising to learn that in the latest World Bank’s Ease of Doing Business rankings Nigeria moved up 24 places to 145 out of the 190 countries surveyed, and was amongst the top 10 Most Reformed countries in the world. We commend the government on this achievement and to remain relentless in their efforts. But the work has only just begun as it remains easier to do business in 144 countries across the world than in Nigeria – we need to change this and soon!

Way Forward

The challenge on our hands now is how do we reform our tax system such that our small businesses are not stifled while at the same time ensuring the government meets their goal of generating revenue? First, there is an urgent need to streamline and harmonise all taxes and levies across all levels of government to enhance productivity and efficiency for both businesses and government.

 There must be deliberate effort to review all levies and taxes to know which ones are worth amending, retaining or completely eliminating. We also need to leverage technology in our tax administration to foster automation of the tax collection process to increase the ease and reduce leakages. Technology will also ensure that transparency on what and how to pay is increased and will go a long way in reducing compliance costs.

Government must ensure that there are greater awareness and circulation of approved taxes and levies to facilitate compliance and discourage bad behaviour from unscrupulous tax officers who hope to exploit businesses.

We must expand the tax base in Nigeria- for me this is the crux. I want to be a bit provocative here, we have a tax regime on the corporate side that we need to rethink. If our SMEs complain, that is the start-up that will become in the long run will become future conglomerates complain that taxation is an issue for them, then why don’t we tier our corporate taxes.

Have a fair system for SMEs, given them tax breaks/holidays; introduce incentives and awards systems for SMEs that graduate to paying tax.  A comprehensive reorientation exercise across all tax agencies will ensure that officers have the right values needed for the job and that due process is followed at all times. We should examine some of the tax issues facing corporates in Nigeria, which if speedily resolved could potentially have a catalytic impact on our economy.

 For instance, there are provisions in the tax code which discourage Groups from domiciling their headquarters in Nigeria, evidenced by the increasing incidence of Groups relocating to neighbouring countries in the sub-region such as Ghana.  Such laws hamper the wide-scale creation of jobs as well as the transfer of knowledge and technology – both essential in embedding the innovation and growth of the economy which our country needs. fFor example, the provisions of the Excess Dividend Tax, subject income that has already been taxed in the books of an operating company to the second round of tax in the books of a Nigerian parent company.

This greatly disadvantages indigenous companies. It also means that a Nigerian parent company that receives dividend payments from a subsidiary will suffer additional tax upon the distribution of its dividends to shareholders, contrary to an existing law that states dividend received from subsidiaries should not be subject to further tax. Additionally, the provision in the tax code on minimum tax, states that a company must pay a tax equal to a minimum amount computed on the basis of the company’s net assets, turnover, paid-up capital or gross profits.

While it appears fair on the surface, this provision is particularly detrimental to Nigerian holding companies for the following reasons:

– computing a minimum tax based on the description in the tax code mandates a holding company to pay tax on franked investment from subsidiaries which has already been taxed, amounting to double taxation.

– the provision is also discriminatory against Nigerian investors as it does not apply to companies with a minimum of 25% imported capital. As we should be striving to support and encourage indigenous enterprises, this is counterproductive.

There are more examples, and I can draw more illustrations, but I think that the point has been made: Issues with our tax system do not negatively impact SMEs alone, corporates are significantly affected as well. We should use taxation as a dynamic fiscal policy tool to shape behaviours and nurture sectors that are close to us and policies should be uniform across board.

By Tony O. Elumelu, CON

Chairman, Heirs Holdings Group

Founder, The Tony Elumelu Foundation