Breaking the Fiscal Gridlock: Rethinking Nigeria’s Overreliance on Tax Enforcement
A Misguided Revenue Strategy
In Lagos, a mid-tier manufacturing company recently found itself overwhelmed with multiple audit notices from both federal and state tax authorities, including VAT reconciliation and transfer pricing audits – all within a two-month period. This scenario reflects Nigeria’s current tax environment, marked by intensifying audits and revenue-driven scrutiny of the formal economy.
Despite having one of Africa’s lowest tax-to-GDP ratios (10.86% in 2023 according to FIRS data), Nigeria’s revenue strategy raises concerns. Rather than widening the tax base, authorities are increasing pressure on already compliant businesses through erratic audits, retroactive assessments, and a frustrating compliance regime.
Transfer Pricing Turmoil
Nigeria’s transfer pricing enforcement often lacks the commercial depth needed to fairly evaluate intercompany transactions. Multinationals face massive adjustments based on questionable assumptions, while prolonged audits and unclear documentation standards undermine confidence. While aligned with OECD BEPS principles, Nigeria needs evidence-based application focused on economic analysis rather than revenue pursuit.
VAT: Formal Sector Under Siege
Nigeria’s VAT revenue surged 84.62% to ₦6.72 trillion in 2024, but this growth masks a systemic problem. The informal sector – representing over half of GDP and about 40 million unregistered businesses – remains largely untaxed. Instead of implementing inclusion strategies, authorities continue burdening the formal sector with repeated audits.
Effective VAT collection requires digitizing marketplaces, simplifying tax structures for small businesses, and incentivizing voluntary registration.
The Squeeze on Salaried Workers
Personal Income Tax growth stems from middle-income earners bearing disproportionate burdens, while wealthy individuals and informal elites evade taxation through weak data integration. With inflation at 33.2% (March 2025, NBS) and poor infrastructure, salary earners face mounting tax pressures with minimal returns.
Encouraging Compliance Over Coercion
Nigeria should emulate progressive models like Rwanda’s, where compliance comes through streamlined services, digitization, and fair treatment rather than coercion. Transitioning to a service-oriented tax administration that promotes transparency and education could foster voluntary compliance.
A Smarter Path Forward
To build a balanced tax system, Nigeria must:
- Harmonize federal and state tax policies
- Strengthen the Joint Tax Board
- Prioritize full automation
- Reform dispute resolution processes
- Encourage informal sector participation through mobile tax platforms
Conclusion: Fairness First
Taxation represents a social contract. When marked by high taxes, poor services, and aggressive enforcement, public confidence erodes. Nigeria doesn’t need more taxes – it needs a just, inclusive system geared toward long-term prosperity.
Credit: Olawole Oluwabusayo Oladotun, ACCA, ACTI, Tax Manager at PKF Professional Services, Lagos.
Source: Business Day