The Burden of State: Why Tax Reform Cannot Wait

By Kenny Oladipo

MaTaZ ArIsInG
Dallas, Texas

As I reflect on the ongoing debate for or against the present administration’s proposed tax reforms, the story of Forrest Gump as depicted in the film comes to mind. Forrest Gump (acted by the legendary Tom Hanks) was born with disabled legs. His odds of becoming anyone influential in life was severely limited and his quality of life significantly diminished. However, against all odds he became a billionaire nonetheless, through sheer force of will, and the buoyancy of human spirit. Forrest Gump had braces on his legs to aid his mobility, but he could not run with those legs. Because of his disability he was repeatedly bullied by bigger boys in his school. The bullying continued unabated for a very long time, until one fateful day when he was harassed by these bullies on his way back from school. With his books in his hands, his braces on his legs, and his tormentors on bikes seeking to hurt him. A visibly scared boy, already expecting the worse got a voice prompt to run from his friend (a young girl that walks him home), and a boy that could not run due to his limitations, summoned his inner strength and started running. As Forrest Gump began to run, the braces on his legs gave way one after the other, he found new momentum and outran the bullies on bikes. He never looked back since that day, he was forever freed from his shackles, doubts and fears. He later joined the military, and went on to become very successful in life, inspiring a host of people that felt left behind to thrive. None of these feats would have been possible without the imminence of danger and a friend that believed in him.

No question, reforms business is a messy business, and the sausage making process may be unsightly at times. But reform we must, if we are to unshackle the national economy from its legacy strictures. A promising aspect of the debate is the near unanimous agreement by all parties that the tax system needs a revamp. Depending on who is asked, the timing argument swings both ways, while the president wants to expedite passage, another group prefers a much-drawn out process. Both sides have valid arguments and are pushing narratives to bolster same. That said, drawing from my professional experience in management of change, the president’s argument appears to be better weighted on the scale of preference. In change management, four states must be considered and evaluated, with definitive timelines for transitioning from one state to another. These states are:

Perceived state: This is the state that you think you are in. Oftentimes people overestimate their strengths and undercount their weaknesses, thereby, giving a false sense of security and ability. The same is true for a system or a country, where a country may be perceived as being rich due to some skewed parameters and assumptions, when it is not.
Actual state: This is the real state or baseline on which an effective intervention can be applied. This state is arrived at, after a rigorous evaluation of the perceived state by removing faulty foundation and rebuilding a more robust one. The transition period between the perceived state and the actual state is typically between six months and one year. Any change agent that misses this window cannot achieve anything meaningful afterwards, this cycle is critically important.
Future state: This state acts as a blueprint for long-term goals, providing clarity on desired outcomes and milestones. It aligns teams or government agencies toward common objectives and guides organizational or national growth. The transition period between the actual state and the future state is between two years and four years. This cycle defines success, and the benefits of the transformational endeavors should begin to show signs of life at this point.
Ideal state: This is the perfect state, which is largely aspirational. It serves as a model template for orientating the reforms that have been applied in the future state. The transition period between the future state and the ideal state is five years and beyond, depending on the size, scope and scale of the interventions.

This predication is important to pinpoint the exact location of the current reform programs on the change management map. The country is now between the actual state and the future state spot, and the transition period must follow a strict timeline to be effective. Tax reform constitutes the third plank of the tripodal economic reform agenda of this administration, with the removal of fuel subsidy and the harmonization of the currency being the other two planks. To complete the trifecta, then the tax reform bills must be passed into law before the current administration turns two years in office. My educated guess would be that the president is aware of this window, so are his detractors or opponents.

Now, to tag back to the Forrest Gump story, he broke free when he was faced with imminent danger, and he heard a supportive voice of a friend. Few weeks ago, rising from a meeting at the Arewa House in Kaduna, prominent voices from the North raised serious concerns about some provisions in the proposed tax reform bills. The National Economic Council led by the vice president also recommended a pause to allow for wider consultations on the bills.

Undoubtedly, legitimate concerns were raised that must be given proper attention, by finding a win-win solution for all stakeholders. That said, as much as the president would like to listen to the delay calls, he’s constrained by a timeline that must not be missed if all the reforms are to make sense and the pains already endured by the people are not to go to waste. The North ought to seize this moment and see it as a “Forrest Gump” moment for the region. In this scenario, the regional anxiety around the likely passage into law of a new VAT distribution system and allied tax matters could be viewed as the imminence of danger that Forrest Gump experienced. While the president urging for the proposed bills to proceed on current timescale, seen as the good friend urging Forrest Gump to run to greatness. The North has the viable potential to outrun any challenges and become one of the richest places in the country, if these new reforms are used as the accelerants for growth, and not wedges to it.

To attract sufficient buy-in of all stakeholders, the Tax Reforms Committee and FIRS must eliminate assumptions, and give precise data and metric where possible that would underlie the proposed VAT distribution. It is not enough to say, VAT on telecommunications would be by subscriber base, the estimated size of the actual subscribers per state should be provided. It is also common sensical to understand that nobody would vote in favor of a law that is assumed (rightly or wrongly) to reduce own pre-existing share from a certain pool, in which case keeping the status quo becomes a more sensible option. If VAT on food items, transportation etc. would be zero, and the North for now is primarily an agricultural economy, how do we quantify the loss in revenue that should have accrued to the North? To achieve this, there should be an equalization mechanism like some form of in-kind revenue replacement for the North to account for the fiscal lacunae.
As a general principle, all domestic food production should be measured at source at fulfillment or distribution centers in local government areas, and certified by recognized inspection companies like SGS, Bureau Veritas, or reputable local equivalent, before the food items are transported out of state. The North can create a new business model around the measurement system for farm production, with the receiving states for those food items also doing own corresponding measurement at destination. The weights at source and destination are then reconciled for proper revenue assessment. A well-run national commodity exchange framework may spring up because of this opportunity.

It is also important not to shame the North into accepting the proposed tax reform, it would be counterproductive. Every country has a section of its economy with baked-in advantages and must be preserved to keep the balance. Population size is a baked-in advantage for the North and the bill should not seek to undo it, otherwise, the instinctual response would tend towards rejection. National planners must meet them where they are and reassure them that it is for the common good and not some form of punishment. The 30% of state and local government sharing formula assigned to population size in the old system should be retained in the new system, and not be reduced to 20% as presently proposed. The percentage assigned to population size should remain the same under the new proposal. I want the tax reform to go through, but we need to view issues from the prism of the North as well. The fact that they have legitimate concerns about the bill, doesn’t necessarily mean that they don’t like progress.
The most contentious issue remains the proposed VAT distribution, and proshare.co review on the subject matter was profound and is herewith captured.

“Progressive Value Added Tax: Many, including some governors and Sen. Ali Ndume, focus on VAT. Chapter Six of the Nigeria Tax Bill contains provisions about value-added tax. The bill, in section 146, indeed provides for a gradual increase in the VAT rate from the current 7.5% to 10% in 2025, 12.5% in 2026, 2027, 2028, and 2029, and pegged at 15% from 2030.
However, it did not end there; a lot of basic goods and services that are consumed by the poor are either totally exempt from paying VAT or zero-rated. The items exempt from VAT are listed in part IV of chapter 8 of the Nigeria Tax Bill, including food items, medical items, baby products, transportation, electricity, LPG, CNG, petrol products, etc. So, in essence, the progressive VAT rates will not affect the poor or VATable things they normally purchase.
The second part of the VAT controversy concerns the derivation formula. However, it is important to point out that the Nigeria Tax Bill does not make any provisions for sharing formulas or derivation; rather, it is another bill, the Nigeria Tax Administration Bill, that made such provisions, but I will briefly touch on it here.
Section 77 of the Nigeria Tax Administration Bill provides for the distribution of VAT in the following manner:

1. 10% to the federal government
2. 55% to the state governments and FCT and
3. 35% to the local governments
   The same section provided for the distribution of 60% of the VAT revenue standing to the credit of the states and local governments based on derivation. Section 22(12) of the Bill specifies the proposed derivation model: “For attribution, any return under this section shall provide details of the derivation of taxable supplies by location in a manner prescribed by the service.”
   Many opposing the new VAT model did not read this part. They thought the 60% of VAT revenue provided for sharing based on derivation in section 77 would follow the current model, where derivation is attributed to headquarters remittance. That’s not the case. With the new Nigeria Tax Administration Bill proposal, VAT will be attributed to the place of supply and consumption and not necessarily the place of remittance, which currently favours places with many company headquarters.” (https://proshare.co/articles/president-tinubus-tax-reform-bills-under-a-microscope?menu=Economy&classification=Read&category=Taxes%20%26%20Tariffs).

In conclusion, it is imperative for the president to complete the final phase of his economic reforms, by ensuring that the proposed tax bills that have passed second reading in both chambers of the National Assembly become the substantive tax laws of the land by May 29, 2025. The North should also come to terms with the new reality that these reforms are essentially the required tools that would wake up the economic giants in the region, and the country would see this latent economic powerhouse transform beautifully into a potent economic juggernaut and a more prosperous region. It’s time to run with this vision to broadly unfurl shared prosperity across the nation.

Kenny Oladipo,
Houston, TX.
A Senior Reliability Engineer in the Oil & Gas sector, with academic training in Mechanical Engineering and Law.

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