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Small Businesses and the Adoption of the Integrated Tax Administration System in Nigeria

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Presentation by Efobi Uchenna, Beecroft Ibukum and Belmondo Tanankem at the second annual Nigerian Tax Research Network meeting which took place in Abuja on 24th and 25th November 2018.

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Small Businesses and the Adoption of the Integrated Tax Administration System in Nigeria

  1. 1. Efobi Uchenna Covenant University, Nigeria uche.efobi@covenantuniversity.edu.ng Beecroft Ibukun Covenant University, Nigeria ibukun.beecroft@covenantuniversity.edu.ng We acknowledge NTRN/ICTD for the generous funding and technical assistance that was received for this project. Belmondo Tanankem Ministry of Economy, Planning, and Regional Development, Cameroon tanankemvoufo@yahoo.fr
  2. 2. 1. Introduction 2. Motivation 3. Research Questions 4. Background - Taxation and the ITAS System 5. Research Method 6. Results and Discussion 7. Conclusion and Policy Implication
  3. 3.  Building the capacity of tax administration is an important instrument for generating internal revenue to spur development in Africa.  Important challenges in tax administration in developing countries are geared towards: ◦ tax collection, and ◦ the inefficiency of the tax system to timely and adequately generate sufficient revenue for the government  Technology adoption is crucial to improving the overall efficiency of service delivery (including tax administration) in the public sector. It aids in: ◦ reducing public officials’ discretionary input in service delivery, ◦ combating corrupt practices, and ◦ reducing the cost of such revenue generation process. 3
  4. 4.  The electronic tax collection and filling system is a significant and attractive initiative to the revenue generating authorities of many developing countries  About 32 percent of developing countries have introduced such electronic tax filing systems.  Issues still unknown include: ◦ the extent to which taxpayers use these systems, and ◦ the factors that motivate them to adopt such systems 4
  5. 5.  Understanding the extent to which tax remittance technology is adopted by small businesses and what motivates the adoption is important for the following reasons: a) Low rate of adoption of electronic systems in initiating and implementing financially related transactions in Africa b) Similar low adoption rate for the tax system in Africa and most of the tax authorities report being dissatisfied with their existing electronic systems. c) There has been a history of low rate of private sector adoption of technologies that was initiated by the government:  A vivid example is the mobile money service that was introduced by the Central Bank in 2011, and for which there has been a dismal adoption rate (of about 13 percent) since its introduction. 5
  6. 6. d) Urgent need to improve non-oil revenue in Nigeria, especially from SMEs. • SMEs makeup about 97 percent of the Nigerian economy and their aggregated tax remittances surpass those of the large enterprises. e) Finally, there are other benefits from the electronic tax system:  decreasing taxpayers compliance costs,  reducing the tendency for extortion and other corrupt practices by tax officials, and  reducing opportunities for collusion and tax evasion. 6
  7. 7.  Research questions that this study intends to answer: a) What is the extent of the adoption of the ITAS? ◦ Actual adoption ◦ Perception b) What are the factors that motivate ITAS adoption among small businesses? 7
  8. 8.  Total number of taxes and contributions paid by a typical manufacturing firm in Nigeria is 59 ◦ Higher than the SSA average of 37.2, and World average of 10.9 ◦ Including consumption taxes - like the value added tax and sales tax  Ease of paying taxes: Hours to remit taxes by a typical firm is about 366 hours per annum ◦ SSA average is about 280.8 hours, and the World average is about 160.7 hours (World Bank, 2018) ◦ If working 8 hours per day, it would take 45.75 days to remit taxes  Thus, Nigeria is ranked about 50 percentage points away from the global best performers in the ease of paying taxes ◦ i.e. the number of tax payments, time allocated to tax computations, total tax and contribution rate, and post- filing index. 8
  9. 9.  The ITAS framework was initiated to boost national revenue through: ◦ easing the tax administration processes, ◦ enhancing transparency in tax administration, and ◦ promoting voluntary tax compliance  To understand likely reception to technology, we present statistics of mobile technology service usage in Nigeria 9
  10. 10. Used the internet to pay bills in the past year (% age 15+) Mobile money account (% age 15+) Made or received digital payments in the past year (% age 15+) Used a mobile phone or the internet to access a financial institution account in the past year (% age 15+) Used a mobile phone or the internet to access an account (% age 15+) World 22% 4% 52% 23% 25% Sub-Saharan Africa 6% 21% 34% 8% 21% Nigeria 4% 6% 30% 7% 8% South Africa* 10% 19% 60% 17% 21% 10 Mobile Financial Service Usage in Nigeria Note: *South Africa was included as a good comparison for Nigeria considering the economic size of both countries, and the political influence they have within the continent.
  11. 11.  The data for this research was from a survey of small businesses from seven (7) Southwestern states in Nigeria for the period July to August 2018. ◦ Abia, Anambra, Cross River, Delta, Lagos, Ondo, Oyo,  We focus on small businesses because: ◦ This group of taxpayers pay company income tax (CIT) and personal income tax (PIT), for which the ITAS system will be most efficient for tax filling. ◦ Small businesses, on the other hand, personally file both the CIT and PIT, and hence will be most affected by the ITAS system considering that the majority of their tax filing is based on the effort of the entrepreneur or the individuals within the enterprise.  We focus on South-Western Nigeria because: ◦ About 60% of SMEs in Nigeria are located within the southern region, with Lagos having the highest enclave (SMEDAN, 2013). ◦ Most economic activities in Nigeria are prevalent in this region, and states in this region 11
  12. 12.  The calculated sample size for this study is approximately 430 small businesses from a population of 42,655 in Nigeria  Actual sample was 485 small businesses (additional sample for contingency). ◦ The population of the SMEs in Lagos State was derived from the 2013 SMEDAN statistics.  The sample is distributed across the states with the highest number of FIRS offices and across the tax coordination areas ◦ Based on principles of Probability Proportional to Size (PPS) to allocate number of small businesses to states according to the concentration of the enterprises and the location of tax offices.  Justification for sample selection is to test other important external influences from tax administrators that might influence the behaviour of taxpayers (i.e. small businesses) in complying with the ITAS framework. 12
  13. 13. Tax Coordination Area States Total SMEs Proportion Proposed Sample FIRS Offices Akwa-Ibom, Bayelsa and Cross River Coordination Cross-River 1294 0.025 17 3 Akwa-Ibom 1093 2 Bayelsa 426 2 Anambra and Imo Coordination Anambra 1737 0.040 27 4 Imo 1394 3 Delta, Edo, Rivers Coordination Delta 1444 0.034 22 4 Edo 1997 4 Rivers 3022 3 Abia, Ebonyi, and Enugu Coordination Abia 1809 0.042 28 4 Ebonyi 1210 2 Enugu 911 2 Ekiti, Kwara and Ondo Coordination Ekiti 1029 2 Ondo 1999 0.046 31 2 Lagos Coordination Lagos 11663 0.271 179 16 Ogun, Osun and Oyo Coordination Ogun 1794 3 Osun 2272 1 Oyo 7987 0.185 122 3 Total 17 27,732 1.000 426
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  15. 15. Variables Definition Mean Std. Dev. Ownership structure Education of the owner Measured as ‘1’ if owner’s highest education qualification is secondary school, 2 if University, and 3 if completed a post- graduate degree 2.604 0.653 Board size Measured as the number of owners that the firm has, including male and female. This shows the diversity of views that may be present among the top managers of the small businesses 1.373 0.876 Owner’s industry experience The number of years that the owner (i.e. entrepreneur) of the firm has been in this particular business or industry. We expect that higher experience will imply that the owner will be less responsive to change to ease its administration. 8.521 5.938 Owner’s age The age of the owner. Older individuals are expected to be less receptive to change; implying that they will be less likely interested in adopting ITAS. 43.417 9.009 Manager’s finance degree A count variable of the number of board members of the small businesses with a finance degree. Apriori expectation is positive considering their conversance with systems that can improve tax efficiency. 1.328 1.918 Owner’s involvement A dummy variable ‘1’ if the owner of the firm is also a member of the board of the firm. Apriori expectation is also positive. 0.715 0.452 15
  16. 16. Firm Structure Audit efficiency Measures the efficiency of the audit process, where ‘1’ equals that the firm is using an external auditor, and ‘0’ otherwise. 0.220 0.415 Computerized accounting system A dummy variable ‘1’ if the firm’s accounting system is computerized and ‘0’ otherwise. This variable is expected to have a positive influence on the likelihood of adopting ITAS. 0.333 0.476 External tax consultant A dummy variable ‘1’ if the firm engages the services of an external tax consultant for tax related matters. This is expected to have a positive influence on the probability of adopting ITAS. 0.270 0.444 Small business participated in ITAS training A dummy variable ‘1’ if the firm participated in a training organized by FIRS on how to use ITAS, and ‘0’ otherwise. This variable is expected to have a positive relationship with the likelihood of adopting ITAS. 0.154 0.361 Internet use A dummy variable ‘1’ if the firm uses internet in its operations, and ‘0’ otherwise. 0.706 0.456 Legal consequence of tax non- compliance A dummy variable ‘1’ if the firm reports that they are aware of the consequences of tax non-compliance, and ‘0’ otherwise. 0.643 0.480 Size of business This is measured as the total number of employees that the firm has. It is expected that larger firms will most likely adopt the ITAS platform for tax remuneration than smaller firms. 20.867 32.024 Age of company Measured as the total age of the firm since its incorporation. 12.960 12.732 Firm performance This is measured as the logarithm value of profit of the firm in the last 12 months before the survey. 15.205 1.645 Firm innovativeness This variable range from 0 to 6. Values were computed as a sum of the responses to the participation of firms in the following activities – introduced a new or significantly improved product or service; introduced a new of significantly improved process; introduced new technology to firms’ operation; trained worker on new methods and processes; organized seminar or trained workers on improving organization processes; introduced new technology to firms’ marketing or customer relations. 3.099 2.067 16
  17. 17. External environment Tax burden score Burden score of the tax administration is defined as the cumulative weighted score of the responses of firms across eight different indicators including tax regulations, tax payment system, tax officials, tax information, filling tax complaints, courts to settle tax dispute, accessibility of tax offices, and online tax payment system. The different indicators are given similar weight (1/8) considering that each of the indicators are an important perception that can define the response of taxpayers to initiatives by tax administrators. 0.433 0.257 Tax environment Firms perception about general taxation, which is computed as an index that range from 0 to 1 with higher values implying that firms have a negative perception about taxation. The index comprise questions related to firms do not pay taxes regularly, firms misreport their income and expense, firms over report their allowances, firms pay bribes to tax officers, firms declare losses to avoid paying taxes, and tax officials demand for bribe. The responses to these questions are then weighted (1/6), and the sum of all the responses were the values for this variable. Firms with negative perception are expected to less likely adopt ITAS. 0.619 0.285 FIRS personally encourages A dummy variable ‘1’ if the firm ever received any letter or information from FIRS encouraging them to use ITAS of pay their tax using ITAS. 0.455 0.499 FIRS advert A dummy variable ‘1’ if the only information about ITAS was through a public advertisement by the FIRS office. 0.308 0.462 Trust tax administration A dummy variable ‘1’ if the firm reports that they trust the tax administration system in their location/area. 2.275 0.996 Outcome variables Used ITAS for tax computation A dummy variable ‘1’ if the firm used the ITAS system to compute and file its tax in the last filling season, and ‘0’ otherwise. 0.140 0.349 Perception about ITAS Ranges from 0 to 6 with higher values implying that firm perceive ITAS better than the manual tax filling system. The variable is computed from the addition of the following responses to the questions on – preferring the ITAS compared to the manual tax system; making less mistakes when filing taxes while using ITAS; ITAS platform being less complex and difficult to follow; trusting the tax computation from ITAS; better tax values when computing with ITAS compared to manual process; needing more time to understand the ITAS tax computation. The initial response to these questions are ‘1’ if yes, and ‘0’ if no. 0.727 1.445 17
  18. 18.  Formally we estimate the following equation; Pr(Yi Xi,Wi,Zi,Ci.c=φ(σXi + δWi + λZi+∅Ci)  Adoption: Probit regression is applied ◦ to identify factors that determine or are associated with the probability that a small business will adopt the ITAS.  Perception: Tobit model is applied ◦ applied to take into consideration the censoring component of this variable ◦ ranges from 0 to 6; 0 - less positive perception; 6 - more positive perception 18
  19. 19.  Knowledge and Adoption of Integrated Tax Administration System (ITAS) across sampled states  Knowledge is not necessarily synonymous with adoption  Lagos has the highest rate of adoption relative to knowledge 19
  20. 20.  Knowledge about ITAS and Adoption Rate across Deciles of Firm Size  The knowledge and adoption rate of ITAS tends to increase with the size of the firm 20
  21. 21.  Knowledge about ITAS and Adoption Rate across Educational Qualification of Firm’s Management  Level of education is positively related to knowledge and adoption of ITAS 21
  22. 22.  Knowledge about ITAS and Adoption Rate across Deciles of Firm’s Burden Score of Tax Administration  Firms that perceive tax administration as most burdensome tend to adopt ITAS more  Same for firms that perceive tax administration as least burdensome 22
  23. 23. ITAS and Organizational Management Characteristics Most important factors affecting adoption and perception are education and manager’s finance degree; Note: This summarized results are from different regression models. The results are the marginal effects of the estimation. Values in parenthesis are the p-values, and *, **, *** represent 10, 5, and 1 percent levels of significance. 23 Variables Signs and Significant Values Adoption of ITAS Perception of ITAS Education of the Owner 0.075*** (0.006) 0.367*** (0.001) Board size -0.006 (0.413) 0.112* (0.093) Owner’s experience in industry 0.006*** (0.003) 0.021* (0.075) Owner’s age 0.003*** (0.000) 0.002 (0.980) Manager’s finance degree 0.045* (0.100) 0.197*** (0.010) Manager’s involvement in business -0.033 (0.216) -0.063 (0.684)
  24. 24. 24 ITAS and Firm’s Internal Organizational Structure Note: Same as Preceding Table Variables Signs and Significant Values Adoption of ITAS Perception of ITAS Auditor efficiency 0.330*** (0.000) 0.963*** (0.000) Computerized accounting system 0.088*** (0.000) 0.346*** (0.046) External tax consultant 0.240*** (0.000) 0.764** (0.003) FIRS official training firms 0.442*** (0.000) 0.818*** (0.012) Firm uses internet 0.105*** (0.000) 0.219 (0.220) Aware of the legal consequence 0.126*** (0.000) 0.326* (0.100) Size of business 0.009 (0.317) 0.005 (0.192) Age of company 0.005** (0.024) 0.018*** (0.000) Firm performance 0.022 (0.120) 0.025 (0.826) Firm’s innovativeness 0.017 (0.125) 0.106** (0.035)
  25. 25.  External Environment of Firms and ITAS Adoption  Note: Same as Preceding Table 25 Variables Signs and Significant Values Adoption of ITAS Perception of ITAS Tax burden score -0.044 (0.572) 0.099 (0.195) Perception about tax 0.028 (0.591) 0.026 (0.919) FIRS personally encourages 0.144** (0.013) 0.258** (0.050) FIRS advert 0.082*** (0.002) -0.010 (0.952) Trust tax administration 0.040*** (0.002) 0.105 (0.190)
  26. 26.  We further re-estimate the regression results in previous Tables by controlling for the FIRS office fixed effect. ◦ Based on contemporary experiences, some FIRS offices perform better than others in being aggressive with tax information and tax compliance, and with the extent to which they inform firms about the new ITAS system  The results remain consistent as in previous Tables. 26
  27. 27. Main Findings: The following matter in ITAS Adoption & Perception 1) The education of the owner of these small businesses 2) Manager’s finance related degree 3) The use of external auditors and tax consultants 4) Training of small businesses on ITAS 5) Awareness of legal consequences of non-compliance 6) Firm’s level of innovation 7) Internet usage by firms 8) Public advert by FIRS offices 9) The trust for tax administration 27
  28. 28.  Considering these issues in encouraging ITAS adoption can also benefit tax administrators ◦ significant system-wide efficiency gains from ITAS compliance ◦ reduction of tax officers’ man hour for tax administration ◦ time saved can be directed at other activities likely to increase the marginal productivity of the tax process. 28
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