Exploring Alternative Approaches To Achieving Sustainable Tax Compliance In Nigeria

EXPLORING ALTERNATIVE APPROACHES TO ACHIEVING SUSTAINABLE TAX COMPLIANCE IN NIGERIA

Abdulrauf ALIYU, PhD

(Senior Policy Adviser, African Centre for Tax & Governance)

A paper presented at the 2024 Annual Seminar of Society of Women in Taxation on the 13th of May, 2024, at the Nigerian Society of Engineers Hall, Abuja

1. Introduction

The Nigerian tax system plays a pivotal role in funding public services, infrastructure development, and social welfare programs essential for sustainable development. However, achieving sustainable tax compliance in Nigeria has been a longstanding challenge, characterized by issues such as tax evasion, compliance costs, and taxpayer mistrust.

Tax compliance is crucial for funding public services, driving economic growth, and ensuring social development. It involves not only adhering to tax laws and regulations but also encompasses registration, filing, reporting, and payment of taxes. Sustainable tax compliance goes beyond mere adherence to laws; it entails fostering a culture of voluntary compliance, reducing tax evasion, and promoting trust and fairness within the tax system.

The purpose of this paper is to explore alternative approaches to achieving sustainable tax compliance in Nigeria. By drawing insights from theories, empirical literature, and best practices, we aim to provide a comprehensive understanding of innovative strategies that can address the challenges of traditional tax compliance methods and contribute to the development of a more effective and equitable tax system in Nigeria.

2. Conceptual Issues: Tax Compliance and Sustainable Tax Compliance

Tax compliance refers to the fulfillment of tax obligations by individuals, businesses, and other entities in accordance with tax laws and regulations. It encompasses various activities such as accurate reporting of income, timely filing of tax returns, and payment of taxes owed. Sustainable tax compliance extends beyond basic compliance to encompass long-term adherence to tax laws, promotion of voluntary compliance, and alignment with principles of fairness, equity, and inclusivity.

To further understand the conceptual nuances of tax compliance and sustainable tax compliance, let’s explore definitions provided by different scholars:

• Alm (2012) defines tax compliance as “the degree to which taxpayers fulfill their tax obligations, including timely and accurate reporting of income, payment of taxes owed, and compliance with tax laws and regulations.”

• Torgler (2007) expands on sustainable tax compliance, stating that it involves “the continuous and voluntary adherence to tax laws and regulations over time, driven by factors such as tax morale, trust in institutions, and perceptions of fairness and equity.”

• Additionally, Richardson (2016) emphasizes that tax compliance encompasses not only legal obligations but also ethical considerations, societal norms, and taxpayer attitudes towards taxation.

3. Traditional Approaches to Tax Compliance

Historically, tax compliance in Nigeria has relied on traditional approaches such as legal enforcement, penalties for non-compliance, and audit-based strategies. While these methods have been effective to some extent, they also come with limitations such as high compliance costs, administrative burdens, and potential negative impacts on taxpayer morale and trust.

4. Alternative Approaches for Achieving Tax Compliance

4.1 Behavioral Insights and Nudges: Behavioral economics offers valuable insights into human decision-making processes, which can be harnessed to design interventions that promote tax compliance. Nudges, such as framing tax payments as contributions to public goods, leveraging social norms, and providing personalized messaging, can influence taxpayer behavior and enhance voluntary compliance (Thaler & Sunstein, 2008).

4.2 Design Thinking and User-Centric Approaches: Design thinking principles emphasize empathy, creativity, and iterative problem-solving to develop user-friendly tax compliance solutions. Involving taxpayers in co-designing compliance processes, simplifying procedures, and providing clear guidance can improve compliance outcomes and user experience (Brown, 2009; Liedtka, 2015).

4.3 Data Analytics and Predictive Modelling: Advancements in data analytics enable tax authorities to analyse taxpayer data, detect compliance patterns, and target enforcement efforts effectively. Predictive modelling can identify high-risk taxpayers, prioritize audit resources, and enhance compliance monitoring (Alm et al., 2017).

4.4 Gender Analysis and Inclusive Policies: Considering gender perspectives in tax policy and compliance can promote equity, reduce disparities, and empower women as active participants in the tax system. Gender-responsive policies, education initiatives, and capacity-building programs contribute to sustainable tax compliance and economic empowerment (Bird & Zolt, 2005; Wodon et al., 2018).

4.5 Financial Incentives for Compliance: Offering financial incentives, such as tax credits or preferential treatment, to compliant taxpayers can incentivize voluntary compliance, reduce tax evasion, and foster a positive compliance culture (James & Alley, 2001).

5. Importance of Exploring Alternative Approaches

Efficiency: Alternative approaches can make tax compliance more efficient and cost-effective, benefiting both taxpayers and tax authorities. Automation, streamlined processes, and user-centric design enhance compliance outcomes and reduce administrative burdens (Alm et al., 2017).

Voluntary Compliance: Promoting voluntary compliance reduces the need for punitive measures, fosters trust in the tax system, and contributes to a positive compliance culture (Thaler & Sunstein, 2008).

Gender Perspectives: Incorporating gender analysis into tax compliance strategies promotes equity, empowers women, and contributes to sustainable development goals (Bird & Zolt, 2005; Wodon et al., 2018).

Equity and Fairness: Alternative approaches address disparities, reduce compliance burdens for vulnerable groups, and ensure fairness and inclusivity within the tax system (Clist & Morrissey, 2011).

Environmental Sustainability: Green tax incentives, eco-friendly policies, and carbon pricing mechanisms contribute to environmental sustainability and align tax policies with sustainability goals (Bovenberg & Goulder, 2002; Tietenberg & Lewis, 2020).

Innovation and Adaptability: Exploring innovative approaches fosters adaptability, resilience, and responsiveness within the tax system, enabling effective responses to evolving challenges and technological advancements (Castells, 1996).

Social Inclusion and Diversity: Inclusive tax policies, targeted incentives, and capacity-building programs promote social inclusion, reduce inequalities, and create a more equitable society (Hochrainer-Stigler et al., 2019).

6. Insights from Theories and Empirical Literature

• Behavioral Economics Perspective: Insights from behavioral economics highlight the effectiveness of nudges, incentives, and social norms in influencing taxpayer behavior and promoting voluntary compliance (Thaler & Sunstein, 2008; Kleven et al., 2011).

• Institutional Economics Perspective: Institutional factors such as transparency, enforcement mechanisms, and trust play a crucial role in shaping compliance behavior and fostering voluntary compliance (Torgler, 2007).

• Technology and Data Analytics Perspective: Advancements in technology, data analytics, and predictive modeling enhance compliance monitoring, improve transparency, and streamline tax compliance processes (Alm et al., 2017; Anderloni et al., 2019).

7. Cases of Alternative Approaches to Achieving Sustainable Tax Compliance

In the global landscape of tax compliance, various countries have implemented innovative approaches and best practices to enhance sustainable tax compliance. These practices serve as valuable lessons and inspiration for Nigeria, offering insights into effective strategies that align with the country’s socio-economic context. By examining best practice cases from around the world, Nigeria can glean valuable lessons to improve its tax compliance framework, promote voluntary compliance, and foster economic growth. Here are some cases:

7.1 New Zealand’s Voluntary Compliance Model: New Zealand is renowned for its high level of voluntary tax compliance, attributed to a combination of factors such as simplified tax laws, taxpayer education, and a strong culture of compliance. The country’s tax system focuses on transparency, fairness, and user-friendly processes, which contribute to a positive compliance environment. Nigeria can learn from New Zealand’s emphasis on taxpayer education, clear communication, and accessible compliance tools to improve voluntary compliance rates.

7.2 Singapore’s Use of Technology in Tax Administration: Singapore has leveraged technology extensively in its tax administration, implementing innovative solutions such as online tax filing platforms, automated compliance checks, and data analytics for risk assessment. These technological advancements have not only improved efficiency and accuracy in tax processes but also reduced compliance costs and enhanced taxpayer experience. Nigeria can adopt Singapore’s approach by investing in digital infrastructure, implementing user-friendly tax portals, and leveraging data analytics for compliance monitoring.

7.3 United States’ Behavioral Insights in Tax Compliance: The United States has employed behavioral insights and nudges to promote tax compliance effectively. Initiatives such as personalized tax reminders, social norm messaging, and targeted incentives for compliance have contributed to higher voluntary compliance rates and reduced tax evasion. Nigeria can draw inspiration from these behavioral strategies to design tailored interventions that address cultural norms, motivations, and behavioral biases among taxpayers, thereby enhancing compliance outcomes.

7.4 Rwanda’s Gender-Responsive Tax Policies: Rwanda has implemented gender-responsive tax policies aimed at promoting women’s participation in the formal economy and reducing gender disparities. Initiatives such as tax incentives for women-owned businesses, gender-specific tax education programs, and inclusive policy frameworks have contributed to increased economic empowerment and compliance among women. Nigeria can emulate Rwanda’s approach by developing gender-sensitive tax policies, providing targeted support for women entrepreneurs, and integrating gender analysis into tax compliance strategies.

7.5 Norway’s Green Tax Incentives: Norway has implemented effective green tax incentives to promote environmental sustainability and reduce carbon emissions. Tax incentives such as exemptions for eco-friendly businesses, carbon pricing mechanisms, and subsidies for renewable energy investments have incentivized businesses and individuals to adopt environmentally friendly practices. Nigeria can learn from Norway’s approach by introducing green tax incentives, promoting sustainable business practices, and aligning tax policies with environmental conservation goals.

7.6 Australia’s Collaborative Compliance Model: Australia’s collaborative compliance model involves proactive engagement between tax authorities, taxpayers, and tax professionals to foster mutual understanding, transparency, and trust. This approach emphasizes cooperative compliance, where taxpayers receive support and guidance from tax authorities to meet their obligations effectively. Nigeria can adopt elements of Australia’s collaborative compliance model by enhancing stakeholder collaboration, providing taxpayer assistance programs, and facilitating compliance through education and support initiatives.

8. Conclusion

Exploring alternative approaches to achieving sustainable tax compliance in Nigeria requires a multifaceted approach that integrates insights from behavioral economics, institutional economics, technology, gender perspectives, and environmental considerations. By embracing innovation, equity, inclusivity, and evidence-based strategies, Nigeria can develop a more effective, equitable, and sustainable tax compliance ecosystem that contributes to economic prosperity, social welfare, and environmental sustainability.

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