Do “Poor-Only” Tax Havens Work?

Tax havens are places that have very lax tax requirements that allow individuals and corporations to legally avoid paying tax. While it may not illegal to avoid paying taxes, historically and especially with the leak of the Paradise and Panama papers, tax havens are notorious for being a conduit for laundered funds and other illicit financial practices.

Add to this, the fact that the bulk of capital in tax havens come from non-residents’ personal deposits and shell companies that are established by large corporations for just that purpose – to avoid paying taxes from income they have earned elsewhere and you might just start to understand why tax havens are problematic.

While tax havens have had a bad reputation in recent times as hubs for financial impropriety, their impact on local businesses and residents is actually positive. Take Mauritius as an example. From independence in 1968 to 1989, the Indian Ocean nation was mostly agrarian, with a small population that depended on sugar plantations and subsistence agriculture. However, after signing a series of double-taxation agreements with over 40 countries and passing the Mauritius Offshore Business Activity Act, Mauritius reinvented itself from a former sugar colony of the British empire to a “gateway to Africa”. Specifically, Mauritius became one of Africa’s richest nations boasting a per-capita income of over $26,000 from $400 per capita income at independence. How did Mauritius do it? Simple, by becoming a tax haven for large corporations and wealthy individuals. If tax havens work for the wealthy, would they also work for the poor? Would exclusively for-the-poor tax havens work?

“Tax-less” Nigeria

Nigeria is not a tax haven by any stretch of the imagination. And while the Nigerian tax system needs serious reforms, Nigeria is not a nation that depends on taxes to support government expenditure. With a tax-to-GDP ratio of around 3% or 6% (depending on who’s doing the calculations, that is, the Organization for Cooperation and Economic Development (OCED) or the World Bank respectively). Taxes were mostly a formal “by-line” in our oil-dominated revenue system – until the steep drop in crude oil prices in 2016. Since then, the Federal government has ratcheted up its taxation system and set ambitious goals for tax collections. Despite all of this, Nigeria still falls far short of the 15% threshold which the World Bank says is necessary to sustain and drive economic growth.

The majority of Nigeria’s low-income earners (around 60% of the population), do not pay federal or state taxes. However, while they may not directly pay federal taxes, they pay other arbitrary levies and “taxes”. These levies are usually imposed or collected by unions, community groups, and local government agents. Usually, the collection agents have sour relationships with informal business owners and traders. This is because of the physically aggressive way collection agents demand payment. One characteristic of this is the arbitrary pricing and exactly what the levies are supposed to be used for is shrouded in opaque systems. The payers mostly receive little direct or indirect benefits for their contribution. It is against this background that the anti-tax policy of the Cross River state government comes into focus. By cancelling taxes for informal and small businesses up to hotels with less than 50 rooms, the Cross River state government has effectively created a “poor-only” tax haven.

By insisting that the people should not pay taxes because the government has failed to provide basic structures needed for a well-functioning society, the governor admitted, perhaps unwittingly, that the state did not need the vast majority of its residents or their money.

Zero-taxes in the form of tax rebates or tax holidays is not new in Nigeria. The Industrial Development Act specifies what businesses are eligible for income tax relief as Pioneer Industries. Billionaire businessman, Aliko Dangote is one of the major beneficiaries of this tax policy. However, Nigeria’s tax progressive tax system does not capture low-income earners on the streets, essentially allowing them to live free of state income taxes (at the least).

A tax haven for the poor.

While Ben-Ayade’s populist anti-tax stance may not be a tax haven in the real sense, it is certainly not his first public attempt to stifle tax collection in the state. In 2017, a similar move to suspend “illegal” taxation failed to stop low-income earners from being forced to pay levies and taxes. However, this recent drama may well be his most publicized anti-tax effort in Cross River state. It has been well received and has drawn commendation from the general public and associations like the All Farmers Association of Nigeria. Indeed, it is a bit difficult to criticise this seemingly well-intentioned effort to reduce the burden on low-income earners. The reality though is that press conferences are easier than policy execution. And the anti-tax policy is far from being a simple matter of banning taxes. The many layers of taxation, federal, state, local governments as well as road transport unions, market unions, etc., require more information than what the blanket ban statements reveal.

By insisting that the people should not pay taxes because the government has failed to provide basic structures needed for a well-functioning society, the governor admitted, perhaps unwittingly, that the state did not need the vast majority of its residents or their money.

Applause notwithstanding, Cross River’s anti-tax scope is very poorly defined, or at least poorly communicated. For starters, the zero-tax beneficiaries may not actually be low-income earners. As Ozioma Okey-Kalu, a lecturer at the Federal School of Statistics noted in a recent article, “Sometimes the size of a shop does not directly indicate the size of the business. People can borrow to open something that seems big because they see that as a business strategy. This does not mean that they are not low-income earners at that point in time.” For all practical purposes, a tax holiday for small businesses is not a far-fetched idea, considering the effect of government-mandated lockdowns that are only just being gradually removed. This should not, however, completely remove the longer-term responsibility of individuals to contribute to the running of government services.

How well the anti-tax policy plays out in the next few years or even months remains to be seen. But the challenges to effectively implementing a tax-free regime that will not be taken advantage of, (even as the state collects taxes from the “big” businesses) are not to be taken lightly. The Cross River state governor lamented the failure of government, his government, to provide basic amenities and facilities for low-income earners, a tax haven may offset the cost of doing business in the state, but it does not diminish the responsibility of the government to fulfil the social contract of governance. “Poor-only” Tax havens may work for the poor, but not in the long term and certainly not if the government abdicates its responsibility.

 


Featured Photo by Farah Nabil on Unsplash

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