RMAFC Releases Full Text Of Memorandum To Tinubu On Tax Reform, Denies Opposing President

RMAFC Releases Full Text Of Memorandum To Tinubu On Tax Reform, Denies Opposing PresidentThe full text of the memorandum from the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) detailing its position on the tax reform bills proposed by President Bola Tinubu has been made public. This follows earlier reports suggesting that the RMAFC had raised concerns over the constitutionality of the President’s proposals.....KINDLY READ THE FULL STORY HERE▶

Initially, RMAFC was reported to have challenged the constitutional validity of certain elements within the proposed tax reform bills, specifically highlighting the Commission’s role as the sole body constitutionally empowered to determine the revenue-sharing formula among Nigeria’s three tiers of government. The Commission was said to have outlined a series of legal, constitutional, and technical objections to the reforms.

However, RMAFC quickly issued a denial, stating that it did not oppose the President’s proposals. During a press conference held on Tuesday in Abuja, RMAFC Chairman Mohammed Shehu described the claims as “false” and “malicious,” offering clarification on the Commission’s stance regarding the legislation.

Following the clarification, Naija News obtained the full copy of the memorandum, which was subsequently made available by Economic Confidential.

Read the Full Text of the Memorandum Below:

MEMORANDUM ON THE POSITION OF THE REVENUE MOBILISATION ALLOCATION AND FISCAL COMMISSION (RMAFC) ON FOUR (4) BILLS IN RESPECT OF THE TAX REFORM AND FISCAL POLICY BILL AT THE NATIONAL ASSEMBLY FOR DELIBERATION

1.0 Introduction

1.1 The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) commends the visionary leadership of His Excellency, President Ahmed Bola Tinubu, GCFR, under the Renewed Hope Agenda, particularly in his efforts to address Nigeria’s fiscal challenges through tax reforms.

1.2 The Commission acknowledges and appreciates the President’s innovative initiatives to diversify and stabilize Nigeria’s revenue base. RMAFC, as the body responsible for mobilizing and allocating revenue for the three tiers of government, welcomes the submission of the four proposed bills, which reflect the President’s commitment to fiscal reform.

1.3 These proposed bills are expected to significantly enhance RMAFC’s efforts in increasing domestic revenue mobilization. They will also help integrate underreported sectors, including contributions from the informal economy, into the tax framework. Furthermore, these reforms have the potential to improve Nigeria’s revenue-to-GDP ratio, positioning the nation favorably among countries with robust fiscal performance.

1.4 RMAFC fully supports the proposed reforms, believing they will serve as an important step in advancing Nigeria’s revenue generation and long-term development goals. However, concerns have been raised over the application of the derivation principle in Value Added Tax (VAT) allocation, which could undermine fairness in the distribution of VAT revenue.

2.0 Background on Value Added Tax (VAT) in Nigeria

2.1 VAT was introduced in Nigeria in 1993 with the enactment of the Value Added Tax Act No. 102 of 1993, replacing the Sales Tax system. The tax, initially set at a rate of 5%, was designed to broaden Nigeria’s tax base and increase government revenue by imposing a consumption tax on goods and services.

2.2 The Federal Inland Revenue Service (FIRS) administers VAT, while both federal and state governments share the revenue based on a predefined formula. However, there has been growing controversy regarding VAT collection and allocation, particularly between the federal government and some states, such as Rivers and Lagos, which argue for states’ right to administer VAT within their territories.

2.3 In January 2020, the VAT rate was increased to 7.5% as part of efforts to diversify Nigeria’s non-oil revenue sources amid fluctuating oil prices.

3.0 Revenue Distribution and Disputes

3.1 VAT revenue is shared as follows: 15% to the Federal Government, 50% to States, and 35% to Local Governments. However, recent disputes between the Federal Government and certain states, especially Rivers and Lagos, have brought into focus the debate over whether VAT revenue should follow the derivation principle or remain centrally controlled.

3.2 These debates have led to judicial interventions, with states like Rivers passing laws to collect VAT locally. In 2021, the Federal High Court ruled in favor of Rivers State, but the Court of Appeal granted a stay of execution pending the decision of the Supreme Court.

4.0 RMAFC’s Position on VAT Allocation

4.1 RMAFC plays a critical role in Nigeria’s fiscal system by ensuring the fair distribution of revenues. The Commission’s constitutional mandate is to ensure that revenue sharing among the three tiers of government is equitable, just, and in line with the principles of fiscal federalism.

4.2 While VAT is a consumption tax, its allocation should reflect not only where it is collected but also where it is consumed. RMAFC argues that any arbitrary allocation of VAT, whether vertically or horizontally, risks creating inequities among states and undermining the principles of fairness and justice.

4.3 The Commission is concerned that attempts to apply the derivation principle to VAT, as advocated by certain states, may not be appropriate given the nature of VAT as a consumption tax.

5.0 Theoretical Framework of Fiscal Federalism

5.1 Fiscal federalism, as proposed by economists like Musgrave (1952) and Wallace E. O. (1972), advocates for a fair and balanced distribution of resources between different levels of government. Applying this theory to VAT, RMAFC believes that VAT revenue must be shared in a way that ensures equity across the federation, taking into account both consumption patterns and the need to support weaker state economies.

6.0 The Concept of Derivation in Fiscal Federalism

6.1 Derivation is the principle that revenue generated from specific resources should be allocated to the region where the resource is produced. This principle has been applied to oil revenues, but the complexities of VAT, which is based on consumption rather than production, make it difficult to apply the derivation principle in the same way.

6.2 RMAFC emphasizes that applying the derivation principle to VAT is problematic due to the nature of consumption-based taxation, where goods and services are bought and consumed across state boundaries. The challenge of tracking where VAT is consumed versus where it is collected further complicates the issue.

7.0 Recommendations

7.1 Empower RMAFC to finalize VAT allocation formula: The Commission should be given the mandate to develop a VAT allocation formula that reflects the consumption-based nature of VAT while ensuring equity across all levels of government.

7.2 Constitutional Adherence: VAT allocation should remain within the framework established by RMAFC, rather than being subject to arbitrary decisions that may undermine Nigeria’s constitutional principles.

7.3 Stakeholder Engagement: A broad-based consultation among federal, state, and local governments should take place to foster consensus and avoid tensions.

7.4 Digital Tracking Systems: RMAFC recommends the adoption of digital systems to monitor VAT collections and track consumption patterns, ensuring accurate revenue distribution.

8.0 Conclusion

VAT remains a vital source of revenue for Nigeria, and its equitable distribution is essential for maintaining national cohesion and fairness in the revenue-sharing process. RMAFC reiterates its role as the constitutionally mandated body responsible for developing fair and just revenue allocation formulas. By adhering to constitutional principles, Nigeria can ensure a more equitable and sustainable fiscal framework that benefits all tiers of government.

M. B. Shehu, OFR, Ph.D

Chairman, Revenue Mobilisation Allocation and Fiscal Commission (RMAFC)

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