Background
In recent times, global mobility has risen significantly to an all-time high with many skilled workers and students seeking better opportunities abroad. The major driver is alluded to be a fallout from the COVID-19 pandemic, which greatly impacted work culture and enabled employees to rethink their career goals. Employees are increasingly seeking for work life balance and better working conditions outside the shores of their home countries. Economists have tagged this recent trend the 'great resignation' as the attrition rate in most companies continue to escalate. A lot of Nigerians have also used study opportunities abroad as a justification to migrate abroad, mostly to Canada, United Kingdom (UK) and the United States of America (US). According to the Immigration Refugees and Citizenship Canada (IRCC) the number of new study permits for Nigerian citizens increased by 30.3% from 10,550 in 2020 to 13,745 in 2022. This is the highest in 22 years!1.
In 2021, over 15,000 Nigerians were granted permanent residency in Canada2. According to the UK immigration report released recently, Nigeria is second to India in the number of visas granted for skilled workers in the health care category (13,604 health care workers), which is 14% of the total granted3. It was noted that the recent wave of Nigerians relocating out of the country represents the largest movement of people out of the country in 50 years. The statistics are very alarming, and Nigeria should take stock of how this disruption would impact the economy, the work force, revenue generation for the government – especially, taxes lost from Nigerians who are now residents of other countries. Also of great importance, is the risk of increased tax evasion globally and the impact on global information reporting, which needs to be evaluated.
About 114 participating countries already have an established framework for the Automatic Exchange of Information (AEOI) of taxable persons in the relevant countries. However, the increased rate of migration around the world and especially from Nigeria poses a threat to the integrity of the information exchanged and the tenacity of the existing framework of the Common Reporting Standard (CRS). This article evaluates the impact of the increased migration on information reporting, under CRS and recommendations to strengthen the CRS procedures in ensuring the objectives of the Organization for Economic Co-operation and Development (OECD) are achieved.
Reporting Requirements
In Nigeria, the Income Tax (Common Reporting Standard) Regulations, 2019 ('the CRS Regulations' or 'the Regulations') and the Income Tax CRS Implementation and Compliance Guidelines, 2019 ('the CRS Guidelines' or 'the Guidelines') are the legal basis for the implementation of CRS. The Guidelines clarify the process of identifying reportable persons by providing general reporting and due diligence requirements on how a reportable person can be identified and the type of information to be reviewed and reported. The Guidelines specify indicia which can be used to identify reportable accounts. These are: current mailing or residence address in a reportable jurisdiction(s); one or more current or most recent telephone number in a reportable jurisdiction; current standing instructions to transfer funds to an account maintained in a reportable jurisdiction(s); signatory authority granted to a person with an address in a reportable jurisdiction(s); current 'hold mail' instruction or 'in-care-of' address in a reportable jurisdiction(s).
Thus, the information provided by account users to their bankers or financial institutions (referred to as Reporting Financial Institutions (RFIs)) during the account opening process or information update process are reviewed and used to determine whether an account will be reportable under CRS or not. Essentially, RFIs rely on information in their existing database to conduct an electronic record search on reportable customers using the indicia. It is fundamental for the existing information to be correct, up-to-date and complete in ensuring the objectives of the CRS exercise are achieved. The challenge however is the inadequacy of such information, especially as many migrants from Nigeria have moved to other participating jurisdictions. The record held by the RFIs is as though many of these migrants are still resident in Nigeria and the ability to update such incomplete records is usually outside of the control of the RFIs.
The Reporting Challenge
The CRS exercise entails the systematic transmission of bulk information by a source country to another participating country via a means known as Automatic Exchange of Information (AEOI). Typically, RFIs collate information of reportable persons in the required format and submit same to the tax authority. The main information to be reported include; name, address, jurisdiction of residence, Tax Identification Number (TIN), date of birth, account number and account balance of the reportable persons4. The collation of reportable persons by an RFI is essentially the process of identification of persons who earn income in one jurisdiction but are resident in another jurisdiction. The tax authority upon receipt of the information from all RFIs, will analyze and collate the information relating to each participating jurisdiction for transmission in a secured manner, to that country.
For example, information of Canadian residents with bank accounts or investment accounts in Nigeria will be collated and shared with the Canadian tax authority. Similarly, information of UK residents with investments or bank accounts in Nigeria will be collated and forwarded to the UK tax authorities. These jurisdictions will in turn conduct the same exercise with their RFIs and exchange information of Nigerian residents with investments or bank accounts in the UK with the Nigerian tax authority (the Federal Inland Revenue Service). The objective of the exercise is to curb tax evasion and ensure that local tax authorities of participating countries have a view of other income earned by their residents, outside the shores of their country. Consequently, all foreign sources of income will be brought under the purview of the relevant tax authorities and assessed to tax as applicable.
However, the high rate of migration especially to other participating jurisdictions, begs the question of how well the information reported during this period captures the new tax residency status of the migrants. Usually, when the resident of a participating jurisdiction "A" moves to another participating country "B", the migrant becomes reportable in country A, having become a 'foreign' resident upon migration. However, the reportable status of an individual can only be based on information available to the RFI in its database, supporting the current place of residence of that individual. The challenge is that most RFIs rely on information provided by their customers and as expected, most customers do not update the records held by their RFIs upon migration. Therefore, there is a significant risk that information being reported by RFIs at this time, may be outdated and incomplete.
As is common with many countries, most migrants maintain ties with their home countries and are more likely to retain investments and continue to engage in financial transactions via their bank accounts. Therefore, such persons who ought to be reportable, may be considered as non-reportable considering that their address, phone number and other critical CRS indicia have not been updated. Consequently, the RFI is unable to capture correctly, all the reportable persons in its database, despite implementing the CRS requirements to the letter. Thus, the current global disruption exposes the inability of the CRS protocol to adequately achieve the objectives of capturing reportable persons and thus leaving room for tax evasion.
Recommendations for key stakeholders
Having identified the impact of the high migration rate on information reporting and the inadequacy of the CRS reporting requirements, we have provided below recommendations to be considered by various stakeholders.
The RFIs
Financial Institutions are at the forefront of CRS reporting and will remain critical stakeholders in actualizing the objectives. In ensuring that the time and resources incurred by RFIs are well justified in fulfilling the purpose of the exercise, RFIs will have to do more than just collate information for submission. Given the times we are in, it is critical for RFIs to promptly commence a database review by reaching out to all customers to update the information on their records. It may be beneficial to have such database reviews/updates more frequently, given the high rate of migration.
To ensure an efficient database review exercise and maximum cooperation of customers, it may be beneficial to sensitize customers on the aim of the exercise and why it is important to ensure an up-to-date record.
Federal Inland Revenue Service (FIRS)
The FIRS has shown continued commitment to the implementation of the CRS in Nigeria. However, a lot still needs to be done in view of the recent challenges. Currently, the Regulations and Guidelines require relevant customers to complete self-certification forms at the request of the RFIs. To ensure this, there is a penalty of ?10 million for failure to comply with the Regulation and ?1 million for every month the failure continues. In addition, where a person gives false information or omits information, the Regulation imposes a penalty of ?5 million.
Whilst the penalties seem stringent enough to stimulate compliance from customers, the implementation seems impracticable. Most customers do not have up to the penalty amounts in their accounts and the RFIs are also cautious of losing customers. Consequently, the penalty relating to customers requires urgent review to more practicable/reasonable measures. 5For example, the government of Jersey imposes a penalty of £300 for failure to comply with any obligation under the CRS regulations and £60 for continued non-compliance after being notified of the penalty which seems more realistic.
We urge the tax authorities to collaborate with regulators within the industry, in arriving at a provision efficient enough to ensure maximum compliance. Such collaboration is required to simplify the process for the RFIs who take on much burden in ensuring taxpayers are fully compliant with the CRS Regulation. For example, the regulator (FIRS in conjunction with CBN) may introduce restriction of transaction thresholds for account holders who do not update their information annually. Also, account suspension by the regulators may be considered for continued non-compliance, as we have seen done in some other jurisdictions. In addition, the FIRS should equally be at the forefront of driving awareness with the public to improve compliance. Beyond issuance of self-certification forms by the RFIs, customers should be required to voluntarily update their information regularly with relevant institutions.
Central Bank of Nigeria (CBN) and other Regulators
The FIRS is the agency responsible for the administration of CRS in Nigeria. However, it is important that other regulators such as the CBN complement the efforts of the FIRS by weighing in on the implementation of some of the provisions. The CBN can compel RFIs to maintain a healthy and up-to-date database of customers which ultimately improves the due diligence process. Recently, the Central Bank of the United Arab Emirates (UAE) imposed financial sanctions on six banks operating in the UAE for breaching due diligence and reporting standards of the CRS6. It is certain that involvement of the UAE Central Bank will motivate the banks and their customers more to comply with the regulation.
One of the CRS indicia is standing instructions to transfer funds to an account maintained in a reportable jurisdiction. This indicia closely relates to other anti-money laundering (AML) procedures which may be of interest to the CBN. Therefore, the CBN and other regulators should collaborate more with the FIRS in ensuring maximum compliance from RFIs and their customers.
OECD
It is commendable that the OECD continually reviews and updates the CRS framework to ensure consistency with current day realities. One of such recent commendable updates is the development of the Crypto-Asset Reporting Framework (CARF) to ensure transparency in crypto-asset transactions. In the spirit of responding to economic changes globally, we urge the OECD to begin to consider what more can be done in addition to the requirements in view of increased global mobility.
One of such considerations might be exploring how real time data can complement information reported by participating countries, as a second level check in ensuring the overarching objectives are achieved. We note that the immigration authorities in each jurisdiction maintain real time data of new residents from reportable jurisdictions. As such, structures may be put in place to leverage this information to complement the accuracy of information reported. While this may be daunting, it is a prospect worth exploring.
Conclusion
Global information reporting is a brilliant strategy to monitor activities of taxpayers abroad. However, it is discouraging where the goals are not fulfilled, despite the effort and resources employed. Whilst the impact of reporting dated information mostly affects the countries receiving new migrants, other jurisdictions should endeavor to implement a comprehensive CRS framework, as the tide may reverse in the near future.
In addition, we recognize that effectively managing the CRS process for optimum realization may be a herculean task in the Nigerian jurisdiction. However, CRS has a potential to contribute a fair share to the annual tax revenue budget in Nigeria. 7The 2020 Global Forum Annual Report indicated that CRS benefited developing nations by at least €29 billion. Beyond increased revenues, the CRS also provides an opportunity for the FIRS to develop a more robust database. This will further serve as a strong basis for future cross-border alliances to enhance the burgeoning tax framework in Nigeria.
Footnotes
1. https://businessday.ng/news/article/nigerians-studying-in-canada-hit-record-high/
2. https://www.cicnews.com/2022/09/how-to-immigrate-to-canada-from-nigeria-0930122.html#gs.ftvfvm
3. https://www.vanguardngr.com/2022/10/exodus-of-the-next-generation-time-for-real-concern/
4. the Income Tax (Common Reporting Standard) Implementation and Compliance Guidelines, 2019 ("The CRS Guidelines")
5. https://www.gov.je/TaxesMoney/InternationalTaxAgreements/IGAs/pages/fatcacrspenalties.aspx
6. https://www.khaleejtimes.com/business/uae-central-bank-imposes-financial-sanctions-on-6-banks
7. https://www.oecd.org/tax/transparency/documents/global-forum-annual-report-2020.pdf
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.