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Businesses in Nigeria are at risk of double taxation as state and federal governments battle over the right to collect VAT in Africa’s largest economy, creating uncertainty in a difficult financial environment.

On September 10th, the governor of Lagos, Babajide Sanwo-Olu, signed a law that allows Nigeria’s richest state to collect its VAT.

The state, which is largely made up of the city of Lagos, accounts for about a third of Nigeria’s gross domestic product and is home to almost all of Nigeria’s major corporations and banks, as well as most of the multinationals and most of the country’s wealthy. Officials have long complained that it pays the central government far more taxes than it receives.

A similar law enacted in Rivers State, the center of the country’s oil industry, is on appeal and has been put on hold. Lagos has argued that this postponement does not apply to his right.

As a sign of confusion for the economy, Rivers Governor Nyesom Wike has threatened to shut down businesses that don’t pay VAT locally, while the federal government has urged businesses to continue paying taxes as usual.

“This whole controversy creates confusion and uncertainty – it’s not good for business,” said Muda Yusuf, a consultant and former head of the Lagos Chamber of Commerce and Industry. “Everyone is concerned about the prospect of double taxation. . .[and businesses worry they] can be harassed [federal] and state tax authorities. ”

A manager of a foreign multinational that pays around $ 3.6 million in sales tax annually said, “Our problem is that now we don’t know who to pay to, so we just keep the money. Because you know that when you pay to one [entity], you never get it back [if the court rules it should go to another]. “

The 7.5 percent sales tax is administered by the Federal Inland Revenue Service (Firs), which distributes 15 percent of the money to the central government and the rest to the country’s 36 states, the federal capital Abuja, and municipalities. Most get more than they deposit, but Lagos gets about 15 percent of the total, according to PwC.

The revenue from VAT accounts for about 30 percent of the country’s tax revenue: According to the National Bureau of Statistics, the levy was N 1.53 trillion (3.7 billion) public finance, ”Accra-based consultancy Songhai Advisory said in a statement on Wednesday.

The tax dispute is part of a longstanding debate about the deepening of federalism in Nigeria. Proponents argue that greater state autonomy would reduce insecurity and corruption and allow them to focus on developing the local economy.

Lagos State Information Commissioner Gbenga Omotosa said the new law provides “justice” and “financial federalism” that would allow Nigeria’s economic engine to invest more in infrastructure – including roads, rail and ports – that benefit the whole country would.

“Over 70 percent of the sea or air traffic to Nigeria comes to Lagos, all companies are in Lagos,” he said. “Whatever infrastructure you do in Lagos will affect all parts of Nigeria – so if you improve the roads in Lagos you will get goods faster in other parts of the country.”

SBM Intel, a Lagos-based consulting firm, said the move in Lagos was an important step in giving states more tax power, with others, who were also generating significant revenue, likely to follow suit.

President Muhammadu Buhari wants the economy to be less dependent on oil, which accounts for roughly half of government revenue © Reuters

However, Taiwo Oyedele, head of Africa tax at PwC, said it would only complicate doing business in Nigeria. “Nigeria’s tax system is in a very precarious state and that will only make things worse,” he said. “It’s already complex, why should you make it even more complicated?”

President Muhammadu Buhari’s government has made it a priority to diversify the economy away from oil, which provides about half of the state’s revenue and almost all of its foreign currency revenue. It has also tried to improve the business environment – its ranking on the World Bank’s list of the simplicity of doing business rose 15 places to 131 out of 190 countries between 2019 and 2020.

But Nigeria is still a complicated place for business, said Yusuf. “Companies are already complaining about too many taxes, too many levies, too many fees to be paid,” he said. “Especially at a time when companies are confronted with many problems relating to the macroeconomic environment.”