Centralization of Tax Administration in Nigeria: The Legal and Efficiency Considerations

Abstract

In Nigeria, the recently enacted Federal Inland Revenue Service (Establishment) Act 2007 is generating controversy as to whether, among other considerations, the Act centralizes the administration of all federally enacted tax laws, especially those covered by item D7 of the second schedule to Nigeria's 1999 Constitution. In its contribution to the debate, this article assesses the Act from two perspectives, namely law and efficiency. On the legal consideration, the article takes the position that, indeed, the Act centralizes administration of the federal tax laws contemplated by item D7, consistently with the relevant constitutional provisions. On the efficiency consideration, however, the article argues that the centralization effected by the Act is inefficient. It argues that a proper impact assessment of the Act, in light of the constitution which recognizes states as the only beneficiaries of the revenue collected by the affected laws, would have revealed the inevitability of agency problems and costs, which would be difficult to address due to a lack of motivation or incentives in a federal collecting agency and a lack of disciplinary power in the states-beneficiaries. It further argues that the horizontal transition implicit in the Act's reform would create avoidable waste that is bound to arise from an abandonment of years of resources which the pre-Act tax administration framework has created.