VAT Attribution and Derivation: A Personal Appeal to All Parties *by Muhammad Nami

Muhammad Nami

 

 

 

 

 

Introduction 

 

I have read a ton of views on the proposed Nigeria Tax Administration and other tax reform bills. On one hand, some stakeholders decry the bills as being a contrast to the current administration’s championing for local government autonomy. Some, like the National Economic Council (NEC), last month recommended the withdrawal of the Bills, stating that there were too many controversies surrounding it. They called for more inclusion in the stakeholder consultation process. The Northern Governors Forum (NGF) in similar fashion rejected the new derivation-based model for Value Added Tax (VAT) distribution in the Bills. On the other hand, some wholly support the Bills and believe that its benefits are transformational and necessary. Each stakeholder and commentator holds their view in light of information that is available to them. And that is valid and fair.

 

 

 

 

 

 

But before I go into the lengthy details of my thoughts on this matter, let me share the definition of the two subjects that are crucial to this conversation: attribution and derivation.

 

 

 

 

 

The principle of derivation in revenue sharing ensures that revenues from taxes are distributed to the region or jurisdiction where they were generated from. For example, if a company generates revenue through sales in a particular state, a portion of the taxes or royalties from that economic activity is returned to the state. The principle of attribution, on the other hand involves allocating tax revenues based on predefined criteria, such as population size, geographical size, need, national interest, or expenditure responsibilities, etc, rather than the location of tax generating entity. Thus revenues are collected nationally and are distributed to states according to agreed-upon formulas.