1 Division of Taxing Powers in Nigeria – a Paradigm Shift BY SANNI, ABIOLA OLAITAN LL.B., (HONS) (O.A.U.) LL.M (O.A.U.), B.L. MATRIC NO: 999006216 2 DECEMBER, 2010. DIVISION OF TAXING POWERS IN NIGERIA – A PARADIGM SHIFT BY SANNI, ABIOLA OLAITAN LL.B., (HONS) (O.A.U.) LL.M (O.A.U.), B.L. MATRIC NO: 999006216 A THESIS SUBMITTED TO THE DEPARTMENT OF COMMERCIAL AND INDUSTRIAL LAW, UNIVERSITY OF LAGOS IN FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF DOCTOR OF PHILOSOPHY (Ph.D) IN COMMERCIAL LAW. DECEMBER, 2010 3 SCHOOL OF POST GRADUATE STUDIES UNIVERSITY OF LAGOS CERTIFICATION This is to certify that the thesis: “DIVISION OF TAXING POWERS IN NIGERIA – A PARADIGM SHIFT” Submitted to the School of Post graduate studies, University of Lagos For the award of the degree of DOCTOR OF PHILOSOPHY (Ph.D) is a record of original research carried out by SANNI, ABIOLA OLAITAN In the Department of Commercial and Industrial Law. ______________________ ___________________ _________________ AUTHOR’S NAME SIGNATURE DATE ______________________ ___________________ _________________ 1 st SUPREVISOR’S NAME SIGNATURE DATE ______________________ ___________________ _________________ 2 nd SUPREVISOR’S NAME SIGNATURE DATE ______________________ ___________________ _________________ 1 st INTERNAL EXAMINER’S NAME SIGNATURE DATE ______________________ ___________________ _________________ 2 nd INTERNAL EXAMINER NAME SIGNATURE DATE ______________________ ___________________ _________________ EXTERNAL EXAMINER’S NAME SIGNATURE DATE ______________________ ___________________ _________________ P.G. SCHOOL SIGNATURE DATE REPRESENTATIVE 4 DEDICATION This thesis is dedicated to the memory of my father Pa Samuel Eluwole Sanni, my aged mother Mrs Comfort Opa Sanni and my darling wife, Sola for her steadfastness, prayer and everything. 5 TABLE OF CONTENTS Page CHAPTER 1 1.0. INTRODUCTION…………………………………………………………………………..1 1.0. Background to the Study ………………………………………………………………….....4 1.2. Statement of the problem ………………………………………………………………….... 7 1.3. Operational Definitions ………………………………………………………………………9 1.3.1. Paradigm …………………………………………………………………..................9 1.3.2. Tax …………………………………………………………………………...............9 1.3.3. Taxing powers ………………………………………………………………………10 1.3.4. Federalism …………………………………………………………………………..10 1.3.5. Fiscal federalism…………………………………………………………………….10 1.4. Scope and limitation of Study………………………………………………………………11 1.5. Research questions ………………………………………………………………………….12 1.6. Theoretical Framework……………………………………………………………...............13 1.6.1. Federalism…………………………………………………………………………14 1.6.2. Fiscal Federalism………………………………………………………...............16 1.6.3. Theories of Division of Taxing Powers…………………………………………...20 1.6.3.1. Conventional Model …………………………………………………………....20 1.6.3.1. Public Choice Theory …………………………………………………………..22 2.0. RESEARCH METHODOLOGY ………………………………………………………….26 CHAPTER 2 2.0. LITERATURE REVIEW ………………………………………………………………..27 2.0. Introduction ……………………………………………………………………...................27 2. 1. Federalism ………………………………………………………………………….28 2. 2. Nature of Tax vis-a-vis Related Terms……………………………………………..33 2.3. Nature of Taxing Powers …………………………………………………………...34 6 2.4. Division of Taxing Powers …………………………………………………………….36 2.5. International Perspectives………………………………..………………………………… 45 2.6. DISCUSSION ………………………………………………………………………………50 CHAPTER 3 CONCEPTUAL BASIS OF TAX & DIVISION OF TAXING POWERS 3.0. Introduction …………………………………………………………………………………56 3.1. Functions of Taxation …………………………………………………………...………….59 3.1.1 Provision of public goods ………………………………………………................59 3.1.2. Distributive functions ……………………………………………………………..62 3.1.3. Economic Stabilization …………………………………………………...............63 3.2. Tax and Right to Property …………………………………………………………………..65 3.3. Nature of Taxing Powers …………………………………………………………………..69 3.3.1. What is a tax? ………………………………………………………………......70 3.3.2. Levy ……………………………………………………………………………....73 3.3.3. Duty ……………………………………………………………………………….74 3.3.4. Fee/Charge ……………………………………………………………………......75 3.3.5. Rates ………………………………………………………………………………78 3.3.6. Fines ………………………………………………………………………………79 3.3.7. Taxing Power …………………………………………………….……………….81 3.3.8. Regulatory Powers ………………………………………………………………. 84 3.4. Distinguishing Between Taxing Powers and Legislative Powers …………………………..88 3.5. Limits of Taxing Powers …………………………………………………………………. ..90 3.5.1 Constitutional limitations ………………………………………………………….91 3.5.2. Policy considerations ……………………………………………………………..93 3.5.3. Legislative hurdle …………………………………………………………………95 3.5.4. Administrative Constraints …………………………………………………….....97 3.5.5. Territorial jurisdiction ………………………………………………………….....98 3.6. Problems Associated with Division of Taxing Power …………………………………… ..99 7 3.6.1. Spillovers or Externalities ……………………………………………………….100 3.6.2. Impact of Tax Policy on Mobility and Distribution of Factors of Production…………...101 3.6.3. Imbalance of revenue and development between States ………………………………...102 3.6.4. Imbalance of revenue in favour of the federal government ……………………..103 3.6.5. Compensating States for revenue loss ………………………………………..104 3.7. Approaches to Allocating Taxing Powers ……………………………………………..104 3.7.1. Should Tax Base be utilised exclusively or concurrently? ……………...........106 3.7.1.1. Exclusive Base Utilization ……………………………………………,……106 3.7.1.2. Concurrent Utilization of Tax Base………………………………………….108 3.7.2. Mechanism for Federal-State Fiscal Coordination ……………………………110 3.7.2.1. Tax credit system ……………………………………………………………111 3.7.2.2. Tax deduction ……………………………………………………………….113 3.7.2.3. Tax Supplement ………………………………………………………………..114 3.7.2.4. Piggybacking …………………………………………………………………...115 3.7.2.5 Grants ……………………………………………………………………………116 CHAPTER 4 LEGAL FRAMEWORK & PRACTICE OF DIVISION OF TAXING POWERS – INTERNATIONAL PERSPECTIVE 4.0. Introduction ………………………………………………………………………………117 4.1. United States of America …………………………………………………………………118 4.1.1. Federal taxing power ………………………………………………………………..122 4.1.2. State taxing powers ……………………………………………………………...126 4.2. Canada …………………………………………………………………………… ……….130 4.2.1. Taxing power of the Dominion…………………………………………………………132 4.2.2. Taxing Power of the Province ………………………………………………………….132 4.3. Australia …………………………………………………………………………...............143 4.4. India ……………………………………………………………………………………….149 4.5.Brazil………………………………………………………………………………………..155 8 CHAPTER 5 EVOLUTION OF DIVISION OF TAXING POWERS IN NIGERIA FROM 1954 TO 1999 CONSTITUTION 5.0. Introduction ………………………………………………………………….. ……..……161 5.1. Fiscal Arrangement in the Pre-Colonial era ………………………………………..……..162 5.2. Evolution of a modern Tax System – From community Tax to Personal Income Tax ……………………………………………….…………………..………163 5.2.1. Harmonisation of Community Taxes (Direct Taxation)…….. ………..………...164 5.2.2. Emergence of Personal Income Tax ………………………………….…………166 5.2.3. Introduction of Regionalism ………………………………………….…………171 5.2.4. Reconsideration of a “dual system”……………………………………… …….174 5.2.5. Chicks Commission, 1953 ……………………………………….……………...178 5.2.6. 1954 Lyttleton Constitution………………………………………….………….181 5.3. Independence to Military Rule (1960-1966) ……………………………………………...188 5.4. Military Rule and Division of Taxing Powers ………………………………………........192 5.3.1. Dina‟s Committee ………………………………………………………………194 5.4.2. Mohammed/Obasanjo Military Government ……………………………………201 5.5. The provisions of the 1979 constitution …………………………………………………..208 5.6. The Military Rule from 1983 -1999 ……………………………………………………… 211 5.6.1. The Emergence of the Sales Tax Act …………………………………...............212 5.6.2. Era of Study Group…………………………………………………………........213 CHAPTER 6 FRAMEWORK FOR DIVISION OF TAXING POWERS UNDER THE 1999 CONSTITUTION 6.0. Introduction ………………………………………………………………..………………217 9 6.1. Constitutional Framework…………...……………………………………….…................218 6.2. Federal Taxing Powers …………………………………………………………………....223 6.2.1. Implied grant…………………………………………………………………….225 6.2.1. Limitations of the Federal Taxing Powers ………………………………………230 6.3.3. Scope of and Contentious Issues arising from Federal Taxes …………………………..231 6.3.3.1. Customs Duties ………………………………………………………………..231 6.3.3.2. Excise Duties ………………………………………………………………….236 6.3.3.2. Income/Profits Tax ……………………………………………………………238 6.3.3.3. Personal Income Tax …………………………………………………………240 6.3.3.4. Companies Income Tax ……………………………………………………….244 6.3.3.5. Petroleum Profits Tax………………………………………………………….249 6.3.3.6. Education Tax …………………………………………………………………254 6.3.3.7. Technology Tax ……………………………………………………………….256 6.3.3.8. Capital Gains Tax ……………………………………………………………..256 6.3.3.9. Stamp Duty ……………………………………………………………………258 6.3.3.10. Value Added Tax ……………………………………………………………261 6.4. States Taxing Powers …………………………………………………………………….267 6.4.1. Express State Taxing Powers ……………………………………………………267 6.4.2. Implied Taxing Powers of the States ……………………………………………268 6.4.2.1. The subject matter must not be on the Exclusive List ………………...............269 6.4.2.2. Whether the subject matter is on the Concurrent Legislative List …………….270 6.4.2.3. Any other specific provision in the Constitution?.......................……………..……….275 6.4.3. Residual Taxing power of the State …………………………………………………...275 6.4.3.1. Betting Duty Law …………………………………………………………………….278 6.4.3.2. Pool Betting Tax ………………………………………………………………………279 6.4.3.3. Education Development Levy Law ………………………………………………….279 6.4.3.4. Entertainment Tax …………………………………………………………….280 6.4.3.5. Special Development Levy ……………………………………………… ………281 6.4.3.6. Trade Cattle Control and Tax …………………………………………………………283 6.4.3.7. Tenement Rates ……………………………………………………………………….284 6.4.3.8. Personal Income Tax Law ……………………………………………………………284 10 6.4.3.9. Stamp Duties Law……………………………………………………………. ………286 6.4.3.10. Capital Gains Tax Act ………………………………………………………..287 6.4.3.11. Produce Sales Tax …………………………………………………………..288 6.4.3.12. Sales Tax Law. …………………………………………………………….......289 6.4.4. Delegation of States taxes to the Local Government Councils........................................295 6.5. Local Government Taxing Powers ……………………………………………………….296 6.6. Division of Taxing Powers and Principles of Federalism ……………………………......304 6.6.1. Separateness and independence of each government ……………………….....304 6.6.1.1. Financial Independence ……………………………………………………….305 6.6.1.2. Taxation and Territoriality ……………………………………………………309 6.6.1.3. Autonomous tax institution …………………………………………. ……….311 6.6.1.3. Autonomous tax policy ……………………………………………………. ...322. 6.6.2. Mutual non-interference or inter-governmental immunities …………………….326 6.6.3. Equality between State Governments ………………………………………...…329 6.6.4. Division of Powers ……………………………………………………………....330 CHAPTER 7 SUMMARY, FINDINGS AND CONCLUSION 7.0. Summary ………………………………………………………………………………….339 7.1. Findings …………………………………………………………………………...............353 7.2. Contributions to Knowledge ………………………………………………………………355 7.3. Conclusion & Recommendations …………………………………………………………356 11 AKNOWLEDGEMENTS My gratitude goes to the Almighty God for His grace over me throughout my academic sojourn this far. I am indebted to my supervisors Prof P.K. Fogam and Prof T.A.I. Osipitan for their sacrifice and commitment to my career development without which this work would not have met the deadline for submission. I sincerely appreciate the encouragement of Prof. C.K Agomo at all times. I thank Prof. Oluwole Akanle and Mr Ade Ipaye for sparing time for regular intellectual discourse. Without Professor Oyelowo Oyewo and Prof Fogams‟s foresight in graciously approving a one year study leave for me this thesis could have still been a work in progress. I thank God for their exemplary leadership. Words cannot express my profound appreciation to Prof. I.O Smith, Dr Yemi Oke and all the members of the Academic Programme Committee (APC) for their encouragement and guidance. Profs Ogundipe, Okanlawan, Akinboye, Ilori, Dr Obasoro John and Dr. Okunniga deserve special mention. I am indebted to Mrs Kathy Mandlebaum, the former Director of the International Tax Programme, Temple University, Philadelphia, United States of America where I was a Fulbright Scholar between July 2002 to May 2003. I also thank Christiana-Panayi, HJA for her supervision of my work while I was a Visiting Research Scholar to the Centre for Commercial Law Studies, Queen Mary College, University of London. My sincere gratitude goes to the University of Lagos for granting leaves which enabled me to take advantage of opportunities to travel abroad for research purposes. I sincerely thank Mr Olu Sodimu and Prof Toyin Ogundipe for facilitating 12 a Ph.D Financial Assistance Grant by the University of Lagos. I thank Professor Owasanoye for facilitating my leave at the Nigerian Institute of Advanced Legal Studies during which this work was finally concluded. My special gratitude goes to my seniors Prof. A.A. Adeyemi, Prof. Akin Oyebode, Prof. E.N.U Uzodike, Prof. K. Mowoe, Chief Akin Ibidapo-Obe and Prof. A. Atsenuwa for their encouragement. Special thanks also go to Mrs Joke Oyewunmi, Dr. Joe Abugu, Dr. Wale Olawoyin, Dr. Dayo Amokaye, Dr Bolodeoku, Mr.Olaniyan, Mrs Asikia Ige, Mr Akeem Bello, Mr.Tunde Otubu, Dr. K.A. Amusa, Mrs Kemi Adekile, Mr Gbenga Akingbehin, Dr. Dayo Ayoade, Mrs Iyabo Ogunniran, Mrs Kemi Omotubora, Mr Yomi Olukolu, Mr. Tunde Oni, Yinka Owoeye, Wahab Shittu and Dr. Simon Igbinedon for their comments and encouragement at different stages of the work. My immediate family bore the brunt of my being an absentee father during my trips abroad and obsession with this research. I am also grateful to my siblings Rotimi, Lekan, Babatunde, Toyin, Tunde, Joke and their spouses. I also appreciate my in-laws the Ibraheems for their prayer and support. I sincerely thank Messrs Lekan Bada, Akin Akintayo, Ade Adegoroye, Folarin Philip, Emmanuel Oke and my bosom friend Engr Bayo Owojori for helping to proof read this work. I thank Mrs Ikwenobe, Pastors Amuse, other staff of Departments of Commercial and Industrial and Public Law, my teeming students, friends too numerous to mention for their constant prayer and encouragement. May the Almighty God reward you all for being such a blessing in my life. 13 SANNI, ABIOLA OLAITAN ABSTRACT The prolonged military rule in Nigeria has bequeathed an over centralized structure under the Constitution of the Federal Republic of Nigeria, 1999 whereby the Federal Government generates about 90 percent of the country‟s tax revenue. While the need for decentralization and diversification of Nigerian revenue base from oil is self evident, the critical roles of division of taxing powers in achieving these laudable objectives are yet to be articulated and mainstreamed in public discourse. This thesis examines the framework for division of taxing powers in Nigeria and the gap between theory and practice based on the country‟s historical experiences and that of other federations. It is argued that the current structure of division of taxing powers is antithetical to the basic principles of federalism. The thesis recommends a concurrent use of a few broad based taxes under a cooperative federalism framework as a panacea for reform. . This thesis is divided into seven chapters. Chapter One is on general introduction and research framework while Chapter Two focuses on Literature review. The jurisprudential basis of tax and other related terms form the basis of Chapter Three. Chapter Four examines the international perspectives of division of taxing powers in some federal countries such as United States of America, Canada, Australia, India and Brazil. Chapter Five examines the evolution of division of taxing powers in Nigeria while Chapter six discusses the scheme of division of taxing powers under the 1999 Constitution and the extent to which it either converges or diverges from the 14 principles of federalism. The work is concluded in Chapter Seven with summary, findings and recommendations. TABLE OF CASES Aderawos Timbers Trading Company Ltd v. FBIR (1961)1 All NLR 247……………………...231 Angus v. Minister of National Revenue (1957) Ex CB 342……………………………………………139 Attorney General of Bendel v Attorney General of Federation (1982) 3NCLR 1…………………………………………………………………………………………..50 Attorney General, Federation v. Attorney General, Abia State & 35 Ors. (No 2) [2002] 6 NWLR (Pt.76)………………………………….50, 233, 257, 276, 333 A-G (NSW) v. Homebrush Flour Mills(1937)56CLR390......................................................72 Attorney General, Lagos State v. Attorney General, Federation & 35 Ors. Suit No. SC/20/2008 ……………50, 89, 225, 230, 233, 241, 266, 293, 307 Attorney General, Lagos State v. Eko Hotels & Suite &FIRS 1 TLRN, 25……….265, 266, 291,350 Attorney General of Ondo State v. Attorney General of the Federation (2002)9 NWLR223……………………………………………………………………………………………………………..93, 337 Attorney-General of Ogun State v Attorney-General of the Federation (1982) 2 NCLR 166…………………………………………………………………….50, 325 Attorney-General of Ogun State v. Alhaja Ayinke Aberuagba (1984) S.C. 20…………………………………………………35, 51, 55, 89, 92, 94, 116, 225, 226, 229, 230, 232, 236, 239, 292, 294, 334, 349. 15 A-G (NSW) v. Homebrush Flour Mills Ltd(1937)56 CLR 390…………………………………………73 Australian Tape Manufacturers Association v. Commonwealth (1993)176 CLR480………………………………………………………………………………………………………71 Bamidele & Ors v. Commissioner for Local Government (1994)2NWLR(Pt.28)568............................................................................................................................303 Bank of Tornto v. Lambe(1887)12 AC. 575...........................................................................................134 Baxter v. Commissioner for Taxation (NSW)(1807)..........................................................................326 Bolten v. Madsen (1963)110 CLR 497........................................................................................... ..........145 Boucher v. Lawson (1973)Cas. Temp. Hard 85.(1738) Cunning p.144...........................97, 308 Burnette v. Coronado Oil 285 US 396 (1932)................................................................................... .....326 Cape Brandy Syndicate v. IRC [1921] K.B. 64.................................................................................70, 231 California v. Central Pacific. 127 US 1(1888)................................................................................ ......328 Caron v. King (1924) A.C. 999...................................................................................................................134 Collector v. Day US 113 (1870)............................................................................................... .................326 Coltness Iron Company v. Black (1881) 6 A.C.315.ilac Circuit Court..........................................95 City of Essendon Corp v. Criterion Theatres (1974) 74 CLR1..................................................327 D’Emeden v. Pedder (1904)1CLR 91...................................................................... ............................326 Daymond v. South West Water Authority (1976) AC 609...........................................................77 Davis v. Mills (1904)194 US 451............................................................................................................65 Deakins v.Webb (1904)1 CLR 585.......................................................................................................326 Dennis Hotels Pty v. Victoria (1959-1960)104 C.L.R.529.........................................................144 Dickinson’s Arcade Pty v. The State of Tasmania(1974)130 C.L.R.1....................................144 DFC of T v. Brown (1958) 100 CLR.32.................................................................................................68 16 Dobbins v. Commissioner of Erie County 16 Pet 435(1842)...................................................326 Emelogu v. The State (1988)2NWLR(Pt.78)528...........................................................................293 Entick v. Carrighton (1765)19 State Tr.1029..................................................................................65 Eti-Osa Local Government v. Jegede(2007)10 NWLR(Pt.1043)537....................................335 Fairfax v. Commissioner of Taxation (1965) 114 C.L.R. 1 ………………………………………76 Fawehinmi v. Babangida (2003)3NWLR(Pt.808)604..............................................................293 First Bank Plc v. A.G. Anambra (2000)1.N.R.L.R.129..................................................................68 Helvering v. Powers 293 US 214 (1943).......................................................................................327 INEC v Musa [2003] 10 W.R.N.1...........................................................................................................34 Indian v. Taylor(1955) A.C 491........................................................................................98, 308, 309 Indian Motorcycle Ltd.v. United States 283 US 570 (1931)....................................................326 Johnson v. Maryland 254 US 51 (1920)..........................................................................................326 Knight, Frank and Rutley v. A-G Kano State(1998)7NWLR(Pt.556)1...................................303 Lakanmi v A.G. for Western State (1971) 1 U.I.L.R., 201..........................................................194, 196 Lond v. Rockwood 227 US 142 (1928)........................................................................................... ...326 Mama Cass Restaurants Ltd v. Federal Board of Inland Revenue Suit No. FHC.L/CS/826/04........................................................................................................... ........263, 264 Manufacturers’ Association of Nigeria v. A-G Lagos State Suit No.ID/105M/2001...............265 Mapleview Estate, Inc v City of Brown City No. 236366 San ………………………………………….78 Matthews v Chicory Marketing Board (Vict), (1938) 60 C.L.R. 263 ......................................70, 145 McCray v. United States 195 U.S. 27 (1904) at p.59. McCulloh v. Maryland 4 Wheat.316 (1819).....................................................................................3247 Mobil Producing (Nig) Ltd v. Tai Local Government Council(2004)10 CLRN99.............336 17 New York v. United States 326 US 587...............................................................................................327 Nichols v Ames (173 U.S. 509 (1929), p.505.................................................................................82, 339 Nigerian Soft Drinks Ltd v. A-G Lagos State (1987)2NWLR9Pt.57)444................................292 Ohio v. Helvering 293 US 360 (1943).......................................................................................... .........327 Ohio v. Thomas 173 US 276(1899).............................................................................................................328 Panhandle Oil Company v. Mississipi 277 US 21(1928)....................................................................326 Peterswald v. Batley(1904)1 CLR 497......................................................................................................145 Parton v. Milk Board 80 C.L.R., 229............................................................................................................144 Pirrie v. McFarlane (1925)36 CLR 170......................................................................................................327 Polaroid Corp v. Offerman, 507 S.E. 2.d 284, 349 N.C. 290 (1998)................................................248 Pryce v. Monmouthshire Canal and Rly Companies (1897)4 App Cas 197..........................................................................................................................................75 Registered Association of Telecommunications Operators of Nigeria & Ors v. Lagos State & Ors. (Unreported) Suit No.FHC/L/CS/517/06...........................................................86 S.A. Authority v. Regional Tax Board (1967) N.C.L.R. 452..................................................................234 Saginaw Co. v. John Sexton Corp of Michighan 232 Mich. App 202............................................................................................................ ....................................75 S.D.V. Nigeria Limited v. Apapa Local Government Council (Unreported Suit) The Guardian 13th May, 2000, p.31 ......................................................................302 Shell Petroleum Development Company of Nigeria Limited v. Burutu Local Government Council (2002)1.NLRLR 1......................................................................79, 299 Societe Centrale D’Hypothesques v. Cite de Quebec (1961) QLR 661............................................77 18 South Australia v. Silver Bros Ltd [1932] A.C. 514. South Carolina v. United States 199 US 437 (1905)............................................................................ .327 Springer v. United States 102 U.S.586(1880).........................................................................................124 Tennant v. Smith (1892) A.C. 154...................................................................................................................95 United States v. Shoe Corp 532 U.S. 360(1998)............................................... .........................................77 Vestey v. Inland Revenue Commission (1980)AC 1148....................................................................68 Western Australian v. Chamberlain Industries property Ltd 121 C.L.R......................... ..........144 19 TABLE OF STATUTES Betting Duty Law No. 26 Cap.B1 Laws of Lagos State, 2003...................................................278, 279 Capital Gains Tax Act, Cap. C1 Laws of the Federation of Nigeria, 2004.........................228, 259, 315, 337 Capital Gains Tax Act, No.44 Cap. C1 Laws of the Lagos States 2003.................................280,288 Constitution of the Federation of Nigeria, 1960........................................................................190, 230 1963 Constitution of the Federation of Nigeria, Act No. 20 of 1963 Section 2.................................................................................................................... .............................................188 Section 76(1).......................................................................................................................................................188 Section 138(1)....................................................................................................................................................188 Section 140.................................................................................................................. ........................................188 Section 166.................................................................................................................. .............................................5 1979 Constitution of the Federal Republic of Nigeria........................................................................209, 210, 229, 230, 261, 273 1999 Constitution of the Federal Republic of Nigeria, Cap. C3 Laws of the Federation of Nigeria, 2004 Section 2(1)....................................................................................................................................................4, 104 Section 2(2)................................................................................................................................................................4 Section 3(1)..............................................................................................................................................................54 Section 3(2)...............................................................................................................................................................54 Section 4(2)...................................................................................................................................................88, 313, 258 Section 4(3)....................................................................................................................................................2, 358, 20 Section 4(5)....................................................................................................................................................2, 358 Section 4(7).............................................................................................................................270, 277, 316, 358 Section 7(5).......................................................................................................................................91, 270, 298 Section 14(2)(b)...................................................................................................................................................50 Section 16(1)..................................................................................................................................................50 Section 16(4)..............................................................................................................................................63 Section 24(f)...............................................................................................................................................59 Section 44(1).......................................................................................................................................67, 95 Section 44(2)...............................................................................................................................................67 Section 45(1)...............................................................................................................................................67 Section 58..............................................................................................................................................94, 95 Section 59..................................................................................... .............................................95, 316, 317 Section 120.................................................................................................................. .................................76 Section 122...............................................................................................................................................144 Section 162..........................................................................................................76, 235, 245, 251, 305 Section 163.................................................................................................................. ......................259, 318 Section 165...................................................................................................................................................322 Section 315.................................................................................................................. ...................8, 294, 357 Section 318.....................................................................................................................................................306 Item 2 Exclusive Legislative List...........................................................................................................270 Item 3 Exclusive Legislative List...........................................................................................................270 Item 4 Exclusive Legislative List...........................................................................................................233 Item 5 Exclusive Legislative List.................................................................................................233, 271 Item 6 Exclusive Legislative List................................. ...........................................................................271 Item 8 Exclusive Legislative List............................................................................................................233 Item 14 Exclusive Legislative List.........................................................................................................233 Item 18 Exclusive Legislative List.........................................................................................................233 Item 16 Exclusive Legislative List............................................................................................2, 240, 335 Item 17 Exclusive Legislative List...........................................................................................................233 Item 18 Exclusive Legislative List...........................................................................................................233 Item 22 Exclusive Legislative List...........................................................................................................233 21 Item 23 Exclusive Legislative List............................................................................................................233 Item 24 Exclusive Legislative List..........................................................................................................233 Item 27 Exclusive Legislative List..........................................................................................................233 Item 31 Exclusive Legislative List..........................................................................................................233 Item 47 Exclusive Legislative List........................................................................................................233 Item 50 Exclusive Legislative List........................................................................................................233 Item 51 Exclusive Legislative List..................................................................... ....................................233 Item 54 Exclusive Legislative List.........................................................................................................233 Item 61 Exclusive Legislative List..........................................................................................................233 Item 25 Exclusive Legislative List..............................................................................................................2 Item 58 Exclusive Legislative List...................................................................................................2, 335 Item 59 Exclusive Legislative List................................................................................2, 104, 257, 335 Item 62(a) Exclusive Legislative List......................................................................................................89 Item D7 Concurrent Legislative List.................................................................................272, 273, 313 Item D8 Concurrent Legislative List................................................................241, 272, 273, 313, 314 Items D9-10 Concurrent Legislative List..........................................................................244, 273, 295 Chapter 2...............................................................................................................................................................56 Companies Income Tax Act, Cap C21 Laws of the Federation of Nigeria, 2004...............228, 247 Customs and Excise Management Act, Cap C4 Laws of the Federation of Nigeria, 2004...................................................................................... ..........228 Companies Income Tax Ordinance No.14 of 1939 Section 2.................................................................................................................................................. ....................171 Section 4.................................................................................................. ....................................................................171 Section17A................................................................................................................... ...............................................172 Education Tax Act Cap. E4 Laws of the Federation of Nigeria, 2004 Section 5.................................................................................................................... ....................................................76 Section 3(1)................................................................................................................................................................257 Section 1(3)...................................................................................... ...........................................................................257 Education Development Levy Law No.66 Cap. E4 Laws of Lagos 22 State, 2003..................................................................................................................................................279, 281 Entertainment Tax Law Cap. E2 Laws of Lagos State, 2003.................................................279, 280 Federal Inland Revenue Services (Establishment) Act No.13, 2007.................................273, 311, 312, 313, 315, 316, 317, 320 Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F34, Laws of the Federation of Nigeria, 2004 Income Tax Management Act (ITMA), Cap 173 Laws of Federation of Nigeria, 1990 ...................................................................................................191, 342 Income Tax (Colony) Ordinance, 1927 Section 1.................................................................................................................... ......................................169 Section 3(a)................................................................................................................. ..................................169 Land Use Charge Law Cap L61 Laws of Lagos State, 2003.............................................296, 302 Lagos State Wharf Landing Fee Law, 2009......................................................................................237 Lagos State Infrastructure Maintenance and Regulatory Agency Law,2004 Section 3...........................................................................................................................................................86 Section 16........................................................................................................................................................86 Lytltleton Constitution of 1954 Section 51(1)................................................................................................................................................183 Item 36 Exclusive Legislative List.........................................................................................................183 National Information Technology Development Agency Act, 2007........................................256, 355 Nigerian Investment Promotion Commission Act, Cap N.117 Laws of the Federation of Nigeria, 2004 Non-Native Income Tax (Protectorate) Ordinance No.21 of 1931 Section 1.......................................................................................... ......................................................................170 Section 3.................................................................................................................... ............................................170 Off-Shore Oil Revenue Decree No.9 of 1971...........................................................................................199 Public Enterprises (Privatization and Commercialization) Act, Cap P.38, Laws of the Federation of Nigeria, 2004 Personal Income Tax Act, No. 104,1993 Cap.P8 Laws of the Federation of the Nigeria, 2004 Section 86(1)................................................................................................................ .............................................98 23 Section 2(2)............................................................................................................................ ...................................274, 275 Personal Income Tax Law No.16 Cap.P4 Laws of Lagos State, 2003..........................................278, 285, 286, 311, 314, 328, 337 Petroleum Profits Tax Act, Cap.P13, Laws of the Federation of Nigeria, 2004......................228, 249, 252 Pool Betting Tax Law No.7 Cap. P10 Laws of Lagos State, 2003................................. ..........279, 280 Produce Sales Tax Law No.19 Cap.19 Laws of Lagos State, 2003.........................................278, 289 Revenue Mobilization Allocation and Fiscal Commission Act No. 49 of 1989, Cap R4 Laws of the Federation of Nigeria, 2004...............................................................219 Stamp Duties Act, Cap S8 Laws of the Federation of Nigeria, 2004.............................................228, 260, 274, 315, 316 Stamp Duties Law No.16 Cap.S10 Laws of Lagos State, 2003.............................................278, 287 Sales Tax Law No.9 Cap.S3 Laws of Lagos State 2003.......................................................................264, 278, 289 Special Development Levy Law No.4 Cap.S8 Laws of Lagos State, 2003...................................278, 282 The Constitution (Distributable Pool Account) Decree No.13 of 1970.......................................198 The Income Tax Management (Uniform Taxation) Decree No.7 of 1975...................................201 Taxes and Levies (Approved List for Collection) Act No. 21 of 1998, Cap T1 Laws of the Federation of Nigeria, 2004............................................................................... ......274, 321, 331, 332, 352, 358 The Unification Decree No. 24 of 1966.........................................................................................................193 Tenement Rates Law No.10 Cap.T2 Laws of Lagos State, 2003........................................278, 284 Trade Cattle Control and Tax Law No.4 Cap.T4 Laws of Lagos State 2003..............................278, 284 Value Added Tax Decree No.102 of 1993, Cap V1 Laws of the Federation of Nigeria, 2004 Section 40.................................................................................... ........................................................215, 235, 263 Section 2,3,5,6&7............................................................................................................ ........................................292 24 ABBREVIATIONS AC Appeal Court AG Attorney General ASLJ Arizona State Law Journal BNA British North America Act BTR British Tax Review Cap Chapter CGT Capital Gains Tax CGTA Capital Gains Tax Act CIT Company Income Tax CITN Chartered institute of Taxation of Nigeria CJN Chief Justice of Nigeria CFRN Constitution of the Federal Republic of Nigeria CLL Concurrent Legislative List CLR Commonwealth Law Report CLS Current Law Series CE Custom and Excise CGT Capital Gain Tax DPA Distributable Pool Account Ed Editor Edn Edition ELL Exclusive Legislative List ET Education Tax ETA Education Tax Act Et al And Others FA Federation Account FBIR Federal Board of Inland Revenue FEC Federal Executive Council FIRS Federal Inland Revenue Service FIRSEA Federal Inland Revenue Service Establishment Act FPFAA Federal-Provincial Fiscal Arrangement Act FHC Federal High Court FIRS Federal Inland Revenue Service GST General Sales Tax HMF Habour Maintenance Fund HST Harmonised Sales Tax IMF International Monetary Fund ITMA Income Tax Management Act 25 JTB Joint Tax Board JMAS Journal of Modern African Studies JPE Journal of Political Economy, J JUSTICE LFN Laws of Federation of Nigeria LICJN Legal Issues For Contemporary Justice in Nigeria LUCL Land Use Charge Law MAN Manufacturer Association of Nigeria (MAN) MPJFIL Modern Practice Journal of Finance & Investment Law NCS Nigerian Customs Services NDCC Niger Delta Development Commission NECA Nigerian Employer Consultative Assembly NIALS Nigerian Institute of Legal Advance Studies NNPC Nigerian National Petroleum Corporation NIIS National Institute of International Affairs NITDA National Information Technology Development Agency NJL Nigerian Journal of Legislation NLJ Nigerian Law Journal NWLR Nigeria Weekly Law Report Ors Others PAYE Pay As You Earn Ph.D Doctor of Philosophy Degree PITL Personal Income Tax Law PPIB Productivity Price & Income Board PPT Petroleum Profits Tax PPTA Petroleum Profits Tax Act QJE Quarterly Journal of Economics. QST Quebec Sales Tax RST Retail Sales Tax PIT Personal Income Tax PITA Personal Income Tax Act SC Supreme Court SD Stamp Duties SDA Stamp Duties Act TCA Tax Collection Agreement TRA Tax Rental Agreement UILR University of Ife Law Report UK United Kingdom UDIPTA Uniform Division of Income for Tax Purpose Act USA United States of America VAT Value Added Tax VATA Value Added Tax Act Vol Volume WRN Weekly Report of Nigeria WT Withholding Tax 26 CHAPTER ONE 1.0. INTRODUCTION Federalism is premised on the division of powers and functions between the federal and state governments. By implication there is plurality of government. If conflicts are therefore to be avoided between the levels of government, there must be an agreement which clearly spells out the power relation between the federal and state governments. The desire to maintain unity, while equally preserving the diverse interests within the federation, necessarily gives rise to an arrangement where matters of common interests are reserved for the federal government, while matters of a purely local nature, are within the competence of the state governments. The devise of most federating countries is to embody the agreement in the Constitution.1 The Constitution is therefore the basis of the division of taxing powers in every country. However, the technical division of powers might differ from country to country or from constitution to constitution.2 Generally, the technique for the division of powers is that of enumerated powers and residual powers. The enumeration may be made under one list of matters exclusive to either the federal or state governments, or there may be two or even three lists, one for the federal government exclusively, one to the state governments exclusively and another concurrent to both.3 The idea of having two legislative lists has long been a feature of the Nigerian Constitution.4 The enumerated matters under the 1 See also, Nwabueze, B.O, Federalism in Nigeria under the Presidential Constitution (London: Sweet & Maxwell, 1983) p.20. Osipitan, T., “Federalism under the New Military Administration in Nigeria – Myth or Reality?”, Vol. 5, Journal of Private and Property Law (JPPL), April 1986,p.45 at p.49. 2 Emiko, G.I. “An Analysis of Federal/State Taxing Powers” in Tax Law and Tax Administration in Nigeria, (Lagos: Nigerian Institute of Advanced Legal Studies, 1991), ed., Ajomo, M.A., p.12. 3 Osipitan, T, supra note 1, p. 21.. 4 Akande, J.O., Akande: Introduction to the Nigerian Constitution (London: Sweet & Maxwell, 1982), p. 8. 27 Constitution of the Federal Republic of Nigeria, 19995 are grouped under two lists – one exclusive to the Federal Government and the other concurrent to it and the State Governments, namely, the Exclusive and Concurrent Legislative Lists, respectively.6 As the name suggests, matters on the Exclusive Legislative List belong to the Federal Government to the exclusion of the State Governments in so far as the Constitution does not provide otherwise.7 The Exclusive Legislative List consists of 68 items while the Concurrent Legislative List has 12 items. Where there is a list of matters concurrent to both the Federal and State Governments, the Federal Government almost invariably prevails in the event of conflict or inconsistency between the laws of the two governments.8 The adoption of the above general scheme of division of powers has far-reaching consequences for the allocation of taxing powers. While certain taxes are expressly reserved for the Federal Government, none is so reserved for the States. Under the current arrangement, the most significant taxes in terms of revenue generation and potentials such as the Petroleum Profits Tax, Companies Income Tax, Customs and Excise Duties are exclusively within the competence of the federal government.9 Beyond this, the important taxes administered by the states such as Personal Income Tax, Capital Gains Tax, Stamp Duties are established by federal statutes which also determine their rates and administrative framework and regulations. The Value Added Tax, which is now a 5 Cap C 23 Laws of Federation of Nigeria, 2004 (Hereinafter referred to as the “1999 Constitution”) 6 Nwabueze, B.O., supra note 1, p. 39. 7 See section 4(3) of the 1999 Constitution. 8 Section 4(5) of the 1999 Constitution provides that “If any Law enacted by the House of Assembly of a State is inconsistent with any law validly made by the National Assembly, the law made by the National Assembly shall prevail, and that other Law shall, to the extent of the inconsistency, be void.” 9 See items 16, 25, 58 and 59 of the Exclusive Legislative Lists of the 1999 Constitution. 28 significant source of revenue to the States, is imposed and administered by the federal government under a revenue sharing arrangement which is exclusively determined by the federal government.10 The federalised scheme of division of taxing powers under the extant Constitution has somewhat beclouded the extent of the scope of the taxing powers of the States. A distinguished tax administrator recently opined that the state governments in Nigeria lack power to impose taxes under the 1999 Constitution and can only administer taxes imposed under federal statute. According to her: “Strictly speaking and sentiments aside, the Constitution would appear to recognize in most instances that fiscal authorities for taxes lie with the Federal and Local Government tiers of Government only. State involvement would appear to be restricted to the administration of Federal Taxes as defined in the Constitution as may be delegated through the National Assembly. Clearly, this is one area that will elicit debate which I would encourage not just now but in our various States. It is also an area for public discourse as most of the taxes and charges that the taxpayer are bearing at the State and Local government levels, are strictly speaking unconstitutional if not backed by proper laws. The debate on this topic would enhance our understanding of our current Constitution but also assist us as we seek to improve on the Constitution”.11 The federalised nature of taxing powers has not only made the States to be dependent on federal allocation but also provided a springboard for friction between the federal and States over any tax (item) that seems to have potentials for revenue generation. 10 The VAT proceeds are divided in the ratio of 15%:50%:35% to the Federal Government; the State Governments and the Local Governments respectively. See section 36 of the Value Added Tax Act No 102, 1993 as amended by the Value Added Tax (Amendment) Act No 12 of 2007. 11 Ms Ifueko Omoigui, Executive Chairman, Federal Inland revenue Services, in a paper titled “Building a Viable State: Deepening/Widening Internally Generated revenue for Effective Capital Financing”, delivered at the Governor‟s Forum, Abuja 26 th October, 2007 29 While it is indubitable that Nigeria is a federal country in form,12 the long period of military rule seems to have bequeathed a system that leans more in favour of a unitary system in its substance. 1.1. Background to the Study Every era is characterized by vogue words or phrases that suddenly become ubiquitous.13 Since the commencement of civilian rule14 under the Constitution of the Federal Republic of Nigeria, 1999,15 the vogue phrases in Nigeria have, perhaps, been “fiscal federalism” and “resource control”16 which are often used interchangeably. These words mean different things to different people. They have generally re-awakened the consciousness on the need to rethink or reform the basis of inter-governmental fiscal relationships in Nigeria.17 The 12 Section 2 of the 1999 Constitution provides (2)(1) “Nigeria is one indivisible and indissoluble sovereign state to be known by the name of the Federal Republic of Nigeria. (2) Nigeria shall be a Federation consisting of States and a Federal Capital Territory”. 13 Pinto, D., “Governance in a Globalised world: Is this the end of the National State?” in Rajiv, B., ed, International Tax Competition – Globalised and Fiscal Sovereignty, (London: Commonwealth Secretariat, 2002), p. 66. 14 Nigeria was ruled by successive Military Government which emerged from coups and counter coups for a period of twenty eight years out of the country‟s forty nine years of political independence from Britain in 1960. 15 Cap C23, Laws of Federation of Nigeria (LFN), 2004 (Hereafter referred to as the “1999 Constitution”) 16 However the history of the agitation for jus t allocation of resources dates back to the resistance by Adaka Boro a Police Officer from Niger Delta Area of the former Easter Nigeria whose group demanded for the Sagbama Kingdom. See generally, “The Adaka Boro Centre – Documenting the Niger Delta Struggle” available online at http://www.adakaboro.org/home. Site visited on 14th July 2009. 17 The term "resource control" is now subject to various interpretations, by politicians, politic al scholars, military-politicians, government and non-governmental organizations, corporate executives, contractors, diplomats and several interest groups. These diverse interpretations seek not to clarify but confuse the issue so that the communities and the peoples‟ position on the matter are further compounded so as to delay an agreement or a resolution on the matter. Let us examine these variegated views on resource control vis a viz the position of the communities. The mining industry as a whole and to some extent the logging companies believe that resource control or its agitation by the people of the Niger Delta and beyond are merely a clamour for a return of parts of oil and logging revenue into the regions (states). They advertised the belief that once the states have been settled, there will be peace. Government leaders believe that an agitation for control of resources is nothing but "separatist tendencies" that must not be tolerated, but crushed. Government does not favour dialogue on this matter even though its agents preach peace. The federal government sees the setting up of Niger Delta Development Commission (NDDC) by the government as a way out of the problems in the Niger Delta. Control of oil and gas resources by the States of the Niger Delta as opposed to the federal government seem to be the driving force that defines the understanding of resource 30 current restiveness in the Niger Delta area18 resulting from the activities of the militants and the concomitant threat to national security have made an in-depth study of fundamental issues underlining these demands more compelling. In the words of Isawa Elaigwu, “it is a political imperative to critically assess the process of fiscal federalism in Nigeria in order to respond to emerging exigencies of the times”.19 The clamour for fiscal federalism in Nigeria is accentuated by the facts that the economic fortunes of teeming majority of Nigerians have worsened compared to the standards during the pre-independence and post independence eras20 under the Constitution of the Federation of Nigeria, 1960 (1960 Constitution) and Constitution of the Federal Republic of Nigeria,1963 (1963 Constitutions).21 This is in spite of the huge amount of revenue accruing to Nigeria as the fourth largest exporter of crude oil in the world.22 The poor control here. The governors of the South-South States are the prime movers of this view and the advertised objective is to utilize the resources for the building of social infrastructure for the states. The position assumes that the issue of the federating units is settled and the States and the local governments are the other units of governance in the Nigerian federation and no more. Building a refinery or a power plant by some states is thus seen by some of them as resource control. See Oronto, D, (ERA) “A Community Guide to Understanding the Resource Control”. Available online at http://www.waado.org/nigerdelta/Essays/ResourceControl/Guide_Douglas.html. Site visited on 4th July 2009. 18 The Niger Delta, the delta of the Niger River in Nigeria, is a densely populated region sometimes called the Oil Rivers because it was once a major producer of palm oil. The area was the British Oil Rivers Protectorate from 1885 until 1893, when it was expanded and became the Niger Coast Protectorate. The Niger Delta, as now defined officially by the Nigerian Government, extends over about 70,000 km² and makes up 7.5% of Nigeria‟s land mass. Historically and cartographically, it consists of present day, Bayelsa, Delta, Rivers State, Akwa Ibom and Cross River State. In the year 2000, however, General Olusegun Obansanjo's regime expanded its definition to include Abia, Edo, Imo and Ondo States. See “Niger Delta” available online at http://en.wikipedia.org/wiki/Niger_Delta. Site visited on 7th July 2009. 19 See the Introduction to Fiscal Federalism in Nigeria – Facing the Challenges of the Future (Jos: Institute of Governance and Social Research, 2007) (ed) Isawa Elaigwu, J, p.7. 20 See “Nigeria” Available online at http://en.wikipedia.org/wiki/Nigeria where it was stated tha t “Due to inflation per capital GDP today remains lower than in 1960 when Nigeria became independent. See also “An Overview of the Nigerian Economic Growth and Development”, Available online at http://www.onlinenigeria.com/economics/. Sites visited on 20 th January 2010. 21 See section 166 of the 1963 Constitution for the Short title of the Constitution. 22 In 2006, Nigeria produced a total million barrel of oil per day out of which 2.15 million barrel was exported. See “Top World Oil Producers, Exporters, Consumers, and Importers, 2006,” Available online at http://www.infoplease.com/ipa/A0922041.html. Site visited on 2 nd February 2009 http://www.waado.org/nigerdelta/Essays/ResourceControl/Guide_Douglas.html http://en.wikipedia.org/wiki/River_delta http://en.wikipedia.org/wiki/Niger_River http://en.wikipedia.org/wiki/Nigeria http://en.wikipedia.org/wiki/Palm_oil http://en.wikipedia.org/wiki/Oil_Rivers_Protectorate http://en.wikipedia.org/wiki/Oil_Rivers_Protectorate http://en.wikipedia.org/wiki/Niger_Coast_Protectorate http://en.wikipedia.org/wiki/Bayelsa_State http://en.wikipedia.org/wiki/Delta_State http://en.wikipedia.org/wiki/Rivers_State http://en.wikipedia.org/wiki/Akwa_Ibom http://en.wikipedia.org/wiki/Cross_River http://en.wikipedia.org/wiki/Abia http://en.wikipedia.org/wiki/Edo http://en.wikipedia.org/wiki/Imo http://en.wikipedia.org/wiki/Ondo http://en.wikipedia.org/wiki/Niger_Delta http://www.onlinenigeria.com/economics/ 31 showing of Nigeria in terms of economic development and the growing corruption in virtually all facets of its national life at all levels of government lends credence to the research finding that countries that rely on revenue from natural resource exports or external aid have little need to negotiate with, or to be accountable to citizens, or to build capacity to raise and administer tax. However, states that rely on broad taxation have much greater incentives to practice better governance. 23 This thesis examines the constitutional framework for division of taxing powers in Nigeria and the gap between theory and practice based on the country's historical experiences and that of other federations. It is argued that the current structure of division of taxing powers is antithetical to the basic principles of federalism and counter-productive. What is more, it has resulted in the unfortunate situation whereby neither the Federal Government nor the States generate appreciable tax revenue and are largely dependent on revenue from oil. Against this background, the thesis recommends a paradigm shift from the current system of exclusive use of tax base by levels of government to one whereby a few broad based taxes such as Income Tax and Sales tax/VAT can be jointly utilized by the Federal and State Governments under a well-coordinated inter governmental fiscal arrangement. This thesis is divided into seven chapters. Chapter One is on general introduction, the research and theoretical framework for conducting the research while Chapter Two is devoted to Literature Review. The jurisprudential basis of tax and other related terms form the basis of Chapter Three. Chapter Four examines the strategies and dynamics of division 23 See “How Does Taxation Affect the Quality of Governance?” IDS Policy Briefing Issue 34, March 2007, p.2. 32 of taxing powers and practices in some federal countries such as United States of America, Canada, Australia, India and Brazil. Chapter Five examines the evolution of division of taxing powers in Nigeria while Chapter Six discusses the framework for division of taxing powers under the Constitution of the Federal Republic of Nigeria, 1999 and the emerging challenges arising there from. The thesis concludes with Chapter Seven which contains recommendations. 1.2. Statement of the problem The recent tax reforms24 have focused mainly on review or re-design of the existing taxes without addressing the challenges of revenue diversification from a constitutional perspective. As a matter of fact, the outcome of certain aspects of the reforms have thrown up serious constitutional challenges and heightened tension in inter governmental fiscal relationship. For example, the modification of State administered Sales Tax to a federally administered Value Added Tax (VAT) in 1993 under the Military rule has given rise to a controversy on the competence of the Federal Government to continue to administer VAT under the 1999 Constitution. Also, the constitutionality or otherwise of some of the statutes enacted during the Military rule which impinge the taxing powers of states have been called to question in the attempt by States to improve their tax revenue. Such statutes 24 There was a reform of the Tax System in Nigeria in 1993 and 2003 respectively. The 2003 Study Group recommended, inter alia: (i) various amendment to major tax statutes; (ii) compilation of registers of individual and corporate taxpayers; (iii) issuance of smart taxpayer National Identification Number; (iv) adoption of a National Tax Policy; (v) streamlining of tax incentives; (vi) establishment of autonomous tax authorities; (vii) replacement of all existing taxes with only two taxes: (i)income tax and (ii) expenditure tax. See generally, “Nigerian Tax Reform in 2003 and Beyond” Main Report of the Study Group on the Nigerian Tax System, July 2003. 33 include, Value Added Tax Act,25 the Education Tax Act26 and the National Industrial Technology Act27 and Taxes and Levies (Approved List for Collection) Act.28 It is remarkable that the ongoing debate on the review of the 1999 Constitution29 has paid little or no attention on the framework for the division of taxing powers.30 The thesis identifies lack of conceptual clarification between taxing power and related terms such as legislative power and regulatory power as one of the key factor(s) responsible for the rave of double taxation in Nigeria and recommends a constitutional framework that will preserve this distinction. It is hoped that this will provide a constitutional springboard and reinforce other efforts aimed at curbing the festering problems of illegal taxes by all levels of government. The work advocates for a critical review of constitutional framework for division of taxing power under the 1999 Constitution towards the attainment of the twin objectives of defederalisation of power and diversification of the economic base. The strength and weaknesses of the extant framework are examined while recommendations are made in the light of normative principles for division of taxing powers, Nigerian historical experience and practice in other federations. The Study investigates the evolution of taxing powers in 25 Cap V1, LFN, 2004. 26 Cap E4, LFN, 2004 27 Of 2007. No number is assigned to the Act. 28 Cap T2 LFN 2004. 29 Within its first year of operation, the Constitution had become a very controversial document with trenchant calls for its review. A lot of criticisms had in fact trailed the Constitution since its promulgation. See the Preface to I.A. Ayua, (ed,) Nigeria, Issues in the 1999 Constitution, (Lagos: Nigerian Institute of Advanced Legal Studies: 2000), p.vii. 30 Out of the proposed 109 amendments to the 1999 Constitution by the National Assembly, it is remarkable that none of them touched on division of taxing powers. See “Nigeria Rejects Proposed Constitutional Amendment”, available online at http://www.voanews.com/english/archive/2006-05/2006-05-17- voa25.cfm?CFID=94733738&CFTOKEN=40203322. Site visited on 17 th August 2006 34 Nigeria since 1954 and finds that the prevailing philosophy in the allocation of taxing powers has been to allocate the most significant taxes in terms of revenue potentials to the Federal Government while the States are left with taxes that are relatively difficult to administer with little revenue potentials. Since the taxing powers of the Federal Government bludgeoned during the successive military rules, the thesis also examines the constitutionality or otherwise of some of the tax statutes made during the military era as existing laws under section 315 of the 1999 Constitution. The objective, here, is to determine which of the existing Federal taxing statutes could operate, as State Laws, with necessary modification, pending the amendment of the 1999 Constitution. 1.3. Operational Definitions The following important terms in the title of the thesis bear the following meaning in the context of this work: 1.3.1. Paradigm - A paradigm shift refers to a great and important change in the way something is done or thought about or „out of the box thinking‟.31 1.3.2. Tax - The word “tax” is a compulsory payment imposed by government for the purpose of financing the public sector in a statute enacted specifically for that purpose32 31 Id. 32 such as the Personal Income Tax Act Cap P8 LFN 2004, Companies Income Tax Act Cap C21, LFN 2004 or Value Added Tax Act Cap V1, LFN, 2004 35 for which no direct benefit is conferred on taxpayers by government in exchange for the payment. 1.3.3. Taxing powers – “Taxing powers” refers to the power of a government to impose tax and determine the base and rate of the tax. The power to merely collect or administer taxes imposed by another level of government does not approximate to taxing power. 1.3.4. Federalism – Federalism is a system whereby both the Federal and State Governments will be able to concurrently exercise independent power to impose and determine the rate of a few broad based taxes within their respective jurisdictions under an arrangement which guarantees the autonomy of each level but promotes cooperation on a voluntary basis.33 1.3.5. Fiscal federalism - The concept of fiscal federalism aims at devolving power to the lower level in a federation in order to improve efficiency and promote accountability of a federal system in terms of service delivery to the people. Fiscal Federalism is achieved through an efficient (i) division of functions, (ii) division of taxing and other revenue raising powers and (iii) inter governmental transfer(s). Division of functions emphasises 33 The discussion of contemporary federalism seems to have started with K.C. Wheare who defined it as a “method of dividing powers such that general and regional governments are each, within a sphere, co - ordinate and independent.” Wheare‟s prognosis that the two levels must be “co -ordinate” and “independent” within their respective spheres have proved to be too legalistic, and therefore, unworkable in any federation anywhere in the world. The search for a more dynamic federalism has given rise to different “types” of federalism, all of which involve the use of a preceding adjective, for example, “co-ordinate”, “cooperative” and “organic“ federalism and lately fiscal federalism. See Agbonika, J.A.M, “Federalism and Military Rule in Nigeria,” (Thesis: (Ph. D) University of London 1991), p.21, Osipitan, T.A.I., Supra note 1, p.45. 36 the need to allocate particular functions to a level of government that is best able to perform them in the most efficient manner. 1.4. Scope and limitation of Study A tax system has three critical elements – the policy, the law and the administration. Policies are the fundamental principles which guide the orderly development of the tax laws and administration and, therefore, forms the foundation of the entire tax system.34 Tax law is “a rule or body of rules governing the imposition and administration of taxes in a given society.35 Tax administration can be briefly defined as the implementation of the tax laws in order to achieve set objectives. If there are good tax laws which are badly administered, the objectives of taxation may be far from being achieved. For there to be a good tax system the tripod of taxation must be roundly developed. In point of fact, any dysfunctionality in the tax system can be traced to defects in one or more of the tripod. For instance, if the tax policies are inconsistent or weak, it is certain that the entire tax system will be dysfunctional. Hence, since Adam Smith‟s Wealth of Nations in 1776,36 different nations have tried to align their tax systems, as much as possible, with the principles of equity, certainty, convenience and administrative efficiency propounded by Smith in his epic work. 34 Policy is the general principles by which a government is guided in its management of public affairs. See Black‟s Law Dictionary, Bryan A.G., (ed), (St. Paul, Minnn: West Group, 8 th ed, 2004) (Hereinafter referred to as Black‟s Law Dictionary) p.1196. 35 For instance, a layman may think that all the laws of a State are contained in the Constitution. This is incorrect. The sources of tax laws includes the Constitution, Statutes, delegated legislations, 36 See Joyce, J., A., Complete Analysis or Abridgment of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, (Cambridge: Deighton and J. Nicholson, 1797). 37 This thesis focuses on the constitutional framework for division of taxing powers in Nigeria as a response to the current scheme under the 1999 Constitution which seems overtly skewed in favour of the Federal Government to the detriment of the States and local governments. The main concern is the determination of which taxes should be imposed by each level of government. The work is not concerned about a review or reform of any particular tax or taxes. This work, therefore, does not include matters relating to the institutional framework for tax administration and the task of designing the appropriate structure and general administrative framework for each tax under each statute such as Customs and Excise Act, Petroleum Profits Tax Act, Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act, Capital Gains Tax Act, Stamp Duties, Sales Tax Law, etc which are post-allocation matters.37 For example, the work does not delve into policy issues relating to the appropriate rate and structure of each tax such as whether an income tax should adopt a comprehensive base or scheduler system, or whether a value added tax system should adopt a destination or origin principle.38 1.5. Research questions The main research questions which this thesis seeks to answer are as follows: 1. What is the jurisprudential nature of taxing powers and in what way(s) are they distinguishable from legislative powers for the purpose of clarifying and reforming the 37 . These have been the focus of the various 1993 and 2003 Tax Study Groups which made fundamental changes to the statutory framework of different taxes . 38 The task of designing the appropriate structure of each is so complex that two volumes of book have been devoted to the subject. See Thuronyi, V, (ed) Tax Law Design & Drafting, Vols 1 & 2., (Washington: IMF, 1998). 38 basis of division of taxing powers under the Constitution of the Federal Republic of Nigeria, 1999? 2. What is the evolutionary path and overriding principle of the framework for division of taxing powers from the colonial period up till the Constitution of the Federal Republic of Nigeria, 1999, and to what extent are they responsible for the current tension in inter- governmental fiscal relations in Nigeria? 3. To what extent is the framework for division of taxing powers under the 1999 Constitution adheres to or diverges from the principle of fiscal federalism? 4.What policy of division of taxing powers and constitutional framework may help to achieve the objectives of defederalization and diversification of the revenue base of Nigeria? 1.6. Theoretical Framework A discussion of division of taxing powers essentially straddles issues relating to law, politics and economics. Okorodudu captures the multidisciplinary nature of taxing powers when she opined that: “Analysis of Federal and State Taxing Powers presents to the lawyers, the accountants, the tax expert, the economist, the students of constitutional law and indeed, millions of Nigerian a continuing intricate, but rewarding insight into the growth of the fundamental grund norm which binds the component parts of our country together as a federation.39 39 Okorodudu, M.T., “Analysis of Federal and State Taxing Powers”, in Ajomo, MA, p .47 Supra note 6. 39 A meaningful study of problems of the allocation of taxing powers will thus have to be undertaken from an interdisciplinary perspective. 1.6.1. Federalism K.C. Wheare had defined federalism as a “method of dividing powers such that federal and state governments are each, within a sphere, co-ordinate and independent.”40 The writer believes that each level of government should have adequate resources to perform its functions without appealing to the other levels of government for financial assistance. He was emphatic about financial independence without which federalism is a farce. According to him: “If state authorities, for example, find that the services allotted to them are too expensive for them to perform, and if they call upon the federal authority for grants and subsidies to assist them, they are no longer coordinate with the federal government, but subordinate to it. Financial subordination makes an end to federalism in fact no matter how carefully the legal forms may be preserved. It follows therefore that both state and federal authorities in a federation must be given the power in the constitution for each to have access to and control, its own sufficient financial resources. Each must have a power to tax and to borrow for the financing of its own resources.”41 40 See Wheare, K.C., Federal Government, 4 th edn., (London: OUP, 1953), pp 2, 10, 35. The distinguished writer recognises that a federation has different characteristics but choose to focus on a particular one which in his view, makes a federal system unique. According to him “I have put forward uncompromisingly a criterion of federal government. To the extent to which any system of government does not conform to this criterion, it has no claim to call itself federal” 41 Id. 40 Wheare‟s definition has been criticised mainly on the ground that it is too legalistic and inflexible.42 According to Jinadu, the definition had relied excessively on what Wheare assumes to be the essential features of federalism in the United States in formulating his federal principles.43 To that extent, Wheare‟s definition is static on the basis that no federal system, in modern time, including that of the United States can satisfy the rigid criterion of the federal and the component units being independent and coordinate.44 Given that the definition of federalism has acquired a functional and dynamic dimension in different societies in the light of the socio-political, economic and cultural forces, it is generally agreed that any federal system should have certain irreducible features. There is consensus among writers that “the vitality of the federal system lies in the fact that there is no sacrosanct federal system but that there are many federal systems as there are federal states in the world. Each federal system is a product of its environment. In order to make their system work better, several federal states are either engaged in, or about to begin, the process of reviewing their federal system. Therefore, the need to review each federal system should not be regarded as a sign of weakness or as something to apologise for.”45 Nwabueze has identified certain principles which serve as useful guides in the understanding and analysis of the workings of a federal system.46 These are: 42 See Birch, A.H., “Approaches to the Study of Federalism” Political Studies, 14, 1 (1966), p.15, Riker, W.H., Federalism; Origin, Operation, Significance, (Boston: Little, Brown Inc) 1964, pp. 98-99. 43 Jinadu, L.A., “A Note on the Theory of Federalism”, in Akinyemi, B., et al., (eds) Readings on Federalism (Lagos: Nigerian Institute of International Affairs, 1979), p.16. 44 Birch, A.H., Federalism, Finance and Social Legislation in Canada, Australia and the United States , (Oxford: Clarendon Press, 1955), p.15, Vile, M.J.C., The Structure of American Federalism, (London: Oxford University Press, 1968), p. 198 45 See the Preface to Akinyemi, B., et al., (eds) op.cit., See Note 71. 46 Nwabueze, B.O., Supra, pp 1-17 note 17. 41 (i) Each government must exist, not as an appendage of another government, but as an autonomous entity in the sense of being able to exercise its own will in the conduct of its affairs, free from direction by another government;47 (ii) Division of powers between different levels of government, (iii) Principle of non-interference; (iv) Equality between the Regional Governments; (v) A supreme constitution These principles will be used to analyse the extent to which the arrangement under extant Constitution either adhere to or diverges from these principles. 1.6.2. Fiscal Federalism The past half-century has seen a significant pressure towards defederalization or movement towards federalism.48 Generally, reactions to excessive federalization have led to demand for greater responsibilities or resources for regional or local governments. The defederalization process has, therefore, rendered the study of what has been variously called “multi level finance”, “fiscal federalism” and “fiscal defederalization”49 more relevant.50 47 Id.p.1. 48 Ahmad, A & Brosio, G., “Introduction: Fiscal Federalism – A Review of Developments in the Literature and Policy” in Ahmad, A & Brosio, G., (eds) Handbook on Fiscal Federalism (Cheltenham, UK, Northampton, MA, USA: Edward Elgar, 2006) p.4. 49 K. Mensere, “Evaluating the Taxing Powers of Sub-Central Governments” 2000 IBFD Bulletin, p 133. 50 Ahmad, A & G. Brosio, Loc cit., p.4. 42 Agiobenebo, Tamunopriye has highlighted the principles that have been evolved to guide intergovernmental fiscal relations in practice as follows:51 a. The Principle of Diversity. One of the arguments for the federal system is its ability to accommodate a large variety of diversities. So, the fiscal system must provide scope for variety and differences to adequately accommodate the supply of national, regional (state) and local public goods. b. The Principle of Equivalence. The geographical incidence of the various public goods differs. Therefore, allocative efficiency requires the equalization of locational advantages arising from interjurisdictional differences with a combination of taxes, public goods and services. c. The Principle of Federalized Stabilization. This principle requires the use of fiscal instruments for achieving macro policy objectives (stabilization, growth, etc) at the national level. d. Correction of Spillover Effects. Efficiency of fiscal federalism requires that interjurisdictional externalities be corrected by the system. Spillover effects or interjurisdictional externalities refer to externalities (both benefits enjoyed and harm suffered) by residents of different geo-political units because benefit regions for many public goods and services are open entities.52 51 Agiobenebo, T., “Asignmnet, Criteria and the Fiscal Constitution: An Excursion into a Theory of Rational Fiscal Federalism in Nigeria”, in Fiscal Federalism and Nigeria;s Economic Development , Selected Papers Presented at the 1999 Annual Conference of the Nigerian Economic Society, pp 41-3. 52 This requirement is intended to control for what in the fiscal decentralization literature is referred to as the “central city exploitation thesis” exploitation of economies of scale and the rationale for intergovernmental grants. For example, effluent discharges into a tidal river joining a number of local government areas or states will impact negatively on the welfare of the residents of all the states or local government areas and not just the residents of the state emitting the discharge. Efficiency and equity require that the emitting entity should internalize the cost of the external diseconomy. In the alternative, if this external diseconomy is across 43 e. Minimum Provision of Essential Public Goods and Services. This principle requires that fiscal federalism should assure all citizens that, irrespective of where they reside, they will be provided with a minimum level of certain essential public goods and services. f. Fiscal Equalization Principle. The existence of sharp regional differences in resource endowment and concomitant differences in fiscal capacity of State and local governments would indicate that some degree of fiscal equalization among the various levels and units of governments is required in order to ensure minimum level of public goods and services. g. The Efficiency Principle. This principle has two dimensions in a two-step hierarchy. At the first level, it requires that, collectively, the set of criteria directing fiscal federalism should ensure efficiency in the allocation of resources in the Paretian sense.53 The efficiency criterion, in practice, is implemented partially and loosely through the criterion of absorptive capacity, which is not adequate. At the second level, it requires that the collective principles of intergovernmental fiscal relations should ensure that each level of government maximizes its internal revenue earnings at minimum tax efforts with optimal distortion. states, then the national government should intervene; and if it is confined to a state but across local government areas, then the state government should intervene. See Agiobenebo, T.J., Id. p. 42. 53 Pareto efficiency, or Pareto optimality, is an important concept in economics with broad applications in game theory, engineering and the social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution. Informally, Pareto efficient situations are those in which any (additional) change to make any person better off is impossible without making someone else worse off given a set of alternative allocations of, say, goods or income for a set of individuals, a change from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is defined as Pareto efficient or Pareto optimal when no further Pareto improvements can be made. Such an allocation is often called a strong Pareto optimum (SPO) by way of setting it apart from mere "weak Pareto optima" as defined below. See “Pareto Efficiency” available online at http://en.wikipedia.org/wiki/Pareto_efficiency accessed on 21 October 2009. See also, G. Cabresi, “Transactional Costs, Resource Allocation & Liability Rules – A comment, 11 j. Law & Economics 67 (1968) http://en.wikipedia.org/wiki/Economics http://en.wikipedia.org/wiki/Game_theory http://en.wikipedia.org/wiki/Engineering http://en.wikipedia.org/wiki/Social_sciences http://en.wikipedia.org/wiki/Vilfredo_Pareto http://en.wikipedia.org/wiki/Economic_efficiency http://en.wikipedia.org/wiki/Income_distribution http://en.wikipedia.org/wiki/Goods_%28economics%29 http://en.wikipedia.org/wiki/Agent_%28economics%29 http://en.wikipedia.org/wiki/Pareto_efficiency 44 h. The Principle of Derivation. The derivation principle requires that the component units of a federation be able to control some of their preferences in their own way with their own resources. i. The Principle of Locational Neutrality. Interregional fiscal differences tend to influence locational choices both of individuals and firms. Given the natural differences in resources endowments, differences in tax capacity and effort, some degree of locational interference appears to be an inevitable cost of fiscal federalism. The focus of policy therefore is to minimize the distortions arising from such interference. Consequently, it is recommended that differential taxes which create locational distortions should be avoided as much as practicable. j. The Principle of Federalized Redistribution. The redistribution function of fiscal policy through progressive taxation and expenditure programmes should be federalized at the federal level. This principle is mutually consistent with that of the principle of locational neutrality. In other words, if the redistribution function is defederalized, it can lead to distortions in locational decisions. These principles are not mutually consistent. Consequently, they are difficult to adhere to simultaneously. Some of them conflict, thus calling for trade-offs. For example, the principle of diversity may conflict with that of locational neutrality with attendant socio- economic costs. Also, the principle of equalization of fiscal position in an attempt to achieve horizontal equity, may conflict with the efficiency criterion because of the disincentive effects of the former on labour mobility and productivity. 45 1.6.3. Theories of Division of Taxing Powers. There are two main theories of division of taxing powers viz: (i) The Conventional Model and (ii) The Public Choice Approach. 1.6.3.1. Conventional Model Musgrave54 attempted to provide answers to this question by dividing, the functions of government into three branches viz: (i) macroeconomic stabilization, (ii) income redistribution, and (iii) resource allocation. He then proceeded to allocate taxes based on their nature to help government in achieving these purposes. He thought that the responsibility of income redistribution and macroeconomic stabilization should be assigned to federal government because of the existence of spillover effects, whereas resource allocation may be performed by all levels of government. It follows that progressive personal income taxes and corporate income taxes should be assigned to the federal government being best instruments for both income redistribution and macroeconomic stabilization.55 According to him, all the levels of government should be responsible for resource allocation through the use of benefit taxes. Musgrave sees fiscal federalism as a system whose purpose “is to permit different groups living in various States to express different preferences for public services which inevitably leads to differences in the level of taxation and public services”.56 Against this background, he provides some guidelines for the setting of local taxes. First, local governments should 54 Musgrave, R.A., “Who should Tax, Where and What”, in McLure, C.E., (ed), Tax Assignment in Federal Countries, (Canberra: The Australian National University:1983), p.2 55 Ambrosanio, M.F. & Bordignon, M., “Normative versus Positive Theories of Revenue Assignments in Federations” in Ahmad, E & Brosio, G, eds. Handbook of Fiscal Federalism, (Cheltenham, UK, Northampton, MA, USA:Edward Elgar, 2006), p.312. 56 Musgrave, R.A., loc.cit., p.179., Ahmad, E & Brosio, G, “Introduction: Fiscal Federalism – A Review of Developments in the literature and Policy,” in Ahmad, E & Brosio, G, eds Supra note 75 ), p.4., 46 levy taxes on relatively immobile bases or assets in order to prevent tax competition and revenue losses. Second, they should levy taxes on bases that are evenly distributed among jurisdictions, in order to prevent the generation of horizontal fiscal imbalances. Third, they should levy taxes whose yields are relatively stable in real terms, to ensure expenditure planning.57 The Conventional model is not free of criticisms. First, it rests on the assumption that governments are benevolent and would always use tax revenue to maximise the social- welfare of the people, which is not the case in practice.58 Second, it does not take into account the exercise of political power and bargaining in designing allocation of taxing powers.59 In practice, the division of taxing powers is usually more of a product of historical and political factors than economic factors. Third, it ignores the reality in the real world that the states and local governments may also be involved in the functions of economic stabilization and resource distribution. Fourthly, the most important and elastic tax bases to the federal government will necessarily be assigned exclusively to the federal government and inevitably put the federal in a stronger fiscal position vis-à-vis the states.60 57 Id, p.312. 58 See generally, Brennnan, G & Buchanan, J., “Normative Tax Theory for a Federal Polity: Some Public Choice Preliminaries” in McLure, C.E., ed,, “Who should Tax, Where and What”, p.32., Supra note 81. 59 Id. 60 See Bird, M.R., Bird, R,.M., “Rethinking Tax Assignment: The Need for Better Sub National Taxes” IMF Working Paper 1999, WP/99/175. Available online at www.adb.org/Documents/Events/2002/Citizen_participation/FDP_LAC.pdf where the writer stated: “The conventional model of tax assignment in a multi-tiers government structure basically assigns all productive revenue sources to the central government. Since this prescription accords with the needs and wishes of most central governments, it is not surprising that this is indeed the pattern found in most countries”. http://www.adb.org/Documents/Events/2002/Citizen_participation/FDP_LAC.pdf 47 1.6.3.1. Public Choice Theory The public choice theory is attributed to the duo of Brennan and Buchanan.61 The theory is predicated on the assumption that politicians are like leviathans, and therefore, cannot be trusted to use tax revenues to maximize the welfare of the citizenry in the absence of appropriate checks and balances. Accordingly, the public choice theory underscores the positive effect of tax competition among local governments as one of the forces restraining tax design and budget size. Local taxes on mobile bases should, therefore, be allowed to trigger competition in order to limit the power of governments to set their tax rates too high. This is facilitated through the freedom of taxpayers to „vote with their feet.‟62 The Public Choice approach rejects certain underlying notions of the Conventional Model that: (i) the functions of economic stabilization is exclusive to the federal government; (ii) the principal criterion of tax design is to minimize distortion in the economy; and (iii) policy choices and preferences of the Federal Government are superior to those of the lower levels of government. According to the Public Choice Approach, in countries where States perform a measure of stabilization functions, there is no reason why they cannot co- occupy the jurisdiction to impose taxes such as companies income and excise taxes. Furthermore, as much as it is desirable to minimize distortion in a tax system, this may be overridden by a higher political objective such as the observance of the basic tenets of federalism. In a federal system, the Federal Government and each State have power to 61 See Brennan, G. & Buchannan, J., “normative Tax Theory For a Federal Polity: Some Public Choice Preliminaries, in McLure, C., Jr. Tax Assignment in Federal Countries, (Canberra: Centre For Research on Federal Finacial Relatiosn, The Australian National University, Canaberra, 1983), p. 52. . 62 See “Tiebout Model”, Available online at http://en.wikipedia.org/wiki/Tiebout_model. Site visited on 20 April, 2005. http://en.wikipedia.org/wiki/Tiebout_model 48 pursue their respective policies within the limits of their powers. Where, there are divergence in the approaches of the Federal and State, it does not and should not necessarily follow that the policy choice of one is superior to the other. The Public Choice Theory, for these reasons, rejected the terminologies of “higher” and “lower” in describing the different levels of government and adopts instead “federal” and “subnational governments”.63 Against this background, the Public Choice Approach recognizes that allocation of taxing powers that actually prevails in any country inevitably reflects more on the outcome of historical situations and political bargaining than the consistent application of any Conventional principles.64 The approach emphasizes the need to establish an appropriate legal framework which will ensure that each level of government has access to sufficient revenue to match their fiscal responsibilities. In essence, each level of government should not only have access to sufficient revenue but they should also be able to determine how much to generate to meet their responsibilities as may be required from time to time. The true test, therefore, is whether the arrangement adopted truly gives each level of government the power to adjust its tax rate to meet its expanding expenditure profile, as the need may arise from time to time. Applying the public choice approach to the subna