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Vestiges: Do We Still Need The Industrial Training Fund (ITF)? – Government, Public Sector


INTRODUCTION

The Industrial Training Fund Act, Cap.I9 Laws of the
Federation of Nigeria (LFN) 2004, (ITFA),
originally
enacted in 1971, established the Industrial Training Fund (ITF) to
comprise sums provided by the Federal Government and contributions
by employers with the sole objective of “promoting and
encouraging the acquisition of skills in industry or commerce with
a view to generating a pool of indigenously trained manpower
sufficient to meet the needs of the economy.”
1
In June 2011, the Industrial Training Fund (Amendment)
Act (ITFAM)
amended the
ITFA, further amplifying its
implementation.

Whilst it has been argued that the
ITFAM rather drives the
ITFA away from its sole objective, the
more pertinent question is: does Nigeria actually still needs the
ITF? This article will attempt to show that the ITF is an
anachronism and a regulatory overhang, as its underlying objective
could still be achieved without the institution. We will preface
our discussion with an overview of the ITF regime.

Overview of the ITF Regulatory Regime

The ITF regime mandates employers meeting prescribed thresholds
(of turnover and employee numbers)2 to contribute one
percent (1%) of their annual payroll cost to the ITF, not later
than 1st April of the following year.3
“Contribution” includes “underpayment and any
interest or penalty payable or for late payment, as the case
maybe” (section 14 ITFAM);
whilst penalty for none or
late payment is 5% monthly interest on the unpaid amount(s). Two
key requirements merit special mention: training prescriptions and
refund of contribution.

A. Training

All employers are mandated to comply with set guidelines for
systematic and effective training of their employees.4
They include, having:

  1. Training Policy (TP): The TP which represents the
    commitment of top management to staff training and development,
    should also specify various types of training including orientation
    and induction of new employers. A written TP approved by the
    management should be made known to the employees either by means of
    induction courses, hand-outs, manuals and bulletins and submitted
    to the Fund at the beginning of each year.

  2. Training Plan: An Annual Training Plan (ATP) should be
    submitted to ITF and approved before the beginning of the
    training year
    . In the event of any change in the approved ATP,
    such amendments must be communicated to ITF not later than one
    month after such amendments or changes. Adhoc trainings must be
    communicated two or four weeks prior for local and foreign
    trainings respectively.5

  3. Training Records: Employers are expected to keep and
    update all necessary records relevant to the training.

B. Obtaining Refunds from the ITF

Every employer is entitled to up to
50% refund of their contributions based on their approved ATP by
the ITF,6 upon the ITF being satisfied that the
employer’s training is adequate and meets the ITF’s onerous
reimbursement criteria.7 Furthermore, the ITF shall
notify the Federal Board of Inland Revenue (FIRS) of any refund
made to employers.

Does Nigeria Still Needs the ITF?

It goes without saying that human capital is critical to
national development, and this truism is real across all
geographies. However, whilst the objective behind the ITF is a
noble one, but can be achieved even more efficiently without the
ITF for the following reasons:

  • The ITF represents an ‘unnecessary’ incentive:
    Employers – as often reflected by their long term business strategy
    – already have sufficient motivation to develop their staff. They
    realise – without the ITF – that people is their most important
    factor of production, and that the employer’s long term
    sustainable future (anchored on growth, profitability and
    competitiveness), cannot be achieved without people. Therefore,
    they will take a disciplined approach to human capital development
    because it makes unassailable business sense to do so:
    develop/train your personnel or be left behind and risk extinction.
    Often, the bigger and more structured the business, the more they
    tend to institutionalise training as a key part of their human
    capital cum business strategy;

  • ITF contribution is an unnecessary addition to the list of
    taxes in Nigeria:
    The ITF contribution swells the numbers of
    payments to government by Nigerian businesses. In a sense, it
    smacks of double taxation because the typical employer would have
    already or will incur employee training costs, whilst still being
    required to contribute 1% of their annual payroll costs to
    government. Whilst it may be argued that the prospect of 50% refund
    enables employers claw back some of their ITF contributions, the
    considerable administrative energy and resources required to
    achieve could more often than not have been better focused on the
    employer’s core business. Apparently, the foregoing contributes
    its quota to inhibiting Nigeria’s investment attractiveness. In
    other words, Nigerian tax system would be much simpler without the
    ITF;8 similarly Nigeria’s unimpressive ranking in
    the annual global tax comparative study, Paying Taxes will
    likely be better without ITF;9

  • ITFA’s requirements detract from reform efforts to
    improve ease of doing business:
    The same point applies to the
    other global study, Doing Business. As highlighted above,
    the ITF compliance requirements could be significant, both to small
    and big businesses. The latter would have more people to cover in
    their reports to the ITF whilst the former, even if they have few
    employees, may be burdened with ITF compliance at the expense of
    existential business issues. Alternatively, a small size employer
    is likely to take a pragmatic view and prioritise existential
    business issues, than ITF compliance. The recently signed
    Finance Act 2019 has eased tax burden on
    small and medium enterprises (SMEs), for example by prescribing
    exemption or preferential tax rates.10 However, the
    ITFAM sought to bring smaller employers
    (having at least 5 employees) into the ITF compliance net: it
    imposed compliance obligations on small time employers that in
    other climes, ought to be beneficiary of government grants. Whilst
    ‘coverage creep’ to smaller businesses would be less
    objectionable in the case of pensions, section
    2(2)(3)
    Pension Reform Act
    2014
    raised the compulsory pension compliance
    threshold from employers having five (5) employees to employers
    with fifteen (15) employees. Meanwhile because of the ostensible
    benefits, subsidiary legislation allowed voluntary participation by
    employees of employers having three (3)
    employees;11

  • The ITF is more of a clog in the wheel and unsuited
    regulator of specialist training
    : It is preposterous that in
    these days and age, employers would be required to provide
    prior notifications of training programmes to ITF before they could
    qualify for refunds or the quantum of refunds that ITF would grant
    to them
    . It is foreseeable that business exigencies may
    necessitate sending staff for training at short notice, including
    sometimes when the employer becomes aware of a training programme,
    close to the deadline. It is also a notorious fact that the wheels
    of public sector service delivery moves slowly in Nigeria. If as
    contemplated by ITFAM, all employers having at least 5 employees in
    Nigeria were to be ITF compliant, will the ITF be able to discharge
    its regulatory functions effectively in such scenario? Even if it
    were to leverage technology like the FIRS does, it would probably
    need to massively increase its personnel numbers – to solve an
    arguably unnecessary problem. Finally, given the specialised
    knowledge, cutting edge expertise and fast moving (obsolescence)
    trends in many sectors, what capacity does ITF have to evaluate the
    adequacy or otherwise, of their training programmes? In the
    circumstances, the ITF as regulator is most probably lagging behind
    its regulated entities, especially in specialist sectors.

  • ITF presumes that on the job training is not a significant
    contributor to human capital development:
    The requirements for
    claiming refund of employers’ contribution from the ITF does
    not give the necessary recognition to on the job training. Rather
    it emphasises formal, almost classroom type (offsite and onsite)
    training, by stipulating evidence of training and receipts etc as
    part of documentation requirements. Meanwhile, on the job training
    vide observance and practice can be most effective modes of
    training in some sectors. ITF’s one size fits all’s
    prescriptions in this regard are therefore unrealistic;

  • ‘Lean’ government considerations: Globally,
    lean government focused on creating a business friendly environment
    towards their optimal contribution to the economy is becoming the
    more popular regulatory model. In recent history, the Federal (FG)
    Government has at one time sought to streamline its ministries,
    departments and agencies (MDAs). Maybe the functions of the ITF
    could be performed by agencies such as the National Directorate of
    Employment (NDE)? Can ITF not be rationalised/merged with agencies
    under the Ministry of Labour and Productivity, such as NDE and/or
    the Small and Medium Enterprise Development Agency of Nigeria
    (SMEDAN)?;

  • Government should focus on developing public sector
    workers
    : It creates a moral burden for government that has not
    made an excellent showing in the training of its own public sector
    workers to seek to regulate the training of private sector workers.
    If the FG were to focus on human capital development in the public
    sector, it would have set a great example for private sector
    players (who by the way, have enough business rationale to develop
    their staff), to follow;

  • Government can fund ITF’s interventions from corporate
    and other tax sources
    : Doubtless, the government may want to
    continue ITF’s interventions like the Students Industrial Work
    Experience Scheme (SIWES) in line with its Social Investment
    Programme (SIP). However, it can be done by budgetary allocations,
    which always reflects government’s priorities. Instructively,
    no employer is directly mandated to fund the FG’s SIP
    initiatives like N-Power, social transfers and school meals – these
    are funded from the budget. It is also trite that businesses that
    are not overly burdened with regulation are likely to be more
    profitable and therefore pay more taxes from which government would
    fund its budgets;

  • Many employers are already helping with human capital
    development beyond their organisations
    : Most of the major
    employers already fund student’ scholarship and bursary
    programmes, ‘adopt’ some public schools/provide other
    episodic significant assistance, undertake or sponsor
    apprenticeship schemes, offer internship and National Youth Service
    Corps (NYSC) members work experience amongst other corporate social
    responsibility (CSR) initiatives that they do not benefit from
    directly. Some of their staff that they invest heavily in their
    training and development leave to work for other employers
    (including sometimes the public sector), or to start their own
    ventures. All these are examples of laudable contributions by
    employers. Not the least is that all corporate employers also pay
    2% of their assessable tax to the coffers of the Tertiary Education
    Trust Fund, via the FIRS.12 Rather than granting tax
    deductibility for ITF contributions, would it not be more efficient
    to scrap same or at least totally exempt employers from
    contributing if they can show in previous year that fully trained
    their employees?;

  • Refund is an acknowledgement that ITF contributions is
    unnecessary/inefficient
    : In 2017, NSITF reimbursed N6.4
    billion to 430 companies.13 As mentioned earlier, given
    the strong imperatives for employers to develop their staff,
    provision for refund in the ITFA smacks
    of buyer’s remorse – that the contributions should not have
    been mandated in the first place;

  • Nigeria has liberalised its investment environment:
    Further reinforcing the thesis that the ITF is an
    anachronism is the fact that Nigeria has been liberalising its
    investment environment since the mid-1980s. The time of
    “command and control”, paternalistic thinking driven
    economy, typified by strict foreign exchange controls, restriction
    or curtailing of foreign investments into certain sectors,
    excessive regulatory burden, etc is gone. ITF is part of that
    obsolete architecture and ought to be either removed or at least
    revamped, given our current investment promotion stance.

  • ITFA/ITFAM may be unconstitutional: Whilst conceding
    this may be quite a stretch, ITF contributions is arguably
    oppressive, expropriatory and therefore unconstitutional as it
    entails government forcefully taking money from employers’
    whether or not they train their staff.14 Aggrieved
    employers may have a credible narrative in challenging the
    legislation as unconstitutional for being oppressive, and not an
    acceptable exception to justifiable government expropriatory
    action.15 Apart from the fact that government’s
    locus standi to complain about the adequacy of employers
    training of their own employees may be suspect, the courts may not
    be persuaded that mandatory employer contributions to the IFT is
    the best solution in the circumstances.

CONCLUSION

Viewed against government’s recognition of the need to
promote a free market economy as a fulcrum for accelerating
Nigeria’s development – where growth and expansion would
largely be driven by innovation and competition – the ITF idea has
become outdated. Today’s global reality is that private sector
capacity development initiatives, rather than public sector led
variants, are more optimal and impactful and should therefore be
promoted. Since employers with the more value-adding staff
development plans will attract, motivate and retain the best
talent, and consequently enjoy competitive market advantage, there
is no need for any ‘extraneous’ regulatory interventions
a la ITF in the business landscape.

It is unreasonable to posit that absent the ITF, employers are
not incentivized enough to adequately train their staff, when they
know the impact of training on their brand equity. They also want
to entrench their market positions hence they institute policies
and desire awards that acknowledge them as employers of choice.
Again considering a wide array of alternative policy instruments
available to government, the case against IFT contributions become
more compelling.

It is respectfully submitted that the ITF has outlived its
usefulness and should therefore be scrapped, or at the very least
be restructured to make the counter-arguments against its utility
(as discussed above), less forceful. Government should focus more
on creating the requisite enabling environment for exceptional
operational performance by employers. This will in turn lead to
increased tax contributions to the public fisc, for
government spending accordingly, on determined priority areas.

Originally published (in February 2020) as a guest article in
KPMG’s Nigerian Tax Journal 2020,
pp.40-42
. The author acknowledges the input of his
LeLaw colleagues, particularly Chuks
Okoriekwe to this article, but is wholly responsible for the views
expressed herein.

Footnotes

1. See section 2 ITFA, as
amended by section 3 ITFAM.

2. Sections 16 ITF and
ITFAM define ’employer’ as
“any person engaged in industry or commerce with whom an
employee entered into a contract of service or apprenticeship and
who is responsible for the payment of wages or remuneration to the
employee.”
Prior to June 2011, employers having at least
25 employees were subject to ITFA; subsequently, the requirement
became at least 5 employees or a minimum turnover of N50 million.
See sections Section 6(1) ITFA
and 6 ITFAM. Note that
section 16 ITFAM defines employees
“as all persons whether or not they are Nigerians,
employed in any establishment in return for salary, wages or other
consideration, and whether employed full time or part time, and
includes temporary employees who work for periods not less than
thirty days.”
Consultants being “independent
contractors”,
and excluded from
“payroll”, would not be regarded as
employees.

3. “Payroll” has been defined by
section 16 ITFAM as “the sum
total of
all basic pay
allowances
and other entitlements payable within
and outside Nigeria
to any employee in an
establishment, public or private.” ITF Form 7A

(Employer Registration and Payment of Training Contribution
Form
) clarifies the coverage of the various types of
entitlements. A pertinent (and maybe moot) question is:
should training costs be included as part of payroll
cost for the purposes of computing the 1%
contribution?
Excluding training as part of
“payroll cost” reduces the base for making the 1%
contribution and vice versa.

4. See Section 8 ITFAM. Employer’s refusal
to train indigenous staff shall be seen as a breach of this
provision and such an employer shall be guilty and liable on
conviction.

5. The TP of every employer must clearly provide the
employer’s areas of emphasis for any particular period. The
purpose of a TP is to define strategies, methods and processes that
will be utilised to achieve the training provided, objectives of
employee training, types of training and faculties, the methods of
implementation and the duration of training.

6. Pursuant to section 7 ITFA, albeit ITFAM has
now reduced the maximum refund amount to 50% from 60%. In practice,
employers may not get the maximum refund threshold if the ITF
is not satisfied that they have covered all the areas of training
needs
. It is not just based on the amount spent on
training.

7. Essentially, to qualify for refund from ITF, an
employer must have satisfied the following requirements: (a) Full
payment of the training contribution for the year of claim together
with supporting documentation (receipts ); (b) Each training
programme, based on identified training needs, must be submitted to
ITF for approval as prescribed. For example, for Apprentice
Training, a formal letter of approval for the programme should be
attached with Form 4A to the nearest Area Office of ITF, two weeks
before commencement of training; (c) Annual approval of learning
and development by ITF and furnishing of satisfactory evidence of
training to ITF (not less than 15% of the employer’s total
workforce must be trained annually for employer eligibility for a
refund); (d) Employers timeously filing their refund claims on time
(by or before June 30 for the preceding year) and in the prescribed
format; (e) For offshore trainings, the employer must also provide
satisfactory evidence in respect thereof; and (f) All payments
shall be by e-payment solutions.

8. For some context, see ‘Eating the
Frog’ of Multiplicity of Taxes’,

‘Taxspectives’ by Afolabi Elebiju, THISDAY Lawyer,
21.10.2014, p.15
(also available online at Thought
Leadership
page at www.lelawlegal.com): “It is no longer
news that in the Paying Taxes 2014 survey results, Nigeria’s
rating slipped to 170
th (out of 189 countries)
from 155
th (of 185 countries) in the 2013
results. Paying Taxes, … monitors total tax rate (TTR),
compliance time (CT) and number of payments (NoPs) of a typical
small company in the economies surveyed. While Nigeria’s TTR
(33.8%) beats the African average of 52.9%, she significantly lags
the African CT average (956 vs 320 hours) and NoPs (47 vs 36.1).
Indeed Nigeria’s 47
payments is 42nd
on NoPs in Africa, beating only 11 countries, none of which
includes ‘peer’ economies like South Africa and Egypt. That
Nigeria is last in Africa (53
rd position) on CT,
gives real cause for concern. Having followed Paying Taxes for a
while, I note that Nigeria’s 2014 CT (956 hours)
‘improved’ from 1,120 hours in the 2006 survey results.
Meanwhile, Cameroun with 1,300 hours CT in 2006 has leapfrogged to
630 hours in the 2014 results!”

9. In the 2020 results, whilst Nigeria’s CT has
improved to 343.365 hours, her 48 NoPs is largely constituted by 27
Labour tax related payments, compared with 2 profit tax payments
and 19 other taxes payments: https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2020/overall-ranking-and-data-tables.html
(accessed 08.02.2020). Nigeria’s 156th ranking out of 190
countries could have been higher without ITF compliance
requirements.

10. For example “small” companies with less
than N25 million turnover are exempted from paying corporate income
tax (CIT), and also from VAT filing obligations (charging and
remitting VAT); “medium” companies with over N25 million
but below N100 million turnover are subject to only 20% CIT rate
(compared to the generally applicable 30% CIT rate),
etc.

11. For a more detailed discussion, see Gabriel
Fatokunbo, ‘Reformations: Can the Pension Reform
Act 2014 Go Further?’
, LeLaw Thought
Leadership Insights, 04.2020
available at: www.lelawlegal.com. Pursuant to the
PRA, Guidelines for Micro Pension Plan 2018
(MPP)
, aims to cover employees of businesses
with less than 3 employees and self-employed persons.

12. It has been argued that the 0% CIT rate applicable to
small companies does not exempt them from payment of TETFund tax,
since the Finance Act 2020 did not
expressly grant the latter exemption.

13. See Friday Olokor, ‘ITF Spends N6.4bn
on 430 Companies’,
The Punch, 8 March
2018
: (https://www.pressreader.com/nigeria/the-punch/20180309/281887298820309
(accessed 10.01.2020). According to the report, the ITF facilitated
the training of more than 90,000 Nigerians on employability and
entrepreneurship and an additional 37,000 from 1,454 organisations
through its National Industrial Skills Acquisition Development
Programme, Women Skills Empowerment Program and Skills Development
Program for Youths in Construction Trade in 2017.

14. Chapter IV,
1999 1999 Constitution of the
Federal Republic of Nigeria as amended

(1999 Constitution) enshrines fundamental
human rights for Nigerian citizens. Sections 43 and 44
1999 Constitution
, provides against expropriation of
immovable property with exceptions, including when required in the
public interest, access to adequate compensation and the
courts.

15. A strong counter-argument though is that
section 44(2)(a) 1999 Constitution
provides for carve-out for “general law” “for
the imposition or enforcement of any tax, rate or duty”.

ITFA/ITFAM can then be argued to be such law. However, the core of
our thesis is that these legislation are “unfair” for
mandating ITF contributions.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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