AN OVERVIEW OF THE

NIGERIAN TAX SYSTEM:

IMPLICATIONS FOR FOREIGN
INVESTORS

BY

MARK ANTHONY C. DIKE, FCTI

PRESIDENT AND CHAIRMAN OF COUNCIL OF
THE CHARTERED INSTITUTE OF TAXATION
OF NIGERIA (CITN) AT THE NIGERIANS IN
DESPORA ORGANISATION (NIDO) UK SOUTH
INVESTMENT CONFERENCE ON THE 17TH –
18TH MARCH 2014
1.0 INTRODUCTION

As Africa’s most populous country, Nigeria boasts of the continent’s second

largest oil reserves and has a very promising growth outlook. Poised to eclipse
Africa’s largest economy by 2015, Nigeria is becoming a rather worthy recipient
of foreign capital, receiving anywhere from $10-$12 billion per year. However,
in order to take full advantage of what foreign investment has to offer, Nigeria
has been trying to improve its economic and political climate.

For Nigeria, meaningful, long-lasting economic growth and development is

almost entirely contingent upon securing substantial amounts of foreign direct
investment. FDI, as it is called, is crucial for the Nigerian economy, as it permits
the transfer of technology and facilitates improvements in productivity.
Ultimately, this can help alleviate Nigeria’s widespread poverty by increasing per
capita income and elevating overall standards of living.

As a result of the Country’s unique nature, there is a need for prospective

investors to completely understand the business environment, particularly the
legal and regulatory framework for operating within the Country. Businesses in
Nigeria are unique in their processes and requirements and there is often a need
to be well guided before commencing business operations. Industries such as the
Oil and Gas Industry, the Mining Industry, the Telecommunications Industry and
all other vibrant industries within the Nigerian economy all have their own rules
and regulations which are expected to be strictly adhered to. General regulatory
issues such as formal registration for all companies and individuals intending to
invest, tax requirements and liaising with government agencies are all issues to
which adequate attention needs to be given.

This paper therefore covers an overview of the Nigerian Tax System, the
imperatives of a tax system as it relates to the tripod on which the tax system
stands comprising of tax policy, tax legislation and tax administration, legal and
regulatory requirements for investors as well as the use of tax incentives in
attracting foreign direct investment in Nigeria.

1.1 Essence of Taxation

In order to properly understand the subject matter, let us remind ourselves about
the meaning of the focal word ‘tax’. Tax has been defined as ‘a monetary charge
imposed by the Government on persons, entities, transactions and properties to
yield revenue’.

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Cicero called taxes the sinews of the state. That is the primary way the society
allocates the burden of government to its people. Tax is a powerful tool for
achieving economic and social policy objectives of government and it is a means
of transferring resources from the private to the public sector.

A standard definition of tax: “a compulsory exaction from a taxpayer paid in cash

or in kind to the government to provide for the public services of common interest
without particular regard to the particular benefit received by the taxpayer.”

Taxation is undoubtedly a veritable instrument for national development. Apart

from being a major source of revenue for government to provide goods and
services needed by the people, tax policies, can and do stimulate economic
growth and job creation through its impact on investment and capital formation
in the economy. In this respect, reform of the tax system that ensures
effectiveness, equity, and efficiency are necessary conditions for a healthy public
finance

2.0 THE TRIPOD OF THE NIGERIAN TAX SYSTEM

The Nigeria tax system, like any tax system, is a tripartite structure which
comprises of: Tax Policy, Tax Legislation and Tax Administration. Tax policy
forms the basis for tax laws while tax administration is the implementation of the
tax laws. This shows that in a bid to establish an effective and efficient tax system
that will make taxation the pivot for national development, appropriate tax
policies and legislations should be put in place and adequately implemented.

2.1 Objectives of a Tax System

 To promote fiscal responsibility and accountability

 To facilitate economic growth and development
 To provide the government with stable resources for the provision of public
goods and services
 To address inequalities in income distribution
 To provide economic stabilization
 To correct market failures or imperfections
3.0 MEANING OF NATIONAL TAX POLICY

The National Tax Policy is a document which sets broad parameters for taxation
and ancillary matters connected with taxation. It is a clear statement on the
principles governing tax administration and revenue collection. It therefore,

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provides a set of guidelines, rules and modus operandi that would regulate
taxation in Nigeria.

3.2 Objectives of National Tax Policy

The objectives of the National Tax Policy are to address the myriad of problems
bedeviling the Nigerian tax system. It is aimed at creating a tax system that will
contribute to the well-being of all Nigerians and taxes which are collected by
Government, should directly Impact on the lives of the citizens. This can be
accomplished through proper and judicious utilization of the revenues collected
by government. The tax system, as envisaged by the National Tax Policy, is
expected to meet the following objectives:

 To promote fiscal responsibility and accountability

 To facilitate economic growth and development
 To provide the government with stable resources for the provision of public
goods and services
 To address inequalities in income distribution.
 To provide economic stabilization.
 To pursue fairness and equity.
 To correct market failures.
The Policy document was launched and given credence to in April 2012.
However, in a bid to give legal backing to tax policy, there is need to fully
crystalise its tenets into more tax laws enacted by the national assembly.

4.0 TAX LEGISLATION

Laws refer to a whole body of enacted acts of legislation. In the context of

taxation, it is a codified system of order that describes the legal implications of
taxation, i.e. government levies on economic transactions.

 Tax laws provide a well-defined legal backing to the administration of each

tax type
 States in clear terms the applicable rate,
 Tax laws stipulate what constitutes offence and the appropriate sanctions
to each offence.
 They enshrine best practices in terms of ethical and professional conduct.
4.2 Tax Laws in Force in Nigeria

 Federal Inland Revenue Service (Establishment) Act No. 13 of 2007

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  Companies Income Tax Act (CITA) CAP C21 LFN, 2004 (commencement
1st Jan, 1958)
 Personal Income Tax Act (PITA) CAP 8 LFN, 2004 (as amended)
 Petroleum Profits Tax Act (PPTA) CAP 13 LFN, 2004 (commencement 1st
Jan, 1958)
 Deep Offshore and Inland Basin Production Sharing Contracts Act
 Value Added Tax Act (VATA) CAP D1 LFN, 2004 (commencement 1 st
Dec, 1993)
 Education Tax Act CAP E4 LFN, 2004 (commencement 1st Jan, 1993)
 Capital Gains Tax Act (CGT) CAP C1 LFN, 2004 (commencement 1 st
April, 1967)
 Stamp Duties Act CAP S8 LFN, 2004 (commencement 1st April, 1939)
 National Information Technology Development Agency Act (NITDA)
 Nigeria LNG (Fiscal Incentives, Guarantees & Assurances) Act
 Industrial Development (Income Tax Relief) Act
 Industrial Inspectorate Act
 Investment and Securities Act, 2007
 Insurance Act of 1997 (as amended)
4.3 Bases of Imposition of Tax in the Nigerian Tax System

For a good understanding of taxes payable by individuals and corporate bodies,

it is essential to note the bases on which taxes are imposed in the Nigerian tax
system. May I quickly point out that even though taxes are payable by individuals
and corporate bodies, such taxes are not levied or imposed on such individuals
and corporate bodies. Rather, taxes are levied on the incomes and transactions of
these individuals and corporate bodies.

Taxes may be direct or indirect and may be imposed on individuals’ incomes,

corporate entities’ incomes, assets and transactions. The bases of imposition are
highlighted below:

 On individuals’ incomes
Personal Income Tax – imposed on the income of all Nigerian citizens or
residents who derive income in Nigeria and outside Nigeria;

Development Levy – a flat charge imposed on every taxable person typically

within a state.

 On Companies’ incomes (Corporate Entities)

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Companies Income Tax – 30% imposed on the profits of all corporate entities
who are registered in Nigeria or derive income from Nigeria, other than those
engaged in petroleum operations;

Petroleum Profits Tax – imposed on the profits of all corporate entities registered
in Nigeria or who derive income from oil and gas operations in Nigeria between
50% and 85%;

Education Tax – 2% imposed on all corporate entities registered in Nigeria;

Technology Development Levy – imposed on selected corporate entities

(telecommunication companies, internet service providers, pension managers,
banks, insurance companies and other financial institutions within a specified
turnover range) in Nigeria to support nationwide development of technology
infrastructure and capacity.

 On Transactions
Value Added Tax – imposed on the net sales value of non-exempt, qualifying
goods and services in Nigeria, it is 5% of the value;

Capital Gains Tax – 10% imposed on capital gains derived from sales or disposal
of chargeable assets;

Stamp Duties – imposed on instruments executed by individuals and corporate

entities in Nigeria’ the rate on Stamp duties varies;

Excise Duty – imposed on the manufacture of goods within the Government

territory and collected by the Nigeria Customs Service;

Import Duty – imposed on the import of goods into the Government territory and
collected by the Nigeria Customs Service; and

Export Duty - imposed on the export of goods outside the Government territory
and collected by the Nigeria Customs Service.

This includes taxes such as property tax and other such taxes imposed on land or
landed property.

Notwithstanding the above enumerated bases of imposition of taxes, the various

tax laws provide relief and exemption to certain entities on certain incomes and
activities. Again, let us note that these reliefs or exemptions are limited to the
specific incomes or transactions for which they have been so granted rather than
the global income or transaction of a particular entity.
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To achieve the overall purposes and objectives of taxation, there is an inevitable
need for a set of rules and regulations (quasi laws) to, amongst other things, give
its administration a legal backing, provide ethical and professional conduct, etc.
The components of the tripartite structure of a tax system will now be mentioned
in relationship with the Nigerian tax system.

5.0 TAX ADMINISTRATION IN NIGERIA

The administration of taxation in Nigeria is vested in the various tax authorities

depending on the type of tax under consideration.

Broadly, there are three categories of tax authorities, namely:

 Federal Inland Revenue Service,

 State Internal Revenue Service, and
 The Local Government Revenue Committee
The enabling law in respect of each type of tax will normally contain a provision
as to the body charged with the administration of the tax. Each of the above
mentioned tax authorities has their distinct composition, powers and functions.

LIST OF APPROVED TAXES AND LEVIES FOR THE THREE TIERS

OF GOVERNMENT

A list of taxes and levies for collection by the three tiers of government has been
approved by government and published by the Joint Tax Board (J.T.B.) as
follows:

(A) Taxes collectible by the Federal Government

(1) Companies income tax;

(2) Withholding tax on companies;

(3) Petroleum Profit Tax;

(4) Value-added tax (VAT);

(5) Education tax;

(6) Capital gains tax - Abuja residents and corporate bodies;

(7) Stamp duties involving a corporate entity;

(8) Personal income tax in respect of:

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 - Armed forces personnel;

- Police personnel;

- Residents of Abuja FCT;

- External Affairs officers; and

- Non-residents.

(B) Taxes/Levies Collectible by State Governments

(1) Personal income tax:

- Pay-As-You-Earn (PAYE);

- Direct (self and government) assessment;

- Withholding tax (individuals only);

(2) Capital gains tax;

(3) Stamp duties (instruments executed by individuals);

(4) Pools betting, lotteries, gaming and casino taxes;

(5) Road taxes;

(6) Business premises registration and renewal levy;

- urban areas (as defined by each state):

 maximum of N 10,000 for registration and N5 ,000 for the

renewal per annum

- rural areas

- registration N2,000 per annum

- renewal N 1,000 per annum

(7) Development levy (individuals only) not more than N100 per annum
on all taxable individuals;

(8) Naming of street registration fee in state capitals

(9) Right of occupancy fees in state capitals;

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 (10) Rates in markets where state finances are involved.

(C) Taxes/Levies Collectible by Local Governments

(1) Shops and kiosks rates;

(2) Tenement rates;

(3) On and off liquor licence;

(4) Slaughter slab fees;

(5) Marriage, birth and death registration fees;

(6) Naming of street registration fee (excluding state capitals):

(7) Right of occupancy fees (excluding state capitals);

(8) Market/motor park fees (excluding market where state finance are
involved);

(9) Domestic animal licence;

(10) Bicycle, truck, canoe, wheelbarrow and cart fees;

(11) Cattle tax;

(12) Merriment and road closure fees;

(13) Radio/television (other than radio/TV transmitter) licences and

vehicle radio licence (to be imposed by the local government in which
the car is registered);

(14) Wrong parking charges;

(15) Public convenience, sewage and refuse disposal fees;

(16) Customary, burial ground and religious places permits; and

(17) Signboard/advertisement permit.

6.0 FOREIGN INVESTMENT IN NIGERIA

Investment in Nigeria is regulated by the Nigerian Investment Promotion

Commission. The agency is set up to encourage and promote foreign investments
in Nigeria. It serves as the regulatory agency for foreign investors operating in

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Nigeria. Its registration procedures have been streamlined to further encourage
inflow of direct foreign investment into the country.

It has put in place a one stop shop, which is an investment centre where thirteen
(13) government agencies relevant to foreign investment, are brought under one
roof in order to provide prompt and efficient services to foreign investors.
Presently the following government agencies can be found in NIPC’s One- Stop-
Shop for the provision of their services:

i. The Nigeria Investment Promotion Commission

(NIPC)
ii. The Corporate Affairs Commission (CAC)
iii. The Nigeria Immigration Service (NIS)
iv. The Nigeria Customs Service (NCS)
v. The Federal Inland Revenue Service (FIRS)
vi. The National Office for Technology Acquisition and
Promotion (NOTAP)
vii. The Federal Capital Territory (FCT)
viii. The National Agency for Food, Drugs Administration
and Control (NAFDAC)
ix. The Central Bank of Nigeria (CBN)
x. The Bureau of Statistics
xi. The Federal Ministry of Solid Minerals Development
xii. The Federal Ministry of Finance
xiii. The Standard Organisation of Nigeria (SON)

7.0 TAX INCENTIVES AND FOREIGN DIRECT INVESTMENT

Foreign investors are partners with the Nigerian Government and people to
develop the Nigeria economy. This relationship should however be reciprocal
and not exploitative. Nigerian Government guarantees security of investments,
hence investors should discharge their obligations (tax, corporate social
responsibility etc).

Consequently, tax incentives are special arrangements in the tax laws to attract,
retain or increase investment in a particular sector with a view to stimulating
growth in specific areas and assisting companies and individuals as they set up
businesses. The underlying wisdom in such incentives is to bring about general
growth and development across sectors and the economy at large. According to
Morisset (2003), Tax incentive is a reduction in the corporate income tax rate,
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through tax holidays or temporary rebates for certain types of investment or
companies. This is corroborated by Adegbile (2011) that Tax incentives are part
of the system by developing countries and usually established by governments in
order to grant foreign investors more attractive conditions to invest in their
country.

The Current policy of Nigerian Government is to ensure that incentives are sector
based and not granted arbitrarily. The benefit to the Nigerian economy must
however exceed the cost of taxes foregone.

Incentives are reviewed regularly to Foreign Investors and if they are serving the
expected purpose incentives are expected to voluntarily plough back into the
Nigerian economy. The arguments against use of tax incentives for foreign
investments argue against the vain objective of such effort as they condemn the
strong abuse of some discretionary waivers and duty suspension schemes.
However tenable their cries might be, proponents of the use of such incentives
describe it as statistically significant enough to drive foreign investments in the
positive direction. It is these and other reasons that we set out to explain Tax
incentives, its cost and benefits with emphasis on its relevance for investors.

7.1 WHY BOTHER ABOUT TAX INCENTIVES?

The question about interest in the offer of incentives lie in the impact of foreign
Direct Investment on productivity as measured by the Gross Domestic Product
(GDP). This is provides ready and measurable yardstick for justification or
rejection of sustenance of such regime of incentives so as to forestall economic
loss and absence of resource efficiency.
A test of this relationship is contained in CBN Journal of Applied Statistics
wherein results from the impact of foreign direct investment (FDI) and economic
growth using a combination of Conitegrated Vector Autoregressive and Granger
causality analysis to assess FDI and its impact on economic growth as measured
by Gross Domestic Product (GDP). These methods test data from 1970 – 2009
and produced the tables below:

Table: Johansen Test for Cointegration Rank

Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.57922 58.311 (0.0032) 32.895 (0.0071)
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 1 0.57922 25.417 (0.1515) (0.3782)
2 0.2055 11.406 (0.1903) (0.3154)
3 0.06769 2.663 (0.1027) (0.1027)
Source: Abdullahi F. Z et al; CBN Journal of Applied Statistics
The result of this test showed that the cointegration relation with restricted
constant is: GDP = 1.168FDI + 0.195IFR – 1.5588INR
The implication of this model is that Gross domestic product not only has a
positive relationship with Foreign Direct Investment but also leads to a 1.168
percentage GDP growth from a percentage increase in Foreign Direct Investment.
Inferentially and at 2012 Gross Domestic Product and foreign direct investment
levels, GDP rises by USD558 Million with rise of USD89 Million in foreign
direct investment.
Though tax incentive is not the only stimulant of foreign direct investment,
reports of revenue losses in the sum of N100 Billion yearly to waivers and other
taxes becomes dimmed by the growth prospects that the incentive brings at the
end of the day.
Below is a graphical representation of the survey for the most problematic factors
for doing business in Nigeria. Ranked as 120th out of 148th position in world
rankings of Global competitiveness in doing business for the year 2012/ 2013, it
can be noted that while the country’s Tax rates continue to remain competitive
being 4th least responsive problem for businesses, Tax regulation on the other
hand stands in the middle of the pack due perhaps largely to various
interpretations and confusions that sometimes characterizes administration and
implementation of Tax laws by issuance of vague guides and explanatory notes.
Since the general trajectory of Tax incentives is to assist firms to birth their ideas,
bringing their innovations to limelight as well creating the conducive
environment for self-sustenance by the instrumentality of fiscal policy of
government, such incentives contributes to bringing down general tax burdens to
such establishments making them just as competitive as their pairs in other parts
of the world.

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 Global Competitiveness Index Report (3.6)
25

20

15

10

Source: World Economic Forum (2012/ 2013)

Another graphical representation of note is the effect/ impact of Foreign Direct
Investment on Gross Domestic Product (GDP). This is explained hereinafter
thus:

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 YEARS FDI (=N=MN) GDP (=N=MN)
1970 251.00
1971 489.60
1972 432.80
1973 577.80
1974 507.10
1975 757.40
1976 521.10
1977 717.30 96,100.00
1978 664.70 89,000.00
1979 704.00 91,200.00
1980 786.40 96,200.00
1981 584.90 70,400.00
1982 2,193.40 70,200.00
1983 1,673.60 66,400.00
1984 1,385.30 63,000.00
1985 1,423.50 68,900.00
1986 4,024.00 71,100.00
1987 5,110.80 70,700.00
1988 6,236.70 77,800.00
1989 4,692.70 83,500.00
1990 10,450.20 90,300.00
1991 5,610.20 96,600.00
1992 11,730.70 97,000.00
1993 42,624.90 100,000.00
1994 7,825.50 101,300.00
1995 55,999.30 103,500.00
1996 5,672.90 107,000.00
1997 10,004.00 110,400.00
1998 32,434.50 113,000.00
1999 4,035.50 117,000.00
2000 16,453.60 121,000.00
2001 4,937.00 126,000.00
2002 8,988.50 131,000.00
2003 13,531.20 136,000.00
2004 20,064.40 145,400.00
2005 26,083.70 156,000.00
2006 41,734.00 169,304.00

Source: Central Bank of Nigeria

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 FDI - GDP TREND
180,000.00

160,000.00

140,000.00

120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

-
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

FDI (=N=MN) GDP (=N=MN)

Though the famous quote by a serving Military Head of State has rang through
time and summed up the irony of Nigerians suffering in the midst of plenty when
he said “that the problem that Nigeria has is not that of lack of money, but how
to spend money”. Its wider ramifications for the country’s need over 40 years
later is best encapsulated per the data and graph represented above with respect
to Foreign Direct Investment flows.

We observe from 1971 – 1975 and 1976 - 1980 an almost flattened growth
trajectory of FDI as this period was that of surplus in government budgeting also
witnessing the government’s Indigenization and Import substitution policies
which were not Foreign Direct Investment friendly. More particularly, the growth
rate of Foreign Direct Investment inflow for this 5-year periods were 54.70% and
50.91% respectively. The period 1981 – 1985 and 1986 – 1990 shows some better
performance at 143.37% and 159.70% growth rates respectively. This comes as
no surprise for two reasons that can be readily adduced. Firstly, the period 1981
– 1985 was a period of return to civilian administration, majorly, and relaxation
of Military-led indigenization programmes while the Structural Adjustment
Programme (SAP) came on stream from 1986, during the General Babaginda
administration, bringing about greater liberalization and better degree of
openness.

Though the period of offer of a potpourri of conscious tax incentives to stimulate

Foreign Direct Investment date back since 1958, another conscious and vigorous
effort at reigniting same again could arguably be traced back to the mid 1990s

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when the Military introduced Tax holidays to attract investment in the oil and gas
sector. This initiative has since led to investment of that sector among other
sectors where investments are badly needed. It can also be seen from the graph
that the nation also enjoyed some elevated flow of Foreign investment into the
country from the 1990s and beyond also at an average growth rate of 76.46%.

7.1 TAX EXEMPTIONS AND INCENTIVES

Tax laws provide various incentives to companies carrying on businesses and

these Incentives may be granted on industry basis or on tax type and may
include:

 Exemption from payment of taxes

 Reduction in rate of tax to be paid
 Grant of allowances and deductions from profits subject to tax etc
The President has broad powers to grant tax incentives to any company or
individual.

1. Under the Industrial Development Act, Pioneer Status is granted to

qualifying companies and/or products and services resulting in 3-5 year tax
holiday. Qualifying industries include; Mining, manufacture of cement,
glass and glassware, lime from limestone, ceramic products, rubber, leather
textile etc and other areas of industry that are of economic benefit to the
country.

Tax Incentives are also granted to companies in certain industries where it

is deemed that:

 the industry is not being carried on in Nigeria on a scale suitable to

Nigeria’s economic requirements or at all, or there are favourable
prospects of further developments in Nigeria
 it is in public interest to do so from payment of taxes
The Incentives attract tax exemption for a three year period in the first
instance and a maximum of five years in total. Also tax free dividends
during pioneer period, and carry forward of losses made and capital
allowances (on assets) incurred during the pioneer period.

2. Under the Companies Income Tax Act: The Companies Income Tax Act
has been amended in order to encourage potential and existing investors
and entrepreneurs. The current rate in all sectors, except for petroleum is
30%.

Dividends interest, rent or royalty earned by companies outside Nigeria

and brought in through specified channels are exempt from tax. Interest

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 earned by a foreign company on its bank deposits in Nigeria are exempt
from tax.

Nigerian companies with a minimum of 25% foreign equity and within

their first four years of operation are exempt from payment of minimum
tax.

The President of the Federal Republic of Nigeria in April 2012 signed into
law an Order for the part exemption of profits of companies from tax. The
order is to last for five assessment years from the effective date and is
definitely aimed at stimulating employment of fresh graduates and school
leavers, as well as to encourage the channeling of private sector investment
in critical public infrastructure.

The tax incentives contained in the Order can be classified under the following
headings:

(a) Employment Tax Relief (ETR)

The relief claimable is 5% of the assessable profits of a company subject
to a maximum of 100% of the gross salaries of the qualifying employees.
The relief is available if the company has a minimum net employment of
10 employees (counting two employees from the same immediate family
as one). Not less than 60% of the new employees must have had no
previous work experience and must have graduated from school or
vocation within 3 years of assessment. The employees must be Nigerians
in first-time full- time employment of the company. The relief must be
utilized in the year of assessment in which the company qualifies and any
unutilized amount cannot be carried forward.
Companies claiming this relief would be expected to furnish the tax
authority with a list of joining and leaving employees during the year, their
qualifications, year of graduation and gross salaries earned during the year,
together with the PAYE tax paid on such salaries.

(b) Work Experience Acquisition Programme Relief (WEARP)

This relief is claimable at the rate of 5% of the assessable profits of a
company subject to a maximum of 100% of the gross salaries of the
qualifying employees. The relief is available if the company has a
minimum net employment of 5 new employees (counting two employees
from the same immediate family as one). Such employees must be
Nigerians in first-time full- time employment by the company and must be
retained for a minimum of 2 years from the year of assessment the
employees were first employed. Also, this relief must be utilized in the
year of assessment in which the company qualifies and any unutilized
amount cannot be carried forward.
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 Companies involved in HR outsourcing could generate good tax savings
from claiming this relief so long as they are able to retain the same
personnel on their contracts for the mandatory two-year period. The
inability to carry forward the relief also means that new companies would
not be able to claim the relief unless they record taxable profits by their
third year of commencement.

(c) Infrastructure Tax Relief (ITR)

The relief claimable shall be 30% of the cost of providing completed
infrastructure/facilities of a public nature, for use by the company and the
public except where it is impracticable to be used by the public or an
exemption from public use has been obtained from the Minister of Finance.

The qualifying infrastructure (facilities) include power/electricity, roads

and bridges, water, health, educational and sports facilities and others as
may be specified by an order issued by the Minister of Finance. The relief
shall be treated as additional deduction/expense in arriving at the
assessable profit of the company. Any amount that cannot be utilized is
available for carried forward for a maximum of two assessment periods.
This relief appears to be a duplication of the Rural Infrastructure Relief in
Section 29 of CITA, except that the qualifying infrastructure has been
expanded in the order and the limitations in Section 29 (such as the
nearness to Government infrastructure), which are not mentioned in the
order. This means that companies can claim both reliefs within the same
tax return.

3. Incentives under the Personal Income Tax Act: Non-Nigerian

employees of foreign companies in Nigeria may be exempt from tax in
Nigeria, where they spend a cumulative period of less than 183 days in
Nigeria during a 12 months period and their income is subject to tax in their
home country. The Minister of Finance also has wide powers to grant
exemptions to any person based on a treaty entered into with Nigeria.

4. Under the Capital Gains Tax Act: Foreign companies carrying on

business in Nigeria are exempted from capital gains tax on disposal of
assets, except such proceeds are brought into Nigeria.

5. Incentives under the Value Added Tax Act: Import of several items
exempted from value added tax. Exported goods and Import and Export
Duty Exemptions services also exempted from value added tax and
Reductions .Import and export duty exemptions and reductions are
available for several items. List of exempt items and rates is reviewed

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 annually based on economic considerations and developments in the
Nigeria economy.

6. Incentives under the Petroleum Sector: The incentives in this sector are
granted to companies that are into joint ventures with the Nigerian National
Petroleum Corporation and have signed Memorandum of Understanding.
The incentives are:
 Guaranteed minimum margin of USS2.50bl;
 Accelerated capital allowances which provides that the capital
allowances can be carried forward indefinitely;
 Graduate royalty rates approved for oil companies.
 Onshore production in territorial waters and continental shelf areas
beyond 100 meters.

Investment tax allowances (ITA) is granted to a company in respect of any

asset for the accounting period. The ITA is graduated as follows:

On shore - 5%
Off shore in depth of up to 10m - 10%
Off shore in depth of between 100-200m - 15%
Off shore in depth of over 200m - 20%

7. TAX INCENTIVES TO GAS INDUSTRY

In view of the enormous potentials in this sector, Government approved

the following fiscal incentives:

a. GAS PRODUCTION PHASE

Applicable tax rate is the same as the company income tax
which is currently at 30%
Capital allowance at the rate of 20% per annum in the first
four years, 19% in the fifth year and the remaining 1% in the
books
Investment tax credit at the current rate of 5%
Royalty at the rate of 7% on shore and 5% off shore

b. GAS TRANSMISSION AND DISTRIBUTION

- Capital allowance as in production phase above

- Tax rate as in production phase
- Tax holiday under pioneer status

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 c. LNG PROJECTS
-Applicable tax rate under PPT is 45%
- Capital allowance is 33% per year on-straight line basis in
the first three years with 1% remaining in the books
- Investment tax credit of 10%
- Royalty 7% on-shore 5% off-shore, tax deductible

d. GAS EXPLOITATION (UPSTREAM OPERATION)

Fiscal arrangements are reviewed as follows:
-All investments necessary to separate oil from gas from
reserves into suitable product is considered part of the oil
field development.
- Capital investment facilities to deliver associated gas in
usable form at utilization or transfer points will be treated for
fiscal purposes as part of the capital investment for oil
development.
- Capital allowances, operating expenses and basis for
assessment will be subjected to the provisions of the PPT
Act and the revised Memorandum of Understanding (MOU).

e. GAS UTILISATION (DOWN STREAM OPERATAION)

Companies engaged in gas utilization are to be subjected to the
provisions of the Companies Income Tax Act (CITA)
- An initial tax free period of three years renewable for an
additional two years
- Accelerated capital allowances after the tax-free period in the
form of 90% with 10% retention in the books
- 15% investment capital allowance, which shall not reduce the
value of the asset.

In 1998, the government approved additional incentives to support the

gas industry in the following areas:
- All gas developmental projects, including those engaged in power
generation, liquid plants, fertilizer plants, gas distribution/transmission
pipelines are taxed under the provisions of Companies Income Tax
(CITA) and not the Petroleum Profit Tax;
- All fiscal incentives under the gas utilization downstream operations
since 1997 are to be extended to industrial projects that use gas i.e. power
plants, gas to liquids plants, fertilizer plants, gas distribution/transmission
plants;
- The initial tax holiday is to be extended from three years to five years;
- Gas is transferred at 0% PPT 0% Royalty;
- Investment capital allowance is increased from 5% to 15%;
- Interest on loan on gas project is to be tax deductible provided that prior
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 approval was obtained from the Federal Ministry of Finance before taking
the loan; and
- All dividends distributed during the tax holiday shall not be taxed.

8. Incentives under the Tax Free Zones and Export Processing Zones.

There are laws creating tax free zones and export zones, which exempt
companies operating in those areas from tax obligations in Nigeria for
operations carried out in the zones ◦ Companies are required to register
before enjoying the benefits and all activities must be performed
exclusively within the zones - activities outside the zones will be subject
to tax. Tax free status is continuous as long as activities are restricted to
the zones.

Some of the incentives are as follows:

• Complete tax holiday for all Federal, State and Local Government taxes,
rates, custom duties and levies.

• One-stop approval for all permits, operating licences and incorporation

papers.

• Duty-free, tax-free import of raw materials for goods destined for re-
export.

• Duty-free introduction of capital goods, consumer goods, components,

machinery, equipment and furniture.

• Permission to sell 100% of manufactured, assembled or imported goods

into the domestic Nigerian Market.

• When selling into the domestic market, the amount of import of import
duty on goods manufactured in the free zones is calculated on the basis of
the value of the raw materials or components used in assembly not the
finished product.

• 100% foreign ownership of investments.

• 100% repatriation of capital, profits and dividends.

• Waiver of all import and export licenses.

• Waiver on all expatriate quotas for companies operating in the zones.

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 • Prohibition of strikes and lockouts.

• Rent-free land during the first 6 months of construction.

Government may however review the status of the zones based on

economic considerations.

9. Nigeria’s Double Tax Treaty

This network offers significant incentives to investors, there is

considerable room for further expansion subject to development of a clear
tax treaty strategy. Nigeria has existing treaties with:

 UK;
 France;
 Netherlands;
 Belgium;
 Pakistan;
 Canada;
 Czech Republic;
 Philippines; and
 Romania.

Negotiations are in progress at various stages with other countries like

Turkey, Russia, India, and Korea.

Other countries have indicated their interest to commence negotiation of

tax treaties with Nigeria. As a concession to Nigeria’s treaty partners,
government has approved a lower treaty rate of 7.5 on dividends, interest,
rent and royalties when paid to a bonafide beneficial owner of a treaty
country.

10. OIL AND GAS FREE ZONE

The Oil and Gas Export Free Zone Act No. 8 of 1996 established an Oil and Gas
Free Zone Authority to manage, control and co-ordinate all the activities within
the zone. This zone encompasses three oil and gas service centres around the ports
of Onne (near Port Harcourt), Calabar and Warri. All three ports have enhanced
stacking and warehousing facilities awaiting subscribers. Incentives and fiscal
measures approved by government that favour and encourage large investments
in the region include:
• No personal income tax
• 100% repatriation of capital and profit
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• No pre-shipment inspection for goods imported into the free zone.

11.TELECOMMUNICATIONS
Government provides non-fiscal incentives to private investors in addition to a
tariff structure that ensures that investors recover their investment over a
reasonable period of time, bearing in mind the need for differential tariffs between
urban and rural areas. The tariff structure as approved by the regulatory authority,
Nigerian Communication Commission, also provides adequate cross-subsidy
between the profitable trunk and local calls of the urban and non-profitable
operation of the rural areas.
Other Incentives in place are:-
a) Manufacture/installation of telecommunications related equipment is
considered as pioneer activity. As a result, they enjoy 5 to 7 years tax holiday
depending on location.
b) Taxes and duties do not exceed those charged on essential electrical goods.
12. INVESTMENT PROMOTION AND PROTECTION AGREEMENT
(IPPA)

As part of additional effort to foster foreign investors’ confidence in the Nigeria

economy, Government continues to enter into bilateral investment promotion and
protection agreements (IPPAs) with countries that do business with Nigeria. The
IPPA helps to guarantee the safety of the investment of the contracting parties in
the event of war, revolution, expropriation or nationalisation. It also guarantees
investors the transfer of interests, dividends, profits and other incomes as well as
compensation for dispossession or loss. To this end, Nigeria has concluded and
signed IPPAs with:
 France;
 United Kingdom;
 Netherlands;
 Romania;
 Switzerland;
 Spain;
 South Africa; etc.

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Negotiations with the United States of America, Belgium, Sweden and the
Russian Federation are at various stages.
13. LIBERALISATION OF OWNERSHIP STRUCTURE
The government in repealing the Nigerian Enterprises Promotion Act of 1972
(Amended in 1977 and in 1989) and promulgating the Nigerian Investment
Promotion Commission Act of 1995 has liberalized the ownerships structure of
business in Nigeria. The implication of this is that foreigners can now own 100%
shares in any company as opposed to the earlier arrangement of 60%-40% in
favour of Nigerians.
14. REPATRIATION OF PROFIT
Under the provisions of the Foreign Exchange (Monitoring & Miscellaneous
Provision Act No. 17 of 1995), foreign investors are free to repatriate their profits
and dividends net of taxes through an authourised dealer in freely convertible
currency.
15. GUARANTEES AGAINST EXPROPRIATION
The Nigerian Investment Promotion Commission Act guarantees that no
enterprise shall be nationalized or expropriated by any government in Nigeria.
8.0 MULTI-LEVEL TAXES
There is often a problem of multiple taxes for businesses, at the federal, state and
local government levels. Investors are therefore advised to engage the services of
professional tax advisors in dealing with this problem.
8.1 INVESTORS RELATIONSHIP WITH CHARTERED TAX
PRACTITIONERS

Members of CITN are the only statutorily recognized tax professionals in Nigeria.
They add value to businesses by their professional and ethical handling of tax
matters. Whether they work in-house as tax managers or outside as tax
consultant, they help their firms/ clients in tax planning, advisory services,
compliance issues and tax dispute resolutions. Therefore Investors are strongly
advised to work hand in hand with CITN certified professional tax practitioners
in the bid to ensure tax compliance in their firms.

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Conclusion
The Nigerian economy and system of government are dynamic and evolving at a
rapid rate. The government is also working extremely hard towards eradicating
corruption with the establishment of the Economic and Financial Crimes
Commission (EFCC) and the Independent Corrupt Practices and Other Related
Offences Commission (ICPC) which are statutory bodies charged with
prosecuting cases of corruption in the Country. Nigeria is the Country to invest
in now. Any disciplined and law abiding citizen will be able to settle into the
Nigerian business environment and conduct business satisfactorily.

References
M.A.C Dike (2013): An overview of the Nigerian Tax System and the Taxes
payable by individuals and Corporate Bodies.
Ifueko Omoigui Okauru (2012): “Tax Incentives for Foreign Investors in
Nigeria” at The Nigeria Investors Business Forum in Berne Switzerland
Nigerian Investment Promotion Council- www.nipc-nigeria.org/FAQ.htm
The Nigerian Investment Promotion Council Act
New Tax Incentives for Nigerian Companies by Pedabo

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