Tax incentives under the Nigerian tax laws


Nigeria has always put in place policies to attract foreign direct investment (FDI) as far back as 1952 in order to promote economic growth and development. On annual basis, through the approved Budgets, the Federal Government used to roll out   tax incentives as part of fiscal policies to attract  targeted sectors of the economy. Thus, plethora  of general incentives and tax incentives  are  available in the various statutes and Acts to encourage and attract local and foreign investors but experience has shown that they are often not taken up probably due to the expense of processing   the relevant documentation and perhaps the high cost of doing business.

Tax Incentives s are granted on sector basis-agriculture, mining, oil and gas etc. and are reviewed regularly especially during tax reforms and amendments to tax legislation. In 1996 alone, the Federal Government released over 80 tax incentives.  Tax incentives, a prominent feature of developing countries’ strategies for attracting Foreign Direct Investments (FDIs)  are popular policy measures used in many countries whether low or  high- income countries. Indeed, the high- income countries which are mostly member states  of the Organization for Economic Cooperation and Development (OECD) recognize that a tax incentive is a type of government spending in the form of a tax expenditure.

1.(ii) What are Tax Incentives (TI)s?

A T I is a deliberate reduction in (or total elimination of) tax liability granted by government in order to encourage particular economic units  (e.g corporate bodies)to act in some desirable ways such as to invest more, produce more, employ more, export more, save more, consume less, import less, pollute less and so on. The reduction in tax liability which a tax incentive constitutes can be achieved through reduction in tax rate, reduction in tax base, outright tax exemption, tax deferment and so no. (Dotun Philips)

The term “tax incentive” encompasses all the measures adopted by Government to motivate taxpayers to respond favourably to their tax obligations.(Manuwa,1996)

The United Nations Conference on Trade and Development (UNCTAD) (2000) ,defined tax incentives as any measurable advantages accorded to specific enterprises or categories of business by (or at the direction of) a Government, in order to encourage them to behave in a certain manner.

Bruce (2004) defined tax incentives as fiscal measures that are used to attract local or foreign investment capital to certain economic activities in particular areas in a country .

In other words, a TI is created when a government deliberately manipulates the tax system to the advantage of a potential taxable person or adopts policies that favour the tax payer.

Most countries, irrespective of their stage of development, employ an array of incentives to realize their investment objectives.

Objectives of Tax Incentives

Tax incentives can be designed to achieve the following:

•attract foreign investment;

• encourage the growth of infant industries;

•encourage dispersal of industries;

• enhance import substitution of economic activities;

• shift investment to preferred sectors; and

• discourage inventible capital outflow.

Philips (1996) itemized the following as objectives of TI:

Regional Investment:

Tax incentives may be designed for development at regions that are disadvantaged due to their remoteness from major urban centers. Operating in a remote area  entail  higher costs of  transportation and  communication  in delivery. Such higher costs place the location at a competitive disadvantage relative to other attractive sites.  Those assigned to work in remote areas may demand for higher wages, which  implies higher cost to prospective investors. The first best solution would be for Government to develop adequate infrastructure and amenities so as to reduce these cost, Government could also compensate the investors for the cost of developing the area and in training workers in the region. UNCTAD (2000) .

Regional development objectives which is to develop a particular Region include support to rural development, far away from major cities and reducing environmental hazards. Angola, Brazil, Ecuador, Ghana, India and Thailand are some countries that use such incentive. Nigeria also offers  a regional incentive in form of  accelerated capital allowances which are granted on the basis of the cost of qualified capital expenditure to investors that establish operations in rural areas where facilities such as electricity, tarred roads,  and water supply are not available

Sectorial Investment:

Some of the TIs in Nigeria are sector-based; they are targeted at agriculture, petroleum industry, mining etc and businesses with new technology. Tax holidays are available for pioneer products and companies involved in industries that are not fully developed. In Nigeria, the holiday period covers an initial period of three years, renewable for an additional two years. A new company going into mining of solid materials is exempted from tax for the first three years of operation.

A company engaged in marketing and distribution of natural gas for commercial purposes, enjoy a three-year tax-free period, renewable for an additional two years; accelerated capital allowances at the rate of 90 per cent of plant and machinery after the tax-holiday period.

Companies engaged in exploration of petroleum in deep offshore areas (water depths over 200 metres) and inland basin areas are granted a concessionary profits tax at the rate of 50 per cent of chargeable profits for the duration of the production-sharing contracts (PSCs) instead of the normal rate, 85 per cent. Royalties for deep offshore PSCs are graduated from 12 per cent to 0 per cent depending on water depth, while inland-basin PSCs are charged a flat rate royalty of 10 per cent.

Losses incurred by agricultural trade and businesses are carried forward indefinitely,

whereas others are restricted to four years, though the restriction has been withdrawn. Tractors, ploughs and other agricultural implements are exempt from VAT.

Performance Enhancement 

Tax incentives can be used to enhance performance in certain sectors of the economy e.gEconet Ltd (now Airtel) was granted pioneer status and declared a pioneer company to enhance performance in the communication sector.

Transfer of Technology

An important objective for using tax incentives to attract foreign investment is the transfer of technology. Nigeria has a  specific set of  incentives  directed towards research and development (R & D) activities.

Another objective is the structural development (OECD, 2010) . Some governments offer  incentives to develop certain industries or activities considered crucial for development, such as  industrial parks, export activities, the film industry or business with new technologies. 

Thus, Singapore offers exemptions from taxation for a period of five years for companies which work in industries that are not sufficiently developed.

Teju Somorin

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