Nigeria: Newsflash On The Companies Income Tax (Exemption Of Profits) Order, 2012

Last Updated: 8 November 2012
Article by Victor Onyenkpa

Introduction

The President of the Federal Republic of Nigeria recently issued an order which confers certain fiscal incentives on companies doing business in Nigeria. The incentives are in the form of tax exemptions/reliefs – not tax credits – and are aimed at encouraging employment, employee-retention and infrastructural development in the country.

The Companies Income Tax (Exemption of Profits) Order, 2012 (the Order) was made by the President in exercise of the powers under section 23(2) of the Companies Income Tax (CIT) Act, Cap C21, Laws of the Federation of Nigeria, 2004 (as amended).

The Order was made on 27 April 2012. The existence of the Order was, however, only made public on 4 October 2012, when the Minister of Trade and Investment unveiled its threefold tax relief scheme at an investment forum in Lagos.

The key provisions of the Order and its implications for taxpayers in Nigeria are as follows:

1.1 Date of commencement of the Order

The Order has a commencement date of 27 April 2012 and will be in force for 5 years from the commencement date.

Given the above commencement date, one critical question that will presumably be raised by taxpayers is whether or not the tax reliefs provided by the Order can be enjoyed by companies in 2012 tax year. Unfortunately, the Order does not provide a clear cut position on this issue.

However, considering that the performance of companies vis-à-vis the qualification criteria specified in the Order, will most likely be certified by their statutory auditors from the effective date of the Order, it is unlikely that companies (other than those in the first tax year) will be able to enjoy the reliefs until 2013 tax year.

1.2 Categories of tax reliefs and criteria for qualification

The Order specifies three categories of tax reliefs, namely Employment Tax Relief, Work Experience Acquisition Programme Relief and Infrastructure Tax Relief.

(a) Employment Tax Relief (ETR): Based on the provisions of paragraph 1 of the Order, a company can enjoy ETR in the form of an exemption from CIT of up to 5% of its assessable profits in an assessment period. To qualify for ETR, the company must have a minimum net employment1 of 10 employees in the relevant assessment period. Furthermore, at least 60% of the employees must have no previous work experience, and must have been employed by the company within three years of graduating from their respective schools or vocations.

Paragraph 2 of the Order limits the actual ETR claimable by a company to the gross salaries paid to the qualifying employees2. The paragraph also provides that ETR can only be utilised in the tax year in which the employees are first employed. Any unabsorbed deduction cannot be carried forward to another assessment period.

The Order defines 'employee' as "only Nigerians actively employed in Nigeria by the company on a full time basis, who do not hold any other employment and whose employment duties are primarily discharged in Nigeria". Also, the Order prohibits a company from claiming ETR on more than one employee from the same immediate family. In this instance, the Order provides that the number of qualifying employees on which a company can claim ETR will be computed less any such additional member of the same immediate family.

(b) Work Experience Acquisition Programme Relief (WEAPR): The WEAPR claimable by a company in Nigeria is 5% of its assessable profits in the tax year in which it qualifies. Like unutilised ETR, any unabsorbed WEAPR deduction cannot be carried forward to the next tax year. The restriction applicable under the ETR scheme to employees from the same immediate family, also applies under the WEAPR scheme. However, the qualification criteria for WEAPR are different from those applicable to ETR.

To qualify for WEAPR, a company must have a minimum net employment of five 'new employees', and must have retained the employees for a minimum of two years from the tax year in which they were first employed by the company. In essence, a company would qualify for WEAPR in the third year of employment of the 'new employees' retained in its employment.

The Order defines 'new employee' as a full time employee who is being offered employment by the company for the first time in any capacity and who falls within the above definition of 'employee'.

(c) Infrastructure Tax Relief (ITR): Paragraph 3 of the Order grants qualifying companies a CIT exemption of 30% of the cost incurred in providing infrastructure or facilities of a 'public nature'. Based on the paragraph, 'infrastructure or facilities of a public nature' include: power (electricity); roads and bridges; water; health, educational and sporting facilities; and other facilities as may be approved from time to time by the Minister of Finance and published in the Federal Government Gazette upon the recommendation of the Federal Inland Revenue Service (FIRS).

The Order provides that the ITR will be granted in addition to the usual deductions allowed in respect of the costs incurred under the relevant provisions of the CIT Act, "and shall form part of the deductible expenses of the company". In effect, the ITR will be treated as an allowable expense to be deducted in arriving at assessable profits, and not as a relief to be set off against assessable profits.

ITR is to be claimed by a company in the assessment period in which the infrastructure or facility is provided. However, unlike ETR and WEAPR, any unutilised portion of the ITR can be utilised within two assessment periods from the period it first became available.

To qualify for ITR, the relevant infrastructure and/or facilities must have been completed by the company, and available for use by the company and the public, or the community where the infrastructure/facilities are sited. However, the Order provides exception where public use is impracticable or an exemption is obtained from the Minister of Finance.

It is important to note that sections 34 and 40 of the CIT Act (as amended) currently contain provisions which aim to encourage companies to invest in rural areas and provide the infrastructure/facilities incidental to such investments, by way of rural investment allowance. However, one of the major reasons for the ineffectiveness of the incentive scheme is the requirement for the relevant trade or business to be sited in a location that is at least 20 kilometres away from similar facilities provided by the government. The ITR scheme does not include this requirement.

1.3 Prerequisites for claiming exemption

In addition to the above qualification criteria, the Order specifies the following prerequisites for claiming the exemptions:

  1. The company must have a Taxpayer Identification Number issued by the FIRS.
  1. The exemption/relief to be claimed by the company must be duly certified by its statutory auditors. The auditors are required to state the particulars specified in the Order in respect of ETR and ITR.
  1. The certification provided by the company's statutory auditors must be verified by the FIRS.

1.4 Penalties

Based on paragraph 4(4) of the Order, an auditor, company or any other person that provides (or is involved in the preparation of) a certification that contains any false statement or declaration commits an offence under section 42 of the FIRS (Establishment) Act and section 94 of CIT Act (as amended). The penalties specified under the sections include maximum imprisonment terms of 3 and 5 years, respectively, upon conviction.

Conclusion

The Federal Government's decision to grant additional tax incentives to companies is, no doubt, a step in the right direction. For one, the tax exemptions will incentivise companies that have huge human capital needs, or that invest in public infrastructure/facilities in order to carry on their business. The incentives will also provide fiscal 'sweeteners' to companies that invest in the provision of basic social amenities (that may not be critical to their business operations) due to their deep commitment to corporate social responsibility.

It is unclear why the incentives were not extended to sole proprietors and partnerships. One reason might be because sole proprietors and partnerships are taxed by state governments, many of whom would be reluctant to support any policy that would potentially reduce taxes accruable to them.

One wonders if the incentives are significant enough to spur companies to change their orientation towards the creation of employment opportunities or the provision of infrastructure/facilities. This is because such investments will usually result in a net outflow from the company when compared to the above reliefs. Nonetheless, companies will do well to evaluate the benefits they stand to derive from the new tax incentive regime.

Footnotes

1 The Order defines 'net employment' as "the difference between incoming and outgoing employees of the company within the assessment period".

2 The Order did not define the term "qualifying employees". Consequently, it is unclear whether the cap on ETR claimable by a company would be limited to gross salaries paid to employees without any previous work experience.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions