Nigeria: Let There Be Roads …

Last Updated: 11 February 2019
Article by Taiwo Oyedele

MATTERS ARISING FROM THE ROAD INFRASTRUCTURE DEVELOPMENT AND REFURBISHMENT INVESTMENT TAX CREDIT SCHEME ORDER, 2019

Context

According to the Infrastructure Concession Regulatory Commission, Nigeria has about 195,000 km of road network out of which about 32,000 km are federal roads and 31,000 km are state roads. In total, only about 60,000 km are paved leaving 135,000 km of road untarred. A large proportion of the paved roads are in bad conditions due to poor maintenance.

President Muhammadu Buhari on 25 January 2019 signed a 10-page Executive Order No. 007 known as the "Companies Income Tax (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme) Order, 2019" described as a Public-Private Partnership intervention to enable government leverage private sector funding in a manner that creates value for money through private sector discipline. The Order is accompanied by an 11-page Regulation made up of First Schedule on the Administration and Operation of the Scheme while the Second Schedule contains a sample MoU for eligible road projects.

Legal framework

The Order references the powers conferred on the President under Section 23(2) of the Companies Income Tax Act (CITA). The section provides that the President may exempt by order (a) any company or class of companies from all or any of the provisions of this Act (CITA); or (b) from tax on all or any profits of any company or class of companies from any source, on any ground which appears to it sufficient.

Highlights of the Order

The Scheme will be in force for a period of 10 years from date of commencement of the Order. A Management Committee will be set up to implement and administer the Scheme. Participants and beneficiaries must be registered by the Committee which shall have discretion over costs that may be allowed as part of the Project Cost. In addition, there shall be an MoU and contract documents between participants and the Minister of Finance as Chairman of the Committee. Completion of each road project shall be between 12 to 48 months.

Participants in the Scheme shall be entitled to tax credits for the project cost incurred including a single uplift equivalent at the prevailing CBN monetary policy rate plus 2 per cent. The uplift shall not constitute taxable income in the hands of a participant or beneficiary. Costs incurred on roads under the scheme are not eligible for any other allowances or tax relief.

The aggregate professional fees admissible as part of Project Cost shall not exceed 1.25% of cost of construction or refurbishment costing N10 billion and above.

Eligibility

Eligible participants are companies or corporations established under any law in force in Nigeria. This includes a pool of companies operating through a Special Purpose Vehicle registered with the Securities and Exchange Commission as an infrastructure Fund and Institutional Investors such as Pension Fund Administrators.

Eligible road means any road approved by the President on the recommendation of the Minister of Finance based on roads presented to the Minister by the Road Scheme Management Committee, and published in the official Gazettes of the Federal Republic of Nigeria.

Eligible project cost means any expenditure wholly, reasonably, exclusively and necessarily incurred by a participant for the construction or refurbishment of an eligible road as certified by the Committee. This includes cost of road construction or refurbishment, road maintenance for a period of 5 years following completion of construction or refurbishment, professional fees, and necessary and reasonable variation certified by the relevant regulatory authority. Cost must be obtained through competitive bidding process and must follow set procedures of the Bureau of Public Enterprises for certifying and approving procurement for federal government contracts.

Procedures

Eligible participants are to submit written applications to the Committee to include a valid Tax Clearance Certificate (TCC) issued by the FIRS; latest audited financial statements of Corporate Sponsor(s); and project cost and timelines bids to include design and specification for the identified road project. A Fund Manager must present evidence of registration with SEC and authorization letter to act for and on behalf of a pool of companies.

The Committee will apply the set procedures of Ministry of Works in approving project cost and completion timelines. Participants are to apply to the FIRS for a Road Infrastructure Tax Credit Certificate annually based on approved costs. Once issued, the certificate becomes valid for use against the corporate income tax (CIT) in and from the relevant fiscal year, in which the project cost is incurred, until it is fully utilized. The utilization is not automatic as participants must apply to the FIRS to claim the credit. The amount of credit to be utilized in any given year is limited to 50 per cent of the CIT payable by the participant or beneficiary for that year of assessment except with respect to roads in an Economically Disadvantaged Area which is not subject to the limitation.

The Road Tax Credit is a tradable instrument and may be sold in whole or in part to a willing buyer on a relevant Securities Exchange or such other approved transaction. Every sale or transfer is subject to the approval of the Committee. Various actions required by government including issue of Tax Credit Certificates by the FIRS are deemed to be automatically done after 14 days in line with the Executive Order 01 of 2017.

Governance

The Regulation to the Order provides for a Management Committee to be chaired by the Minister of Finance while the Minister for Works will act as the Deputy Chairman. Other members are drawn from both ministries and other MDAs viz: Trade and Investment; Justice; BPE; FIRS; NIPC; SEC; Infrastructure Concession Regulatory Commission; Budget Office; NBS; NSIA; the Presidency; and any other person as may be deemed necessary by the Minister of Finance.

The ministry of finance may engage consultants to undertake value engineering studies to ensure value for money. Committee members are to apply the principles and procedures as laid down by their respective MDAs in performing their functions.

Reporting

The Tax Credit may qualify as an assets in a participant or beneficiary's accounts in line with IFRS. The Committee is to facilitate the preparation by the FIRS of annual returns of all Roads Tax Credits issued and utilized in every fiscal year which may be submitted by the finance minister to the Federation Accounts Allocation Committee and potentially to the National Assembly.

The grey areas

The Order raises a number of key questions:

  1. Are eligible roads limited only to federal roads given that states and LGs are entitled to a share of CIT revenue?
  2. Is borrowing cost eligible? And foreign exchange differences, both realized and unrealized, given that road projects would inevitably involve foreign inputs? It appears the intention of the uplift is to compensate for borrowing cost or time value of money spent but it does not go far enough as it is a single uplift while claims against tax could take several years.
  3. How will internally generated cost be treated given that it cannot be subject to a competitive bid – and should it be cost to company or cost that would have been charged to a third party?
  4. Why would any institutional investor such as a PFA participate given that their funds under management are exempt from CIT and selling the Tax Credit will give them lower than risk-free returns?
  5. Why is the eligibility limited to organisations established under Nigerian laws and liable to CIT to the exclusion of foreign investors and oil companies taxable under the PPTA?
  6. How will the 10yrs sunset be determined? Will projects started and still in progress by year 10 be eligible? And untilised credits?
  7. Any gains or losses on disposal shall be taxed in the manner prescribed by the applicable tax legislation. Will this be capital gains tax, CIT or other taxes?
  8. In the event that a project or project cost is not approved, how will the associated cost be treated? And professional fees that exceeds the cap of 1.25% or maintenance carried out after 5 years? In practice FIRS takes the rebuttable view that unapproved costs are also not allowable for tax purposes?
  9. Does fiscal year cover any tax payable in that year or only taxes which become due in the year? Will this be different from WHT credit utilization?
  10. Will the Tax Credit be treated as tax revenue by government or tax expenditure? And in any case how will this be reconciled with revenue and capex budgets of federal, state and LGs?

My two kobo

With the impending new minimum wage bound to put more pressure on funding available for capital spending, so this is generally a good idea. It is should be a win-win situation for government to partner with the private sector and if diligently implemented can bring huge benefits to all stakeholders. It should prevent budget padding, reduce contract inflation, cut down political patronage and rent-seeking, ensure timely project completion, reduce abandonment of projects and address sub-standard quality of work. It should however be worthwhile for the private sector and not be at excessive cost to the government. As currently drafted it does not appear attractive except if borrowing cost is eligible as part of project costs. As an incentive, eligible roads could be named after the relevant company.

To ensure the efficiency of the private sector, the Scheme should be designed to limit discretion by the Committee and avoid conflict of interest by its members. In addition, there should be an independent audit and not just by ministries as contained in the Order.

There could be a legal challenge as granting a waiver or exemption under CITA as provided for under S23 is not the same as granting of credit for road projects. Government should consider a Plan B in case the Scheme is successfully challenged.

Another concern is continuity in the event of a change in government before expiration of the Scheme. Hopefully as the Scheme idea predates the current government it would be sustained into subsequent regimes.

In principle, how much the private sector can invest on roads under this Scheme is limited to about half the annual CIT revenue which has ranged between N600B and N1T in the past 5 years. To effectively address the funding of roads and other infrastructure projects, other initiatives involving private sector funding with cost recovery from independent revenue sources should be explored.

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
Taiwo Oyedele
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
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