As multinationals seek new frontiers for growth, the tax regime of destination countries, amongst other factors, influence investment decisions. The need to attract Foreign Direct Investment (FDI) has resulted in tax competition among jurisdictions around the world. Many countries constantly review their tax policies to reduce tax and fiscal burdens that stand in the way of investment into the country. In recent years, the Nigerian Government has amended the tax laws in line with global best practices in order to improve ease of doing business and remain tax competitive.

In sourcing revenue from taxes, there should be a balance between pursuit of tax revenues and promoting a favorable investment climate. Essentially, the Government should explore utilizing the tax regime and other fiscal measures to generate revenue that will foster Nigeria's economic stability and simultaneously attract foreign direct investment (FDI) to the country.

Nigeria's Investment Climate

Until recently, the Nigerian government placed overt reliance on the oil sector while paying lip service to the development of other sectors. Declining oil demand largely brought about by the Covid-19 pandemic and reduced oil production have greatly devastated the economy, surged the country's debt profile and devalued the Naira. According to published reports, Nigeria attracted total FDI of $2.6 billion in 20201. This is $0.7 billion lesser than total FDI of $3.3 billion in 20192.

Despite the unsavory turn of events, investment opportunities have heightened for various other sectors of the Nigerian economy. According to the International Monetary Fund, the Nigerian Economy is projected to grow by 2.5% in 20213, an upward increase from the earlier estimate of 1.5%. Notwithstanding the projection, the 33.3% estimated unemployment rate in quarter three of 20204 as reported by the Nigerian Bureau of Statistics poses a great challenge to the economy. With an inflation rate of 17.93% as at May 20215 and estimated 40.1% of the population in poverty, the Nigerian population may be seen more as a liability and no longer as an asset that would easily attract investors.

While the 2021 budget provides social investment programs to address the poverty and unemployment challenges, the Government has also taken some steps to improve the ease of doing business by reviewing some laws to align with Global best practices. In 2020, the erstwhile Companies and Allied Matters Act (CAMA) – the principal statute governing all business forms and allied affairs was repealed and replaced. The new CAMA is targeted at greatly easing regulatory requirements for companies, reducing the time and cost implications of company registration, eliminating administrative bottlenecks and increasing corporate form options.

The Finance Acts of 2019 and 2020 ("the Acts") were also enacted to improve the Nigerian tax regime and administrative framework. The Acts refined a wide spectrum of our tax legislation, attuning them to better respond to current issues, increase investor confidence in tax reform and reflect economic realities. In particular, the Finance Act, 2020 was signed into law as an instrumental tool to improve the ease of doing business in Nigeria, widen the tax base, introduce response measures to the Covid-19 pandemic and bolster Nigeria's fiscal profile.

Perhaps the above measures and other initiatives have contributed to Nigeria's ranking as 105 on the Ease of Starting a Business Ranking compared to countries like Ghana, Kenya and South Africa that rank 116th, 129th and 139th place respectively. It is expected that the Government will continue to take bold steps and introduce new measures to improve the economy that will impact the daily lives of citizens. Embracing foreign exchange reforms and strengthening efforts to increase revenues will go a long way in achieving this.

The Nigerian Tax Landscape

Despite Nigeria's concerted efforts at improving tax collection and administration, the tax to GDP ratio has remained around 6% for some years; one of the lowest in the world. For context, Ghana's lowest tax to GDP ratio according to the OECD stood at 7.8% in 2000. Kenya's lowest was 16.1% in 2002, while South Africa's lowest was 22.4% in 2000. Presently, the tax to GDP ratio of these respective countries stands at 14.1%, 17.4% and 29.1%.

Various factors including; narrow tax base; low level of tax compliance; low taxpayer education; high opportunity cost of tax exemptions; and tax administrative inefficiencies have been identified as being responsible for Nigeria's low tax to GDP ratio. The reforms to the tax laws occasioned by the Acts are aimed at tackling some of these challenges.

The amendments to the Federal Inland Revenue Service (FIRS) Establishment Act introducing the use of technology to automate the tax administration process which culminated in the unveiling of the FIRS TaxPro Max portal is aimed at addressing the twin issues of widespread non-compliance and a narrow tax base. All companies are mandated to utilize the portal to fulfil their tax compliance obligations in a timely and seamless manner. It is expected that the FIRS' attempts at digitalization through its virtual migration will greatly reduce administrative inefficiencies and the cost of tax collection. Nevertheless, there have been some resistance by taxpayers that the unfettered access to taxpayer's records granted by Section 26 (1)(e) of the FIRS Act conflicts with the right to privacy provided by Section 45 (1) of the Constitution and raises cyber security concerns. Hopefully, taxpayers and FIRS would reach a consensus in addressing this issue.

A notable amendment to the tax laws is the introduction of the concept of Significant Economic Presence (SEP) which is aimed at widening the Nigerian tax base to include certain types of foreign service providers and companies who derive profits from Nigeria from remote services. The Companies Income Tax (SEP) Order 2020 specifies foreign Companies providing digital, technical, professional, management or consultancy services.

Based on the SEP, income earned above ₦25m by a foreign company from transmission of signals, messages, sounds and data of any kind is liable to tax at 30% of taxable profit while withholding tax on income earned is the final tax on technical, professional, management and consultancy fees. The requirement for foreign companies that earn income from digital transactions to prepare special purpose financial statements (FS) and submit tax returns on Nigerian income may pose some administrative challenges. While subjecting foreign companies to tax on taxable profit ensures only profitable companies are taxed, the FIRS would have to develop tools to verify the accuracy of the income earned and expenses incurred in Nigeria. Foreign companies would also incur additional cost in preparing FS for Nigerian operations. Countries like Tunisia, Zimbabwe and Kenya have adopted a simpler approach of subjecting digital transactions to a percentage of turnover which makes administration and collection easier. In view of the proposed minimum tax of 15% by the Organization for Economic Cooperation and Development (OECD), Nigeria would also need to evaluate its unilateral approach to taxing income from digital transactions and impact on FDI.

While the tax reform efforts of the Nigerian Government are expected to improve revenue collection, increased voluntary compliance has been shown to be more effective in achieving these objectives. Where enforcement drives are initiated alongside improved transparency and accountability on government expenditure with tangible public benefits, more taxpayers will be willing to pay taxes voluntarily. This will reduce administrative cost and improve tax to GDP ratio.

Specific Tax considerations and impact on doing business in Nigeria

Given the scarcity and high mobility of investment capital, many countries have embarked on various measures in ensuring their tax systems are robust enough and provide adequate incentives to attract FDI, without jeopardizing the needed tax revenue required for sustainable development. Some of the considerations are as follows:

a) Threshold for tax registration and reduction in tax rates

Prior to the enactment of the Acts, every company in Nigeria was liable to tax at 30% and was required to pay and remit companies income tax (CIT and value added tax (VAT). With effect from January 2020, companies with turnover below ₦25m are not liable to CIT and are not required to file VAT returns. Companies with turnover between ₦25m and ₦100m are only liable to CIT at 20%, while companies with turnover above ₦100m are liable to tax at 30%.

The introduction of tax thresholds will greatly impact small and medium scale businesses and help tax authorities to prioritize compliance risks within the limited resources. Tax thresholds and varying tax rates are in line with global best practices and are common in Africa. In Ghana, for example, the applicable CIT rate is industry specific and certain businesses are exempted from tax in the first five years of operation. The amendment to the Nigerian tax laws to allow varying tax rates based on turnover is a welcome development.

b) Double Tax Agreement (DTA)

Tax treaties are enacted by countries in order to mitigate the double taxation or non-taxation that may occur based on domestic laws that exist in the country of origin of a foreign company or national and the host country. Nigeria currently has DTA with fourteen countries (non with any African Country), while DTA with about eight countries are yet to be ratified. The number of DTAs is comparable to Ghana and Kenya with 126 and 147 DTAs respectively but a far cry from Mauritius which has DTAs with 448 countries and South Africa having DTAs with 789 countries.

While the number of DTAs Nigeria has with other countries is limited being the largest economy in Africa, the economic benefits of the existing DTAs and how much they influence investment decisions (amongst other factors) are yet to be ascertained. Nevertheless, Nigeria may be able to accrue some economic benefits being signatory to the African Continental Free Trade Area which provides for a "single market" window for African countries and better incentive to attract investments from other counties outside Africa.

c) Pioneer Status Incentive (PSI)

PSI was introduced by the Industrial Development (Income Tax Relief) Act to generate an influx of investment and foreign exchange to boost the Nigerian economy. The incentive operates as a three-year tax holiday from the Companies Income Tax, renewable for a further period of two years. It is granted to Companies in Nigeria that carry out activities in approved pioneer industries or that manufacture pioneer products.

The concept of granting tax holidays to attract investment in targeted sectors of the economy is well-known An important factor to consider is the amount of tax revenues forfeited by the Government in providing incentives to taxpayers. A recent study by the World Bank showed that tax incentives in developing countries usually turn out to be redundant i.e. most investments would have been undertaken even without the existence of such incentives10. Tax holidays alone may not attract the amount of FDI Nigeria desires to reignite the economy and remain tax competitive. Ensuring an attractive investment climate to attract investors would require more focus on political stability, improved security and ensuring more skilled labor is available.

d) Certainty in Tax Administration

Recently, the Chief Judge of the Federal High Court (FHC) in Nigeria issued the FHC (Federal Inland Revenue Service) Practice Directions (Practice Directions), 2021, which was made to take effect on 1st June, 2021. Based on Order V Rule 3 of the Practice Directions, taxpayers are required to pay 50% of amounts assessed by the FIRS in an interest yielding account of the FHC pending the determination of a case.

This has generated mixed reactions from stakeholders as certain provisions of the Practice Directions are argued to be ultra vires the powers of the FHC and may be unconstitutional given that Practice Directions cannot introduce new provisions that are inconsistent with existing laws.

The above and other seemingly unfair practices create uncertainty in tax administration and send conflicting signals to intending investors. While there may be grey areas in the tax laws which are subject to diverse interpretation by the taxpayers and tax authorities, tax administration should be based on clear provisions of the tax laws and enforcement should be made without threat to the confidence taxpayers and investors have in the tax system.

e) Tax Amnesty

Past efforts of the tax authorities to widen the tax base include the Voluntary Assets and Income Declaration Scheme (VAIDS) and Voluntary Offshore Assets Regularization Scheme (VOARS). Both schemes offered a period of tax amnesty to all taxpayers who were in default. All defaulting taxpayers who had failed to pay or under-declared their assets and tax liabilities were granted time allowance to come forward and regularize their records with the tax authorities. These taxpayers were stated to be free from prosecution and related penalties upon declaration.

While the tax authorities did generate some revenue from VAIDS, it failed to meet its target. Compared to similar amnesty initiative in South Africa which attracted over 3.3Billion Rands (USD 258.6 Million)11 , VAIDS generated 30 Billion Naira (about 8%) from its target of 350 Billion Naira12. There were also reports about the Executive Order 008, the legislation upon which the VOARS Scheme was premised being inconsistent with provisions of the extant tax laws and thus unenforceable13. These schemes may have done little to boost taxpayers' confidence in the tax system and given the present trust deficit, it may be difficult for the tax authority to embark on future similar initiatives.

As the government seeks to strengthen the tax laws to improve tax administration, it is important to constantly evaluate the impact on the economy and investment climate. It is hoped that actions taken by the tax authorities would align with the government's objectives to improve the Nigerian tax regime.


From the steps taken by the Nigerian government, it is apparent that Nigeria's tax regime contributes its quota in attracting FDI. While being tax competitive is of utmost importance, Nigeria's macroeconomic and political issues including its burgeoning security challenges, among others also need to be addressed to provide an enabling environment for investors.


1. UNCTAD – Investment Trends Monitor

2. UNCTAD – Investment Trends Monitor












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