Generally, business organisations within a country contribute to the development of its economy. A critical review of thriving economies will reveal that successful business organisations within such economies, have a significant influence on the economy's gross domestic product. Hence, it is safe to say that growth and positive performance of business organisations, ensure that the host countries achieve organic and overall economic growth. This is better obtainable where the policies, regulations and other environmental elements create conducive business environment. Factors such as ease of access to raw materials, regulatory framework set by the government, availability of funds, and cost of business necessities such as power, security, property/land etc. are critical for business growth.
Over the years, Nigeria has made notable steps to ensure that its tax and other regulations favour businesses operating in Nigeria and provide incentives for foreign direct investments. However, the efficacy of these regulations in achieving these goals is contentious. In this article, we will look at some of the policies enacted to aid foreign direct investment in Nigeria, and the tax and other regulatory challenges that impede local and foreign investors in Nigeria's business environment.
Some Available Incentives to Encourage Investment in Nigeria
Like many countries, Nigeria has regulations that encourage foreign participation in its business environment. These regulations are aimed at improving investors' confidence and setting the country at a competitively attractive position in comparison to other countries. Some of these policies are discussed below:
i. Nigeria Export Processing Zones (NEPZ) Act
NEPZ Act oversees the establishment, administration and management of export processing zones in Nigeria. These zones are established as territories where goods can be manufactured, imported and exported without the entities operating therein being subject to taxes and custom tariffs. Through the Act, the Nigerian Export Processing Zones Authority (NEPZA) is empowered to adopt investment promotion strategies in the zones, recommend additional incentive measures, issue licenses for operations (developer, operator and enterprise licenses) and supervise/coordinate the functions of organisations operating within the zones.
Currently, there are about 46 Free Trade Zones (FTZ) located across several states in the country (Lagos, Cross Rivers, Akwa Ibom, Ogun e.t.c). In determining the eligiblity to operate within any FTZ, the NEPZA checks to ensure that the proposed activities of the applicant are in line with the activities approved within the FTZ.
The tax exemptions offered provide significant cost savings for approved entities/ businesses operating in the FTZs, allowing them to channel their resources towards growth, increased productivity and profitability. This makes the FTZs attractive to foreign and local investors, thus stimulating economic growth.
ii. Nigerian Investment Promotion Commission (NIPC) Act
The NIPC Act was enacted in 1995, but amended in 2004. The overall objective of the Act is to encourage local and foreign investments in Nigeria. Based on the provisions of the Act, the NIPC functions as an agent of the Nigerian government to monitor and coordinate all investment activities in Nigeria. The NIPC also promotes industrialisation and is responsible for initiating supportive measures that will enhance investment in Nigeria.
The NIPC Act guarantees unconditional transfer of funds in the form of dividends, loan servicing and remittance of proceeds upon liquidation, to foreign investors in freely convertible currency. Further, investors are guaranteed against nationalization or expropriation by the Nigerian Government.
iii. Pioneer Status Incentive (PSI)
Established by the Industrial Development (Income Tax Relief) Act, the PSI is a tax holiday for qualifying industries and products. The PSI is targeted at encouraging investment in novel products and industries that could potentially have positive impact on the economy. The PSI comes in form of a relief from payment of corporate income tax (due on the profit derived from the sale of products and from the operations of entities within the industries) for an initial period of three years, and renewable for up to two additional years.
Tax and Regulatory Challenges
Despite the policies, incentives and other efforts made by the Nigerian government towards enhancing investments in the country, challenges to Nigerian businesses arguably still persists. We discuss hereunder, some of these challenges from a tax and financial regulatory perspective.
i. Nigerian Corporate Income Tax Rate Compared to Other African Jurisdictions
Tax payment is eminent in every business organisation and in every jurisdiction. While taxes are a revenue source for the government, it is charged against the profit of business organisations and as such limits their distributable profit. Hence, tax friendly jurisdictions perform better at attracting foreign investors due to the possibility of maximising the latter's returns on investments.
The tax laws in Nigeria were recently amended by the 2019, 2020 and 2021 Finance Acts. Currently, Nigerian companies with revenue above 100 million naira (large companies) in a year are subjected income tax at 30% in such year. Nigerian companies are also subjected to tertiary education tax at 2.5% of assessible profit. This totals 32.5% tax rate for large companies
Comparing with other African countries, Nigeria's tax rate appear to be quite significant. For example, income tax rate in Mauritius is at 15%, Egypt at 22.5%, Ghana at 25% and South Africa at 28%.
ii. Volatility and Unpredictability of the Tax Legislation
For three consecutive years, Nigeria has made amendments to its tax laws via enactment of Finance Acts. Some of these amendments may impact the attraction of foreign investors to Nigeria. Some notable amendments introduced by the Acts are:
- In Nigeria, based on the Capital Gains Tax (CGT) Act, capital gains are subjected to tax at 10%. Although share disposals are considered as capital gains, prior to the Finance Act 2021, the gains were exempt from CGT. However, with the amendment, such gains are now taxable subject to certain exemptions such as the value of the disposal and its subsequent reinvestment.
- Introduction of VAT on services rendered by offshore providers to Nigeria resident persons. The service recipient in Nigeria is required to self-charge the applicable VAT on the transaction. This implies the adoption of destination principle to VAT.
- Minimum tax is triggered where a company has no tax to pay or a tax that is lower than the computed minimum tax. Previously, as a means to encourage foreign investments, organisations with 25% imported equity are exempt from minimum tax. However, this incentive was expunged by Finance Act 2019.
While the above changes were necessitated by the need to increase revenue through taxation and provide a level playing ground for companies operating in Nigeria (whether locally owned/foreign-owned), they might be a deterrent to foreign investors. Further, the erratic nature of these changes, will make it difficult for investors to make sustainable investment plans.
iii. Multiplicity of Taxes
In Nigeria, the three tiers of government derive revenue from taxes as allocated by the Taxes and Levies (Approved List for Collection) Act. The taxes are administered by their respective agents such as the Federal Inland Revenue Service (FIRS) and the State Board of Internal Revenue Service (SBIRS). Generally, the FIRS is responsible for the taxation of corporate entities, while the SBIRS oversees taxes applicable to non- corporate entities.
Often times, there is an overlap in the income base being subjected to tax by these different administrative authorities. A typical example is the VAT and Consumption tax which subjects similar income base to tax, but administered by different tax authorities. Although the taxes are not directly borne by companies, its effect impacts on the overall cost of product/service offered by the companies and as a result the revenue generation.
iv. Ease of Repatriation of Capital / Investment Returns
Nigeria has standard financial policies in place to ensure that foreign companies investing in Nigeria have easy access to their investments for capital and returns repatriation. Some of these policies are enshrined in laws such as National Office for Technology Acquisition and Promotion (NOTAP) Act, Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Nigerian Investment Promotion Commission (NIPC) Act e.t.c.
In Nigeria, foreign investors are issued a certificate of capital importation (CCI) for the funds inflow to Nigeria for investment; this amongst other things grants access to foreign exchange via official channels for the repatriation of returns and capital.
However, due to the limited availability of foreign exchange in the Nigeria, in practice, the supposed access is not readily available.
Conclusion
While the federal government has taken commendable steps and introduced policies and tax laws geared at stimulating foreign direct investments in Nigeria, it is evident from the above that more effort is required to ensure these policies actually improve investor confidence and attractions to Nigeria. Some measures that may be considered in achieving this feat are:
- Simplifying the tax system to reduce the incidence of multiplicity of taxes, harmonise tax laws and streamline tax administration. This will encourage voluntary compliance and reduce tax compliance cost for investors.
- Elimination of bureaucratic hurdles within the government systems that delay timely response to the request of the companies/investors e.g prompt processing of repatraition proceeds. This will encourage foreign exchange inflow by foreign investors, and amongst other factors, improve overall ease of doing business.
Nigerian Companies and potential investors are advised to stay abreast of developments in the tax and regulatory space especially with the imminent change in government, in order to maximize their business efficiency and take advantage of potential cost savings opportunities and incentives.
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.
