Tax incentives are a vital component of government taxation policies aimed at stimulating specific economic activities by reducing tax obligations. The United Nations Conference on Trade and Development (UNCTAD) (2000), defined tax incentive as any measurable advantage accorded to specific enterprises or categories of business by a government, in order to encourage them to behave in a certain manner. Many nations, particularly developing ones, leverage tax incentives and waivers to attract both domestic and foreign investment in critical sectors of their economies. Nigeria, like many other countries, utilizes tax incentives to foster investment, exports, job creation, and alleviate unemployment.
In recent times, there have been widespread calls for the review of tax waivers and incentives extended to businesses in Nigeria. The Nigerian Senate has echoed these concerns, highlighting that the country has incurred significant revenue losses, estimated at over 17 trillion Naira, due to tax incentives over the past five years. This issue gains further significance against the backdrop of the 2024 budget projecting a fiscal deficit of 9 trillion Naira, a figure expected to escalate amidst the current challenging economic conditions.
This article aims to assess various tax incentive programs offered by the Nigerian government, and their impacts on businesses and the nation's economy.
Overview of Tax Incentive Schemes in Nigeria
In Nigeria, tax waivers and incentive are established through various legislative acts and come in different forms, such as the Pioneer Status Incentive (PSI), Road Infrastructure Tax Credit Scheme and Free Trade Zones.
The Industrial Development (Income Tax Relief) Act 2018, as amended, serves as the legislation governing the PSI program in Nigeria. This incentive offers a tax holiday from Companies Income Tax (CIT) to eligible companies engaged in approved activities for an initial three-year period, extendable for up to two additional years. Additionally, companies granted PSI are permitted to utilize tax losses during the holiday against taxable profits afterwards, and enjoy tax exemption on dividends paid out of pioneer profits during both the pioneer and post-pioneer periods.
The administration of the PSI scheme rests with the Nigerian Investment Promotion Commission (NIPC), which evaluates parameters such as employment generation, export potential, value addition, local content level, and corporate social responsibility when granting pioneer status to eligible companies within specified industries that need protection.
Free Trade Zones in Nigeria are governed by the Nigerian Export Processing Zone Act 1992 (NEPZ Act) and the Oil and Gas Free Zone Act (OGFZ Act). The NEPZ Act, being the foundational law, outlines the tax incentive framework for Nigeria's free trade zones with the aim of promoting export of goods and services manufactured or produced within these zones. Incentives within these zones include tax holidays, unrestricted remittance of profits and dividends, no import or export licenses required, up to 100% foreign ownership of enterprises, and permission to sell a portion of production in the domestic market.
The Oil and Gas Free Zone, established under Decree No. 8 of 1996, offers an incentive-driven environment to encourage investment in Nigeria's oil and gas sector. Its objective is to attract both foreign and local investors to increase investments in the sector, thereby boosting the nation's oil reserves, enhancing government revenue, and facilitating technological transfer. Companies operating within these zones enjoy tax holidays from all levels of government taxes, duty-free importation of goods, and guarantees on foreign capital, profits, and dividend repatriation.
In an effort to address the country's significant infrastructure deficit, estimated at approximately USD3 trillion by the World Bank, the Federal Government of Nigeria (FGN) introduced the Road Infrastructure Development and Refurbishment Investment Tax Credit (RITC) Scheme under Executive Order 007 in 2019. This scheme, established for a ten-year period, aims to incentivize Private Participation in the construction and refurbishment of road infrastructure projects in Nigeria. Participants in the scheme are entitled to utilize the total investment cost incurred in eligible road construction projects as tax credits against their future CIT liability until the full cost is recovered.
Impact of Tax Waivers and Tax Incentives on Businesses and the Economy
The Nigerian economy has experienced positive transformations due to tax incentives, particularly in employment generation, GDP contribution, export earnings, and increased foreign direct investment.
The PSI scheme has proven instrumental in aiding numerous businesses to stabilize during their initial years of operation, assisting them in managing losses and the substantial capital requirements typically associated with launching a new business. Moreover, it has facilitated accelerated growth for many companies by enabling them to reinvest their entire profits into expanding their operations. Consequently, this has led to improvement in job creation, a more rapid fulfillment of local demand, and the generation of export earnings.
In addition, tax incentives have helped in providing employment opportunities in Nigeria. This is particularly important given Nigeria's high unemployment rate and the continual expansion of its youthful population. For example, NEPZA reveals that the Free Trade Zones/Nigeria Export Processing Zones have directly created approximately 150,000 jobs and an estimated 250,000 indirect jobs. Similarly, the OGFZA reports that, the Oil and Gas Free Zones have generated over 50,000 direct jobs and an estimated 160,000 indirect jobs. In a cost benefit analysis conducted by the NIPC covering 2011 to 2015, the PSI scheme created over 150,000 direct jobs and about 3 million indirect jobs. These statistics reflect the contributions of these incentive schemes in reducing unemployment rate within the country.
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