The Nigerian Government has put in place a number of investment incentives for the stimulation of private sector investment from within and outside the country. While some of these incentives cover all sectors, other are limited to some specific sectors. The nature and application of these incentives have been considerably simplified.
The incentives include:
(i) COMPANIES INCOME TAX
The Companies Income Tax Act has been amended in order to encourage potential and existing investors and entrepreneurs. The current rate in all sectors, except for petroleum, is 30 percent.
(ii) PIONEER STATUS
The grant of Pioneer Status to an industry is aimed at enabling the industry concerned to make a reasonable level of profit within its formative years. The profit so made is expected to be ploughed back into the business.
Pioneer status is a tax holiday granted to qualified or (eligible) industries anywhere in the Federation and five-year tax holiday in respect of industries located in economically disadvantaged local government area of the Federation. At the moment, there is a list of 71 approved industries declared pioneer industries, which can benefit from tax holiday.
To qualify, a joint venture company or a wholly foreign-owned company must have a minimum share capital of N10milion and incurred a capital expenditure of not less than five million Naira whilst that of qualified indigenous company should not be less than N150,000.00. In addition, an application in respect of Pioneer Status must be submitted within one year the applicant company starts commercial production otherwise the application will be time-barred.
The amount of capital allowance to be enjoyed in any year of assessment is restricted in Nigeria to 75% of assessable profit in case of manufacturing companies and 66% in case of others, except such companies in agro-allied industries that are not affected by this restriction. If leased assets are used in agro-allied ventures, the full (100%) capital allowance claimed will be granted. Moreover, where the leased assets are agricultural plants and equipment, there will be an additional investment allowance of 10% on such expenditure.
(v) IN-PLANT TRAINING
This is applicable to industrial establishments that have set up in – plant training facilities. Such industries enjoy a two percent tax concession for a period of five years.
(vi) INVESTMENT IN INFRASTRUCTURE
This is a form of incentive granted to industries that provide facilities that ordinarily, should have been provided by government. Such facilities include access roads, pipe borne water and electricity. Twenty percent (20%) of the cost of providing these infrastructural facilities, where they do not exist, is tax deductible.
(vii) INVESTMENT IN ECONOMICALLY DISADVANTAGED AREAS
Without prejudice to the provision of the pioneer status enabling law, a pioneer industry sited in economically disadvantaged Local Government Area is entitled to 100% tax holiday for seven years and an additional 5% capital depreciation allowance over and above the initial capital depreciation allowance.
(viii) LABOUR INTENSIVE MODE OF PRODUCTION
Industries with high labour/capital ratio are entitled to tax concessions. These are industries with plants, equipment and machinery, which essentially are operated with minimal automation. Where there is automation, such automation should not be more than one process in the course of production.
The rate is graduated in such a way that an industry employing 1,000 persons or more will enjoy 15 percent tax concession, while an industry employing 200 will enjoy 7 percent and those employing 100 will enjoy 6 percent and so on.
(ix) LOCAL VALUE ADDED
10% tax concession for five (5) years. This applies essentially to engineering industries, where some finished imported products serves as inputs. The concession is aimed at encouraging local fabrication rather than the mere assembly of completely knocked down parts.
(x) RE-INVESTMENT ALLOWANCE
This incentive is granted to companies engaged in manufacturing which incur qualifying capital expenditure for the purposes of approved expansion, etc. the incentive is in the form of a generalized allowance of capital expenditure incurred by companies for the following:-
- Expansion of production capacity
• Modernization of production facilities
• Diversification into related products
(xi) MINIMUM LOCAL RAW MATERIALS UTILIZATION
A tax credit of 20% is granted for five years to industries that attain the minimum level of local raw material sourcing and utilization. The minimum levels of local raw materials sourcing and utilization by sectors are: –
Agro-allied – 70%
Engineering – 60%
Chemicals – 60%
Petrochemicals – 70%
(a) Companies with turnover of less than N1 million are taxed at a low rate of 20% for the first five years of operation if they are in the manufacturing business.
(b) Dividend from companies in manufacturing sector with turnover of less than N1 million is tax-free for the first five years of their operation.
(c) Dividends derived from manufacturing companies in petrol chemical and liquefied natural gas sub-sector are exempted from tax.
(a) Companies in the agro-allied business do not have their capital allowance restricted. It is granted in full i.e. 100%.
(b) The payments of minimum tax by companies that make small or no profits at all do not apply to agro-allied business.
(c) Agro-allied plant and equipment enjoy enhanced capital allowances of up to 50%.
(d) Processing of agricultural produce is a pioneer industry;
consequently, there is 100% tax-free period for 5 years
or projects into processing of agricultural produce.
(e) Agricultural and Agro allied Machinery:
All agricultural and agro-industrial machines and equipment to enjoy 1% duty.
(f) Agricultural Credit Guarantee Scheme Fund (ACGSF) administered by the Central Bank of Nigeria:
Up to 75% guarantee for all loans granted by commercial banks
for agricultural production and processing.
(g) Interest Drawback Program Fund:
60% repayment of interest paid by those who borrow from banks under the ACGS, for the purpose of cassava production and processing provided such borrowers repay their loans on schedule.
(iii) SOLID MINERALS
The following incentives are available in the solid minerals sector:
(a) 3 to 5 years tax holiday;
(b) Low income tax of between 20% and 30%;
(c) Deferred royalty payments depending on the magnitude of the investment and the strategic nature of the project;
(d) Possible capitalization of expenditure on exploration and surveys;
(e) Extension of infrastructure such as roads and electricity to mining sites;
(f) The holder of a mining lease shall, where qualified, be entitled to:
- i) Depreciation or capital allowance of 75% of the certified true capital expenditure incurred in the year of investment and 50% in subsequent years
ii) Investment allowance of 5%
iii) Exemption from payment of customs & import duties
iv) Expatriate quota & resident permit for approved expatriate personnel
(g) In addition to roll-over relief under the capital gains tax (CGT), companies replacing their plants and machinery are to enjoy a once-and-for-all 95% capital allowance in the first year with 5% retention value until the assets is disposed, 15% will be granted for replacement of an asset.
The incentives in this sector are granted to companies that are into joint ventures with the Nigerian National Petroleum Corporation and have signed Memorandum of Understanding. The incentives are:
- Guaranteed minimum margin of USS2.50 bl;
• Accelerated capital allowances which provides that the capital allowances can be carried forward indefinitely;
• Graduate royalty rates approved for oil companies.
Onshore production in territorial waters and continental shelf areas beyond 100 meters.
Investment tax allowances (ITA) is granted to a company in respect of any asset for the accounting period. The ITA is graduated as follows:
On shore – 5%
Off shore in depth of up to 10m – 10%
Off shore in depth of between 100-200m – 15%
Off shore in depth of over 200m – 20%
(v) TAX INCENTIVES TO GAS INDUSTRY
In view of the enormous potentials in this sector, Government has approved the following fiscal incentives:
GAS PRODUCTION PHASE
- Applicable tax rate is the same as the company income tax which is currently at 30%
• Capital allowance at the rate of 20% per annum in the first four years, 19% in the fifth year and the remaining 1% in the books
• Investment tax credit at the current rate of 5%
• Royalty at the rate of 7% on shore and 5% off shore
GAS TRANSMISSION AND DISTRIBUTION
– Capital allowance as in production phase above
– Tax rate as in production phase
– Tax holiday under pioneer status
– Applicable tax rate under PPT is 45%
– Capital allowance is 33% per year on-straight line basis in the first three years with 1% remaining in the books
– Investment tax credit of 10%
– Royalty 7% on-shore 5% off-shore, tax deductible
GAS EXPLOITATION (UPSTREAM OPERATION)
Fiscal arrangements are reviewed as follows:
- All investments necessary to separate oil from gas from reserves into suitable product is considered part of the oil field development.
• Capital investment facilities to deliver associated gas in usable form at utilization or transfer points will be treated for fiscal purposes as part of the capital investment for oil development.
• Capital allowances, operating expenses and basis for assessment will be subjected to the provisions of the PPT Act and the revised Memorandum of Understanding (MOU).
GAS UTILISATION (DOWN STREAM OPERATAION)
- Companies engaged in gas utilization are to be subjected to the provisions of the Companies Income Tax Act (CITA);
• An initial tax free period of three years renewable for an additional two years;
Accelerated capital allowances after the tax-free period in the form of 90% with 10% retention in the books;
• 15% investment capital allowance, which shall not reduce the value of the asset;
In 1998, the government approved additional incentives to support the gas industry in the following areas:
• – All gas developmental projects, including those engaged in power generation, liquid plants, fertilizer plants, gas distribution/transmission pipelines are taxed under the provisions of Companies Income Tax (CITA) and not the Petroleum Profit Tax;
• – All fiscal incentives under the gas utilization downstream operations since 1997 are to be extended to industrial projects that use gas i.e. power plants, gas to liquids plants, fertilizer plants, gas distribution/transmission plants;
• – The initial tax holiday is to be extended from three years to five years;
• – Gas is transferred at 0% PPT 0% Royalty;
• – Investment capital allowance is increased from 5% to 15%;
• – Interest on loan on gas project is to be tax deductible provided that prior approval was obtained from the Federal Ministry of Finance before taking the loan; and
• – All dividends distributed during the tax holiday shall not be taxed.
Government provides non-fiscal incentives to private investors in addition to a tariff structure that ensures that investors recover their investment over a reasonable period of time, bearing in mind the need for differential tariffs between urban and rural areas. The tariff structure as approved by the regulatory authority, Nigerian Communication Commission, also provides adequate cross-subsidy between the profitable trunk and local calls of the urban and non-profitable operation of the rural areas.
Other Incentives in place are:-
- a) Manufacture/installation of telecommunications related equipment is considered as pioneer activity. As a result, they enjoy 3 to 5 years tax holiday.
b) Taxes and duties do not exceed those charged on essential electrical goods.
(vii) ENERGY (Electricity)
Among the incentives put in place by Government to encourage investors in the sector are:
Tax holiday of 3 – 5 years is granted to companies that manufacture:
a) Transformers, meters, control panels, switchgears, cable and other electrical related equipment, which are considered pioneer products/industries:
b) Power plants using gas are assessed under the company income tax act at a reduced rate of 30%.
The following incentives have been put in place to encourage domestic and foreign investors’ participation in the tourism industry in Nigeria:
- i) The tourism sector was accorded preferred sector status in 1999. This makes the sector qualify for incentives (available to similar sectors of the economy) such as tax holiday, longer years of moratorium and import duty exemption on tourism related equipment.
ii) Provision of basic infrastructure that is, road, water, electricity, communications etc to centre of attraction. Some states have specific areas as tourism development zones thereby making acquisition of land easier.
iii) Provision of land for tourism development at concessional rates.
iv) Availability of soft loans with long period of moratorium.
The following incentives are in place to encourage investment in the sector:
i) Shipbuilding, repairs and maintenance of vessels, boat, barges, diving and underwater engineering services, aircraft maintenance and manufacturing are considered pioneer products. As a result, they enjoy 3 -5 years tax holiday depending on location.