Tax incentives and the reality of revenue generation in nigeria prof oyedokun godwin

WELCOME
Prof. Godwin Emmanuel, Oyedokun
HND (Acct.), BSc. (Acct. Ed), BSc (Acc & Fin), MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus & Econs.),
MTP (SA), PhD (Fin), PhD (Acct), FCA, FCTI, ACIB, ACS, MNIM, CNA, FCFIP, FCE, FERP, CICA, CFA, CFE,
CIPFA, CPFA, ABR, CertIFR, FFAR
godwinoye@yahoo.com
+2348033737184, +2348055863944 & +2348095491026
Managing Partner
Oyedokun Godwin Emmanuel and Co
(Chartered Accountants & Tax Practitioners)

TAX INCENTIVES AND THE REALITY OF
REVENUE GENERATION IN NIGERIA
BEING A VIRTUAL PAPER PRESENTATION ON ZOOM AT THE CHARTERED
INSTITUTE OF TAXATION OF NIGERIA MEMBERS’ PRE-INDUCTION ORIENTATION
PROGRAMME HELD ON
27TH AUGUST, 2020.

2020 CITN PRE-INDUCTION ORIENTATION PROGRAMME
 Introduction
 Concept Of Taxation
 Tax Incentives And Types
 Implications Of Tax Incentives On
The Nigerian Economy
 Tax Revenue Generation And
Impacts On The Nigeria Economy
 Conclusion And Case Study
PRESENTATION OUTLINE

Taxation is one of the major fiscal policy instruments used by government in boosting
investments, as well as regulating the economy and inflation. Many developing nations formulate
tax policies aimed at stimulating rapid economic growth.
According to Osoro (1993), the importance of taxation as a veritable tool of economic growth
and development depends on a proper tax system which has the capacity to generate revenue
which can be achieved via implementation of incentives.
Tax incentives are basically premeditated to attract new investment into the country and to
ensure existing ones in priori industries which is based on the country development plan are
capable of stimulating economy growth.
INTRODUCTION

The desirability of using tax incentives to facilitate new investment is a necessary condition for
developing an avenue for managing the unsustainable fiscal deficits in Nigeria. Thus, effective tax
systems are not only central to promoting economic growth but also crucial for achieving
macroeconomic goals.
It is also imperative to know that, the purpose of government asides provision of basic amenities
and protection of lives and property of the citizens is to also create an enabling environment for
individual and corporate organization to strive by ensuring tax incentives is provided.
INTRODUCTION {CONT}

What is Tax ?
A tax is a compulsory payment of
money paid to the Government by
an Individual or Organizations as
the Government covers it’s
expenses on various public
functions, and its interference in
political, economic and societal life
without direct return of benefit to
be derived by the taxpayer.
CONCEPT OF TAX

CLASSIFICATION OF
TAXATION
TAX BASE
INCOME TAX
CONSUMPTION TAX
CAPITAL TAX
TAX BURDEN
PROGRESSIVE TAX
PROPORTIONAL TAX
REGRESSIVE TAX
TAX SUBJECT
DIRECT TAX
INDIRECT TAX
CONCEPT OF TAX {CONT}

Proportion Tax
It has a fixed rate that is
applied to a tax payer’s
assessable income to obtain
the tax liability. The tax
payable is proportional to
the taxpayers’ income.
Progressive Tax
This applies higher tax rates
as income increases. Its sole
objective is to redistribute
income in the economy. It is
also called “Pay as you
earn”.
Regressive Tax
This is formerly used in
Britain, the concept is the
higher you earn, the lower
the tax you pay.
CLASSIFICATION BY TAX BURDEN

CLASSIFICATION BY TAX SUBJECT
INDIRECT TAX
These are imposed on
commodities before
they reach the
consumer, and are paid
by those upon whom
they ultimately fall.
DIRECT TAX
This is assessable
directly on the taxpayer
who is required to pay
tax on his property,
income or profit.

CLASSIFICATION BY TAX BASE
CAPITAL BASE
This include Capital
Gains Tax. This is on
the sale of capital
goods (non-current
asset)
CONSUMPTION BASE
The examples of the
case of
consumption are
value added tax,
stamp duties and
excise duties
INCOME BASE
This include
Personal Income
Tax, petroleum
income tax and
Company Income
Tax

CONCEPT OF TAX INCENTIVES
 The most important argument
central to the influence of tax
incentives on the economy is the
issue of revenue productivity.
 This is so because tax cuts is said to
have capacity to induce tax payers
to be more tax compliant through
reduced tax rates which make tax
evasion and tax avoidance
unattractive.
Tax
Incentives
?
 This refers to relief’s granted to
tax payers or industries in the
form of set-offs from the total
income before tax liability is
determined.
 It could be in form of tax holidays
or waivers. It is established by
legislations or statute authorizing
such payment of tax.

CONCEPT OF TAX INCENTIVES {CONT}
FORMS OF TAX INCENTIVE
SCHEME
 Capital Allowance
Incentives
 Pioneer Status
Incentives
 Explorative incentives
 Life Assurance Policy
Premium
 Pension and Provident
fund.
 Consolidated Relief
Allowance
 Roll over relief
 Investment

SCHEME
 Capital expenditure is not an
admissible expense in earning profits,
But capital expenditure often results
in the creation of fixed assets, such as
plant or machinery, building etc. which
are used for the purpose of earning
profits, It is only therefore reasonable
to give relief for the purposes of
taxation in respect of these items of
expenditure.
 Special allowances usually referred to
as capital allowances are designed to
provide this form of relief
Capital Allowance
Incentives

CONDITIONS FOR
GRANTING CAPITAL
ALLOWANCE
 The assets must be owned by the
person claiming the allowance.
 The asset must be owned by the
person claiming the allowance.
 The asset must be in use in the trade,
business, profession or vocation at the
end of the basis period in respect of
which a claim is made.
 Where applicable, an ‘acceptance
certificate’ for the asset issued by the
Factory Inspectorate Division of the
Federal Ministry of Labour must be
produced.

TYPES OF CAPITAL
ALLOWANCE
INITIAL ALLOWANCES
This type of capital allowance
refers to allowance granted a
business which has incurred
qualifying Capital Expenditure
in the year of Assessment in
which the asset representing
such expenditure was first put
to use for the purpose of the
business.
ANNUAL ALLOWANCE
Annual allowance is granted
every year to a business
owing an asset that was
used for the purpose of the
business. The following
features are necessary for
application of Annual
Allowance.
INVESTMENT ALLOWANCE
It is an addition
allowance which is
granted on plant and
equipment used for a
business at the rate of
10% of the costs.

TYPES OF CAPITAL
ALLOWANCE
BALANCE ADJUSTMENT
A balancing adjustment
could arise upon the
disposal of a qualifying
capital expenditure.
There are two types of
balancing adjustments:
 Balancing Charge
 Balancing Allowance
RURAL INVESTMENT
ALLOWANCE
This new allowance is
granted to companies that
incur expenditures on the
provision of facilities such as
electricity, water, tarred
road or telephone where
such facilities are not
provided by the government
in the area where the
business is located.
No electricity, water, tarred
road or by government.
100%
expenditure
No electricity by government. 50% of the
expenditure
No water by government. 30% of the
expenditure
No tarred road by government. 15% of the
expenditure
No telephone by government. 5% of the
expenditure

Pioneer Status
Incentive
 The pioneer status incentive is tax
holiday given to companies for a
period of time, to encourage the
growth and development of the
Nigerian economy.
 A new company or an existing
company with an expansion plan
may apply for a certificate of
pioneer status which lasts for 3
years and is renewable upon
application for 2 years.
SCHEME

LIST OF PIONEER STATUS INCENTIVES
7 Mining and processing of barytes, bentonites and associated minerals
Barytes, bentonites and associated
minerals
8
Manufacture of oil well drilling materials containing a predominant proportion
of Nigerian raw materials
Barytes, bentonites and associated
minerals
9 The manufacture of cement Cement, clinker
10 Manufacture of glass and glassware
Sheet glass, pharmaceuticals and
laboratory glass wares
11 Manufacture of lime from local limestone Lime
12 Quarrying and processing of marbles Marbles and processed marbles
13 Manufacture of ceramic products
Refractory and heat insulating
constructional products, laboratory
ware

S/N Industries Products
1
Cultivation, Processing and Preservation of food
crops and fruits
Preserved canned foodstuff and fruits, tea, coffee, refined
sugar, tomato puree/juice etc.
2 Integrated dairy production
Butter, cheese, fluid milk and powder, ice cream (by
products, livestock, minor edible products).
3
a) Deep sea trawling and processing
b) Coastal fishing and shrimping
Preserved sea foods, fish and shrimps, fishmeal
4 Mining lead, zinc, and iron and steel from iron ore Iron and steel products
5 Manufacture of iron and steel from Iron ore Iron and steel products
6
The smelting and refining of non-ferrous base metal
and the manufacture of their alloys
Refined non-ferrous base metal and their alloys
LIST OF PIONEER STATUS INCENTIVES

The Government may also direct that an
industry be categorized as pioneer and
therefore qualify for up to 5 years’ tax
holiday if:
 the industry is not being carried on in
Nigeria on a scale suitable to the
economic requirements of Nigeria; or
there are favorable prospects of further
development in Nigeria of that industry;
or
 it is expedient in the public interest to
encourage the development or
establishment of such an industry and
the products of the industry to be a
pioneer product

Objectives of Tax
Incentives  Development of Domestic
market
 Balanced Regional
Development
 Reduction in Unemployment
 Better utilization of Existing
capital
 Diversification of output
 Balance of payment
consideration

Enacted Tax
Incentives Law
Tax laws provide various incentives to
companies carrying on businesses and
these incentives may be granted on
industry basis or on tax type.
SECTORIAL INCENTIVES
 Industry
 Agriculture
 Solid Minerals
 Petroleum
 Telecommunications
 Tourism
 Transport

S/N INCENTIVES
1 Small companies (i.e. those with not more than a gross turnover of ₦25 million in a year) are exempted
from CIT and minimum tax payments. In addition, the tax rate for medium-sized companies (i.e. those with a
turnover of between ₦25million and ₦100million) has been reduced to 20%.
2 Dividend from companies in manufacturing sector with turnover of less than N1 million is tax-free for the
first five years of their operation. Dividends derived from manufacturing companies in petrol chemical and
liquefied natural gas sub-sector are exempted from tax.
INDUSTRY

CONCEPT OF TAX INCENTIVE {CONT}
S/N INCENTIVES
1 Companies in the agro-allied business do not have their capital allowance restricted. It is granted in full
i.e. 100%
2 The payments of minimum tax by companies that make small or no profits at all do not apply to
agro-allied business.
3 Agro-allied plant and equipment enjoy enhanced capital allowances of up to 50%.
4 Agricultural and Agro allied Machinery: All agricultural and agro-industrial machines and
equipment to enjoy 1% duty.
AGRICULTURE

CONCEPT OF TAX INCENTIVE {CONT}
S/N INCENTIVES
5 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.
6 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.
7 Companies engaged in agricultural production are now eligible to an initial tax free period of five years
which may be renewed for an additional three years, subject to satisfactory performance of the
agricultural production.
AGRICULTURE

S/N INCENTIVES
1 3 to 5 years’ tax holiday;
2 Low income tax of between 20% and 30%;
3 Deferred royalty payments depending on the magnitude of the investment and the strategic
nature of the project
4 Possible capitalization of expenditure on exploration and surveys
5 Extension of infrastructure such as roads and electricity to mining sites
SOLID MINERALS

S/N INCENTIVES
6 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.
7 The holder of a mining lease shall, where qualified, be entitled to:
 Depreciation or capital allowance of 75% of the certified true capital expenditure incurred
in the year of investment and 50% in subsequent years
 Investment allowance of 5%
 Exemption from payment of customs & import duties
 Expatriate quota & resident permit for approved expatriate personnel
SOLID MINERALS

PETROLEUM
S/N INCENTIVES
1 Guaranteed minimum margin of USS2.50 bl
2 Accelerated capital allowances which provides that the capital allowances can be carried
forward indefinitely
3 Graduate royalty rates approved for oil companies
4 Petroleum Investment Allowance (PIA) is granted to a company in respect of any asset for the
accounting period.

S/N INCENTIVES
1 Manufacture/installation of telecommunications related equipment is considered as pioneer
activity. As a result, they enjoy 3 to 5 years’ tax holiday.
2 Taxes and duties do not exceed those charged on essential electrical goods
TELECOMMUNICATIONS

S/N INCENTIVES
1 Tax holiday of 3 – 5 years is granted to companies that manufacture products like
Transformers, meters, control panels, switchgears, cable and other electrical related
equipment, which are considered pioneer products/industries
2 Power plants using gas are assessed under the company income tax act at a reduced rate of
30%.
ENERGY

S/N INCENTIVES
1 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.
2 Provision of basic infrastructure that is, road, water, electricity, communications etc to centre
of attraction
3 Provision of land for tourism development at concessional rates
4 Availability of soft loans with long period of moratorium
TOURISM

S/N INCENTIVES
1 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
TRANSPORTATION

VAT
INCENTIVES
Exemption from value added tax Sections
2 & 3 First Schedule VAT Act exempted
the following goods from VAT
 All medical and pharmaceutical products
 Basic food items
 Books and educational materials
 Baby products
 Fertilizer, locally produced agricultural and
veterinary medicine
 All exports
 Plants and machinery imported for use in
Export Processing Zones
 Plants, machinery and equipment
purchased for utilization in gas down-
stream petroleum operations
 Tractors, ploughs and agricultural
equipment and implements purchased for
agricultural purposes

VAT
INCENTIVES
Exemption from value added tax Sections
2 & 3 First Schedule VAT Act exempted
the following services from VAT
 Medical services;
 Services rendered by Community
Banks, Peoples’ Bank and
Mortgage institutions;
 Plays and performances
conducted by educational
institutions as part of learning;
and
 All exported services

VAT
INCENTIVES
Introduction of ₦25million
revenue threshold
Anyone who does not fall within the
threshold above would be exempted
from registering, remitting, issuing
tax invoice and collecting VAT. The
threshold of ₦25million within the
calendar year will reduce the tax
compliance burden for small
companies
The Act exempts assets sold or
transferred to a related party in a
restructuring exercise provided such
assets are not sold by the acquiring
company within 365 days after the
date of restructuring. This welcome
development will aid group
restructuring in Nigeria
Exemption of assets sold in a
restructuring exercise

PITA
INCENTIVES
Tax Credit
Allowable
SECTION 11
Where a resident derives
income from a source outside
Nigeria and the income is
brought into Nigeria through
Government approved
channels, he shall be allowed a
tax credit against the tax
payable by him.
Consolidated Relief
Allowance
SECTION 33 (1)
This allows a Consolidated
Relief Allowance of N200,000
subject to a minimum tax of 1%
of gross income whichever is
higher, with the balance
taxable in accordance with the
Income table in the Sixth
schedule to this Act.

PITA
INCENTIVES
Income > 33,000
SECTION 43
No return of income shall be
filed by a person whose only
source of income in any year
of assessment is employment
in which he earns N33, 000 or
less from that source.
Bank Loans
SECTION 19(7)
This exempts interest on any
loan granted by a bank to a
person engaged in:
i. agricultural trade or
business; and
ii. the fabrication of any
local machinery.

PITA
INCENTIVES
Exemption Of Dividend From Tax
 Dividends paid to a person by a company incorporated in Nigeria, provided that: the
equity participation of the person in the company paying the dividends is either wholly
paid for in foreign currency or by assets brought into Nigeria between 1 January 1987
and 31 December 1992; and of the person to whom the dividends are paid owns not less
than 10 per cent of the equity share capital of the company.
 For the purpose of the exemption referred to in 1), the dividend tax-free period shall
commence from the year of assessment following the year in which the new capital is
brought into Nigeria for the real purpose of the trade or business in Nigeria of the
company paying the dividends and shall continue for five years if the company paying
the dividends is engaged in agricultural production and in any other case, the tax-free
period shall be limited to three years.

CGTA
INCENTIVES
SECTION 28
A gain shall not be a chargeable gain if income is
accrued:
 as part of any superannuation fund (retirement or
benefits fund) approved under Section 20 PITA;
 as part of any national provident fund or other
retirement schemes established under the
provisions of any Act or enactments for employees
throughout Nigeria;
 of any of those funds that is exempt under
paragraph (w) of the Third Schedule of PITA and;
 as a result of the disposal of a right to, or to any
sum payable out of any superannuation fund.
RETIREMENT BENEFIT SCHEME

CGTA
INCENTIVES
SECTION 30
Gains accrued to a person from disposal by
him of Nigerian Government securities, stocks
and shares shall not be chargeable gains
SECURITIES, STOCK AND
SHARES

CGTA
INCENTIVES
SECTION 33
Gains accruing to unit holders in a trust in
respect of disposal of securities, shall not be
chargeable on tax provided the proceeds are
re-invested
REINVESTED PROCEEDS

CGTA
INCENTIVES
SECTION 41
Any arrangement set out in an order made
under Section 38 PITA and Section 45 CITA so
far as they provide (in whatever terms) for
relief from tax chargeable in Nigeria on capital
gains by virtue of this section, have effect in
relation to CGT.
DOUBLE TAXATION RELIEF

OTHERS
INCENTIVES
PROGRAMME
INFRASTRUCTURE TAX RELIEF (ITR)
The relief claimable shall be 30% of the cost of
providing completed infrastructure/facilities of a
public nature, for use by the company and the
public except where it is impracticable to be used
by the public or an exemption from public use has
been obtained from the Minister of Finance.
EMPLOYMENT TAX RELIEF (ETR)
The relief claimable is 5% of the assessable
profits of a company subject to a maximum
of 100% of the gross salaries of the
qualifying employees. The relief is available
if the company has a minimum net
employment of 10 employees (counting two
employees from the same immediate family
as one).
WORK EXPERIENCE ACQUISITION
PROGRAMME RELIEF (WEARP)
This relief is claimable at the rate of 5% of
the assessable profits of a company subject
to a maximum of 100% of the gross salaries
of the qualifying employees. The relief is
available if the company has a minimum net
employment of 5 new employees (counting
two employees from the same immediate
family as one).

FACTORS INFLUENCING TAX INCENTIVES
FACTORS
Administrative
Constraints
Corruption
Factor
Political/Econo
mic Factor
Wrong
Business
Target

CRITICISM OF TAX INCENTIVES
• Many tax incentives,
especially tax
holidays, are
restricted to new
investors
DOUBLE-DIPPING
• In a situation where investor has
two or more operations within a
country or where the investor
derives income from more than
one activity. If one of those
operations, or one type of income,
enjoys a tax preference, profits
will tend to be allocated to the
preferred activity.
TRANSFER PRICING
• Tax incentives,
however, may
provide additional
temptations to inflate
the values of assets.
OVER VALUATION

CRITICISM OF TAX INCENTIVES {CONT}
ABUSE OF DUTY-FREE PRIVILEGES
A common investment incentive takes the form
of an exemption from customs duty on imported
equipment. The risk is that, once imported,
items may be resold on the domestic market.
ASSET STRIPPING AND “FLY-BY-NIGHT” OPERATIONS
Many countries mostly developing countries have
experienced problems with “fly-by-night” operators
that take advantage of tax incentives to make a
quick, tax-free, profit and then disappear to begin
operations in some other country that offers tax
privileges

IMPLICATION OF TAX INCENTIVES ON NIGERIA ECONOMY
Despite criticisms, tax incentives are inevitable and it has
been viewed as a means of allocating resources and
stabilizing the effect of market forces on production and
consumption, if they are efficiently designed.
SPECIAL SECTORS
• Government at times
stimulates a
particular sector of
the economy by giving
or allowing generous
tax incentives to
attract investors in
that sector
VOLUNTARY
COMPLIANCE
• By the granting of
tax incentives to
companies to
engender
voluntary
compliance which
gives rise to
increased revenue
to the government
INFLATION
• By the use of tax
incentives, the
purchasing power
of consumer in an
inflationary
economy is
enhanced.
HOW?

IMPLICATION OF TAX INCENTIVES ON NIGERIA ECONOMY {CONT}
PROTECTIONISM INVESTMENT
Tax incentives are one
of the weapons of
protecting local
industries as it will
make their prices
cheaper than the
imported ones
Investment tends to be
encouraged by a series of
special measures of which
tax relief and incentives are
inclusive. Tax incentives are
normally used by the
government to induce
investors and to widen the
profit margin of companies.

GLOBAL BEST PRACTICES ON TAX INCENTIVES FROM OTHER COUNTRIES
A major tax reform took place in Uganda in 1997.
This reform included complete elimination of new
tax holidays in favor of a rate of 30 per cent on
company income, with generous capital
allowances for all investors and unlimited loss-
carry forward. A zero import duty was also set
on a wide range of capital goods. The elimination
of selective incentives also greatly simplified
investment licensing. The main effects of this tax
reform were (comparing averages of three
years before and after 1997): an increase of one
percentage point in the ratio of investment to
GDP, 70 per cent increase in foreign investment
inflows, and a one percent of GDP increase in tax
revenue.
In 2002, the Foreign Investment Advisory
Service (FIAS) of the World Bank conducted a
study on the promotion of private investment in
Tunisia. In particular, the study analyzed the
role of the fiscal system, including the fiscal
and financial incentives, on the private
investment trends. Between 1996 and 2001,
private investment in Tunisia was increase by
10 per cent in average, which was higher than in
other countries in the region, and places
Tunisia at the same level than countries as
Ireland.

CONCLUSION AND RECOMMENDATIONS
 As an economy growth enhancement tool, the federal government has promulgated tax laws
conferring incentives on companies and individuals carrying on business in Nigeria.
 With this in place, it is crystal clear that organizations can achieve the objectives for which it is
being established especially at development stage considering the high cost of production in Nigeria
owing to power challenges and absence of other infrastructural facilities.
 This paper, however, has been able to show how imperative the effect of tax incentives is in firms’
development and its enormous impact on revenue generation with evidences in other countries.
 Although there are criticism relating to effective implementation of tax incentives as a means of
revenue generation, Government may however need to rationalize the number of tax incentives in
order to restrict them to those that will benefit the entire economy.
 Also, the process of granting and renewing incentives, waivers and concessions must be
transparent and sector focused and not arbitrary or only granted to specific companies or
individuals only.

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