Meaning of Tax Incentives:
A tax incentive is a measure implemented by a government to encourage specific activities by providing tax benefits or advantages to individuals, businesses, or organizations. These incentives are designed to promote economic growth, investment, and development in targeted sectors or regions, or to achieve certain policy objectives.
The purpose of tax incentives is to influence taxpayer behaviour in desired ways. For example, governments may offer tax incentives to businesses that invest in research and development (R&D) to stimulate innovation and technological advancement. Similarly, tax incentives may be provided to individuals or businesses that engage in environmentally friendly activities or invest in renewable energy sources to promote sustainability and reduce carbon emissions.
Flowing from the above, one of the primary methods used by the Nigerian government to encourage investments is through tax incentives. The Companies Income Tax Act (CITA) provides provisions for tax incentives to eligible businesses. These incentives include:
Pioneer Status Incentive:
The principle of pioneer status as a tax incentive is that companies in industries designated as pioneers are relieved from paying company income tax in their formative years to enable them to make a considerable profit for re-investment into the business. It is a tax holiday granted for five years (initial period of three years and renewable for additional two years) to qualifying industries that meet the criteria, from paying corporate income tax. Companies qualified for pioneer status also enjoy the benefits of exemption from 10% withholding tax on dividends paid out of business profits. The pioneer status is administered by the Nigerian Investment Promotion Commission (NIPC).
The Nigerian Investment Promotion Commission grants pioneer status to industries or products that are deemed crucial for the country’s development. Under this incentive, qualified companies enjoy a tax holiday ranging from three to five years, during which they are exempted from paying income tax.
Investment Tax Relief:
Sections 40 CITA provides that where a company has incurred an expenditure on electricity, water, tarred road or telephone for the purpose of a trade or business carried on by the company, the company shall be allowed an “investment tax relief”.
However, the company must satisfy certain requirements before they could be eligible and considered for this tax holiday, and these are as follows;
a) the company must be located at least 20 kilometres away from such facilities provided by the government;
b) the relief shall be for each year expenditure is incurred on each of such facilities;
c) a company shall not be allowed to claim the investment tax relief for more than 3 years; and
d) the relief shall not be available to a company already granted the Pioneer Status.
Exemption from contribution to Industrial Training Fund:
In accordance with the provisions of the Industrial Training Fund Act of 2011 (as amended), Enterprises (companies inclusive) with 25 employees on their payroll in Nigeria are mandated to contribute 1% of their total payrolls to the Industrial Training Fund on or before 1st of April of the following year of payment. However, Start-up companies in Nigeria have been given the privilege of not contributing to this fund.
However, it must be noted that before a labelled startup company can be exempted from contributing one percent of its total payrolls to the Industrial Training Fund, such a startup company must have been providing in-house training for its employees for the period it remains a startup.
Deduction For Research And Development:
Under this incentive, companies and other organisations engaged in research and development activities for commercialization shall be allowed 20% investment tax credit on their qualifying expenditure for that purpose.
Section 26 CITA provides for the purpose of ascertaining the profit or loss of any company for any period from any source chargeable with tax under this Act, there shall be a deduction, not exceeding an amount which is equal to 10% of the total profits of that company for that year as ascertained before any deduction is made under this section and Section 25 of CITA.
Customs and Import Duty Incentives:
To promote industrialization and local production, the Nigerian government offers customs and import duty incentives. These incentives aim to encourage the importation of machinery, raw materials, and components necessary for manufacturing and industrial activities. The incentives include:
a) Duty Drawback:
Manufacturers who export their products are eligible for a duty drawback, which allows them to claim a refund of import duties paid on imported raw materials used in the manufacturing process.
b) Import Duty Exemptions:
Certain goods, such as machinery, equipment, and raw materials imported for specific industries, are exempted from import duties to reduce production costs and encourage investment in those sectors.
Investors in Nigeria are assured of certain guarantees and protections under Nigerian law. These provisions aim to instil confidence and security in investors. The Key guarantees and protections include:
a) Repatriation of Capital and Profits:
Investors are allowed to repatriate their capital, profits, dividends, and interests earned from their investments in Nigeria. This ensures that investors can freely transfer their funds without undue restrictions.
b) Investment Dispute Resolution Mechanisms:
Nigeria has established specialized courts and arbitration centres to resolve investment disputes. This ensures that investors have access to a fair and efficient dispute resolution mechanism, thus mitigating risks associated with investments.
In addition to general investment incentives, Nigeria offers sector-specific incentives to promote investments in specific industries. These incentives are tailored to address the unique needs and challenges of each sector. Some of the notable sector-specific incentives include:
a) Agriculture and Agribusiness:
Tax incentives, grants, and access to agricultural loans are provided to encourage investments in agriculture, agribusiness, and value-added processing.
b) Manufacturing and Export Promotion:
Special incentives are available for manufacturers and exporters, such as export expansion grants, export credit facilities, and tax incentives on export earnings.
c) Renewable Energy:
Incentives, such as tax holidays and import duty exemptions, are provided to attract investments in renewable energy projects, promoting sustainable development and reducing dependence on fossil fuels.