Legal Frameworks Regulating Free Trade Zones in Nigeria

CONTRIBUTED IDOWU JESUTOFUNMI Esq

INTRODUCTION

Free Trade Zones (FTZ) present both opportunities and challenges for national development and enhanced globalised trade between foreign investors and local businesses.[1] A free trade zone is any area in a Country where goods may be imported or exported without any barrier imposed by the host’s customs authorities.[2] It could also refer to a particularly chosen area within a country where regular trade barriers like quotas and tariffs are removed and administrative restricted access is lessened to attract new businesses and foreign investments.[3] At their best, the FTZs facilitate frictionless trade, creating jobs, and economic growth of local communities. At their worst, they enable illicit trade and the laundering of criminal proceeds[4].

Over the years since the establishment of the FTZs in Nigeria, there have been lots of challenges and contentious issues with respect to compliance with the Nigerian laws and rules guiding the operations of FTZs and the obligations required of companies and individuals that claim to work within the FTZs.[5]

This article explains what FTZs are, how FTZs are being managed in Nigeria, the legislations regulating the implementation and administration of the objectives of FTZs, the incentives available to businesses in free trade zones and how the administration and management of FTZs could be improved by implementing existing and emerging initiatives and highlight where new thinking is required to raise global standards to protect the country’s revenue capacity.

WHAT ARE FREE TRADE ZONES

The World Bank defines free trade zone as “small, fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations”.[6] They are a geographic area where goods may be landed, handled, manufactured, or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties.[7] Free-trade zones are organised around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade.[8] Free trade zones can also be labour-intensive manufacturing centres that involve the import of raw materials or components and the export of factory products. An FTZ can also be a region where a group of countries has agreed to reduce or eliminate trade barriers.[9] The primary purpose of a free-trade zone is to remove from a seaport, airport, or border those hindrances to trade caused by high tariffs and complex customs regulations.[10]

Generally, FTZs are set up in underdeveloped parts of the host country with the rationale that the FTZ will attract employers and thus reduce poverty and unemployment and stimulate the area’s economy[11].

ADMINISTRATION OF FTZs IN NIGERIA

In Nigeria, the Calabar Free Trade Zone established in 1991 was the pioneer free zone, which led to the enactment of the Export Processing Act.[12] Due to the economic programmes of the Federal Government, there are now 42 FTZ and over 500 licensed Free Zone enterprises in different economic sectors ranging from Oil and gas, petrochemicals, manufacturing, banking, port operations, pharmaceutical, steel rolling mills, food processing, warehousing and logistics, shipbuilding and maritime services, across Nigeria which are operated by public, private individuals, or a combination of both.[13]

In Nigeria, there are two types of Free Trade Zones (FTZs): specialized and general-purpose trade zones. The Nigerian Export Processing Zone Authority (NEPZA) is the administrative authority responsible for the effective management of general-purpose FTZs. In contrast, specialized zones are regulated by sector-specific authorities, such as the Oil and Gas Export Free Zone Authority (OGEFZA) for the oil and gas sector and the Central Bank of Nigeria for the banking sector.[14] The operations of FTZs are governed by various laws and regulations, including:

  1. Nigerian Export Processing Zones Act (NEPZA),[15] for the general-purpose zones and
  2. Oil & Gas Export Free Zone Act (OGEFZA)[16], for oil & gas zone.
  3. Companies and Income Tax (CITA)[17]
  4. Petroleum Profits Tax Act (PPTA)[18]
  5. Value Added Tax Act[19]

(vi) Federal Inland Revenue Service (Establishment) Act 2007.

Some of the regulations are:

  1. Investment Procedures, Regulations and Operational Guidelines for Free Zones in Nigeria, 2004[20]
  2. Oil & Gas Export Free Zone (OGEFZ) Regulations, 2003
  3. Tinapa Free Zone and Resort Regulations, 2009[21]
  4. Lekki Free Trade Zone Regulations 2010
  5. Lagos Free Trade Zone Regulations 2016
  6. Guidelines for Banking Operations in Free Zones in Nigeria 2016 (By Central Bank of Nigeria)

LAWS REGULATING FREE TRADE ZONES IN NIGERIA

Nigerian Export Processing Zones Act (NEPZ Act) 1992

The NEPZ Act established the Nigeria Export Processing Zone and the Nigerian Export Processing Zone Authority (NEPZA) to oversee and regulate FTZs in the country.[22] NEPZA has the power to issue licenses, manage and supervise FTZs, and create regulations that govern their operations. However, the authority shall not grant approval to a person or company to carry on sector-specific businesses of banking or insurance unless the company is registered and licensed under the Banking Act or the Insurance Act respectively.[23]

The law provides that approved enterprises operating within a zone are to be exempted from all Federal, state and local government taxes, levies and rates.[24] An approved enterprise is required to operate a domiciliary account with a bank within the zone or in the customs territory. The enterprise is not permitted to move funds related to its activities into and out of a zone without permission from the Central Bank of Nigeria[25]. Transactions between enterprises in the zones and others within the customs territory are to be settled in foreign currency. Enterprise operating within any zone shall import, free of customs duties any capital goods, consumer goods, raw materials, components, or articles intended to be used for the purpose of and in connection with an approved activity, including any article for construction, alteration, reconstruction, extension or repair of premises in a zone.[26]

The Act also provides against the importation or storing of prohibited goods, like firearms and ammunition into the zone except by authorized persons.[27]

OIL AND GAS FREE ZONE ACT (OGFZ Act) 1996

The OGFZ Act established the Oil and Gas Free Zone Authority (OGFZA),[28] with the power to license oil and gas free trade zones and manage and supervise the Onne Oil and Gas Free Trade Zone.[29] OGFZA also has guidelines as contained in the Oil and Gas Export Free Zones Regulation 2003.

INCENTIVES AVAILABLE TO BUSINESSES IN FREE TRADE ZONE

There are primary benefits of locating a business in an FTZ. Some of these benefits are:

  1. Duty Deferral – Import duties for imports shipped to an FTZ are deferred until the time those products leave the FTZ and enter the countries’ commerce.
  2. Duty Exemption – Import duties are exempted for imports entering an FTZ and later exported without ever entering countries’ commerce or destroyed within the FTZ.
  3. Duty Reduction (Inverted Tariff) – Importers who import raw materials and conduct manufacturing operations in an FTZ may elect to pay duties for imported raw material based on the duty rate of the manufactured item (when the duty rate for the item is lower than the raw material duty rate) at the time the manufactured product leaves the zone and enters countries’ commerce.[30]
  4. No Value Added Tax (VAT) or Withholding Tax (WHT) is charged on purchases by Approved Enterprises in FTZs from companies in the customs territory. However, enterprises in the Oil and Gas Free Zones are mandated to submit tax returns to the Free Zones Tax Administration Unit.[31]
  5. There is the opportunity for interested businesses to have one-stop approvals for permits, operating licenses, and incorporation papers.
  6. Rent free land during the first 6 months of construction (for government-owned zones).

VULNERABILITIES OF FREE TRADE ZONES IN NIGERIA

The relevance of FTZs continues to grow as globalization defines economic progress. However, the standards, oversight, and regulations governing FTZs have not kept pace with these developments. As a result, illicit actors have been able to take advantage of relaxed oversight and the lack of transparency in zones to launder the proceeds of crime, finance terrorism, and facilitate the proliferation of illegal weapons.

  1. Lack of Standard Financial Laws and Rules: In Nigeria the same laws and regulations do not apply in free trade zones as in the rest of the country, in particular the regulations that relate to financial crime preventive measures such as reporting large value currency transactions and, in some cases, Suspicious Transaction Reports (STRs) as they relate to financial institutions and businesses operating in the zones.
  2. Exploitation of Exemption from Taxes, Rates, etc: Approved enterprises operating within the zones are exempted from all federal, state and local government taxes, levies and rates.[32] Although, this provision is necessary for the actualisation of the objectives for establishing the zones. However, in practice, a lot of companies exploit this provision and cloak illegal trading activities under this section. These activities can range from non-disclosure of trading of unapproved items, inadequate disclosure of trade volume, and trading with related entities in the customs territory without full or any disclosure.[33]
  3. Large-scale smuggling of prohibited goods: This vulnerability involves the illegal transportation, distribution and sale of large quantities of prohibited products such as hard drugs. This is usually carried out by criminal networks and the activities generally avoid all taxes.[34]

RECOMMENDATIONS

  1. Ensure appropriate risk assessment and Customs control: Possible actions to prevent and detect commercial fraud cases exploiting free trade zone systems should be examined from two different viewpoints, namely
      1. maintenance of an appropriate level of Customs control over the admissibility of goods and the business operations carried out, and
      2. appropriate assessment of the risk associated with goods arriving from free zones.
  2. Greater transparency of FTZ operations: Provisions such as Regulation 2(2) of the OGEFZ Regulations, 2003 are inimical to business transparency and should be amended to mean that even though approved enterprises are exempt from payment of income taxes for approved activities, they are still obliged to file income tax returns as provided under CITA.[35]
  3. Ability to recommend additional incentives: The FTZ Authorities need to submit regularly to the Federal Government results of impact assessment exercises of the FTZs using verifiable data of economic performance. This would help, for example, the NEPZ Authority to meet the requirement of recommendation to the Federal Government of additional incentive measures for the Zones.[36]

CONCLUSION

The concept of free trade zones has become central to the integrated global economy. FTZs stimulate economic growth and play a central role in business for many countries and leading manufacturers. As separate customs areas created to encourage trade and foreign direct investment, FTZs are subject to unique laws, regulations, and oversight to take account of their role in job creation and economic development policies. These features provide opportunities for legitimate businesses but also present weaknesses which expose them to misuse by criminal elements.[37]

The misuse of FTZs impacts all jurisdictions including those without FTZs of their own, because goods can originate from or be transhipped through FTZs not subject to adequate export controls.

  1. Zuhair Jibril 2023. A Critical Review of the Free Trade Zones in Nigeria and The Implications to the Nigerian Tax System. International Journal of Law and Clinical Legal Education (1 JOLACLE) 4
  2. Nigeria Export Processing Zones Authority. The Free Zoness Available at https://nepza.gov.ng/free-zones/ Accessed on 10 June 2024
  3. The Trusted Advisors. Free Trade Zones In Nigeria: Legal Framework, Incentives and Opportunities for Investment. Available at FREE TRADE ZONES IN NIGERIA: LEGAL FRAMEWORK, INCENTIVES AND OPPORTUNITIES FOR INVESTMENT | trustedadvisorslaw.com accessed on May 23, 2024.
  4. Ibid
  5. Adepoju Babatunde. Free Trade Zones Between Theory and Practice in Nigeria. Available at freetradezonearticle (1).pdf accessed on May 23, 2024.
  6. The Multi-Donor Investment Climate Advisory Service of the World Bank Group. Special Economic Zones Performance, Lessons Learned, and Implications for Zone Development. Available at https://documents1.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdfhttps://documents1.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdfhttps://documents1.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdf accessed on May 24, 2024.
  7. Corporate Finance Institute. Free Trade Area. Avaliable at Free Trade Area – Overview, Advantages and Disadvantages (corporatefinanceinstitute.com) accessed on May 24, 2024
  8. Definition of Free Trade Zone – Britannica
  9. Arthur O’Sullivan, Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458 Pearson Prentice Hall. P. 454
  10. Ibid
  11. Op cite 2
  12. Nduka Ikeyi. The Export Processing Zones and Foreign Investment Promotion in Nigeria: a Note on recent Legislation. Journal of African Law, 42: 223-230 Avaliable at The Export Processing Zones and foreign investment promotion in Nigeria: a note on recent legislation | Journal of African Law | Cambridge Core accessed on May 24, 2024.
  13. Ibid
  14. Op cit, 2
  15. Cap. N107, LFN 2004
  16. Cap. O5, LFN 2004
  17. Cap C21: Amendment Act (No. 11 of 2007)
  18. PPTA, Cap. P13 2004 LFN
  19. Cap VI; Amendment Act (No. 12 of 2007)
  20. NEPZA Regulations
  21. Made Pursuant to section 27 NEPZA
  22. Section 2 NEPZ Act
  23. Section 4 NEPZ Act
  24. Section 8 NEPZ Act
  25. Central Bank of Nigeria, Guidelines for Banking Operations in the Free Zones in Nigeria, 2016.
  26. Op Cit 9
  27. Section 16 NEPZ Act
  28. Section 2 OGFZ Act
  29. Section 1 OGFZ Act
  30. KPMG Trade and Customs Services: Comparative Review of Select Free Trade Zones around the World, 2009.
  31. section 34(c) of the OGFZA Regulations, 2003
  32. section 8 of both OGEFZA and NEPZA
  33. Uzeme Olomu-Agbodo, Free Trade Zones in Nigeria: Contentious and Burning Issues
  34. The Source: Vol. 34, No. 2, Oct 28, 2013
  35. Section 52, CITA
  36. Section 4(g) NEPZA
  37. Op Cit 29

Leave a Reply

Your email address will not be published. Required fields are marked *

For security, use of hCaptcha is required which is subject to their Privacy Policy and Terms of Use.

Verified by MonsterInsights