The main highights of Nigeria's favourable tax policies are the tax holiday and tax allowance incentives for investors. For example, tax holidays for up to five years may be granted to investors in the manufacturing and gas utilisation sectors. Also, Companies operating in Nigeria’s export processing zones are exempted from all taxes including both import and export duties. Some other companies are also exhempted from the VAT. Furthermore, import duty relief may be obtained on certain machinery, and there are tax allowances for using local raw materials in manufacturing, being a labour-incentive (and therefore employment-generating) business, expenditure on training, infrastructure, research and development and in economically disadvantaged areas. See others by NIPC highlighted below:

 

Personal Income Tax Act

Administered by the Federal Inland Revenue Service and State Boards of Internal Revenue Service, the following taxes are favourable to investors.

Tax credit allowable against tax payable on income derived from outside Nigeria
Section 11 PITA: 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, but the tax credit shall not exceed the proportion of his total tax for the year of assessment which that income derived from outside and brought into Nigeria bears to his aggregate income chargeable to tax in Nigeria.

Consolidated relief allowance
Section 33 (1) PITA 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.

Returns not to be filed where income is N30,000 or less
Section 43 PITA: 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 N30,000 or less from that source.

Income exempted
Section 19(1) PITA specifies several incomes that are exempted from tax, in the Third Schedule to the Act.

Exemption of dividend from tax
The Third Schedule PITA lists incomes exempted from Personal Income Tax Paragraph 25 of the Third Schedule PITA exempts some dividends 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
  • 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 within Nigeria or processing of Nigerian agricultural products produced within Nigeria or production of petrochemicals or liquefied natural gas, and in any other case, the tax-free period shall be limited to three years.

 

Capital Gains Tax Act

General Capital Gains Tax is at the rate of 10% as administered by the Federal Inland Revenue Service.

Exemption on retirement benefits schemes
Section 28 CGTA: 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.

Exemption of gains accruing on securities, stocks, shares
Section 30 CGTA: gains accrued to a person from disposal by him of Nigerian Government securities, stocks and shares shall not be chargeable gains.

Tax exemption on gain arising from take-overs, absorption or merger
Section 32 CGTA: gains arising from acquisition of shares either taken over, absorbed or merged by another company as a result of which the acquired company loses its identity as a limited company, provided no cash was exchanged in respect of the shares.

Tax exemption on proceeds re-invested
Section 33 CGTA: 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.

Double taxation relief
Section 41 CGTA: 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.

 

IDITRA Pioneer Status Incentive 

Under the Industrial Development Income Tax Relief Act (IDITRA), companies engaged in industries/products approved as ‘pioneer industries/products’ shall be

• granted income tax relief for a period of three years, which can be extended for a period of one year and thereafter another one year, or for one period of two years (Section 10(2)(a)(b) IDITRA);
• exempted from paying tax on dividends paid by the pioneer company during the pioneer period to the extent that they are paid out of income exempted from tax (Section 17(3) IDITRA); and
• the loss incurred during the tax relief period is also deemed to be incurred on the first day following the expiration of the tax relief period and can be carried forward to offset profits after the tax-exempt period.

 

Corporate Income Tax

Interest on bonds and short-term securities, and proceeds of the disposal of Government and corporate securities CIT (Exemption of Bonds and Short Term Government Securities) Order 2011 provides tax exemption for interest earned on:

• short term Federal Government securities such as treasury bills and promissory notes
• bonds issued by Federal, State and Local Government and their agencies
• bonds issued by corporate bodies including supra-nationals

for a period of 10 years, with the exception of bonds issued by the Federal Government, which shall continue to enjoy such exempt from tax effective from 2011. 

Exemption of interest on loan
Section 11(2) CITA provides exemption from tax interest on any loan granted by a bank to a company engaged in:

• agricultural trade or business; or
• the fabrication of any local plant and machinery; or
• providing working capital for any cottage industry.

Exemption of profits
Section 23(1) CITA: exempts the profits of the following companies from tax:

• a statutory or registered friendly society, in so far as such profits are not derived from a trade or business carried on by such society;
• a co-operative society registered under any enactment or law relating to co-operative societies;
• engaged in ecclesiastical, charitable or educational activities of a public character;
• formed for the purpose of promoting sporting activities;
• being a trade union registered under the Trade Unions Act;
• dividend distributed by Unit Trust;
• a body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;
• body corporate being a purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria from the purchase and sale (whether for the purposes of export or otherwise) of that commodity;
• company or any corporation established by the law of a State for the purpose of fostering the economic development of that State.
• a company other than a Nigerian company which, but for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria;
• dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels;
• the interest on deposit accounts of a foreign non-resident company;
• the interest on foreign currency domiciliary account in Nigeria;
• dividend received from small companies in the manufacturing sector in the first five years of their operation;
• dividend received from investments in wholly export-oriented businesses;
• any Nigerian company in respect of goods exported from Nigeria;
• a company whose supplies are exclusively inputs to the manufacturing of products for export; and
• a company established within an export processing zone or free trade zone.

 

Deduction for research and development
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.

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.

Reconstruction investment allowance
Section 32 CITA makes available to a company an investment allowance of 10% of the actual expenditure incurred on plant and equipment, in addition to an initial allowance under the Second Schedule of the Act.

Rural investment allowance
For companies not already benefiting from Section 32 and located at least 20 kilometres away from government facilities, Section 34 CITA provides that where a company incurs capital expenditure on the provision of facilities such as electricity, water or tarred road for the purpose of a trade or business, such company shall enjoy an additional allowance under the Second Schedule of CITA at the appropriate rate administered by the Federal Inland Revenue Service as follows: No facilities at all: 100%, No water: 30%, No electricity: 50%, No tarred road: 15%. 

Gas utilization: Investment allowance
For companies in gas utilization (downstream operations), an additional investment allowance of 35% (which shall not reduce the value of the asset) is allowed, as an alternative to the initial tax-free period granted under Section 39(b) CITA to a company which does not claim incentive. i.e A company which claims the incentive shall not also claim the tax-free dividend during the tax-free period. 

Gas utilization: Accelerated capital allowance
Section 39(c) CITA provides for accelerated capital allowance after the tax-free period for companies in gas utilization (downstream operations), administered by the Federal Inland Revenue Service as follows:

1. an annual allowance of 90% with 10% retention, for investment in plant and machinery.
2. an additional investment allowance of 15% which shall not reduce the value of the asset.

 

Gas utilization: Tax-free dividend
For investment of business in foreign currency or the introduction of imported plant and machinery during the period that is not less than 30% of the equity share capital of the company, Section 39(d) CITA provides for tax-free dividend during the tax-free period for companies in gas utilization (downstream operations).

Gas utilization: Interest deduction
Subject to obtaining prior approval of the Minister of Petroleum Resources for such loan, Section 39(e) CITA provides that interest payable on any loan obtained for a gas project shall be deductible, as administered by the Federal Inland Revenue Service.

Investment tax relief
For companies located at least 20 kilometres away from government facilities and incurring annual expenditure on such relevant facilities, 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” at the following rates of expenditure: No facilities at all - 100%, No water - 30%, No electricity - 50%, No tarred road - 15%. A company shall not be allowed to claim the investment tax relief for more than 3 years; and The relief shall not be available to a company already granted the Pioneer Status. 

20% Income tax rate for companies with turnover less than ₦1 million
Section 40(6) CITA provides for a lower rate of tax of 20% payable by companies in the preferred sector of the economy such as agriculture, manufacturing, solid minerals or wholly export trade for the first 5 years of commencement of business, where the turnover is less than ₦1 million as administered by the Federal Inland Revenue Service.

 

Value Added Tax Act

Applicable rate is 5% as administered by the Federal Inland Revenue Service. 

Exemption from value added tax

Sections 2 & 3 First Schedule VAT Act list the goods and services exempted from VAT, as administered by the Federal Inland Revenue Service:

Part 1. Goods

• All medical and pharmaceutical products;
• Basic food items;
• Books and educational materials;
• Baby products;
• Fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment;
• 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; and
• Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
• 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

 

Exemption of commissions on stock exchange transactions

Part II First Schedule VAT Act is modified in VAT (Exemption of Commissions on Stock Exchange Transactions) Order, 2014. The order shall be in force for a period of 5 years, as administered by the Federal Inland Revenue Service.

There is an exemption from VAT on commissions from the following:

• earned on traded value of shares;
• payable to Securities and Exchange Commission;
• payable to Nigerian Stock Exchange; and
• payable to the Central Securities Clearing System on stocks. 

 

See Also Investment Treaties for Bilateral and Multilateral Tax Agreements with Nigeria