Topic:

Tax Allowances and Reliefs: A tool for global tax competition

Contact Information:

Onatoye, Oluwaseun Joshua

Managing Partner

Megamind Professionals

08027173844, 08038636439

contactmegamind@gmail.com

December 2015

Tax Allowances and Reliefs: A tool for global tax competition

Abstract

Where and how much to invest is a decision all resource owners must make

at one point or the order, countries all over the world compete against each

other to ensure these resources are brought in to their countries in order to

facilitate economic growth. Companies are constantly searching for where

they can make the maximum returns and pay little as tax. On the other

hand, Government of countries tries to attract these resources by

formulating various strategies to entice investments into their countries. This

paper seeks to look at tax allowances and relief as a tool used by

Government in tax competition to entice companies to invest in their

countries. This paper will not dwell on tax allowances and reliefs available to

individuals because it is believed that it is straight forward and easy to

calculate. Our focus will be on companies especially Multinational companies

(MNC) which has mandate to maximize their shareholders wealth and are

more sensitive than individuals in considering tax allowance and relief as a

basis for resource allocation. We shall also discuss some allowances and

reliefs used by Government to attract MNC range from tax haven, offshore

financial centres to some other less extreme strategies. This paper also

shows empirically some MNC that have considered reliefs in form of lower

rate of tax to allocate resources to different Countries. This paper draws on

globalization theory and review relevant journals and publications to explain

the concept. Finally, attempts were made to look at some allowances and

reliefs in Nigeria and draw our conclusion based on the literature review.

2

Key words: Tax allowances and reliefs, Tax haven, Offshore financial centre,

MNC, Resource allocation

1.0 Introduction

Governments all over the world depend on all manner of revenues from

different sources to run the economy and seek to attract investment in the

country in order to facilitate economic growth. Among the revenues relied

upon by governments is income from taxes. Taxation is defined as any

system that compulsorily ensures the surrender of control of an entity’s

private goods and or services to enable a government in the provision of

public goods and services. Tax is also defined as a form of compulsory

contributions or payments from households and firms or organizations to 3

support government expenditure. Even though the definitions of taxation

above connote compulsory imposition, governments come out with

strategies to induce investors to bring their resources into the country.

Since tax is seen as a burden to investors, MNC are sensitive to the relief and

allowances put in place by Government in deciding where and how to

allocate to a particular country. As a result, one of the strategies that

governments use in attracting foreign direct investment is through the

introduction of tax reliefs. The tax relief strategy is to help reduce the tax

burden on the profit of companies; at the same time it induces MNC to

allocate more resources to the country.

Tax relief is therefore defined as an approved deductible allowance intended

to reduce assessable profit and thereby lessening the tax burden of the

company. The tax reliefs are given by the government to help reduce the tax

liability of the companies through a reduction in the assessable income of

those who qualify. The reliefs are granted in various ways; for example the

type of business formation, the nature of business, the sector of operation,

the location of business and the type of equipment used etc.

2.0 Literature review

2.1 Nigeria Perspective

According to Dike (2014), comments as follows “the question about interest

in the offer of incentives lies in the impact of foreign Direct Investment on

productivity as measured by the Gross Domestic Product (GDP). This

4

provides ready and measurable yardstick for justification or rejection of

sustenance of such regime of incentives so as to forestall economic loss and

absence of resource efficiency. A test of this relationship is contained in CBN

Journal of Applied Statistics wherein results from the impact of foreign direct

investment (FDI) and economic growth using a combination of Conitegrated

Vector Autoregressive and Granger causality analysis to assess FDI and its

impact on economic growth as measured by Gross Domestic Product (GDP).

These methods test data from 1970 – 2009 and provides that the

cointegration relation with restricted constant is: GDP = 1.168FDI + 0.195IFR

– 1.5588INR The implication of this model is that Gross domestic product not

only has a positive relationship with Foreign Direct Investment but also leads

to a 1.168 percentage GDP growth from a percentage increase in Foreign

Direct Investment. Inferentially and at 2012 Gross Domestic Product and

foreign direct investment levels, GDP rises by USD558 Million with rise of

USD89 Million in foreign direct investment. Though tax incentive is not the

only stimulant of foreign direct investment, reports of revenue losses in the

sum of N100 Billion yearly to waivers and other taxes becomes dimmed by

the growth prospects that the incentive brings at the end of the day. Nigeria

is ranked as 120th out of 148th position in world rankings of Global

competitiveness in doing business for the year 2012/ 2013, it can be noted

that while the country’s Tax rates continue to remain competitive being 4th

least responsive problem for businesses, Tax regulation on the other hand

stands in the middle of the pack due to perhaps largely to various

5

interpretations and confusions that sometimes characterizes administration

and implementation of Tax laws by issuance of vague guides and

explanatory notes. Since the general trajectory of Tax incentives is to assist

firms to birth their ideas, bringing their innovations to limelight as well

creating the conducive environment for self-sustenance by the

instrumentality of fiscal policy of government, such incentives contributes to

bringing down general tax burdens to such establishments making them just

as competitive as their pairs in other parts of the world”.

2.2 Global Perspective

According to OECD (2007), revealed the factors influencing foreign direct

investment (FDI) and the result of the finding are presented below; there is a

consensus in the literature about the main factors affecting (foreign)

investment location decisions. The most important ones are market size and

real income levels, skill levels in the host economy, the availability of

infrastructure and other resource that facilitates efficient specialization of

production, trade policies, and political and macroeconomic stability of the

host country. The relative importance of the different factors varies

depending on the type of investment.

Additionally, the location of foreign direct investment (FDI) may be

influenced by various incentives offered by governments to attract

multinationals. These incentives include fiscal (or tax) incentives (such as

reduced corporate tax rates), financial incentives (such as grants and

6

preferential loans to multinationals), as well as other incentives like market

preferences and monopoly rights. Survey analysis shows that host country

taxation and international investment incentives generally play only a limited

role in determining the international pattern of FDI (e.g. manufacturing FDI).

Factors like market characteristics, relative production costs and resource

availability explain most of the cross-country variation in FDI inflows.

Transparency, simplicity, stability and certainty in the application of the tax

law and in tax administration are often ranked by investors ahead of special

tax incentives. Control of government finances is also identified as a key

element, which helps provide stability in tax laws and thus greater certainty

over tax treatment, as well as greater stability and less risk in the economy

overall. An example illustrating these empirical findings is a recent survey of

investors in South East Europe (OECD (2003)). In particular, this survey can

give a flavour on how tax systems are perceived by investors. This survey

suggested that strategic investors consider tax factors as only one of the

obstacles to investment (counting only 24 per cent), instability and

unpredictability of the tax system (adding risk) being perceived the key tax

impediments. Tax issues were not mentioned in the responses of the

opportunistic investors, indicating that they were not so important in the

decision making process.

Additionally, the same investor survey found that special tax incentives,

rather than encouraging FDI, either were not taken into account (were

judged to be unimportant), or operated to discourage investment. Tax

7

incentives were discouraging to investment where the provisions were

difficult to track, understand or comply with and/or invited corrupt behaviour

on the part of tax officials, tending to increase project costs and uncertainty.

Particularly discouraging were non-transparent incentive regimes, including

those subject to frequent change and involving excessive administrative

discretion. Investors exhibited a strong preference for stable and sound tax

systems that did not deviate significantly from international norms. Then, if

in general tax incentives are not seen by investors a key factor to attract

inbound investment, why are tax incentives chosen by governments to

attract investment in general and FDI in particular? There are three simple

answers to this question of particular relevance for developing countries:

• Tax incentives are much easier to provide than to correct deficiencies in,

for example, infrastructure or skilled labour;

• Tax incentives do not require an actual expenditure of funds or cash

subsidies to investors; and,

• Tax incentives are politically easier to provide than funds.

Best practices recommend that policy makers, in the decision of whether or

not to introduce special tax relief mechanisms, address the impediments

inhibiting investment and question whether these should be tackled through

the tax system, or through structural policy changes in other areas, or both.

There are four particular issues that should be considered in this decision

process:

8

• Transparency, simplicity, stability and certainty in the application of the tax

law and in tax administration are often ranked by investors ahead of special

tax incentives.

• Tax relief may enhance the attractiveness of a potential host country, but

experience shows that in many cases the relief provided will be insufficient

to offset additional business costs incurred when investing there and,

therefore, it does not realistically address the actual need (relevance of tax

incentives).

• Where a firm is able to generate profits in a given host country, tax

incentives may be successful in attracting additional FDI, and may be viewed

as necessary where similar relief is being offered by another (e.g.,

neighboring) jurisdiction also competing for foreign capital. This raises

questions concerning the appropriate design of tax incentive relief (whether

the benefits are given to unintended activities and/or are not given in full to

target activities) as well as whether foreign direct investors would invest in

the region in the absence of special tax incentives.

• Where additional FDI resulting from tax relief can be expected, policy

makers should be encouraged to undertake an analysis of the social benefits

and costs of tax incentives use (efficiency and effectiveness issues).

2.3 Identifying Tax Havens and Offshore Finance Centres

9

According to Booijink and Weyzig (2008), tax havens and OFCs are closely

related, although not every jurisdiction would fall into both categories. They

are also similar in that, while almost any jurisdiction can have some tax

haven or OFC features, a smaller number are usually identified as `pure’ tax

havens or OFCs.

The central feature of a haven is that its laws and other measures can be

used to evade or avoid the tax laws or regulations of other jurisdictions.

Minimization of tax liability is an important element. This generally depends

on

(i) use of paper or `shell’ companies, trusts and other legal entities, and

(ii) Routing and managing financial flows. Hence, tax and financial

management are closely linked.

Pure tax havens or OFCs generally have laws specifically designed for such

purposes, aiming to attract financial and corporate services business, and

such business is a major part of their economy.

The main element of their attractiveness is secrecy. This includes

(i) Strong bank secrecy: information cannot (or not easily) be obtained from

banks and other financial institutions for official purposes such as tax

collection (including other countries’ taxes);

(ii) Secrecy of legal entities: information is not available or obtainable about

companies, corporations, trusts, foundations, or other legal entities, such as

10

the beneficial owners (e.g. shareholders of a company, or beneficiaries of a

trust), details of persons with power to determine the use of assets, or

financial accounts.

In addition, they generally offer specific advantages, especially a zero or low

tax rate, to non-residents or foreign-owned legal entities.

OECD list of tax havens

The main listings of tax havens have been developed by the Organisation for

Economic Cooperation and Development (OECD), as part of the project

against `harmful tax practices’ of its Committee on Fiscal Affairs (CFA). The

OECD 1998 report which launched this project defined a tax haven as a

jurisdiction which has:

(a) no or only nominal taxes (generally or in special circumstances) and

offers itself, or is perceived to offer itself, as a place to be used by

nonresidents to escape tax in their country of residence;

(b) Laws or administrative practices which prevent the effective exchange of

relevant information with other governments on taxpayers benefiting from

the low or no tax jurisdiction; (c) Lack of transparency, and (d) the absence

of a requirement that the activity be substantial, since it would suggest that

a jurisdiction may be attempting to attract investment or transactions that

are purely tax driven (transactions may be booked there without the

11

requirement of adding value so that there is little real activity, i.e. these

jurisdictions are essentially “booking centres”).” (OECD 1998, 22-23)

However, the fourth criterion of `no substantial activities’ was rejected by

the new US administration as announced by Treasury Secretary O’Neill in

July 2001, and it was formally withdrawn in the OECD’s 2002 Progress report

(OECD 2001, 10).

The OECD-CFA initially identified 47 possible tax havens, but 6 of these were

found not to qualify. In 2000, therefore the OECD identified 41 tax havens, of

which 6 had made commitments to cooperate. The OECD list entails

judgments about `reputation’ and results in a list made up essentially of

small jurisdictions. Not surprisingly they complained, and pointed to the

important role of financial centres such as Luxembourg and Switzerland

(which had refused to support the OECD initiative), as well as others such as

the UK (City of London) and Ireland, and other non-OECD jurisdictions such

as Singapore and Dubai. This led to the establishment of the OECD Global

Forum on Taxation, which has worked on establishing global standards of

fiscal transparency for a `level playing field’. (Sharman, 2006).

The OECD project on harmful tax practices has aimed at obtaining

commitments from jurisdictions identified as tax havens to improving

transparency and establishing effective exchange of information. By 2007 it

reported that 33 jurisdictions had made such commitments, while 5

remained `uncooperative’ (Andorra, Liechtenstein, Monaco, Liberia, and the

12

Marshall Islands). The OECD also determined that 3 jurisdictions (Barbados,

Maldives and Tonga) should no longer be considered tax havens, leaving 38

of the 41 identified in 2000 which are still considered tax havens by the

OECD.

2.4 Empirical Analysis to show how MNC Locate Intangible Assets

and other financial resources to Tax Havens

According to Dischinger (2008) In recent years, intangible assets have

gained increasing importance in the corporate production process. Since

access to financial capital has been substantially improved, key physical

assets are less scarce (Zingales, 2000) and intangible factors related to

product innovation and marketing are increasingly seen as the key to

competitive success (Edmans, 2007). Hence, intangibles like patents,

trademarks, Customer lists and copyrights have become major determinants

of firm value. This development is especially significant in multinational

enterprises (MNCs). While until the early 1990ies, MNCs commonly raised

little or no fee from their corporate affiliates for the use of patents or

trademarks, owners of these intangibles have in line with updated legal

regulations and accounting standards started to charge for their immaterial

goods and, thus, intangibles related intra firm trade has surged.

Since then, an increasing number of anecdotes have reported that MNCs

transfer their valuable intangible property to low tax jurisdictions. Famous

examples are Pfizer, Bristol–Myers Squibb and Microsoft which have

13

relocated a considerable part of their research and development (R&D) units

and patents from their home countries to Ireland (see e.g. Simpson, 2005, on

Microsoft’s R&D transfer). Others founded trademark holding companies in

tax havens that own and administer the group’s brands and licenses. E.g.

Vodafone’s intangible properties are held by an Irish subsidiary, and Shell’s

central brand management is located at a Swiss affiliate from where it

charges royalties to operating subsidiaries worldwide.

Further evidence from Citizens for Tax Justice Website

Most of America’s largest corporations maintain subsidiaries in offshore tax

havens. At least 362 companies, making up 72 percent of the Fortune 500,

operate subsidiaries in tax haven jurisdictions as of 2013.

All told, these 362 companies maintain at least 7,827 tax haven

subsidiaries.

The 30 companies with the most money officially booked offshore for

tax purposes collectively operate 1,357 tax haven subsidiaries.

Approximately 64 percent of the companies with any tax haven subsidiaries

registered at least one in Bermuda or the Cayman Islands two notorious tax

havens. Furthermore, the profits that all American multinationals not just

Fortune 500 companies collectively claim were earned in these island

nations in 2010 totaled 1,643 percent and 1,600 percent of each country’s

entire yearly economic output, respectively.

14

Six percent of Fortune 500 companies account for over 60 percent of the

profits reported offshore for tax purposes. These 30 companies with the most

money offshore out of the 287 that report offshore profits collectively book

$1.2 trillion overseas for tax purposes.

Only 55 Fortune 500 companies disclose what they would expect to pay in

U.S. taxes if these profits were not officially booked offshore. All told, these

55 companies would collectively owe $147.5 billion in additional federal

taxes. To put this enormous sum in context, it represents more than the en-

tire state budgets of California, Virginia, and Indiana combined. Based on

these 55 corporations’ public disclosures, the average tax rate that they

have collectively paid to other countries on this income is just 6.7

percent, suggesting that a large portion of this offshore money is booked to

tax havens. This list includes:

Apple: Apple has booked $111.3 billion offshore more than any other

company. It would owe $36.4 billion in U.S. taxes if these profits were not

officially held offshore for tax purposes. A 2013 Senate investigation found

that Apple has structured two Irish subsidiaries to be tax residents of

neither the U.S. where they are managed and controlled nor Ireland where

they are incorporated. This arrangement ensures that they pay no taxes

to any government on the lion’s share of their offshore profits.

American Express: The credit card company officially reports $9.6

billion offshore for tax purposes on which it would otherwise owe $3 billion

15

in U.S. taxes. That implies that American Express currently pays only a 3.8

percent tax rate on its offshore profits to foreign governments, suggesting

that most of the money is booked in tax havens levying little to no tax.

American Express maintains 23 subsidiaries in offshore tax havens.

Nike: The sneaker giant officially holds $6.7 billion offshore for tax

purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. That

implies Nike pays a mere 2.2 percent tax rate to foreign governments on

those offshore profits, suggesting that nearly all of the money is officially

held by subsidiaries in tax havens. Nike does this in part by licensing the

trademarks for some of its products to 12 subsidiaries in Bermuda to which

it then pays royalties.

2.5 Theory of Globalization

According to Oseyomon (2004), Globalization in its literal sense is the

process of transformation of local phenomenon into global ones. It can be

described as a process by which the people of the world are unified into a

single society and function together. This process is combination of

economic, technological, socio-cultural and political forces (Sheila, 2004).

Globalization is often used to refer to economic globalization that is,

integration of national economies into the international economy through

trade, foreign direct investment, capital flows, integration, and the spread of

technology (Bhajwati, 2004). Furthermore, Tom (2008), defines globalization

is “the diminution or elimination of state-enforced restrictions on exchange

across borders and the increasingly integrated and complex global system of

16

production and exchange that has emerged as a result”. Similarly Friedman

(2005) examined the impact of the flattening of the globe, and argued that

globalized trade, outsourcing, supply – chaining, and political forces have

changed the world permanently for both better and worse. He also argued

that the pace of globalization is quickening and will continue to have a

growing impact on business organizations and practices. Again, Obadan

(2008), argued that globalization is not just an economic phenomenon which

integrates world economies but also of culture, technology and governance.

It also has religious, environmental and social dimensions.

From the definition above, it can be seen that since there is the elimination

of state enforced restrictions, foreign direct investment can now flows to

companies that offer the highest returns and lower taxes. This is while MNC

have a lot of their profit saved in offshore financial centres. It is to this end

that Government all over the world enters into competition with each other

to induce MNC to bring their fund to their countries. In addition to other

strategies, Government of the world uses tax allowances and reliefs to

attract and retain direct foreign investment from MNC as shown at the

beginning of the literature review.

3.0. Tax Allowable and relief available to MNCs in Nigeria

Tax laws provide various incentives to companies carrying on businesses and

these Incentives may be granted on industry basis or on tax type and may

include:

Exemption from payment of taxes

17

Reduction in rate of tax to be paid

Grant of allowances and deductions from profits subject to tax etc

The President has broad powers to grant tax incentives to any company or

individual.

1. Under the Industrial Development Act, Pioneer Status is granted to

qualifying companies and/or products and services resulting in 3-5 year tax

holiday. Qualifying industries include; Mining, manufacture of cement, glass

and glassware, lime from limestone, ceramic products, rubber, leather textile

etc and other areas of industry that are of economic benefit to the country.

Tax Incentives are also granted to companies in certain industries where it

is deemed that:

The industry is not being carried on in Nigeria on a scale suitable to

Nigeria’s economic requirements or at all, or there are favourable prospects

of further developments in Nigeria

It is in public interest to exempt the Company from payment of taxes. The

Incentives attract tax exemption for a three year period in the first instance

and a maximum of five years in total. Also tax free dividends during pioneer

period, and carry forward of losses made and capital allowances (on assets)

incurred during the pioneer period.

2. Under the Companies Income Tax Act: 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%. Dividends interest, rent or royalty earned by companies outside Nigeria

18

and brought in through specified channels are exempt from tax. Interest

earned by a foreign company on its bank deposits in Nigeria is exempt from

tax. Nigerian companies with a minimum of 25% foreign equity and within

their first four years of operation are exempt from payment of minimum tax.

The President of the Federal Republic of Nigeria in April 2012 signed into law

an Order for the part exemption of profits of companies from tax. The order

is to last for five assessment years from the effective date and is definitely

aimed at stimulating employment of fresh graduates and school leavers, as

well as to encourage the channeling of private sector investment in critical

public infrastructure. The tax incentives contained in the Order can be

classified under the following headings:

(a)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). Not less than 60% of the new employees

must have had no previous work experience and must have graduated from

school or vocation within 3 years of assessment. The employees must be

Nigerians in first-time full- time employment of the company. The relief must

be utilized in the year of assessment in which the company qualifies and any

unutilized amount cannot be carried forward. Companies claiming this relief

would be expected to furnish the tax authority with a list of joining and

leaving employees during the year, their qualifications, year of graduation

19

and gross salaries earned during the year, together with the PAYE tax paid

on such salaries.

(b)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). Such employees must be Nigerians in first-time full- time employment

by the company and must be retained for a minimum of 2 years from the

year of assessment the employees were first employed. Also, this relief must

be utilized in the year of assessment in which the company qualifies and any

unutilized amount cannot be carried forward. Companies involved in HR

outsourcing could generate good tax savings from claiming this relief so long

as they are able to retain the same personnel on their contracts for the

mandatory two-year period. The inability to carry forward the relief also

means that new companies would not be able to claim the relief unless they

record taxable profits by their third year of commencement.

(c)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. The qualifying infrastructure (facilities) include

power/electricity, roads and bridges, water, health, educational and sports

20

facilities and others as may be specified by an order issued by the Minister of

Finance. The relief shall be treated as additional deduction/expense in

arriving at the assessable profit of the company. Any amount that cannot be

utilized is available for carried forward for a maximum of two assessment

periods. This relief appears to be a duplication of the Rural Infrastructure

Relief in Section 29 of CITA, except that the qualifying infrastructure has

been expanded in the order and the limitations in Section 29 (such as the

nearness to Government infrastructure), which are not mentioned in the

order. This means that companies can claim both reliefs within the same tax

return.

3. Incentives under the Personal Income Tax Act: Non-Nigerian employees of

foreign companies in Nigeria may be exempt from tax in Nigeria, where they

spend a cumulative period of less than 183 days in Nigeria during a 12

months period and their income is subject to tax in their home country. The

Minister of Finance also has wide powers to grant exemptions to any person

based on a treaty entered into with Nigeria.

4. Under the Capital Gains Tax Act: Foreign companies carrying on business

in Nigeria are exempted from capital gains tax on disposal of assets, except

such proceeds are brought into Nigeria.

5. Incentives under the Value Added Tax Act: Import of several items

exempted from value added tax. Exported goods and Import and Export Duty

Exemptions services also exempted from value added tax and

21

Reductions .Import and export duty exemptions and reductions are available

for several items. List of exempt items and rates is reviewed annually based

on economic considerations and developments in the Nigeria economy.

6. Incentives under the Petroleum Sector: 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 USS2.50bl;

Accelerated capital allowances which provide 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%

7. TAX INCENTIVES TO GAS INDUSTRY In view of the enormous potentials in

this sector, Government approved the following fiscal incentives:

a. 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

22

b. GAS TRANSMISSION AND DISTRIBUTION - Capital allowance as in

production phase above - Tax rate as in production phase - Tax holiday

under pioneer status 20

c. LNG PROJECTS -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

d. 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).

e. 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

23

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 21 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.

8. Incentives under the Tax Free Zones and Export Processing Zones. There

are laws creating tax free zones and export zones, which exempt companies

operating in those areas from tax obligations in Nigeria for operations carried

out in the zones

◦ Companies are required to register before enjoying the benefits and all

activities must be performed exclusively within the zones - activities outside

the zones will be subject to tax. Tax free status is continuous as long as

activities are restricted to the zones. Some of the incentives are as follows:

• Complete tax holiday for all Federal, State and Local Government taxes,

rates, custom duties and levies.

24

• One-stop approval for all permits, operating licences and incorporation

papers.

• Duty-free, tax-free import of raw materials for goods destined for re-export.

• Duty-free introduction of capital goods, consumer goods, components,

machinery, equipment and furniture.

• Permission to sell 100% of manufactured, assembled or imported goods

into the domestic Nigerian Market.

• When selling into the domestic market, the amount of import of import

duty on goods manufactured in the free zones is calculated on the basis of

the value of the raw materials or components used in assembly not the

finished product.

• 100% foreign ownership of investments.

• 100% repatriation of capital, profits and dividends.

• Waiver of all import and export licenses.

• Waiver on all expatriate quotas for companies operating in the zones. •

Prohibition of strikes and lockouts.

• Rent-free land during the first 6 months of construction. Government may

however review the status of the zones based on economic considerations.

9. Nigeria’s Double Tax Treaty This network offers significant incentives to

investors; there is considerable room for further expansion subject to

development of a clear tax treaty strategy. Nigeria has existing treaties with:

UK; France; Netherlands; Belgium; Pakistan; Canada; Czech

Republic;

25

Philippines; and Romania.

Negotiations are in progress at various stages with other countries like

Turkey, Russia, India, and Korea. Other countries have indicated their

interest to commence negotiation of tax treaties with Nigeria. As a

concession to Nigeria’s treaty partners, government has approved a lower

treaty rate of 7.5 on dividends, interest, rent and royalties when paid to a

bonafide beneficial owner of a treaty country.

10. OIL AND GAS FREE ZONE The Oil and Gas Export Free Zone Act No. 8 of

1996 established an Oil and Gas Free Zone Authority to manage, control and

co-ordinate all the activities within the zone. This zone encompasses three oil

and gas service centres around the ports of Onne (near Port Harcourt),

Calabar and Warri. All three ports have enhanced stacking and warehousing

facilities awaiting subscribers. Incentives and fiscal measures approved by

government that favour and encourage large investments in the region

include:

• No personal income tax , • 100% repatriation of capital and profit , • No

pre-shipment inspection for goods imported into the free zone.

11. TELECOMMUNICATIONS 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

26

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 5 to 7 years tax

holiday depending on location.

b) Taxes and duties do not exceed those charged on essential electrical

goods.

12. INVESTMENT PROMOTION AND PROTECTION AGREEMENT (IPPA) As part

of additional effort to foster foreign investors’ confidence in the Nigeria

economy, Government continues to enter into bilateral investment

promotion and protection agreements (IPPAs) with countries that do business

with Nigeria. The IPPA helps to guarantee the safety of the investment of the

contracting parties in the event of war, revolution, expropriation or

nationalization. It also guarantees investors the transfer of interests,

dividends, profits and other incomes as well as compensation for

dispossession or loss. To this end, Nigeria has concluded and signed IPPAs

with:

France; United Kingdom; Netherlands; Romania; Switzerland; Spain;

South Africa; etc.

Negotiations with the United States of America, Belgium, Sweden and the

Russian Federation are at various stages.

13. LIBERALISATION OF OWNERSHIP STRUCTURE The government in

repealing the Nigerian Enterprises Promotion Act of 1972 (Amended in 1977

27

and in 1989) and promulgating the Nigerian Investment Promotion

Commission Act of 1995 has liberalized the ownerships structure of business

in Nigeria. The implication of this is that foreigners can now own 100%

shares in any company as opposed to the earlier arrangement of 60%-40% in

favour of Nigerians.

14. REPATRIATION OF PROFIT Under the provisions of the Foreign Exchange

(Monitoring & Miscellaneous Provision Act No. 17 of 1995), foreign investors

are free to repatriate their profits and dividends net of taxes through an

authourised dealer in freely convertible currency.

15. GUARANTEES AGAINST EXPROPRIATION The Nigerian Investment

Promotion Commission Act guarantees that no enterprise shall be

nationalized or expropriated by any government in Nigeria.

4.0 Conclusion

From our literature review we have been able to show that tax allowances

and relief is a strategy tools in the hand of Government to shape the

economy of a Country positively or otherwise. Many strategies have been

adopted by Countries ranging from the extreme and aggressive tax havens

and offshore financial centre to a less aggressive relief method like that of

Nigeria.

Globalization of the world economics has also ease the movement of foreign

direct investment across countries boarders.

5.0 References

28

EU Council, Representatives of the Governments of the Member States 1998

Resolution of the Council and the Representatives of the Governments

of

the Member States, meeting within the Council of 1 December 1997 on

a

code of conduct for business taxation. Official Journal of the European

Communities, C 002 , 06/01/1998 p.1-6

FSF 2000 Report of the Working Group on Offshore Financial Centres. Basel:

Financial Stability Forum.

Huizinga, H., and L. Laeven (2008): “International Profit Shifting Within

Multinationals: A Multi-Country Perspective,” Journal of Public Economics,

92(5-6), 1164–1182.

Ifueko (2012): “Tax Incentives for Foreign Investors in Nigeria” at The

Nigeria Investors Business Forum in Berne Switzerland

Nigerian Investment Promotion Council- www.nipc-nigeria.org/FAQ.htm .

Accessed 12th June, 2015

KPMG International (2006): “KPMGs Corporate Tax Rate Survey,” Corporate

Income Tax Rate - A Trend Analysis, 304-250(October 2006).

New Tax Incentives for Nigerian Companies by Pedabo

Markusen, J. R. (1995): “The Boundaries of Multinational Enterprises and the

Theory of International Trade,” Journal of Economic Perspectives, 9,

169–189.(2002): Multinational Firms and the Theory of International

Trade. The MIT Press, Cambridge.

29

Morgan Lewis & Bockius LLP (2007): “Optimising Brand Value Through

Strategic

Tax Planning,” Intellectual Asset Management - Brands in the

Boardroom 2007, April 2007, Washington DC (USA).

OECD 1998. Harmful Tax Competition. An Emerging Global Issue. Paris:

Organization for Economic Cooperation and Development.

OECD-CFA 2000. Towards Global Tax Cooperation. Paris: OECD.

OECD 2001. The OECD's Project on Harmful Tax Practices: The 2001 Progress

Report. Paris: Organization for Economic Cooperation and

Development.

OECD 2004. The OECD's Project on Harmful Tax Practices: The 2004 Progress

Report. Paris: Organization for Economic Cooperation and

Development.

OECD-CTPA(2006). The OECD's Project on Harmful Tax Practices: 2006

Update on Progress in Member Countries. Paris: Organization for

Economic Cooperation and Development.

Primarolo Report 1999. Report of the Code of Conduct Group (Business

Taxation)

to ECOFIN Council, 29 November 1999.

Plassmann, F., and T. N. Tideman (2001): “Does the Right to Carry Concealed

Handguns Deter Countable Crimes? Only a Count Analysis Can Say,”

The Journal of Law and Economics, 44, 771–98.

Sharman 2006. Havens in a Storm. The Struggle for Global Tax Regulation.

30

Ithaca, Cornell U.P.

The Nigerian Investment Promotion Council Act

Van Dijk, Michiel, Francis Weyzig and Richard Murphy 2006 The Netherlands

– A taxhaven? Amsterdam, Centre for Research on Multinational

Organisations (SOMO)

Simpson, G. R. (2005): “Irish Unit Lets Microsoft Cut Taxes in U.S. and

Europe,”

The Wall Street Journal, November 7, 2005, p. A1.

Sullivan, M. A. (2004): “International Tax Planning: A Guide for Journalists,”

Tax

Notes, published by taxanalysts.

Weichenrieder, A. J. (2008): “Profit Shifting in the EU: Evidence from

Germany,”

International Tax and Public Finance, forthcoming.

Zingales, L. (2000): “In Search of New Foundations,” Journal of Finance,

55(4),

1623–1653.

Zoromé (2007) Concept of Offshore Financial Centers: In Search of an

Operational Definition. Working Paper 07/87. Washington DC: IMF.

31