Doing business in Africa - PwC · communication technology, food and agriculture, infrastructure and real ... The launch of the Global Satellite Mobile (GSM) network improved both

Doing business inAfricaFocus on Nigeria

www.pwc.com

July 2015

PwCJuly 2015

Agenda

1. Why this seminar?

2. PwC Africa Desk

3. Doing Business in Nigeria

2Doing Business in Africa • Nigeria

PwC

Why this seminar?

3

PwCJuly 2015

Why this seminar?

Interest in investing in

Africa continues to grow

rapidly.

Need for general as well

as specific hands-on

information and ability

to discuss new

developments.


PwCJuly 2015

Seminars so far

• Angola• Botswana• Ethiopia• Kenya• Mozambique• Namibia• Rwanda• South Africa• Tanzania• Zambia

Next seminar planned for September 2015


PwC

PwC Africa Desk

6

PwCJuly 2015

The PwC Africa Desk

• The PwC Africa Desk commenced in 2009 and is part of the

International Tax Services team in Johannesburg

• Created to enhance coordinated tax service delivery across PwC in

Africa

• The Desk is staffed by secondments from various PwC offices

across Africa who provide home country contexts

• Countries represented include Nigeria, Uganda and Zambia


PwCJuly 2015

Ways the Africa Desk can support you

One-stopservice

Because of helicopterview, identification ofother cross-country

alternatives

Thought leadershipthrough AfriTax

newsletter, One page taxsummaries per African

country, country seminars,etc.

Quick responses ongeneral and specific

questions

Proactivelyinforms relevantparties on newdevelopments


PwCJuly 2015

Thought leadershipAfriTax newsletter


PwCJuly 2015

Thought leadershipOne page tax summaries


PwCJuly 2015

The PwC presence in Africa

In Africa…

• Member firms in 33 countries withover 8,500 professional staff.

• We have the largest footprint ofprofessional services on the Africancontinent.

• All our African firms are locally-owned.

• Provide a range of professionalbusiness advisory services to thepublic and private sectorsthroughout the continent.

• Committed to the development andprosperity of the African people andeconomies.


Doing business inNigeria

PwCJuly 2015

Agenda

1. Country context

2. Business vehicles

3. Legal and labour

4. Tax framework

5. Key issues

6. Structuring


PwC

Country context1.1. General

1.2 Living and working inNigeria

1.3 Economy

1.4 Risk factors

Doing business in Africa - Nigeria

PwC

Country context

1.1. General


1.3 Economy

1.4 Risk factors

PwCJuly 2015

Country contextGeneral

Where is Nigeria?

Nigeria, officially the Federal Republicof Nigeria, is located in West Africaand shares borders with the Republicof Benin in the west, Chad andCameroon in the east and Niger in thenorth. Its south coast lies in the Gulf ofGuinea in the Atlantic Ocean.

Nigeria is also known as the “Giant ofAfrica”.


PwCJuly 2015

Country contextGeneral

History

• Nigeria was first a British colony

• In 1960, Nigeria became independent

• Nigeria’s economy saw a large boost in the 1970’s following thediscovery of oil in the country’s south region in 1956

• Nigeria is a presidential republic based on a multiparty system

• There are 36 states in Nigeria which share sovereignty with the FederalGovernment of Nigeria, and Abuja, the Federal Capital Territory

• The current president of Nigeria is Muhammadu Buhari


PwC

Country context

1.1. General


1.3 Economy

1.4 Risk factors

PwCJuly 2015

Country contextLiving and working in Nigeria

The country size of Nigeria is 923,000 square kilometres. The population iscurrently about 175 million, making it the country with the largest populationin Africa.

Most companies in Nigeria have their offices in Lagos, the commercial capitalor Abuja, the Federal Capital Territory

Nigeria lies in the tropical zone and tends to experience a lot of humidity. Itsclimate is typically hot and wet. There are two distinct seasons, the rainy seasonwhich is between April and October, and the dry season from November toMarch.

There are about 6 International Airports in Nigeria but the major ones are theMurtala Mohammed Airport in Lagos and the Nnamdi Azikiwe Airport in Abujawhere passengers can fly to Europe, America, the Middle East and other partsof Africa.


PwC

Country context1.1 General


1.3 Economy

1.4 Risk factors

PwCJuly 2015

Nigeria is currently recording steady economic growth

Strengths

• Largest economy in Africa

• Rich in oil and gas

• Large deposits of other natural resources such as iron ore, tin, coal, lead,bauxite, zinc etc.

• Emerging industries with favourable investment opportunities. Some ofthese industries include: consumer goods and retail, information andcommunication technology, food and agriculture, infrastructure and realestate, media and entertainment

• Emerging middle class

• Second most attractive African investment destination after South Africa.


PwCJuly 2015

Economic growth and stability

• Nigeria’s economy has grown steadily at anaverage real GDP of about 7% for the lastdecade.

• With the recent rebasing of the Nigerian GDP,Nigeria’s GDP stands at about $510 Billionmaking it the largest economy in Africa andthe 26th largest in the world.

• The services sector is the country’s largesteconomic output making the highestcontribution to the country’s GDP in 2014.

• Headline inflation fell to 8% in 2013 from 12%in 2012 and remained in this range in 2014.The inflation rate currently lies at about 8.5%which is well within the country’s target ofmaintaining a single digit inflation rate.


PwCJuly 2015

Sectors – contribution to nominal GDP for calendaryear 2013 – 2014

SectorContribution to

GDP

Agriculture, Forestry and Fishing 22%

Manufacturing 7%

Oil and Gas, Mining andConstruction

20%

Services (IncludingTelecommunications and Banking)

51%


Source: National Bureau of Statistics

PwCJuly 2015

EconomyEnergy

• Oil reserves: Estimated to increasesignificantly over the next fewyears. Greater emphasis onexploring the deep offshore in thenear future

• Natural gas and relatedhydrocarbon productions: Verymuch below potential due tolimited investments andinfrastructure in gas facilities

• Some gas infrastructure projectshave been initiated

Investment opportunities

• The divestment from onshoreoil blocks presents anopportunity for investmentby smaller indigenous oilcompanies, foreignparticipation and technicalexpertise.


PwCJuly 2015

EconomyEnergy (continued)

• Power: Power transmission sufferschallenges due to infrastructural deficits

• Recent ambitious reforms to increasepower generation from fossil sources to20,000MW by 2020

• Hydropower: The Government plans toincrease hydroelectricity generationcapacity to 5,690 MW by 2020 based onthe NERC

• The project, a US$8bn World Bankassisted initiative, is expected to attractprivate sector participation in theexecution of the rehabilitation exercise


• The FG's gas-to-poweragenda will help develop andcommercialise Nigeria'snatural gas sector andvarious sectors into thepower sector value chain.


PwCJuly 2015

EconomyEntertainment and Media (E&M)

• Radio and televisionbroadcasting represent anestimate of 34% of the E&MGDP. The country makes anaverage of US$766 million fromsubscriptions and advertisements

• Nollywood, the Nigeria filmindustry is the largest in terms ofmovie production according toUNESCO

• Gambling, lottery and sportsbetting: Projected revenues fromgambling are estimated toaverage 7.7% (US$58 million) by2018


• Construction of additionalcinemas, theatres and auditoriumsfor movies, plays, dramas, andentertainment tours.

• Investment in infrastructure andstate-of-the-art equipmentrequired for film making such asfilm studios, equipment requiredfor computer generated imageryproduction and digital audio andvideo recording and mixing.


PwCJuly 2015

EconomyTourism

• Tourism in Nigeria is mostlydriven by events such as festivalsand cultural celebrations



• Beach and coastal resort development -protection of national parks and gamereserves.

• Water recreation and ecotourismopportunities.

• Tour package services, scenic andmountain holiday resorts

• Development of heritage, cultural andarchaeological sites.

PwCJuly 2015

EconomyReal Estate

• Opportunities for investment inresidential property,commercial office property,industrial property andhospitality property

• Mortgage Finance: TheNigeria Mortgage RefinanceCompany (NMRC) wasestablished to bridge the costsof funding residentialmortgages and promoteavailability and affordability


• Real estate developmentacross all sub sectors.

• Providing risk capital andbank financing for real estate.

• Affordable low incomeresidential propertydevelopment.


PwCJuly 2015

EconomyICT and telecommunication

• Nigeria is Africa's largest mobilemarket. The launch of the GlobalSatellite Mobile (GSM) networkimproved both the local andinternational information andcommunication services

• As at 31 March 2014, the countryhad a tele-density of 90.78 andover 127 million telephone lines

• The Digital economy is becomingincreasingly important as seen inthe world of electronic businessand commerce with 49.8% of thecountry’s demography made up ofyouths; age bracket (15-54)


• IT infrastructure

• Proprietary software

• Hardware supplies

• Tower assets – co-locationand management

• Mobile payment systems

• Consulting

• Supporting and maintenanceservices

• E-business and onlineadvertisements


PwCJuly 2015

EconomyAgriculture

• Nigeria has a wideexpanse of fertile land,cheap labour, watersupply and rainfall

• The Government seeks todevelop Nigeria'sagricultural sector tomake it a geo-strategicdestination for globalagriculture given therising demand for food,both locally and globally

30


• Professional consultations and researchcentres in agriculture business practices.

• Import substitution of agricultural output isa key strategic pillar to boost agriculture.

• Agricultural mechanization – The level ofmechanisation is estimated at 0.03horsepower per hectare as against 1.5horsepower recommended by the Food andAgriculture Organisation. This presents aninvestment opportunity.

Doing Business in Africa • Nigeria

PwCJuly 2015

EconomyAgriculture (continued)



• Staple crops processing zones – Thegovernment has inaugurated a StapleCrops Processing Zone and hopes toestablish more in 2015. The objective is toattract significant investments. There areplans to make special tax incentivesavailable to investors.

• Rice farming and processing – Nigeria isthe world's largest importer of rice. withthe ban of importation and the vast arableland available, there are opportunities forinvestments. Stringent levies on riceimportation effective 2015.

PwC

Country context1.1. General


1.3 Economy

1.4 Risk factors

PwCJuly 2015

Good opportunities but what are the risk factors?Internal and external

• Poor power supply nationwide

• Weak infrastructure across many sectors

• The impact of changes in international oilprices

• Difficulty in overcoming securitychallenges

• Government bureaucracy when awardingand paying for contracts

• Risk of instability in some states across thecountry

• High unemployment and poverty

• Repatriating capital and foreign exchange


PwC

Business Vehicles2.1. Types of entities

2.2 Establishing a subsidiary

PwC

Business Vehicles2.1. Types of entities

2.2 Establishing asubsidiary

PwCJuly 2015

Business VehiclesTypes of entities

Business may beconducted in a variety offorms in Nigeria, such as:

Partnership/Joint Venture

Sole Proprietorship

Incorporated Trustees

Public or Private Company

36

Representative Office


PwCJuly 2015

Business vehiclesEstablishing a subsidiary

Foreigners wishing to set-upbusiness operations in Nigeria areobliged to take necessary steps to :

• Obtain local incorporation of aNigerian company, or

• Incorporate a subsidiary of anexisting company

The following organisations areexcepted from the aboverequirements:

i Companies undertakingapproved loan projects on behalfof donor countries


ii Companies engaged by Federalgovernment to execute specificprojects

iii Foreign government ownedcompanies engaged wholly inexport promotion activities

• A Representative Office may bepreferred for foreign companies.

• However, a RepresentativeOffice cannot engage in businessactivities. It can only serve as apromotional and/or liaisonoffice.

PwCJuly 2015

Business vehiclesCompany vs branch


Item Distinction factor Company Branch

1 Legal personality Yes

Branches are notallowed in Nigeria

2 Tax personality Yes

3 Liability Limited toshareholding

4 Minimum no. of shareholders 2

5 Stakeholder’s perception Long-term presence

6 Audited accounts Mandatory

7 Profit repatriation 10% or 7.5% WHT

PwC

Legal and labour3.1 Legal system at a glance

3.2 Labour

PwC

Legal and labour3.1 Legal system at a

glance

3.2 Labour

PwCJuly 2015

Legal system

• The Nigerian Legal system is based on theEnglish common law legal tradition by virtue ofcolonization.

• The sources of Nigerian law are: TheConstitution, Legislation, English law, Customarylaw, Islamic Law (in some of the Northern states)and Judicial precedents.

• The judicial branch hierarchy is as follows: theSupreme Court, The Court of Appeal, The FederalHigh Court, The High Court, Magistrate Courtsand Customary/Sharia Courts

• Nigeria adopted a new constitution in 1999 whichhas been amended a few times. The most recentamendment was made in 2013.

• The Constitution is the Supreme law in Nigeriaand any law or custom in conflict with it is nulland void to the extent of its inconsistency


PwC

Legal and labour3.1 Legal system at a

glance

3.2 Labour

Doing business in Africa - Nigeria

PwCJuly 2015

Labour overview

• High unemployment rate

• Shortage of skilled labour

• Each employee to have a written contract within 3 months of engagement

• Contract should state particulars of the employer and the employee, theposition and job description/functions, terms and conditions of thecontract, confidentiality clauses, intellectual property rights, hours ofwork, remuneration, holiday and holiday pay, etc.

• Mandated minimum wage of NGN 18,000 (US$90 or ZAR 1,100) permonth

• Employment equity legislation in force

• Compulsory social security costs include pension, social insurance,workers’ compensation, maternity leave, sick leave and death benefits.Expatriates are not required to join the pension scheme


PwCJuly 2015

Immigration

• All foreigners undertaking employment inNigeria must obtain consent from the Ministerof Interior in, writing.

• Foreigners must apply for business visas inorder to work full-time in Nigeria. They arehowever issued Temporary Work permits forshort term projects

• Companies seeking to employ foreigners mustapply for Expatriate Quota Positions. This is toensure that expatriates are not employed to fillpositions where there are suitable and qualifiedNigerians to do so.

• Every non-Nigerian who enters Nigeria legallyand who wishes to live and/or work in Nigeriamust make an application for a CombinedExpatriate Residence Permit and Alien Card(CERPAC) which will be valid for 3 years andbecomes renewable.


PwC

Tax Framework4.1. Tax overview

4.2 Tax Incentives

PwC


4.2 Tax Incentives

PwCJuly 2015

Tax regimeComparing total tax rate


Source: PwC Paying Taxes 2015 analyses

PwCJuly 2015

Tax regimeNumber of payments



PwCJuly 2015

Tax regimeTime to comply



PwCJuly 2015

50

Tax regimeQuick observations from the PwC’s Paying Taxes 2015

Has consistently had thelongest hours to comply inSSA

Taxes are collected by thefederal government, stateas well as local authorities

Dropped from No. 170 in2014 to No. 179 (out of 189economies) in 2015


PwCJuly 2015

Tax regimeGeneral

• Taxed on worldwide income forresidents and source based for nonresidents

• Fiscal year = calendar year, howeverexceptions are possible

• Case law used in interpretation oflegislation which may bedisregarded at times by FIRS /courts of law

• Resident for tax purposes if:

- Incorporated under laws of Nigeria

• No concept of management ofcontrol


PwCJuly 2015

Tax frameworkTax overview

Item Tax type Tax rate

1 Corporate Income Tax 30%

2 Dividends 10% Withholding Tax (7.5% forcountries that have a doubletaxation treaty with Nigeria)

3 Other Withholding Taxes 5% or 10% (2.5% for constructionservices)

4 Capital Gains 10%

5 Personal Income Tax Top rate of 24% but effective ratebetween 18 and 19.2%

6 Value Added Tax 5%

7 Customs and Excise Duties Fixed rates or ad valorem

8 Transfer Pricing regulations acknowledge OECD Guidelines


PwCJuly 2015

Tax regimeOther Direct Taxes

Description Rates as at 2014

Petroleum profit tax (Upstreampetroleum companies)

50%, 65.67% and 85%

Tertiary education tax 2%

Minimum tax 0.5% - 0.25% of differentvariables

Small manufacturing companies andwholly export oriented

20% in first five years ofoperation

New company engaged in mining of solidminerals

Exempt from tax for the first 3years of its operation

Approved companies in ExportProcessing Zones (EPZ)

Exempt from all federal, stateand local taxes


PwCJuly 2015

Tax regimeNational Office for Technology Acquisition and Promotion (NOTAP)


• Agency which registers all contracts and agreements dealing withthe transfer of foreign technology to Nigeria

• Applicable contracts include management services, technicalassistance, trademark license, franchise, software licence,consultancy services etc.

• NOTAP regulates the amount that can be paid for qualifyingservices, usually prescribes a percentage of revenue, cost or netprofit

• Certificate of registration from NOTAP is required to facilitatepayment for services rendered and tax deductibility

• Registration process is administratively burdensome

PwCJuly 2015

Tax compliance matters

Common features

• Self assessment regime withpunitive penalties for non-compliance

• Monthly taxes payable (WHT,PAYE, VAT)

• E-filing and E-Payment of CIT

• Non-resident companies areliable to tax only on the profit orincome derived from Nigeria.

Tread carefully because of:

• Tax commencement rules

• Excess Dividend Tax

• Tax appeal does not suspend taxcollection

• Arm’s Length Principle

• General anti-avoidance

• Pioneer status compliance


PwCJuly 2015

Key proposed tax updates

• Increase of VAT rate from 5% topossibly 10%

• Compulsory E-filing and E-payment of Taxes

• Deregulation of PetroleumProducts

• Passage of the PetroleumIndustry Bill


PwCJuly 2015

Nigeria tax regimeDouble tax treaties

Dividends(recipient >10% of

shares)

Dividends(other cases)

Royalties Interest Technical/Managementservice fees

7.5% 10% 7.5% 7.5% 10%


Treaties with the following countries:

• Belgium

• Canada

• China

• Czech Republic

• France

• Netherlands

• Pakistan

• Philippines

• Romania

• Slovakia

• South Africa

• United Kingdom

Rates are generally as follows for all treaties:

PwC


4.2 Tax incentives

PwCJuly 2015

Tax frameworkTax incentives

• Free Trade Zones/Export Processing Zones

• Pioneer status

• Gas utilisation incentives

• Rural location incentives

• Tourism incentives

• Interest income incentives

• Investment allowances

• Foreign tax credit

• Accelerated capital allowance for companies in agriculture andmanufacturing


PwC

Key issues

PwCJuly 2015

Key issues

Recent developments

• Exchange controls

• Automation ofCertificate of CapitalImportation

• Introduction ofelectronic filing of taxreturns and onlinepayment of taxes


Going forward

• Investors, businesses and policymakers should prepare forthree potential scenariosunfolding in Nigeria in 2015:

1) Oil price stabilization

2) Severe oil price shock

3) Security shock magnifieslow oil price

PwCJuly 2015

Key issuesMain takeaways

• Conduct thorough due diligence or health check exercise prior toacquiring/doing business with local companies

• Use reputable business advisers

• Longest hours to comply with taxes in Sub Saharan Africa

• Lack of infrastructure and security may pose challenges, as well asopportunities

• Various incentives available

• Profit repatriation - Take note of NOTAP and exchange controlrequirements


PwC

Structuring

PwCJuly 2015

Tax FrameworkStructuring considerations

Repatriation ofFunds (incl. forex)

ExitStrategy

Where tolocate your

holdingcompany


PwCJuly 2015

Structuring considerationsNigeria

Double tax treaty networks are limited

Exit strategy regarding capital gains taxation

Use of the South Africa headquarter company regime


Tax efficient financing

Debt push down possible but some planning required

Exchange control compliance

PwCJuly 2015

NigeriaSA headquarter company

• Create a gateway through SA forholding African activities.

• Benefits:

• No withholding tax on dividend,interest and royalties to parent (ForeignC0)

• Dividend participation

• Limited exchange control

• No transfer pricing on financialassistance and IP

• Treaty access

• CGT participation exemption

• Look through for CFC purposes

• Strict requirements to be met toqualify

SA HQcompany

AfricanOpco

SAactivities

Foreign Co

AfricanOpco

AfricanOpco


PwC

Contacts

PwCJuly 2015

ContactsNigeria

Abolade Kehinde

T: +234 (1) 271 1700 ext 6106

E: [email protected]


PwCJuly 2015

ContactsAfrica Desk

Norman Mekgoe

T: +27 11 797 5405


Arthi Muthusamy

T: +27 11 287 0527


Trevor Lukanga

T: +27 11 287 0964


Ibikunle Olatunji

T: +27 11 797 5317



PwC

Q & A

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Doing business in Africa - PwC · communication technology, food and agriculture, infrastructure and real ... The launch of the Global Satellite Mobile (GSM) network improved both