Topic:
Tax Allowances and Reliefs: A tool for global tax competition
Contact Information:
Onatoye, Oluwaseun Joshua
Managing Partner
Megamind Professionals
08027173844, 08038636439
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.
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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
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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
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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
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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
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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:
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• 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
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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• 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
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31
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