Tax is one certain obligation for every company doing business in Nigeria. Tax may be a burden but we have what I call “rest stops” on the journey to paying taxes or using the general term “tax incentives”.
In my article, I have described some of the tax incentives available to incorporated companies in different industries in Nigeria. This article relates to tax incentives for incorporated companies. In a subsequent article, we will examine the incentives for unincorporated entities.
The agricultural industry currently has the following tax incentives:
• An agricultural company with turnover of less than ₦1 million will pay CIT at 20% (instead of 30%) for the first five years in which its turnover is less than this amount
• Exemption from minimum tax
• Non-restriction of the capital allowance claimable on property, plant and equipment purchased
• 10% Investment Allowance on plant and machinery
A lot of manufacturing activities are under the pioneer industries and products. However, there are still other tax incentives available to companies in the manufacturing sector.
• A manufacturing company with turnover of less than ₦1 million will pay CIT at 20% (instead of 30%) for the first five years in which its turnover is less than this amount
• Rural Investment Allowance of between 15% and 100% of the cost incurred in providing facilities/infrastructure in rural areas
• 15% Investment Tax Credit on replacement of obsolete plant and machinery
• 10% Investment Allowance on plant and machinery
• Accelerated capital allowance of 95% in the first year in respect of replacement of industrial plant and machinery.
• Gas Utilisation (Downstream Operations)
Enhanced investment allowance of 35% on assets acquired, or a 3-year tax holiday which is renewable for an additional period of 2 years, subject to satisfactory performance
An annual allowance of 90% plus an additional investment allowance of 15% after the tax-free period. Where a gas company opts for the enhanced allowance, it will not be entitled to the 15% investment allowance
Tax free dividends during the tax holiday, subject to certain conditions
Plant, machinery and equipment purchased for gas utilisation are exempt from value added tax (VAT)
Profit from gas utilisation operations is subject to tax under the CIT Act
Pre-production costs and investment required to separate crude oil and gas from the reservoir are tax deductible expenses
• Gas Utilisation (Upstream Operations)
Capital investment on facilities and equipment required to deliver associated gas in usable form is treated as part of the capital investment for oil development
Investment required to separate crude oil and gas from the reservoir into usable products is also considered as part of oil field development
Gas transferred from a Natural Gas Liquid facility to the gas-to-liquids facilities is subject to 0% Petroleum Profits Tax and 0% royalty.
• A company engaged in wholly export trade with turnover of less than ₦1 million will pay CIT at 20% (instead of 30%) for the first five years in which its turnover is less than this amount
• Export Expansion Grant
• The profits of a company whose supplies are exclusively inputs to the manufacturing of products for export are exempt from CIT
• The profits of a company established within an export processing zone is exempt from CIT
• Tax-free dividends from investment in wholly-export-oriented business
• A mining company with turnover of less than ₦1 million will pay CIT at 20% (instead of 30%) for the first five years in which its turnover is less than this amount
• A new company engaged in the mining of solid minerals will enjoy a tax holiday of three years
• Plant, machinery, equipment and accessories imported exclusively for mining operations in Nigeria are exempted from customs and import duties
6. Services Industry
• 25% of incomes in convertible currencies derived from tourists by a hotel shall be exempt from tax, subject to certain conditions
• Interest payable on any loan granted by a bank for the purpose of manufacturing goods for export, shall be exempted from tax
• Tax exemption of the interest earned from agricultural loans subject to certain conditions
• Companies engaged in research and development activities for commercialization are entitled to 20% investment tax credit
7. General Tax Incentive
• Companies with approved business in the free trade zones/export processing zones are exempt from tax
• Exemption from minimum tax for new companies
• Income from investment in bonds and treasury bills is exempt from tax
• Interest earned on foreign currency domiciliary account in Nigeria is exempt from tax
• Investment (dividend, rent, interest and royalty) income derived by the beneficiary from outside Nigeria and brought into Nigeria through government-approved channels are tax-exempt
Companies in different industries are encouraged to take advantage of these tax incentives. It is important that you engage with a tax professional to confirm your eligibility and the application process (if any) for enjoying these incentives.
HOW TO ENJOY PIONEER STATUS INCENTIVE IN NIGERIA
Pioneer status is a fiscal incentive provided under the Industrial Development (Income Tax Relief) Act, Cap I7, Laws of the Federation of Nigeria, 2004 (IDA). Under the incentive, companies operating in designated pioneer industries or producing pioneer products, which apply for and are granted pioneer status, are entitled to income tax holiday for up to three (3) – five (5) years in the first instance, renewable for an additional maximum period of two (2) years. In addition to income tax holiday, pioneer companies enjoy other benefits such as the exemption of dividends paid out of pioneer profits from withholding tax.
The review of the pioneer status incentive (PSI); an incentive administered by Nigerian Investment Promotion Council (NIPC), led to the suspension of the PSI scheme since September 2015. However, on 7 August 2017, the Minister for Industry, Trade and Investment, Mr. Okechukwu Enelamah, lifted the suspension on the PSI scheme and also announced the approval of addition of 27 new industries and products to the list of pioneer industries. Similarly, the new PSI guidelines and process chart (“the guidelines”) which the NIPC had earlier released on its website was approved.
This article explains the details of the new guidelines and how companies can take advantage of this incentive.
• Approval of additional 27 industries
The approved list of 27 industries focuses on emerging industries in Nigeria such as e-commerce companies, software development, video and television production, real estate investment vehicles and manufacturing of machinery, among others. The Minister also stated that mineral oil prospecting and cement are no longer part of the list of pioneer industries.
Click here to download a copy of the new 27 industries. The full list can be accessed on NIPC’s website
• Required documents for PSI applications
The guidelines require PSI applicants to submit a copy of the following documents in addition to that required under the former guidelines:
– Applicant’s pension compliance certificate
– Nigerian Social Trust Insurance Fund (NSITF) registration certificate
– Industrial Training Fund (ITF) compliance certificate
– Regulatory license(s) to operate in the sector or business activity (where applicable)
– Approval letter received for any incentives/waivers/concessions/grants from other government agencies (where applicable)
– Applicant’s sustainability policy
• Applicable fees
We have outlined in the table below the change in the applicable fees under the old and new guidelines.
Under the old guidelines, the 2% projected tax savings was paid before the issuance of the pioneer certificate and was not refundable regardless of whether the company makes a profit or loss during the pioneer period. However, under the new guidelines, applicants pay 1% of the actual pioneer profits at the end of a year in which the company makes a profit. Therefore, applicants are better off under the new regime in this instance.
On the other hand, under the new regime, applicants will now pay an additional ₦3million to enjoy PSI in their initial application.
• Timeline for PSI application process
The process flowchart introduced by the Minister proposes definite timeline for application and processing of PSI. Based on the process flowchart, the time required to apply and obtain an approval in principle is 18 weeks while to apply for a production day certificate (which comes after an approval in principle) and obtain the PSI certificate is 7 weeks.
In total, an applicant should expect to receive the PSI certificate in 25 weeks (about 6 months) from the date of application. In addition, the time required to obtain a PSI extension certificate is 15 weeks.
• Annual Performance Report and Impact Assessment
According to the guidelines, beneficiaries of PSI are now required to submit a performance report annually to NIPC not later than 30 June of the following calendar year. The report is expected to contain the company’s financial statements, evidence of payment of the annual service charge and other information as provided in the guidelines.
Failure to submit the annual performance report for any year, after two reminders, will result in the PSI certificate being cancelled, removal of the company’s name from the list of beneficiaries and notification to FIRS to collect the tax for the period the report was not filed and the remaining pioneer period initially granted.
A periodic impact assessment would also be carried out by NIPC during the period that a company enjoys the PSI incentive. The purpose of the impact assessment is to measure the effectiveness of the incentive and to evaluate the utilization of the saving accruing from the incentives.
Going forward, the Federal Executive Council has agreed that the pioneer list would be reviewed every two years in order to ensure that the Federal Government (FG) is responsive to changing economic environment. Based on FG’s commitment to the promotion of transparency and efficiency in the PSI process, we hope that the new PSI application and approval process would follow the provisions of the Guidelines to prevent abuse of the incentive.
The Acting President (Ag. President) of the Federal Republic of Nigeria, His Excellency, Professor Yemi Osibajo (SAN), was the Keynote Speaker at The Platform Nigeria organized by Covenant Christian Centre, which held on May 1 2017.
In his speech, the Vice President discussed the Nigerian Economic Recovery and Growth Plan (NERGP), the progress made so far and future reforms by the Federal Government (FG). The discussion centered on the five critical priority areas needed to achieve economic recovery and growth in Nigeria. These priority areas are:
Stabilizing the macroeconomic environment
Delivering agricultural and food security
Energy sufficiency which is adequacy of power and petroleum products, improving transportation infrastructure
Driving industrialization through small and medium scale enterprises
Delivering an effective social investment programme
These five priorities and their key reforms, as expounded by Professor Yemi Osibajo in his speech, are summarized below:
Stabilizing the macroeconomic environment
In stabilizing the macro-economic environment, the FG has focused on aligning fiscal policy with monetary policy and nudging the Central Bank of Nigeria (CBN) towards the objective of more market determined exchange rates. The FG is also working on replacing the 41 items not valid for foreign exchange with a more trade policy-driven restrictions taking into account those items that are required and locally unavailable raw materials.
It is important to note that the CBN had recently released a circular on thirty-six (36) items that are now valid for foreign exchange (Forex). These 36 items are items that hitherto were not valid for Forex, but are now valid. This new circular is one of the windows established by the CBN for Small and Medium Enterprises (SMEs) to provide access to Forex and ease pressure on the market.
In addition, the FG is in the process of obtaining intervention fund for agriculture through the Bank of Agriculture, and for SMEs through the Bank of Industry, as a means to reduce the high interest in the economy which is also reflective of the high inflation rate in the country. There is also the Development Bank of Nigeria which is the main vehicle for intervention banks. Furthermore, Professor Yemi Osibanjo explained that reducing the interest rates will involve borrowing less from the domestic market, however at the moment, the FG is borrowing substantially from the domestic market which is expected to change in the future.
Delivering agricultural and food security
As part of the Federal Government (FG) plan to diversify the Nigerian economy from over dependency on oil revenue, the FG proposed to achieve three objectives in diversifying into agriculture.
First is the provision of the right inputs, equipment and finance which is expected to increase the yield of farmers. The CBN Anchor Borrowers Programme has provided finance for thousands of farmers, which has resulted in increased local production and in fact, local production of rice has tripled as a result. In addition, a major problem before now was the milling of rice paddy. However, FG supplied 200 mills of various sizes to farmers with a combined effort of the public and private sector to address this issue.
Secondly, FG has sought to provide improved seedlings to farmers including rice seedlings. Thereafter, farmers would be taught simple farming practices that improves crop yield. Both Kebbi State government, IITA and Jigawa State have run excellent rice seed improvement programmes that have been of tremendous benefit. Some of the other initiative under the seedling programme are improved wheat and maize production as well as maintaining our position as Number 2 in sorghum production in the world.
The third objective is the provision of fertilizer. In 2017, there will be a major revolution in the fertilizer sector because the Presidential Fertilizer Initiative came up with a design to solve the problem of obtaining fertilizer once and for all. The Ministry of Agriculture produced a soil map for the country that determined the pattern of fertilizer distribution and this helped a great deal. Using the disaggregated soil maps, the FG was able to provide fertilizer for each soil type in different states in Nigeria. Prior to this, there was no map and fertilizers were given indiscriminately. However, after this initiative, the yield increased from 2 tonnes per hectare to between 4.5 and 9 tonnes per hectare. Also, the FG provided a concessionary working capital loan for Nigerian-based blending plants to enable them produce fertilizer locally.
The next phase of the FG agricultural diversification is the plantations of tree crops such as, cocoa, cashew, shea-butter, coconut, sesame seed, soya bean, pineapple, banana, cassava and sugar cane. These are expected to improve the revenue generated from agriculture.
One of the important sector the FG is determined to reform is the Power Sector. The major problem has been that the private sector players have not been able to invest in the critical areas of metering, and others that guarantee improvement in the sector. Other issues include complaint about the inability to generate enough revenue to break-even due to lack of a cost-effective tariff and illiquidity in the energy generation, transmission and distribution value chain.
The Federal Executive Council (FEC) had on the 1st of March 2017 approved ₦701 billion CBN facility as a payment guarantee for Nigeria Bulk Electricity Trading Company (NBET) to guarantee payments to the power sector and in turn improve power supply. This fund will be provided to NBET at a 10% interest per annum; the Federal Ministry of Finance would in turn guarantee the repayment of the principal and interest. Indicative data presented by NBET indicates that NBET intends to pay a flat-rate of 80% of the January-2017 generation invoice. This is a good signal, representing the FG keeping to its word.
The FEC also approved that FG continue discussions with the World Bank Group (WBG) with the objective of securing financial support of US$2.5 billion for the power sector. After discussions with the WBG, the Power Sector Recovery Implementation Program (PSRIP) was created. The PSRIP will address issues such as liquidity, transparency, energy sufficiency and governance in the power sector
Driving industrialization through medium and small scale enterprises
In driving industrialization and focusing on MSMEs, the focus has largely being on creating an enabling environment for doing business in Nigeria. Many Medium, Small and Micro Enterprises (MSMEs) complain about the difficulties of obtaining financial and other assistance from government agencies responsible for one approval or the other relevant for their businesses.
As a result, the FG launched the MSME clinics across Nigeria to inform government agencies about their role as facilitators of business not obstacles. At this clinics, small business owners meet with the relevant government agencies to ask questions and deal with issues on the spot if possible.
In terms of industrial infrastructure, the FG is focusing on improving existing Special Economic Zones, and establishing new ones. ₦50 billion has been set aside in the 2017 budget for the existing free trade zones. The plan is to accelerate the implementation of the National Industrial Revolution Plan (NIRP) through the special economic zones. The zones will focus on priority sectors to generate jobs, promote exports, boost growth and upgrade skills with an objective of creating 1.5 million jobs by 2020.
Growing the digital industry and innovation has also been a priority for the government. After the Aso Villa Demo Day, 30 out of over 4000 innovators emerge and the presidency in collaboration with the World Bank through the GEM programme, further selected 81 innovators through a competitive process. These innovators were provided funds for their businesses through the ₦756.3 million fund set aside for the project.
The FG is also promoting innovation hubs in 6 geo-political zones in Nigeria. The hubs are essentially to provide training for a wide range of technology related skills, empowering youths for entrepreneurship and employment.
Delivering an effective social investment programme
The National Social Investment Programme (SIP) was introduced by the FG in 2016. The programme covers the following:
Homegrown School Feeding Initiative which is targeting 5.5 million primary school people in all the states of the federation from primary 1-3. Eleven states are set to fully start the scheme which would involve feeding 3.5 million school children.
Job Creation Initiative aimed at training 500,000 university graduates, who would be deployed to work in their local communities as teachers, agriculture workers and health support workers. The graduates would be receiving a monthly stipend of ₦30,000 monthly for a period of two years.
Conditional Cash Transfer Initiative, where one million caregivers would be given ₦5,000 monthly for a period of two years. The focus would be on the extremely poor and vulnerable in our society and special emphasis is on the North Eastern part of the country where there are a lot of Internally Displaced Persons.
Enterprise Promotion Programme, which is a loan scheme handled by the Bank of Industry. The loan would be available to 1.66 million people, made up of market women, traders, artisans, small businesses and youths and would be from ₦10,000 to ₦100,000.
The next phase of FG reform is anchored on three pillars which are deepening existing reforms, initiating sub-national reforms, which will culminate in the sub-national ranking of all 36 states and the FCT in 2018 and introduction of a new reform area “Trading within Nigeria”, which will push initiatives aimed at improving business processes and regulations within Nigeria, and ease the movement of goods within the country.
Based on the above, the Vice President concluded that the opportunities are limitless for Nigeria, our population is young, vibrant, bolder, more creative and more entrepreneurial than the youths of any other country in our region. Therefore, we must not allow the failures of the past to hold us down or become an excuse for our failure. We must lead and shape the future as the future is already here.
People give businesses to their friends.
Imagine your business in 5 years’ time, would you be proud to have started the business or wish you had stayed in your current employment and saved your capital?
The decision to succeed as an entrepreneur in Nigeria is totally up to you. First of all, you must determine that you want your business to succeed. Secondly, you must make decisions that will enable your business succeed.
There are several ways that your decisions can directly affect the success of your business in the current economy. However, I have explained 5 critical things (decisions) you must do to ensure that you and your business stay on top during the current recession. Remember that these are just general ways and do not relate to any specific industry.
Number 1: Focus on your core competence – Be the best at what you do
Quality will speak for itself and provide you with repeat customers and referrals. Either by identifying a need, offering a solution or being the alternative will ensure that customers pick you to do business with over your competitors.
Focusing on your core competence ensures that you become the best at what you do and earn that mark of trust that customers look out for.
Quality over quantity, always remember this!
Number 2: Develop and implement strategies to get your competition’s customers
If your business is going to prosper in tough times, you need to continue to expand your customer/client base – and that means drawing in customers from the competition. How can you do this? By creating additional value to your product offering compared to your competitors.
An example would be to include variants of your product either in flavour, size (large, medium or small) or material used.
Number 3: Make the most of the customers/clients you have – Add value
For your existing customers, remember that a bird in the hand is worth two in the bush. Your existing clients are opportunities to make more sales without incurring the costs of finding a new customer. in addition, existing relationship must be well managed to ensure repeat business and referrals.
Some ways to do this is by cross-selling your product and/or services. For example, offering to provide transportation for a small fee as a furniture company or offering free fitting as a clothing company. In essence, understand your business entire value chain and see how you can tap into it either through a forward or backward integration.
Number 4: Maintain a healthy Cash flow – Every Naira counts
There are two (2) ways to protect your cash flow in an economic recession:
Collecting accounts receivable
Early collection of accounts receivables and reduction in credit days on hand is a part of cash flow management that is vital to your business’s health. If collecting your accounts receivable has become a slow process, there are two main courses of action to improve your cash flow:
Take action to speed up payment
First, invoice promptly and follow up clearly stating payment dues dates and sending overdue notices. Putting off invoicing gives customers the impression that you don’t care how long it takes to get your money. Secondly, take measures to encourage prompt payment by giving discounts for early payments. Your turnover within the shortest possible time guarantees more income than waiting for longer periods for the same income.
Collect in instalment
Customers like this as it gives them the impression that they do not have to part with a lot of money at once.
Re-examine all aspects of the business to seek ways to optimize cost. Remove all activities that do not add value to the entire process.
This may involve right-sizing your manpower capacity for efficiency and increased productivity. Remember tough times don’t last, tough people do!
Number 5: Ensure efficiency in your operations – Be convenient
Customers want and expect convenience, which accounts in part for the tremendous surge in online shopping. If you have an e-commerce website, streamline the checkout process, particularly for returning customers. Make it easy to find in-depth information about products and to make returns, and offer customer service via e-mail and by phone for shoppers who want immediate answers.
Traditional brick-and-mortar store owners should reevaluate hours of operation, as well as checkout wait times and staffing to ensure a speedy and convenient shopping experience.
Finally, businesses must not forget that for every period in which the economy nose-dives there will be subsequent recovery and economic peaks. The economic upturn will present opportunities that your strategic decisions during the downturn will have a spillover effect on.
Ann Olalere |
Start Smart Series – Part 3
One of the issues facing small business owners in Nigeria is lack of finance and inadequate management expertise. Not surprisingly failure rates of small businesses is very high (estimated at about 80% within the first 5 years). This is further emphasized by the fact that most Nigerian youths are afraid to start their own businesses.
The draft National Policy on Micro, Small and Medium Scale Enterprise (MSMEs) stated the importance of MSMEs as the primary source of new jobs and the critical breeding and nurturing grounds for domestic entrepreneurial capacities, technical skills, technological innovativeness and managerial competencies. This cannot be better said as small business owners are a critical part of the economy and the business environment in Nigeria. The Nigerian government, in recognizing this fact, has put in place a number of incentives to encourage micro, small and medium enterprises (MSMEs).
The popular saying that knowledge is power is true as lack of knowledge of these incentives have prevented many entrepreneurs from taking advantage of the opportunity. In this part of our Start Smart Series, I have put together some incentives available to business owners in Nigeria:
Targeted at serving NYSC members. It is a financial aid given to NYSC members who have a business plan in one of the identified 35 MSMEs clusters. You can look up details at http://www.boi.ng/graduate-entrepreneurship-fund.
Sure-P Graduate Internship Scheme (GIS)
Opened to all business owners between the ages of 18 and 40 years. It is a skill development training incentive. For details, see http://www.wealthresult.com/finance/small-business-federal-grants
SMEEIS Youth Entrepreneurship Development Program (YEDP)
Opened to members and non-members of NYSC and those who possess a verifiable tertiary institution certificate or artisans with First School Leaving Certificate or a technical certificate or accredited proficiency certificate from the National Board for Technical Education (NBTE), whichever is applicable.
It serves as a financial aid for startups and expansion projects in agricultural value chains (fish farming, poultry, snail farming, etc.), cottage Industry, creative industry (tourism, arts and crafts) and Information and Communications Technology (ICT), among others. Read more about it at http://www.cbn.gov.ng/Devfin/yedp.asp
SMEDAN Business Support Centres
Opened to all entrepreneurs; it is a vocational and entrepreneurship skills training organized by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN). You can check out more about them at http://www.facebook.com/smedaninfo
LIFE (Learning Initiative for Entrepreneurs)
This is a free online training on different business skills for all entrepreneurs. See more at http://www.life-global.org
National Enterprise Development Programme (NEDEP)
This is a skills acquisition, entrepreneurship training/business development service (BDS) and access to finance initiative. See details at https://www.facebook.com/nedepentrepreneurs
These are just a number of incentives available to business owners which can go a long way to ease the journey towards running a successful business.
All the best in your entrepreneurial journey.