Florence / Italy October 29 – November 2, 2014

FOREIGN INVESTMENT COMMISSION

Thursday, October 30, 2014

“IS MY COUNTRY ATTRACTIVE FOR FOREIGN INVESTMENT?”

INVESTMENT INCENTIVES & SUBSIDIES IN NIGERIA

Olufemi Sunmonu

Femi Sunmonu & Associates Qais Conrad Laureate The Concordia

256A Ikorodu Crescent Dolphin Estate 10122

Ikoyi – Lagos qcllegal@axis5ive.net

© UIA 2014

CONTENTS

• Introduction: Investment Incentives or Subsidies

• Africa’s top Investment Destinations in 2013

• Nigeria’s Contributing sectors in 2013

• General Investment Subsidies

• Sector based Investment Subsidies

• Points to note

• Key Priority Areas

• Extant Investment Protection Provisions

INVESTMENT SUBSIDIES OR INCENTIVES?Current global market information ranks Nigeria as the 28th largest economy in the world owing to the recent rebasing of its Gross Domestic Product. The favorable investment climate may be attributed to the nation’s subsidies and/or incentives.

For purposes of clarity, we would distinguish between Incentives and Subsidies.

According to the online Oxford Dictionary, Incentive as “a payment or concession to stimulate greater output or investment”. They would range from tax credit or holidays, subsidies, accelerated depreciation.

The same dictionary defines Subsidy as a “sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low”. Subsidies may be by way of direct or indirect intervention by the Government and may come in form of interest free loans, low interest loans, tax breaks and exemptions, cash grants, etc.

While Incentives are intended to motivate an individual to act in a certain way or adopt a certain practice and are measured in terms of the direct benefits which can be derived, usually from increased production or productivity. Subsidies, on the other hand, are payments in cash or kind which reduce the cost of undertaking an activity for producers, ultimately affecting the final price of the goods to the consumer.

We can therefore deduce that not all incentives are subsidies but all subsidies are incentives.

AFRICA’S LARGEST ECONOMIES AS AT 2013

SOURCE: IMF, NIGERIAN NATIONAL BUREAU OF STATISTICS

Nigeria South Africa Algeria Angola

Nominal GDP(Billions) USD 501 354 216 124

Real Growth (2010 - 2013) 6.40% 2.70% 3.00% 4.90%

50

150

250

350

450

550

501

354

216

124

6.40% 2.70% 3.00% 4.90%

Nominal GDP(Billions) USD Real Growth (2010 - 2013)

STATISTICS OF THE CONTRIBUTING SECTORS IN NIGERIA AS AT 2013

SOURCE: NIGERIA NATIONAL BUREAU OF STATISTICS

7%9%

15%

1%

23%

44%

Key Economic Sectors (%)

Manufacturing Telecoms Oil and GasEntertainment Agriculture Other Services

Agri-culture

22%

Services51.9%

Indus-tries

25.6%

Sector Based Growth (%)

GENERAL INVESTMENT SUBSIDIES

• 20% tax credit for 5years for Companies whose minimum level of local raw materials utilization ranges between 60 – 70%

• Tax deductible expenses of up to 120% for Research and Development (R & D) carried out by Industrial companies and 140% for R & D on Local raw materials

• 20% Investment Tax Credit on qualifying expenditure for Companies that engage in R & D activities for commercialization

• 25% Investment Tax Credit on qualifying capital expenditure for Companies engaging in the fabrication of tools, spare parts and simple machinery for local consumption and export

• Up to 15% tax concession for Labour intensive industries

• Grant of Initial 7 years tax exempt (Pioneer Status) to Manufacturing companies and Companies operating in economically disadvantaged areas

• 2% tax concession for Industries with In-plant training facilities for a year 5 year period

• Capital allowances of 75% of assessable profits for Manufacturing companies and 66% for other Companies

• 20% of expenses incurred on Infrastructure is tax deductible where the Infrastructure was not previously provided by the Government

SECTOR BASED INVESTMENT SUBSIDIES

MANUFACTURING INDUSTRIES

• 20% Income tax for Companies with less than N1Million turnover for the initial 5 year period

• Tax free on dividends for Companies with turnover of less than N1 million for the initial 5 years

• Dividends of companies engaged in Petrol chemical and Liquefied Natural Gas sub-sector are tax- exempt

AGRO-ALLIED INDUSTRIES

• 100% Capital allowance (Zero restriction)

• 1% duty on all agricultural and agro-industrial machines and equipment .

• Grant of up to 50% capital allowances on Agro-allied plant and equipment

• 100% tax-free period for the initial 5 year period for processing of agricultural produce being a pioneer industry

• Agricultural inputs such as fertlizers and seeds subsidized to 50% for farmers registered under the Growth Enhancement Scheme (GES)

• Under the Agricultural Credit Guarantee Scheme Fund (ACGSF) administered by the Central Bank of Nigeria, Companies are guaranteed up to 75% for all loans granted by commercial banks for agricultural production and processing.

• Companies who borrow from banks under the ACGS, for the purpose of cassava production and processing, are entitled to 60% repayment if interest provided they repay their loans on schedule

SECTOR BASED INVESTMENT SUBSIDIESTELECOMMUNICATIONS

• Balanced tariff structure, which ensures investment recoup over a specific period

• Reduced Import duty on all telecom equipment from 25% to 5% for a 2 year period

• Rebate and tax relief for the local manufacture of telecommunications equipment and provision of telecommunication services

• Pioneer status - 5 to 7 years tax holiday depending on location, for manufacture/installation of telecommunications related equipment.

TRANSPORT

• Companies engaging in: - - Shipbuilding, Boat, Barges and Vessel repairs and maintenance

- Diving and underwater engineering services,

- Aircraft maintenance and manufacturing

are considered Pioneer companies and therefore entitled to 5 - 7 years tax holiday depending on location.

• Access to Central Bank of Nigeria (CBN) Intervention Fund by eligible companies of loans not exceeding 70% of the total cost of the project at an all inclusive interest rate of 7% and repayment tenor of 10 – 15years

SECTOR BASED INVESTMENT SUBSIDIESSOLID MINERALS• 3 to 5 years tax holiday

• Reduced income tax from 30% to 20%;

• 95% capital allowance in the first year with 5% retention value for Companies replacing their plants and machinery until the asset is disposed 

• Roll over relief under Capital Gains Tax

• Holders of mining lease shall, upon qualification be entitled to:- Depreciation or capital allowance of 75% of the certified true capital expenditure incurred in the year of investment and 50% in subsequent years- Investment allowance of 5%- Exemption from payment of customs & import duties

TOURISM• 25% of income derived by

hoteliers in convertible currencies is tax-exempt where such income is put in a reserve fund to be utilized within 5 years for further tourism related expansion

• Grant of land for tourism development at concessional rates

• Availability of soft loans with long period of moratorium.

• Tax holidays and import duty exemption on tourism related equipment.

SECTOR BASED INVESTMENT SUBSIDIES

GASSubsidies granted in the Gas Industry vary and generally depend on the specific operationLIQUEFIED NATURAL GAS PROJECTS- Tax payable is 45% under the Petroleum Profits Tax (PPT)- Capital allowance at an annual rate of 33% for the first three years with 1% remaining in the books- 5% Investment tax credit

GAS PRODUCTION PHASE/ GAS TRANSMISSION AND DISTRIBUTION- 30% Income tax payable- 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- Tax holiday under Pioneer status

GAS EXPLOITATION (UPSTREAM OPERATION)

- 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).GAS UTILISATION (DOWN STREAM OPERATAION)• Companies engaged in gas utilization and

development projects are to be subjected to 30% tax instead of 45%

• An initial tax free period of three years renewable for an additional two 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 approval was obtained from the Federal Ministry of Finance before taking the loan

• Dividends distributed during the tax holiday shall be tax exempt

SECTOR BASED INVESTMENT SUBSIDIES

ENERGY (ELECTRICITY)

• Total import duty waiver for parts required for power generation

• Pioneer status grant (5 – 7 years tax holiday) to companies that engage in the manufacture of Transformers, meters, control panels, switchgears, cable and other electrical related equipment

• Tax exemption on dividends paid during Pioneer status

• Income tax at 30% for Power plants engaging in gas utilization

• Provision of soft loans at concessionary lending rates and subsidy on production

PETROLEUM

• Investment Tax Allowances (ITA) to Companies in Joint Ventures with the Nigerian National Petroleum Corporation and have entered into a Memorandum of Understanding 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%

• Guaranteed minimum margin of USS2.50 bl

• Accelerated capital allowances which provides for capital allowances can be carried forward indefinitely

POINTS TO NOTEDouble Taxation Agreements exists between Nigeria and 13 countries namely:

• Belgium, Canada, China, Czech Republic, France, Netherlands, Pakistan, Philippines, Romania, Slovakia, South Africa, Mauritius, and the United Kingdom.

• There is a shipping and air transport double taxation agreement with Italy.

• Other pending double tax treaties which are yet to be concluded or ratified are Poland, South Korea, Spain and Sweden

EXTANT INVESTMENT PROTECTION PROVISIONS

• No restrictions on corporate ownership structure such that foreigners may incorporate wholly foreign companies for the purposes of carrying on any trade or business except those listed in the “Negative list” and businesses under the Cabotage Act and Nigerian Content Act.

• Unrestricted profit and dividends repatriation (net of taxes) in convertible currency through an authorized currency dealer

• Investment Promotion  and  Protection  Agreements (IPPA) The IPPA helps  to guarantee the safety of the investment of the contracting parties in the event of war, revolution, etc.  It also guarantees investors the transfer of interests, dividends, profits and other incomes as  well as compensation  for dispossession  or  loss occasioned by Government activity.To this end, Nigeria has concluded and signed IPPAs with France, United Kingdom, Netherlands, Romania, Switzerland, Spain, South Africa, etc.

• In addition, Section 16 of the Nigerian Investment Protection Act 1995 guarantees that ‘no enterprise shall be nationalized or expropriated by any government of the federation’

KEY PRIORITY INVESTMENT AREASThe Nigerian Government seeks Foreign Direct Investments (FDIs) in the following key priority areas:

• Power

• Infrastructure

• Agriculture

• Solid Minerals

• Non-extractive Oil & Gas activities

OLUFEMI SUNMONUPartner

FEMI SUNMONU & ASSOCIATES QAIS CONRAD LAUREATEfsunmonu@fsalegal.com