AN EXAMINATION OF THE INCENTIVE SYSTEM UNDER THE TAX REFORM BILLS

INTRODUCTION

Taxation and tax incentives are not mutually exclusive concepts. Rather, when strategically aligned, they can enhance government revenue while simultaneously fostering economic development. The United Nations Conference on Trade and Development (UNCTAD) (2000) defines tax incentives as measurable advantages granted to specific enterprises or categories of business by a government to influence their behaviour. In Nigeria, tax incentives serve as fiscal policy tools to stimulate investment, reduce the tax burden for targeted taxpayers, create jobs, accelerate exports, and build an enabling business environment.

Given the strategic importance of tax incentives, it is unsurprising that the Nigeria Tax Bill (the “Bill”), one of four tax reform bills aimed at transforming Nigeria’s economy[1], contains extensive provisions on incentives in Chapter 8. This briefing note examines the incentive framework under the Bill and highlights its potential impact on the Nigerian economy.

TAX INCENTIVES UNDER THE NIGERIA TAX BILL

1.    Exemption of Certain Income from Tax: Section 164 of the Bill retains many existing exemptions found in the Companies Income Tax Act (“CITA”)[2] and the Personal Income Tax Act (“PITA”)[3]. These include the exemption of:

·       The income of statutory or registered friendly societies;

·       The income of co-operative societies;

·       The income of ecclesiastical or charitable establishments of a public character;

·       The income of registered trade unions;

·       Dividends from authorised collective investment schemes;

·       Pensions, gratuities, and death benefits;

·       Income from federal or state-issued bonds;

·       Compensation for death or injury;

·       Income of local governments;

·       Interest on foreign currency domiciliary accounts; and

·       Compensation for loss of employment etc.

However, the Bill also makes notable revisions. It removes certain exemptions, such as:

·       Profits of companies formed solely to promote sporting activities;

·       Profits of corporations established under state laws for economic development;

·       Profits of foreign companies taxed only by reason of funds brought into Nigeria; and

·       Emoluments paid from UK government funds to visiting forces and civilian personnel etc.

In their place, the Bill introduces new exemptions, including:

·       Profits or gains from the disposal of assets by Nigerian government entities, except where derived from trade or business;

·       Pension funds and assets under the Pension Reform Act; and

·       Importantly, the present exemption[4] for dividend or rental income received by Real Estate Investment Companies (“REICs”), subject to a 75% redistribution rule within 12 months does not apply to:

·       Shareholders receiving dividends or rent from REICs;

·       REICs’ management fees and self-earned income; and

·      REICs that fail to meet redistribution conditions.

2.    Deductible Donations: To encourage corporate social responsibility, Section 165 of the Bill provides that donation made to public funds, statutory or registered friendly societies, educational, scientific, and charitable institutions, diplomatic bodies, or for emergency interventions (e.g., pandemics, natural disasters) are deductible. As with existing law[5], deductions are capped at 10% of a company’s profit before tax. However, the Bill improves on Section 25 of CITA (as amended by the Finance Act 2020) by clarifying that for non-cash donations, the deductible amount is the lower of the market value at the time of donation or the acquisition cost of the donated asset.

3.    Research and Development (R&D) Deductions: Currently, Section 26 of CITA permits companies to deduct up to 10% of their profits for R&D expenses. Under Section 166 of the Bill, this cap is reduced to 5%. Moreover, the Bill introduces a caveat: if the output of the R&D is later sold or transferred for commercial exploitation, the resulting proceeds are taxable under Chapter Two of the Bill.

ECONOMIC DEVELOPMENT TAX INCENTIVE (EDTI)

The Bill intends to replace the existing Pioneer Status Incentive (PSI) under the Industrial Development (Income Tax Relief) Act (IDITRA) with a new Economic Development Tax Incentive (EDTI) scheme which will be granted to priority sectors.

What are Priority Sectors?

The Eleventh Schedule outlines priority sectors eligible for EDTI. These largely mirror the 2017 Pioneer Industries and Products List, albeit with reclassifications and additions. The sectors include Agriculture and Food; Energy; Health; Mining and Quarrying; Creative and ICT industries; Building and Operation of Utility Projects; Chemicals and Building Materials; Steel and Metal; Transportation; Industrial Machinery; Environment; Textile Production; Other Manufacturing and Services. Section 167(3) of the Bill also allows the President to update the list based on public interest, sectoral development prospects, or saturation. Each sector also has a sunset period (10–20 years), which is the time limit during which the sector remains eligible for EDTI, and not the duration for which a particular company enjoys the incentive.[6]

ELIGIBILITY AND PROCEDURE FOR EDTI

a.    Eligibility Criteria (Section 168): Applicants may be:

·       Nigerian-incorporated companies;

·       Companies exempted from incorporation; or

·       Promoters of proposed companies.

But, to qualify, an applicant must commit to incurring qualifying capital expenditure (QCE) of at least the amount specified in the Eleventh Schedule, ranging from NGN 30 million to NGN 200 billion, on or before the “production day.” Production day is defined in Section 174(10) as:

·       For service companies, the date services commence at a commercial scale; and

·       For processing, manufacturing, mining, agricultural or other priority industry, the date commercial-scale production of a priority product begins.

b.    Application Procedure (Section 169)

Applications are to be submitted to the Executive Secretary of the Nigerian Investment Promotion Commission (NIPC) in such form as may be prescribed, and must include:

·       Evidence of capital commitment to the sector;

·       Identity (resident or non-resident) of parent company (if applicable);

·       Details of QCE assets and their location;

·       Production day (actual or expected);

·       List and value of any non-priority products/by-products;

·       Company capital structure and shareholding;

·       Director/promoter details and nationalities;

·       Signed declaration affirming the information’s accuracy; and

·       Payment of a non-refundable fee of 0.1% of QCE (capped at NGN 5 million)

Upon complete submission of the above-mentioned requirements, the NIPC will review and recommend the application to the Minister of Industry, Trade and Investment (the “Minister”), who forwards it to the President for approval. Upon presidential approval, the applicant is issued an Economic Development Incentive Certificate (EDIC).[7] Importantly, if a sector is removed from the list of eligible sectors, no new applications will be approved. However, companies with existing EDICs may continue to enjoy their incentives for the certified period.[8]

ADMINISTRATION OF ECONOMIC DEVELOPMENT INCENTIVE CERTIFICATE (SECTIONS 171–177)

The framework vests the NIPC with primary responsibility for issuing, managing, and publishing Economic Development Incentive Certificates (EDIC).[9] Section 171 provides for conditions of the certificate, including specification of permissible by-products and their proportion to the primary priority product. Importantly, newly approved promoters must incorporate the proposed company within three months, and certificates are only effective from the company’s certified production day.[10]  Furthermore, to ensure integrity in corporate restructuring, Section 171(6) places tight restrictions on the transferability of economic development incentive status in merger and acquisition scenarios. Where two incentivised companies merge or one acquires the other, both companies’ incentive statuses expire on the certificate end date of the subsisting company. If an incentivised company acquires a non-incentivised one, or is acquired by such, the incentives do not automatically transfer and are subject to fresh approval under Sections 169 and 172. In the case of a merger, the incentive status of all merging entities terminates on the merger date, but the new (emerging) company may reapply. However, any new certificate granted will be capped at the latest expiry date of the original merging companies’ certificates.

A company enjoying economic development incentive status may also apply to the NIPC to amend its certificate to include new priority product.[11] The application must justify the addition and is subject to compliance with the relevant conditions in sections 169 and 171. Additionally, the incentive period may be extended once for up to five years, if the company reinvests 100% of its profits from the initial incentive period into expanding the same product line. Instructively, section 173 restricts retroactive application of EDIC, and provides that any conflicting tax assessments must be adjusted to reflect the incentives regime.

PRODUCTION DAY AND CAPITAL CERTIFICATION (SECTION 174)

The determination of a company’s “production day” is critical, as it marks the start of the incentive period and eligibility for tax credits. Section 174 sets a detailed timeline for certification by the relevant authority and requires the Service[12] to issue a certificate of qualifying capital expenditure incurred prior to that date. Any artificially inflated expenditures or non-arm’s length transactions may be disregarded or adjusted to market value. Failure to meet the qualifying capital threshold stated in the Eleventh Schedule, results in the nullification of the company’s incentive status[13], adding another gatekeeping layer to preserve fiscal prudence.

GROUNDS FOR SUSPENSION AND CANCELLATION (SECTION 175)

The NIPC may cancel an EDIC if the company applies for it, ceases operations, is liquidated, or fails to commence production within 12 months of the proposed production day. Additionally, the Minister may suspend a certificate on NIPC’s recommendation if the company fails to meet the conditions for the incentive or breaches commitments made in its application. In such cases, the company is given three months to remedy the non-compliance. If it fails to do so, the Minister may recommend cancellation to the President, who may then approve it. Upon cancellation, any accrued benefits may be withdrawn. The effective date of cancellation depends on how long the company has operated after its production start date. The NIPC must also notify the Service and the affected company of any suspension, cancellation, or benefit withdrawal.

COMPLIANCE, PUBLICATION, AND TRANSPARENCY (SECTIONS 176–177)

To ensure transparency and monitor compliance, the NIPC, the Federal Ministry of Industry, Trade and Investment, or the Service may require a priority company to submit data on local production costs, factory pricing, and comparable costs of imported goods.[14] Additionally, the NIPC is mandated to publish in the Official Gazette the names of companies granted EDICs, the sectors or products covered, any cancellations of such certificates (along with their effective dates), and any restrictions imposed on the duration of the incentive period.[15]

INCENTIVE PERIOD AND ECONOMIC DEVELOPMENT TAX CREDIT FRAMEWORK (SECTIONS 178-179)

The incentive regime provides that the initial incentive period for a priority company shall commence from its production day and run for a fixed term of five years, as provided under Section 179 of the Bill. This period may be extended only under limited conditions, such as full reinvestment of profits for expansion under Section 172. During this five-year window, a company is entitled to an economic development tax credit that fully corresponds to the amount of tax, the Company would otherwise owe on profits earned from its priority product or service for each assessment year, as calculated under Chapter Two of the Bill. By the provisions of Section 178, this tax credit may be used to offset the company’s tax liability during the incentive period, excluding any additional tax imposed under Section 57 (Effective Tax Rate).If a company is unable to utilise all of its tax credits within the incentive period, it may carry forward the unutilised credit for up to five additional years after the end of the priority period. However, this carry-forward is limited to the amount of tax actually paid during the incentive period. Any unutilised tax credit remaining after this five-year post-incentive window shall automatically lapse.[16]

This framework ensures that priority companies not only enjoy immediate tax relief during the production and growth phase but also have a reasonable period for post-incentive optimisation of their tax positions, thus promoting sustained reinvestment and operational scaling.

RECORD-KEEPING, TAX COMPLIANCE, AND WITHDRAWAL OF INCENTIVES (SECTIONS 180-182)

Priority companies engaged in both incentivised and non-incentivised businesses must maintain separate, auditor-certified records for each line of business to clearly establish turnover and profit. Failure to comply may lead the Service to treat all income as non-priority, disqualifying the company from economic development tax credits.[17] Such companies must also comply with standard tax filing obligations under the principal tax laws and provide evidence of compliance with the minimum qualifying criteria specified in Sections 168 and 169, and the Eleventh Schedule to the Bill, alongside annual returns.[18] Additionally, the Service reserves the right to withdraw previously granted tax credits within six years of certificate cancellation or at any time in cases of fraud through a formal notice of additional tax assessment.[19]

Special Provisions for Plantation Operators and Transitioning Incentives (Sections 183-184)

For companies in the plantation industry, economic development incentive status is tied to the commencement of commercial production. Any maintenance expenditure incurred before this point is treated as “qualifying plantation expenditure” on the business commencement date for tax purposes.[20] Furthermore, companies granted an economic development tax credit under this regime are excluded from accessing similar tax incentives under any other law. However, entities already enjoying incentives under the extant Industrial Development (Income Tax Relief) Act will retain their benefits for the remainder of the approved period. Likewise, companies that obtained incentives under the new framework before a sector’s sunset date will continue to enjoy their incentives for the duration specified under the Bill.[21]

CONCLUSION

The transition from the long-standing Pioneer Status Incentive to the more structured Economic Development Tax Incentive framework signals a pivotal shift in Nigeria’s approach to tax-based industrial policy. As spotlighted above, this reform is not merely a change of labels but a deliberate move toward a more transparent, performance-driven incentive regime, one that aligns with clearly defined priority sectors and national development goals. The provisions of the Bill reflect a commitment to fiscal prudence, targeted investment stimulation, and enhanced administrative accountability. From tighter qualification criteria and sector-specific sunset clauses to post-approval compliance requirements and public disclosure obligations, the framework demonstrates an intent to limit abuse and improve the return on tax expenditures. However, the promise of this regime will rest on the government’s ability to implement it consistently, maintain institutional discipline, and foster investor trust. In sum, while the legal architecture of the new incentive system appears robust, its success will depend on the transparency of its rollout, the integrity of its administration, and the credibility of Nigeria’s broader business environment. If these elements align, the Economic Development Incentive regime could become a cornerstone for catalysing sustainable and inclusive growth across key sectors of the Nigerian economy.

Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries on this should please be directed at the authors.