That Nigeria is in recession is no longer news. Government revenues at all levels have reached an all-time low. Government at all levels are finding it difficult to meet their obligation to the people because of low revenue base. Companies are laying off workers in droves and unemployment in Nigeria has never reached an epidemic proportion than it is currently. The productive base of the economy is struggling and infrastructure decay is everywhere. No money to revive critical infrastructure and the government have been running a deficit budget for the past 2 years – no thanks to dramatic fall in oil price and internally generated revenue. To cap it all, the comptroller general of customs, Col Hamid Ali (rtd), recently stated that the Nigerian custom service may not be able to meet its target and revenue has fallen sharply.
One critical reason why the Nigeria government is struggling to meet up with its revenue target is the arbitrary granting of tax incentives and waivers. Since the dawn of this new democratic dispensation in 1999, government has lost huge revenues through arbitrary and reckless granting of tax incentives and import waivers. A huge chunk of revenue that ordinarily should have gone into the coffers of the government has been lost through tax incentives and import waivers.
Just recently, Action Aid Nigeria (AAN) and Tax Justice Network (TJN) released a report stating that the country lost about $2.9b on tax waivers to mostly multinational companies. This amount in today’s nominal value is more than the budget for education and health combined – two most critical sectors of the economy. The basis of granting all these incentives and waivers is questionable and in most case granted as a form of political patronage to party stalwarts and other highly politically connected persons and companies.
Nigeria’s fiscal policies and programs always have surprising outcomes. Fiscal policies designed to better the economy ends up producing unintended outcomes either by design or omission by those that initially put the policies in place. All over the world, tax incentives and waivers are used to balance the economy, protect vulnerable local industries, control importation and stimulate growth in some critical industries. But sadly, in Nigeria, tax incentives and waivers are giving to cronies and political associates. The process of granting these waivers is at best opaque. Agreed that the law gives the president the right to grant waivers and concessions, such waivers have resulted in loss of billions of dollars to the national purse and by extension revenue available for sharing.
I tried all I could to search for any report that shows direct relationship between foreign investment and tax incentives and waivers. Sadly, I couldn’t see any and, government in its wisdom have not deemed it fit to even know if these tax incentives have really benefited the real sectors of the economy. There is no mechanism from government agencies like CBN, National Bureau of Statistics, federal ministry of finance, Nigeria Export Promotion Council or even the Federal Executive Council (FEC) to measure the impact of these incentives and waivers on the national economy. This lends credence to my earlier assertion that the executive orders that gave effect to these waivers and incentives were not intended to positively affect the economy generally.
At this critical time, I believe that the current government should review all tax incentives and waivers granted since 1999. A lot of revenues have gone down undetected through this means. Government needs to review all pioneer status, waivers and exemptions that affect corporate taxation. By wisdom, once you are inside a hole, you stop digging. Nigeria’s economy is already in a hole and conventional wisdom requires the government to stop digging further. No waivers and incentives of whatever form should be approved by FEC. As earlier pointed out, there has been no report showing the positive impact of tax incentives and growth in economy, or increase in companies that established business operations in Nigeria. The pioneer status regime, free trade zone tax exemption orders, import waivers and concessions should be discarded immediately.
Take for example the exemption order on income from bonds and treasury bills issued by the former minister of finance and coordinating minister for the economy, Dr. Ngozi Okonji-Iweala in 2012. The then minister said that the exemption order was to increase activity in government bonds and treasury bills and to attract foreign participation. Prior to that, subscription to bonds and treasury bills issued by government were usually subscribed since they are risk-free. There should not be any basis for exempting income from bonds and treasury bills from taxes. Banks and foreigners have made so much from trading in these instruments without commensurate taxes to pay – no thanks to the exemption order. Look at the financial result of Nigerian banks and other finance companies since 2012 and see the huge incomes coming from bonds and treasury bills alone. At the time of company income tax computation, these huge incomes are exempted from suffering CIT at 30%. Imagine the trillions of Naira lost since 2012 when the exemption order came into force and it is still in force.
The case of exemption of taxes in free trade zone is appalling. I recommend that only local companies that establish operations there should benefit from such exemptions to be able to compete favourable with foreign companies. Dangote, Africa’s richest man, is expected to make a kill when his refinery finally comes on stream in 2018. He is currently enjoying import waiver in the Lekki Free Trade, where the refinery is based, and the products to be sold from that refinery will not suffer any form of taxation. This will certainly make the petroleum products from that refinery cheaper compared to imported products with its attendant impact on the generally economy. The free trade zones were established across the country with generous tax incentives to attract foreign direct investment. Sadly, this has not been the case. What most companies are doing is just to establish a subsidiary in the zone to enjoy the tax holidays. We have not seen any major investment from foreigners in free trade zone. Most of the free trade zones are mere empty waste lands. Foreign companies simply establish an office there and use the office to import all manner of items which are duty free and probably smuggle some into the Nigerian custom territory without any duty paid on the goods. It is important for government to tighten all the loopholes in that area.
In conclusion, attracting foreign direct investment is not by granting unsustainable tax incentives and waivers. There has not been any positive correlation between tax waivers and foreign direct investment. The granting of waivers to individual operators in an industry rather than the entire industry creates distortion among industry participants. Tax incentives on the other hand creates wealth among some select sectors as can be seen with the banking sector, and leave other sectors gasping for breath. In recent times, despite the recession, banks have continued to declare huge profits while the manufacturing sector struggles. The huge income on government instrument which banks have monopolized leaves them with huge un-taxed income. These huge profits are never translated into assistance to the real sector but used to oil the opulence life style of the bank’s executives.
The key to attracting foreign direct investment are fiscal discipline, investment in critical infrastructure – especially power and transportation systems and stable political environment. Certainly, tax incentives and waivers are not the key at least in the Nigeria context. Please, let the current economic team go to work immediately!
Emeka Ogbachalu
