TJI Says Nigeria Squanders $2.6Bn on Corporate Tax Incentives

Tax Justice Network (TJN), a nongovernmental organization has said that Nigeria squandered some $2.6 billion on corporate tax incentives in one year, making the country to suffer a downgrade to 34th position on the 2020 Financial Secrecy Index.

In the TJN latest Financial Secrecy Index report, Nigeria’s tax-to-GDP ratio sunk to 5.7 per cent, one of the lowest in the world, due largely “to poor regulatory compliance, weak institutions and a lack of transparency.”

Some studies, the report read, “indicate that corporate incentives are costly and inefficient. In a 2015 report, ActionAid found that Nigeria was losing up to 0.5 per cent of its GDP in corporate income tax incentives given to companies with pioneer status.

“Using the 2015 budget figure, the estimated losses were put at $2.6 billion per year.”

The Financial Secrecy Index, the report read, worsened when international oil companies engaged in oil exploration became the major drivers of foreign direct investment.

Quoting copiously from a report by ActionAid, the secrecy index report noted that Nigeria was “in 2014, advised that its proposed double taxation treaty with Mauritius would promote treaty shopping and tax evasion, yet the country has gone ahead and signed and ratified the treaty.

“Mauritius has also been signaled as one of the most aggressive tax treaty partners towards Africa.”

For treaties and agreements, the Tax Justice Network reported that in 2017, Nigeria signed the Common Reporting Standard Multilateral Competent Authority Agreement, which aims to facilitate the exchange of financial information among jurisdictions.

“With a view to implementing the OECD Guidance for Common Reporting Standard, the country’s Federal Inland Revenue Service released the Income Tax (Common Reporting Standard) Regulation in 2019.

“Under the regulation, reportable financial institutions are to carry out comprehensive due diligence on old and new accounts to identify ‘reportable accounts’ and to file information returnson an annual basis.

“Nigeria currently has double taxation agreements with 22 countries, including the UK, Netherlands, Canada, South Africa, China, Philippines, Pakistan, Romania, France, Belgium, Mauritius, South Korea, Sweden, Slovakia and Italy. Treaties with the United Arab Emirates, Kenya, Poland, South Korea, Singapore, Qatar, Spain, Cameroon and Ghana are not in force as they are yet to be ratified,” the report read.

Furthermore, the country currently has ratified double taxation agreements with 15 countries including Mauritius, which is popularly known as a corporate tax haven and a conduit for illicit financial flows from Africa,” the report added.

Rolling out the Nigeria’s secrecy profile, TJN said: “At independence in 1960, agriculture was the mainstay of Nigeria’s economy, accounting for up to 69 per cent of GDP. The oil boom in the 1970s ushered in a period where petroleum contributed up to 87 per cent of total exports.

“International oil companies engaged in oil exploration became the major drivers of foreign direct investment.

“The macro-economic policies put in place to attract such investment included import duty relief, accelerated depreciation and easy repatriation of profits.

“These incentives, coupled with additional tax avoidance practices, made illicit flows of funds to other secrecy jurisdictions easier.

In 2017, Nigeria scored 17 out of 100 on the Revenue Governance Index (RGI) and ranked 77th out of 89 countries in licensing transparency.

“However, in November 2019, the Nigerian government announced that it will unveil a Beneficial Ownership Register Portal for the oil and mining industry in January 2020 through the Nigerian Extractive Industry Transparency Initiative.

“In practice, littoral states demand personal income tax from the employers of offshore workers on some geographical basis. A possible problem with this is that an FPSO may spread across two or more states, with each state laying claim to taxing rights.”

This, it continued, uncertainty created an avenue for double taxation or under-assessment of tax.

Nigeria’s Financial System Strategy 2020 was launched by the Central Bank of Nigeria in 2006 to transform the financial sector. Part of its objective was to establish an international financial centre in Lekki, Lagos, to create a legal and financial framework linked to international jurisdictions.

“This remains to be implemented, however, and the government has focused on strengthening the integrity of the internal market and automation of payments in the banking sector,” the report read.

On investment incentives, the report states: “In 1992, the Nigerian Export Processing Zones

Authority was established by an enabling act. It gave the authority the power to manage export processing zones that can be established by an order of the president. Currently, there are 13 active free trade zones in Nigeria, with the Lekki Free Trade Zone being the most vibrant.

“The Nigerian Investment Promotion Council promotes investment activities and maintains a one-stop investment centre for registration and licensing of foreign direct investment. Incentives available to enterprises in the export processing zones include an exemption from federal, state or local taxes, levies and duties.