Trillion-naira tax incentives fail to lift FDI

The slide in foreign direct investments to a record low has put the spotlight on the country’s tax expenditure schemes.

Tax expenditure is the value forfeited from government revenue through tax incentives to support growth or attract foreign direct investments.

Over the years, the federal government has come under scrutiny over its tax incentive management and transparency around the scheme.

Data obtained from the Budget Office of the Federation’s latest Medium Term Expenditure Framework report showed Nigeria recorded a tax expenditure of N21.79 trillion between 2020 and 2023.

Kelvin Atafiri, CEO of Cavazanni Human Capital Limited, said the federal government’s tax expenditure is not having a multiplier effect on the economy in terms of foreign direct investments or industrialisation.

“Tax incentives are good; but we need to see an increase in terms of investments,” Atafiri said.

Nigeria’s budget documents showed Nigeria’s tax expenditure gulped N5.6 trillion in 2020, N5.55 trillion in 2021 and N5.34 trillion in 2022. The projected figure for 2023 stands at N5.24 trillion.

“The revenue foregone by tax expenditures was estimated at around 4 percent of GDP in 2021, which made Nigeria one of the costliest tax expenditure countries in Sub-Saharan Africa,” the International Monetary Fund (IMF) said.

Further findings showed that in 2022, Nigeria forfeited companies’ income tax worth N457 billion, value added tax worth N4.3 trillion, customs duties worth N600 billion and petroleum profits tax worth N 307 billion.

In 2021, the country forfeited N548.40 billion worth of companies’ income tax, N3.87 trillion worth of value-added tax, N720 billion worth of customs duties, N337.7 billion worth of Petroleum Profits Tax and N78 .6 billion worth of tax credit under the Road Infrastructure Tax Credit Scheme (RITCS).

Budget documents showed that in 2020, it forfeit companies’ income tax worth N658 billion, value added tax worth N3.48 trillion, customs duties worth N792 billion, petroleum profits tax worth N371.4 billion and RITCS worth N43.6 billion.

In its latest report about Nigeria, the IMF raised concerns about the country’s huge tax expenditure, estimated at four percent of its gross domestic product or N6.8 trillion in 2021, saying the country could only achieve fiscal stability with aggressive reform of the tax system.

“Nigeria offers a large number of tax incentives (tax expenditures)—including tax holidays, generous allowances, and exemptions—which has eroded the revenue base,” it said.

IMF noted that Nigeria’s low tax revenue has been mainly driven by the narrow bases of its indirect taxes, low tax compliance, large amount of tax exemptions as well as low rates.

Financial analysts have said that tax incentives and expenditures may have been grossly abused or inappropriately administered, adding that the country should not give out so much when it is heavily borrowing to meet fiscal demands.

“There’s much more that can be made without raising tax rates or introducing new taxes,” Yomi Olugbenro, a partner and the West Africa Tax Leader at Deloitte, tweeted.

He added, “With the increasing focus on data & intelligence and leveraging technology, could further optimize collection as it enhances its effectiveness in tracking revenue flows, tackling non-compliance and blocking leakages. Imagine having all potential taxpayers in the net.”

Other experts say the government’s high tax expenditure has failed to lure foreign direct investment needed to provide adequate jobs for the people and entrench investment-led economic growth.

“Irrespective of the government tax expenditures, Nigeria no longer commands attention as the most sought-after beautiful bride by many investment suitors,” Joe Nwakwue, former chair of the Society of Petroleum Engineers, told BusinessDay.

Nigeria has struggled to attract tangible FDI since its last wave of privatisation in 2008 when it received $8 billion in FDI, according to World Bank data.

Between 2009 and 2015, the country attracted an average of $3 billion a year but that was enough to rank the country among the top three largest recipients of FDI in Africa.

Nigeria has, however, only managed inflows of less than $468 million a year, according to the National Bureau of Statistics, and has lost its coveted top investment destination in Africa spot to smaller African countries like Egypt.

“Absolute clarity on the foreign-exchange policy is critical if we want to encourage foreign capital,” said Yemi Kale, chief economist at KPMG Nigeria and former head of the nation’s statistics office. The new government needs to undertake “substantial fiscal reforms aimed at reducing deficit finance and improving revenue generation,” he said.

Other experts say Nigeria’s decision to leverage the private sector’s capital for infrastructure development, especially roads, through the RITCS, has brought about the construction and refurbishment of hundreds of kilometres of roads across the country.

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Since 2019, when the ‘tax for roads’ initiative was birthed by Executive Order 007, Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme, signed by President Muhammadu Buhari, some companies, following approvals, have taken up the responsibility of repairing some of the dilapidated roads in the country.

Some of the Infrastructure Tax Credit Scheme participants so far include the Nigerian National Petroleum Company, MTN Nigeria Communications, Transcorp Group, Access Bank, GZI Industries, Mainstream Energy Solutions, BUA Group, Nigeria LNG, and Dangote Group.

Dangote Cement Plc was awarded a tax credit certificate worth N22.3 billion to construct the Apapa-Oworonshoki Ojota road in Lagos and the Lokoja-Obajana-Kabba road connecting Kogi and Kwara states.

The Federal Executive Council also approved the construction of five roads in the country worth N309 billion, totalling 274.9 kilometres, to the Dangote Group. The roads are located in Borno, Kaduna, Lagos and Ogun states. They are Bama to Banki in Borno State, 49.153 kilometres; Dikwa to Gamboru Ngala (Borno), 49.577 kilometres; and Nnamdi Azikiwe Road, popularly known as Western Bye-Pass, in Kaduna State, 21.477 kilometres.

Others are the Deep Sea Port access road Sections I and III in Lagos State through Epe to Sagamu Expressway, 54.24 kilometres, that links Lagos and Ogun States; and the Obele Ilaro-Shagamu Road in Ogun, 100 kilometres.