A new study commissioned by All On, an off-grid energy impact investment firm seeded by Shell, and carried by leading professional services firm, PwC Nigeria has identified five strategic fiscal incentives that if applied to all categories of clean energy producers and off-grid developers in Nigeria, could assist the Federal Government meet its target of 30% renewable energy sourcing by 2030.
While some of these incentives have been used to encourage the development of other sectors in Nigeria such as the gas sector, the report, titled Strategic Fiscal Incentives to Unlock the Off-Grid Clean Energy Sector in Nigeria: Opportunities & Recommendations,’ proposed alterations to their implementation and comes complete with a strategy to make it work.
Import duty Exemptions
The report recommends complete import duty exemption on the importation of machinery and equipment for use in the generation of off-grid power using renewable energy sources.
Apart from items already in the Customs Schedule, it calls for inclusion of PV panels for power generation, Control systems for PV panels and renewable energy powered generators working with direct current, control systems for PV panels and renewable energy powered generators working with direct current, hydroelectric generators 5 Static DC to alternating current (AC) converters for PV systems.
Others are Inverter batteries, DC electronic equipment for use with PV panels, wind and hydro generators, materials used in building equipment for renewable energy use, measuring instruments related to renewable energy variables, such as: temperature gauges, pressure gauges, solar radiation meters etc. and smart meters.
The report called for VAT exemption on importation of equipment and spare parts for use in renewable energy generation, services rendered in relation to the development and deployment of off-grid technologies and manufacturing, importation, sale or development of renewable energy technologies/equipment.
Pioneer Status Incentives
The Industrial Development (Income Tax Relief) Act (“IDITRA”) provides income tax incentives to qualifying industries and products for a three year period, which can be extended for an additional one or two years upon fulfilment of certain requirements. The incentives provided under the IDITRA are income tax relief, tax losses, capital allowances and tax free dividend.
Currently, independent power production utilizing gas, coal or renewable energy sources and manufacturers of solar energy powered equipment and gadgets are on the approved list of pioneer products/industries. However, the length of the pioneer incentive remains unfavorable to off-grid power investors because it typically takes more than five years to have returns on investment in this sector. So it is proposing an extension in the duration of the incentives. “We propose 10 years for clean energy investors in line with the Renewable Energy Master Plan 2012,” the report said.
The Companies Income Tax Act grants 10% investment allowance on qualifying capital expenditure. Investment allowance is calculated from the year of assessment in which the asset is first put to use. Investment allowance does not reduce the capital allowance claimable on the asset but is an uplift on the cost of the asset, and results in 110% tax depreciation deduction on the cost of the asset.
The report therefore recommends an increase from 10% to 25% for qualifying capital expenditure. “This will mean that the capital allowance claimable on qualifying renewable energy power assets will be 125%, with 25% claimable in the year the asset is first put to use.”
Accelerated Capital Allowance
Under Nigerian law, depreciation is disallowed in income tax computations. The law provides for capital allowances in place of accounting depreciation. For instance, under the CITA, plant for agricultural production attract 95% (accelerated) capital allowance in the first year. While under the PITA, ranching and plantation assets attract 30% capital allowance.
It recommends that 90% accelerated capital allowance be granted to qualifying entities and individual on their eligible clean energy generation equipment. The initial 90% will be claimable within the first year of operation while 10% will be granted in the second year. This will mean that the capital allowance is claimed almost completely in the first year of purchasing the equipment.