Time to Invest (1): Focus on Nigeria

In 2Q2014, Nigeria emerged as Africa’s largest economy with an estimated GDP of $479 billion, up from $270 billion in 2013, following a statistical rebasing exercise by the National Bureau of Statistics. According to the IMF, the country currently ranks as the 21st largest economy in the world with a current nominal GDP of about $574 billion. Nigeria’s GDP has been growing at an annual average rate of 6% over the last decade. This has largely been driven by growth in agriculture, telecommunications, banking, insurance, Nollywood (Nigeria’s movie industry), media, real estate, hotels and restaurants, and business services.

Despite its impressive economic growth, Nigeria’s economy is still largely crude oil-driven, with the product contributing about 70% of budgetary revenue, over 90% of foreign exchange earnings, but a paltry 10% of GDP. However, there is a firm commitment from the country’s newly democratically elected government to diversify the economy over the next five years. The government is also keen on tackling corruption, addressing the issues of inadequate power supply and dependence on imported petroleum products, and upgrading the country’s infrastructural facilities, which are largely outmoded.

Nigeria’s over-dependence on crude oil for foreign exchange earnings has exposed it to external shocks since prices plummeted globally in 2H2014. This has resulted in the depletion of the country’s external reserves (which were about $30 billion in November 2015, representing roughly five months’ import cover), a significant fall in the value of the country’s currency, the naira, and the introduction of some exchange control regulations by the Central Bank of Nigeria, such as banning the “dollarization” of local transactions and restricting access to the interbank foreign exchange market for the importation of 41 listed items. Notwithstanding these challenges, the nation has managed to maintain a single-digit inflation rate (currently 9.3%), and continues to grow its GDP.

Social Indicators

Nigeria has an estimated population of 182 million growing at an average of about 3% per annum. This makes it the largest population in Africa, and the seventh largest in the world. The country is projected to become the third largest population in the world by 2050 (only behind India and China), based on the latest UN World Population Prospects report.

Nigeria is a multicultural and multilingual country with a literacy rate of over 60%, and a rising middle class. The country has a young population of 44%, a working-age population of over 50%, and a current unemployment rate of 9.9%.

Business Environment

Business can be carried out in Nigeria through sole proprietorships, partnerships, or incorporated companies, the last being the only vehicle for FDI in the country. Foreigners are able to invest and participate in any enterprise in Nigeria, except those on the “negative list,” from which local investors are also precluded.

There is no restriction on the percentage shareholding foreign investors can hold in a Nigerian company. However, the Nigerian government has been encouraging local content development in key strategic sectors of the economy by giving preference to companies with majority Nigerian shareholding. Specifically, the Nigerian Oil and Gas Industry Content Development Act (NOGICDA) 2010 makes it mandatory for companies engaged in oil and gas production and their contractors to give preference to Nigerian-owned companies in the award of contracts and projects in the industry. A similar posture is being adopted, albeit through regulations (not legislation), in the power and telecommunications sectors.

A foreign investor is required to apply to the Corporate Affairs Commission (CAC) and the Federal Ministry of Interior for incorporation of a local subsidiary and approval to employ expatriates, respectively. The investor is also required to apply for a Certificate of Capital Importation with respect to its investment in a Nigerian company to facilitate the remittance of dividends from its profits and the repatriation of capital on divestiture. Nigeria’s credit rating by S&P is B+ (stable) and BB- (also stable) by Fitch, while per capita income is $3,160.

Tax Environment

Nigeria’s tax regime and policy are an integral part of its overall fiscal policy and are critical to the nation’s aspiration of becoming one of the top 20 economies by 2020. Nigeria operates a “fiscal federalism,” whereby each of the three tiers of government, namely the federal government, state governments, and local governments, can impose taxes and levies as stipulated in the relevant legislation. Taxes due to the federal government (principally income tax on corporate entities and customs duties) are collected by the Federal Inland Revenue Service (FIRS), taxes due to state governments (mainly taxes on income of individuals) are collected by the relevant State Boards of Internal Revenue (SBIRs), while miscellaneous rates and levies are collected by the revenue agencies of local governments.

The tax regime is competitive, with a corporate income tax (CIT) rate of 30% and a capital gains tax (CGT) rate of 10%. Exploration and production companies are charged to petroleum profits tax (PPT) at a standard rate of 85% of chargeable profits (a reduced rate of 65.75% is applicable in the first five years of petroleum operations, when the company is yet to fully recover its capitalized pre-production cost). The PPT rate for companies operating in the deep offshore and inland basin areas under Production Sharing Contracts with the Nigerian National Petroleum Corporation is 50% flat for the contract area. Companies incorporated in Nigeria are subject to a tertiary education tax of 2% of their assessable profits, whilst companies in the telecommunications and financial services sectors pay an additional National Information Technology Development Fund levy of 1% on pre-tax profit.

The country currently has arguably the lowest value added tax (VAT) rate of 5% across Africa, which gives it a comparative advantage over countries like South Africa (14%), Mauritius (15%), Mozambique (17%), Ghana (17.5%), Angola (10%), Kenya (16%), Egypt (10%), and many other African countries. However, input VAT recovery is limited to direct production costs and goods purchased for resale.

Nigeria has a progressive personal income tax (PIT) system under which individuals are charged tax rates of between 7% and 24% of their chargeable income. The maximum effective PIT rate under the system is approximately 19%.

Nigeria’s withholding tax (WHT) regime applies to major forms of income, and ranges from 2.5% to 10%, depending on the nature of the transaction, the status of the beneficiary (i.e. whether individual or corporate body), and the existence of a double tax treaty (DTT) between Nigeria and the country in which the beneficiary is resident. Nigeria currently has DTTs with Belgium, Canada, China, Czech Republic, France, The Netherlands, Pakistan, Philippines, Italy (Air & Shipping Agreement only), Romania, Slovakia, South Africa, and the UK. The DTTs with Mauritius and South Korea have yet to be ratified by the Nigerian legislature.

In 2012, Nigeria issued Transfer Pricing (TP) Regulations, which require that transactions between related parties be conducted at arm’s length. The regulations also require taxpayers to prepare documentation sufficient to verify that the pricing of controlled transactions is consistent with the arm’s length principle. In addition, taxpayers are required to prepare TP compliance reports annually, and file annual TP declaration and disclosure forms with the FIRS with respect to all related-party transactions carried out during the relevant period.

Co-authored by Ayo Luqman Salami, Partner and Akinwale Alao, Manager, KPMG Advisory Services, Nigeria.

David Okwara

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