For over a decade, Nigeria, like so many developing countries, has been granting a number of tax incentives to multinational companies in a bid to attract foreign direct investment. Proponents of the incentives argue that the measures are vital to the development of the economy, while critics point to the glaring lack of evidence supporting these claims. As the Tax Justice Network develops its Corporate Tax Haven Index, we ask: are tax incentives serving the people or a few individuals?
Recently there seems to be a move towards finding a middle ground between the proponents of tax incentives, usually the organised business sector, and the opponents, the civil society organisations and campaigners. In March 2018, at a meeting of civil society organisations organised by Action Aid Nigeria, there was a heated discussion on the role of tax incentives in the development of Nigeria. Although the meeting was intended for the third sector, it also had in attendance representation from the organised private sector and the Federal Inland Revenue Service (FIRS). One of the aims of the meeting was to gauge the perception of stakeholders on the issue of tax incentives, to discuss and agree on certain issues, and to chart a course for further action.
The interesting thing about the discussion was the diversity that it had. For example, while the representatives from the third sector were sceptical about tax incentives in general, the representatives of the organised private sector were inclined towards a more positive view about tax incentives. They support the notion that some tax incentives are good, and one example they cited to that effect is that the domestic manufacturing sector in Nigeria will simply cease to exist without tax incentives. However, the scepticism of the civil society organisations may not be unconnected to the fact that there is currently little or no evidence that suggests that tax incentives are significant to development.
The tax incentives offered by the Nigerian government
Tax incentives are generally categorized into two: cost-based tax incentives (such as tax credits and accelerated depreciation allowances) and profit-based tax incentives (such as tax holidays or reduced tax rates). The types of incentives that come under these two broad categories can greatly vary based on sector, income type, business size, and business location. The incentives can be temporary or permanent and can offer partial exemption or full-exemption.
The IMF defines tax incentives as any special tax provisions that are granted to qualified investment projects or firms that provide a favourable deviation from the general tax code. Included in the examples given by the IMF in their definition are tax holidays, which are widely used in Africa and happen to be the most abused type of tax incentive in Nigeria in the form of pioneer status. The pioneer status is an incentive governed by the Industrial Development (Income Tax Relief) Act, Cap 17 Laws of the Federation of Nigeria, 2004, and it allows certain businesses a tax holiday for three years, which is renewable for another two. The abuse of the pioneer status incentive is partly due to the discretionary powers of the Executive which enables it to grant pioneer status without the need for approval from the National Assembly. The Nigerian tax system permits registered businesses to change their name or business, or even leave the country, after the expiration of their pioneer status which creates more risk for abuse. This, among other things, raises questions about the effectiveness of these so-called tax incentives and the resultant opportunity cost.
Digging deeper or digging our way out?
Studies suggest that tax incentives are generally considered to be the least important factors in making investment decisions in low-income countries, because the investments would have happened with or without them. Factors such as infrastructure, security and rule of law, to mention a few are ranked higher. Similarly, other studies confirm that tax incentives have more negative than positive impact on sustainable development in developing countries. Despite all the evidence and arguments on the ineffectiveness of tax incentives, the Nigerian government, through the Federal Ministry of Trade and Investment expanded its pioneer status regime by including 27 new industries. Although the Nigerian Government reviewed the list of companies and sectors eligible for Pioneer status in 2017, the review was premised on the notion that the businesses were mature enough not to need tax incentives, rather than carry out a thorough analysis on whether the tax incentives are at all useful. Furthermore, last year, the Federal Inland Revenue Service, together with the Nigerian Investment Promotion Council (NIPC) launched the Compendium of Tax Incentives to promote Nigeria as an attractive investment destination using tax incentives. So on the one hand, while Nigerians have been inundated with talks about how the government intends to broaden the tax base and reduce its reliance on oil revenue and make taxation the source of development, the government on the other hand is signing away its tax revenues without any evidence that suggests that a careful cost-benefit analysis has been carried out to ascertain if the tax incentives are going to be beneficial or not. This is despite the recommendations from the newly reviewed National Tax Policy which states that:
“Any incentive to be granted should be broad, sector-based, tenured and transparent; Implementation should be properly monitored, evaluated, periodically reported and kept under review; Revenue forgone from tax incentives or concessions should be quantified against expected benefits and reported annually. Where the benefits cannot be quantified, qualitative factors must be considered; and tax policies on investments should not promote monopoly such as entry barriers or otherwise prevent competition.”
There is no evidence that shows that significant efforts towards the above have been taken, notwithstanding, Nigeria is a country where close to 70 percent of its population live below the poverty line and where, according to the UNICEF, 10.5 million children are out of school.
Perhaps another thing that complicates the issue of tax incentives in Nigeria is the fact that so many agencies are involved in its administration, which leads to the duplication of duties and lack of coordination that opens up avenues for abuse. So even if the said incentives were confirmed to be beneficial, it remains unclear if the existing complicated framework will be efficient and effective in implementation. One other concern is that the government has also never made transparent the cost of the incentives it grants, which may be attributable to the complex nature of the tax incentives framework. One can deduce that the government’s actions are not ill-conceived, however, the same cannot be said about the quality of the decisions.
The Corporate Tax Haven Index
Understanding the harmful nature of these tax incentives is part of the motivation behind the Corporate Tax Haven Index that we are developing at the Tax Justice Network, with tax incentives being a significant portion of the work. The Corporate Tax Haven Index will rank jurisdictions that contribute most to the global race to the bottom in corporate taxation. For tax incentives specifically, the aim is to analyse the problematic nature of tax incentives and how they contribute to the race to the bottom. This is an important step in addressing the inefficiency of tax incentives in Nigeria and other developing countries, because it will greatly aid in the pursuit of global tax transparency and fairness.
As a country that is desperate for funding development, with one of the lowest Human Development Index rankings in the world, and one of the lowest tax to GDP ratios, it is critical that we re-evaluate our tax incentives framework. For every tax we give away, we may be giving away healthcare, security, good roads, improved welfare for the civil service and so much more. It is vital that the Nigerian Government carries out a thorough cost-benefit analysis on tax incentives and make transparent the opportunity cost of these incentives such that it will be clear if the incentives are serving the people or a few individuals. The discretionary powers given to the executives should be reviewed so that if and when the government deems it necessary to grant any form of incentives, they should be based on evidence, approved by the National assembly and with the active participation of relevant stakeholders. Lastly, the government should implement the recommendations of the National Tax Policy to ensure that tax incentives, if and when granted achieve their purpose.