By Bisi Akodu*
The Nigerian Government has over the past twenty years liberalized its hitherto strict laws and regulations relating to foreign investment in Nigeria. Nigeria now offers foreign investors various incentives for the much needed capital investment required for the development of public sector infrastructure such as roads, power, water and transport as well as private sector initiatives in developing manufacturing and agro-allied industries. Macro-economic theory postulates that economic development in a country depends to a large extent on the rate of investment in that country which is said to influence the rate at which capital stock increases, which brings about economic growth[1]. Since investment in the private sector acts as a catalyst to economic growth it stands to reason that the creation of more viable industries creates new job opportunities, new wealth resulting in an increased Gross Domestic Product (GDP).
Governments, around the world, have accepted that to promote and encourage Foreign Direct Investment (FDI), incentives must be given to attract quality investments. These incentives are usually by way of liberalizing strict investment laws and cumbersome procedures and by granting tax holidays to certain industries that would promote and increase the country’s GDP. Government’s inability to successfully manage certain sectors of the economy has been demonstrated by its failure to maintain sustainable infrastructure in the terms of power, water and transportation all of which are desperately needed to attract investment in some sector specific industries. The Nigerian Government’s policy has for some years been geared towards encouraging foreign investment through legislation. However, investment in the private sector has not been as robust in terms of FDI. Admittedly, foreign investment in developing countries cannot be divorced from political and economic considerations. It could be argued that in most developing countries government policies tend to frustrate new legislative initiatives with the result that the point of legislation is totally defeated.
As part of the government’s effort to provide an enabling environment that is conducive to the growth and development of industries and that will encourage FDI, fiscal measures have been provided for deductions and allowances in the determination of taxable income of manufacturing companies. This has been achieved through tax relief by way of Pioneer Status, tax relief for research and development[2]. For industries that attain minimum raw material utilization such as Agro[3], Agro-Allied[4], Engineering[5] and Chemical[6] the tax concessions are very encouraging. Export orientated industries that export more than 6 percent of their products will be granted a 10 percent tax concession for 5 years.
In this paper we will identify and discuss the laws regulating foreign investment in Nigeria and give a general assessment of the adequacy of Government’s bid to improve the investment climate.
Laws regulating Foreign Companies Investing in Nigeria
Foreign companies wishing to invest in Nigeria subject to the area of business they are in, may have to comply with the following laws and regulations:
The Companies & Allied Matters, Act Cap. C 20, LFN, 2004
The Nigerian Investment and Promotion Commission Act, Cap N117, LFN 2004
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, CAP. F.34, Laws of the Federation of Nigeria
Companies Income Tax Act
National Office for Technology Acquisition Promotion Act, Cap N62, LFN, 2004
Stamp Duties Act, Cap S8, LFN 2004
Industrial Development (Income Tax Relief) Act, Cap 17, LFN 2004
Industrial Inspectorate Act, Cap 18,LFN, 2004
Rules and Regulations of the Securities & Exchange Commission and the Nigerian Stock Exchange
Education Tax Act, 2011
Petroleum Profits Tax Act
Withholding Tax Regime
Capital Gains Tax Act
Scope of Legislation
Every foreign company having the intention of carrying on business in Nigeria, shall take all steps necessary to obtain incorporation as a separate entity in Nigeria under the Companies and Allied Matters Act, 2004 (‘CAMA’)[7]. It has been argued that a foreign entity that intends to carry on business on a continuous basis rather than a one off transaction must comply with the CAMA provisions.
Foreign investment in Nigeria is encouraged; the provisions of the Nigerian Investment and Promotion Council Act, 2004 (‘NIPC Act’) provides that a non-Nigerian may invest and participate in the operation of any enterprise in Nigeria[8]. An enterprise has been classified as an industry, project, undertaking of business or business expansion of that industry, project or business or any part of that industry, project or business. The NIPC Act was enacted to encourage foreign investment in Nigeria and protect foreign investment from government acquisition, whilst guaranteeing repatriation of capital, profit and dividend. The government in addition to safeguards against it expropriating foreign businesses provided in the NIPC Act is prepared to enter into investment protection agreements with foreign enterprises wishing to invest in Nigeria.
Similarly the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, 2004 (Forex Act) permits any person to invest in any enterprise or security with foreign currency or capital imported through an authorized dealer (a bank) either by telegraphic transfer, cheque or other negotiable instrument and converted into Naira in the market[9]. It should be noted that where a foreign enterprise intends to buy securities in a Nigerian enterprise, in convertible foreign currency, such transaction must be completed through the Nigerian Stock Exchange.[10]Such foreign currency imported into Nigeria for investment is guaranteed unconditional repatriation in terms of capital, profit and dividend. The Forex Act also gives authority to the Central Bank of Nigeria (‘CBN’) to make regulations and issue directives[11] for the regulation of transactions in foreign exchange.
The Companies Income Tax Act makes provision for the imposition of tax upon profits of all companies incorporated in Nigeria with the exception of those engaged in the petroleum industry, in respect of any trade or business, dividends, interests, royalties, discounts, charges or annuities etc. accruing in, derived from, brought into, or received in Nigeria. Non-resident (foreign) companies that earn or derive income from Nigeria are subject to Company Income Tax charged at 30 percent.
The NOTAP Act, 2004was enacted to, inter alia, monitor on a continuous basis the transfer of foreign technology to Nigeria. The National Office of Technology Acquisition and Promotion (NOTAP) has the function of registering contracts or agreements relating to the transfer of foreign technology in the areas of trademarks, patented inventions, supply of technical expertise, supply of engineering drawings, supply of machinery and plant and the provision of operating staff, managerial assistance and the training of personnel.
The Act provides for the payment of royalties and other technology payments for the services of foreign technical assistance for know-how, patents and other industrial property rights at the rate of 1% to 5% for the value of the IP. Technical service fees range from 1% to 5% of net sales; management fees for management services range between 2% to 5% of profit before tax[12]; Payments for consultancy services must not exceed 5% of the project cost.[13]
The Stamp Duties Act provides for the administration of stamp duty. Stamp duties are payable on documents and the rates of payment of this duty depends on the document in question. The Memorandum and Articles of Association of a corporate entity will attract an ad valorem stamp duty which is based on the authorized share capital of the entity. Where a corporate enterprise has foreign shareholders, the minimum authorized share capital permitted is Ten Million Naira[14].
The Industrial Development (Income Tax Relief) Act provides for the designation of pioneer industries and pioneer products and establishes the procedure for applying for a pioneer certificate. The Act provides a ‘tax relief period’ for pioneer companies and restricts the distribution of dividends and bonus issues during the tax relief period.
The Nigerian Investment Promotion Commission (NIPC) released pioneer status incentive regulations in January 2014. The Pioneer Status Incentive Regulations provides additional conditions to those contained in the Industrial Development (Income Tax Relief) Act for processing an application for Pioneer Status Incentive. It provides an update on the list of requirements to be provided by applicants in addition to the application forms. More prominent in the Regulations, is a service charge of 2% based on estimated tax savings to be paid to the NIPC. The Regulations do not address the controversial issue of pioneer status incentive to companies other than those subject to tax under the Companies Income Tax Act.
The Industrial Inspectorate Act establishes the Industrial Inspectorate Division (IID) of the Federal Ministry of Industries for the purpose of investigating and following the undertakings of industries including investments and other related matters. The IID investigates new and existing undertakings involving capital expenditure for the purpose of determining the investment valuation of the undertaking.
Under the old Securities & Exchange Commission Act, 1988 all foreign companies intending to invest in Nigeria must first obtain SEC<script><script><script><script><script>[15] approval. This process was long drawn and could take between 6 months to 1 year to obtain which meant that until approval a foreign shareholder could not subscribe to shares in the company[16]. The requirement now is that where a foreign investor intends to take up 30% or more of the shares of the company SEC approval must be sought, where the shares have been transferred to the investor SEC would treat the matter as an application for ratification.
The present rules and regulations of the Securities & Exchange Commission and the Nigerian Stock Exchange[17] regulate foreign investment in the Nigerian capital market.
An Education tax of 2% of assessable profits is imposed on all companies incorporated in Nigeria. This tax is viewed as a social obligation placed on all companies in ensuring that they contribute their own quota in developing educational facilities in the country.
Companies engaged in petroleum exploration and production operations in Nigeria (up-stream) are liable to Petroleum Profits Tax. Every company engaged in petroleum operations is obliged to prepare and submit annual returns as specified in the Act within five months of the end of each assessment year. Where the actual tax liability arising from the annual returns exceeds the cumulative estimated tax, a 13 month installment is payable.
Withholding Tax is a mechanism for the collection of other taxes and has no legislation in Nigeria. The application of Withholding tax is found in other tax typesi.e Section 81 of the Companies Income Tax Act, Section 54 of the Petroleum Profit tax Act etc. Withholding tax is paid or deducted at the point of making payment. WHT is withheld by the payee and the net amount is paid to the beneficiary. The amount deducted is remitted to the Federal Inland Revenue Service (FIRS) through a designated bank in the name of the person subject to the deduction.
All companies incorporated in Nigeria which earn any capital gains or gains from disposal of assets are liable to Capital Gains Tax Act. Withholding tax covers Options, debts and incorporeal property.
Foreign Investment Procedure in Nigeria
All non-Nigerian enterprises intending to invest in Nigeria must register with the NIPC after incorporation under the CAMA[18]. Upon registration with the NIPC all approvals for the Business Permit, Expatriate Quota, Pioneer Status and other documents from any government agency or department will be facilitated with the assistance of the NIPC. It should be noted that the Ministry of Interior has a duplicating role in issuing Business Permits and Expatriate Quota and a separate department has been set up under the Immigrations department for the issuance to foreign expatriates of the Combined Expatriate and Residents Permit and Alien Card (CERPAC).
Capital Importation (Cash)
Investment of foreign capital (cash) is conducted through an authorized bank, which has been licensed by the Central Bank of Nigeria to carry on business as a bank. Funds can be transferred to Nigeria by telegraphic transfer, cheque, or other negotiable instrument and converted into the Naira in the market as provided under the Forex Act.
The recipient bank of the transferred funds is required to issue a Certificate of Capital Importation (CCI) to the investor within twenty-four hours. The bank is obliged to make returns to CBN within forty-eight hours of receipt of the funds in accordance with CBN guidelines. It is important that the CCI contains a brief description of what the funds would be applied for be it shares, securities or loan etc.
Although the law has set down this rigorous procedure, in practice these timelines of reporting back and forth are hardly met. The practice for some years had been that the imported funds will be placed in a domiciliary account of the recipient/beneficiary company so it can be utilized as needed. The operation of the ‘Dom account’ ensured that exchange rate losses encountered when converting foreign exchange to Naira are minimized or completely defeated.
Capital Importation (Non-cash)
Capital importation other than cash such as machinery, technology or other transferrable assets are required to be valued and registered as foreign capital[19]. The NOTAP Act requires that all agreements or contracts for the transfer of foreign technology to Nigerian enterprises be duly registered with the body. For Non-cash importation the Industrial Inspectorate is responsible for assessing the valuation of any enterprise in this regard. It has been suggested[20] based on the absence of any provisions in this regard in the NIPC Act and the Forex Act that valuation should not be required where foreign investment is other than cash.
Tax Incentives
The advantages of the role of tax incentives to the foreign investor cannot be ignored or underplayed. Although some exponents argue that these incentives are open to abuse, generally they act as a stimulant to investment due to the forecast that increased profits will be available for distribution as dividends or for reinvestment.
Companies incorporated in Nigeria with foreign ownership may be eligible for the following incentives[21]:
Pioneer status (tax holiday)
Public companies engaged in pioneer industries are by virtue of the Industrial (Income Tax Relief) Act, 2004 entitled to the grant of a Pioneer Status. The grant of a Pioneer Status certificate entitles the pioneer company situated anywhere in Nigeria to a tax holiday of up to 5 (five) years, in respect of industries located in disadvantaged areas a 7 (seven) year tax holiday may be granted. In practice the procedure for obtaining the PS certificate is time consuming and tedious and the grant has certain limitations that act as a disincentive rather than incentive[22].
Dividends receivable by non-residents
As we have discussed earlier a foreign investor can remit dividends to non-resident shareholders. Dividends in this regard will attract a 10 % (ten percent) withholding tax at source.
Concessions on raw material
The Government has over the years encouraged the manufacturing sector by a regime of tax credits on the use of locally sourced raw materials. A tax credit of 20 percent is available to industries that attain a minimum level of local raw material utilization which are sector specific as follows: –
Agro-allied industries – 70%
Chemical industries – 60%
Engineering industries – 60%
Petrochemical industries – 70%
Tax relief for Research and Development
Where Research and Development activities are connected to a Nigerian business from which income and profit is derived, such business can claim up to 120% of its expenses on Research and Development which will be tax deductible. For Research and Development of local raw materials for use in the business, 140% will be tax deductible.
Capital Allowances
The government grants capital allowances in respect of depreciable assets. The amount of capital allowance in any year of assessment is capped at 75% of assessable profit in respect of manufacturing enterprises and 66% in other industries, except agro-allied industries which are unaffected. Where leased assets are employed in agro-allied industries 100% claim on capital allowance is possible with an additional 10% in the case of agricultural plants and equipment.
These allowances are available to both private and public companies.
Divestment of Foreign enterprises
A foreign investor may wish to close, sell or spin-off a business enterprise or business subsidiary in Nigeria. This may be born out of the need to eliminate unprofitable or unmanageable operations; to obtain more funds or liquidity through a good sale or to break the company up into more profitable units, believing that the break-up value may exceed the value of the whole company.
The NIPC Act provides for repatriation of capital, profits and dividends by the foreign entity (net of all taxes) in cases of divestiture. Where a foreign entity decides to divest of its interest in Nigeria various concerns regarding the realization of the sale proceeds would be of vital importance to the sale, such as tax considerations etc.
The CBN lays down guidelines not only for the repatriation of profits and dividends to foreign shareholders but also for repatriation of capital upon divestment.
Procedure for Divestment (withdrawal of investment)
Applications for divestment are processed through the banks usually where the investor’s domiciliary account is operated. ‘Form A’ is filled and submitted to the bank with a copy of the divestment (sale) agreement, copies of certificate (s) of capital importation, evidence that the applicant has sold/transferred ownership in the Nigerian entity and evidence from an independent valuer as to the valuation of the interest sold.
A question that is often asked is whether the CCI is limited to the amount of equity capital invested in the Nigerian entity, that is to say can the foreign investor repatriate more than the amount that is shown on the CCI?
It should be noted that the CCI covers both cash in terms of capital and non-cash assets such as plant, machinery and stock-in-trade that are valued in Naira. In most instances where the revenues generated from a business entity surpass the amount that was invested in the entity the investor can be assured that it can repatriate in excess of the amount indicated on the CCI.
Where a dividend is to be distributed to a holding/parent company that is non-Nigerian the CAMA provides that dividends are payable to shareholders out of the distributable profits of the company[23]. Dividends are only payable out of the following distributable profits: –
Profits arising from the use of the company’s property although it is a wasting asset
Revenue reserves; and
Realized profit on a fixed asset sold, but where more than one asset is sold, the net realized profit on the assets sold.
Where the proceeds/income from the sale are generated in Nigeria a withholding tax of 10 per cent will be paid, in Nigeria to the Federal Inland Revenue Service, on any dividends to be distributed.
Commentary
Apart from the oil/petroleum sector, Foreign Direct Investment in Nigeria has been poor. Initially the restriction of the indigenization laws of the mid ‘70’s closed Nigeria’s gates to investment opportunities. Despite the liberalization that ensued by the enactment of the NIPC Act, Nigeria continues to attract low FDI in manufacturing and other sector specific industries. The United Nations Conference on Trade and Development (UNCTAD)[24] investment policy review has proposed various recommendations including the need for a National Investment Policy that would lead to the growth of non-oil sectors like agro-allied industries and manufacturing.
Improving the regulatory framework for FDI the Government has to urgently address the need for sustainable infrastructure, especially energy and power that will attract investors in the manufacturing sector. Mitigating factors that account for low FDI include corruption and inconsistent policies regarding foreign investment. In the case of the latter, government policies on FDI have been somewhat consistent since adopting democracy in the 1990s. However, despite political drawbacks Government policy is geared towards attracting FDI and its benefits to the economy, hence a Presidential Committee was set up under the last government to review tariffs and fiscal incentives.
It was earlier mentioned that foreign investment in developing countries could not be divorced from political and economic considerations. Concerns about investment and environments and perception of political risk often inhibit foreign direct investment, with the majority of flows going to a handful of countries and leaving the world’s poorest economies largely ignored. This is where the Multilateral Investment Guarantee Agency (MIGA) comes in very handy. As a member of the World Bank Group, MIGA’s mission is to promote foreign direct investment into developing countries to help support economic growth. It does this by providing political risk insurance (guarantees) to the private sector and dispute resolution services for guaranteed investment to prevent disruptions to developmentally beneficial projects. Investors who are skeptical about investing in countries like Nigeria because of the political climate are advised to make the most use of this agency.
The Nigeria Investment Promotions Commission provides a one-stop center (OSIC) for foreign investors wishing to do business in Nigeria. The NIPC Act provides that a foreign investor shall be guaranteed unconditional transferability of funds in freely convertible currency of dividends or profit (net of taxes) attributable to the investment. Payments in respect of loan servicing where a foreign loan has been obtained, remittance of proceeds (net of all taxes)and other obligations in the event of a sale or liquidation of the enterprise or any interest attributable to the investment.
The UNCTAD Blue Book on Best Practices in Investment Nigeria wrote that “the NIPC is officially part of the Federal Ministry of Commerce and Industry. However, recognizing the strategic role of investment in Nigeria’s economy, it is important that an investment promotion agency (IPA) has an institutional setting that enables it to effectively carry out its investment policy advocacy function, a function that is recognized in other countries as a crucial element to attract FDI and benefit from it. Furthermore, it is often not understood that different ministries also have a stake in meeting a country’s strategy on investment promotion. To this end, a more efficient reporting arrangement is being suggested under which NIPC and OSIC could report directly to the Presidency, specifically the Vice-President, who is responsible for coordinating economic affairs”.
Although the government is geared towards an enabling environment for FDI there still are those constraints that can only be remedied by government policy backed by legislation. Foreign investors will need to be assured that the mechanism for dispute resolution will not kill its investment but provide a timely solution to any commercial dispute. Generally, parties to a contract can decide what laws they want to govern their business relationship thus the law that governs a transaction is subject to the contractual agreement between the parties. However, tax, immigration, land matters, security over assets and bankruptcy are subject to Nigerian legislation.
*Mrs. Akodu is a partner at Olisa Agbakoba Legal heading its Corporate/Commercial and Public Sector Group.[1] This is a simplistic analogy[2] 120 percent on research & development are tax deductible provided that the activities are carried out in Nigeria and connected to the business for which the allowance was granted[3] 30% Tax concession[4] 70% Tax concession[5] 63% Tax concession[6] 60%[7] Section 54 CAMA[8] Section 17 NIPC Act[9] Section 26 Forex Act[10] Section 21(2) NIPC Act[11]CBN Existing Monetary Policy Measures were modified for fiscal years 2010/2011[12] Where profit is not expected during the start off period of the business, fees ranging from 1% to 2% of net sales will be applicable for the first 3-5 years.[13] Lump sum payments are permitted in line with international technology market prices[14] Roughly USD5,000[15] The Securities and Exchange Commission is the apex regulatory authority for the capital market in Nigeria[16] The practice was to apply for a ratification, but often what was ratified was different from what was applied for[17] The NSE is a self-regulating body[18] The non-Nigerian enterprise may be registered as a private limited liability, a public limited liability, unlimited liability, limited by guarantee, partnership, sole proprietorship and incorporated trustee (charity)[19] By virtue of the NOTAP Act and the Industrial Inspectorate Act[20] Legal Aspects of finance in Emerging Markets by Dr. Koyinsola Olaniwun Ajayi p 64[21] This list is not exhaustive. Other incentives include (i) re-investment concessions (ii) investment in infrastructure (iii) interest on foreign loans (iv) concessionary rates of import duty on raw materials etc.[22] A pioneer company is restricted from carrying on other business/trade during the holiday period other than those of pertaining to pioneer status. [23]CAMA Section 379(5)[24] The UNCTAD Blue Book on Best Practices in Investment Promotion and Facilitation in Nigeria
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