Time to Invest!


KPMG outlines Nigeria's business and tax environment, highlighting the country's key sectors.

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.

Significant Sectors of the Economy

Nigeria’s economy is largely service-based as the Services sector accounts for over 50% of total GDP. One of the biggest contributors to the Services sector is Information and Communications, which accounts for about 10% of the total output. Agriculture accounts for about 23% of GDP, while Industries contributes about a quarter of the total output. The two major segments of the Industries sector are Crude Oil and Natural Gas (accounting for about 10% of GDP) and Manufacturing (accounting for about 9% of GDP).

Key Investment Incentives

(i) On income

• Nigerian companies with a minimum of 25% imported foreign equity are exempt from payment of minimum tax (tax paid by a company that has no taxable profit or whose taxable profit is lower than the minimum tax).

• Tax exemption of between 40% and 100% of the interest earned on foreign loans advanced to companies in any industry, where the terms and tenor of the loan satisfy the conditions specified in the law.

• The WHT deducted from dividend, interest, rent, and royalties earned by foreign companies and remitted to the FIRS, is the final tax on the income. A 10% WHT rate ordinarily applies, but this is reduced to 7.5% for bona fide recipients in countries that have DTTs with Nigeria.

• Companies set up as approved enterprises in any of the free trade zones in the country are exempt from federal, state, and local government taxes, as well as foreign exchange regulations.

• Exemption of profits of companies investing in gas utilization from income tax for up to five years or, alternatively, up to 145% capital allowance on plant and machinery.

• Income/interest earned from federal government short-term securities is exempted from CIT and PIT. Income earned from bonds issued by the federal, state, and local governments and corporate bodies (including supra-nationals) is also exempted from both taxes. Proceeds of disposal of bonds, stocks, and shares are VAT-exempt and CGT-exempt.

• Tax losses can be carried forward to future tax years without any restrictions (other than tax loss incurred during the commencement period, which has a four-year timeline after which it lapses).

(ii) On qualifying expenditure/assets

• Investment allowance of 10% is granted on qualifying expenditure on plant and equipment, in addition to the general capital allowances (CA) granted on all classes of qualifying expenditure.

• CA of 95% in the first year with respect to plant and machinery purchased to replace old ones.

• No restriction is applied on the CA claimable by companies in the manufacturing and the agro-allied industries.

• Rural investment allowance of between 15% and 100% of the cost incurred in providing facilities/ infrastructure in rural areas are granted to the qualifying companies.

(iii) Pioneer incentives

Under certain circumstances, pioneer status may be granted to companies (including foreign-owned companies registered in Nigeria) involved in designated pioneer industries and/or producing pioneer products. The fiscal incentives available to pioneer companies include:

• Exemption from income tax for three years, with a possible extension for additional two years.

• Capital expenditure on qualifying assets incurred during the tax relief period is treated as having been incurred on the first day following the tax relief period. Pioneer companies are, therefore, able to claim CA fully on such assets post-pioneer.

• Tax-free dividends during the tax relief period.

• Losses during the tax relief period may be set off against profits after the end of the period.

Why invest in Nigeria?

• Largest economy in Africa with a large, literate, and youthful population, and a relatively cheap workforce. Middle-class households account for about a quarter of the total population.

• With the privatization of the electricity/power sector and successful unbundling of the state energy monopoly (Power Holding Company of Nigeria), huge opportunities exist in the power generation, transmission, and distribution space. Current demand is estimated at 12,800MW, while the country only generates about 4,360MW. This huge gap needs to be filled to assist the country in realizing its huge economic potential.

• The country currently imports a significant portion of its petroleum products despite being a huge crude oil producer. The call for building modern refineries to complement existing old ones cannot be made louder than now—significant (foreign and local) investment is, therefore, needed. However, the federal government must be bold enough to deregulate and liberalize the downstream petroleum sector for this to happen.

• Undeveloped rail infrastructure and ongoing plan to reform the sector and revive the nation’s rail network. The road transport network with 21.3km of road per 100sqkm is above the African average of 6.84km per 100sqkm. However, quality needs improvement through expansion, upgrade and rehabilitation of existing roads, and construction of new ones—all these present significant opportunities for FDI.

• The Nigerian government has expressed its commitment to diversify the economy with emphasis on agriculture and industrialization, amongst others.

• The country has a competitive tax regime for companies and individuals. There have been improvements in electronic tax payment system in recent years, thus increasing the ease with which taxpayers pay taxes to the government. The planned introduction of the online Integrated Tax Administration System by the FIRS is expected to further improve tax administration in the country.

• Corporate governance and eradication of corruption are also at the heart of the government’s efforts at sanitizing the business and economic environment and improving the ease of doing business in the country. Key institutions responsible for these are being strengthened and supported to facilitate the task, while there appears to be no “sacred cows” in the war against corruption.

• Nigeria has one of the largest stock exchanges in Africa and consistently remains one of the fastest growing mobile telecommunication markets in the world.

• Above all, the country has had a stable democracy since 1999 with a smooth and peaceful change of government in May 2015.


Nigeria’s position as the largest economy in Africa and 21st largest in the world, its consistent economic growth, huge population, competitive tax landscape, abundant natural resources and tropical climate, and even its infrastructural challenges, provide significant opportunities for investors.

The country’s huge solid minerals and natural gas reserves, for instance, are largely untapped, just as is its potential for generating electricity from renewable energy sources. Opportunities are plentiful in the agricultural, petroleum refining, transportation, health, manufacturing, insurance, tourism, automotive, and real estate sectors.

Nigeria will require significant FDI as it works toward diversifying its economy over the next decade. The year 2016, therefore, presents a unique chance for discerning investors to key into the numerous opportunities in the country and partner with it to achieve its national aspirations. If not in Nigeria, where else in Africa?

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

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