As countries find out new paths for growth, its tax regime, with other factors, influence its investment decisions.


6/14/20227 min read


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As countries find out new paths for growth, its tax regime, with other factors, influence its investment decisions. The need to attract Foreign Direct Investment (FDI) has resulted in tax competition among nations around the world. Many countries review their tax policies from time to time to reduce tax and fiscal burdens that might hinder investment into the country. Recently, the Nigerian Government has reviewed the tax laws to allign with global greatest practices to make doing business easy and remain tax competitive.

In sourcing for revenue from taxes, there ought to be a balance between pursuit of tax revenues and promoting a favorable investment environment. The Government should utilize the tax regime and other fiscal measures to create revenue that will improve Nigeria’s economic stability and also attract foreign direct investment (FDI) to the country.


Until recently, the Nigerian government relied solely on the oil sector while ignoring the development of other sectors. Regressive oil demand largely brought about by the Covid-19 pandemic and diminishing oil production have greatly frustrated the economy, increased the country’s debt profile and devalued the Naira.

Despite the negative turn of events, investment opportunities have increased for various other sectors of the Nigerian economy.

While the 2022 budget makes provision for social investment programs to attend to the poverty and unemployment challenges, the Government has also taken steps to improve the ease of doing business by making some laws to be in line with Global greatest practices. In 2020, the erstwhile Companies and Allied Matters Act (CAMA) – the principal statute governing all business forms and allied affairs was annulled and replaced. The new CAMA is aimed at easing regulatory requirements for companies, reducing the time and cost implications of company registration, removing administrative bottlenecks and increasing corporate form options.

The Finance Acts of 2019 and 2020 (“the Acts”) were also passed into law to greatly improve the Nigerian tax regime and administrative framework. The Acts polished a wide spectrum of our tax legislation, adjusting them to respond better to current issues, increase investor confidence in tax reform and reflect the reality of the economy. In particular, the Finance Act, 2020 was enacted as an important tool in improving the ease of doing business in Nigeria, enlarge the tax base, introduce response measures to the Covid-19 pandemic and bolster Nigeria’s fiscal profile. Embracing foreign exchange reforms and improving efforts to increase revenues will go a long way in achieving this.


Unfortunately, despite Nigeria’s cooperative efforts at improving tax collection and administration, the tax to GDP ratio is still around 6%; one of the lowest in the world.

Various factors like narrow tax base; low level of tax compliance; low taxpayer education; high opportunity cost of tax exemptions; and tax administrative inefficiencies have been identified as being responsible for Nigeria’s low tax to GDP ratio. The improvements to the tax laws caused by the Acts are targeted at handling some of these challenges.

The changes to the Federal Inland Revenue Service (FIRS) Establishment Act introducing the use of technology to automate the tax administration process which resulted in the unveiling of the FIRS TaxPro Max portal aimed at addressing the issues of lack of compliance and a narrow tax base. All companies are required to effectively use the portal to fulfil their tax compliance obligations easily and on time. It is hoped that the FIRS' efforts at digitalization through its virtual migration will reduce the administrative inefficiencies and the cost of tax collection. However, there have been some resistance by taxpayers that the free access to taxpayer's records granted by Section 26 (1)(e) of the FIRS Act is at logger heads with the right to privacy provided by Section 45 (1) of the Constitution and had introduced concerns about cyber security.

A notable inclusion to the tax laws is the introduction of Significant Economic Presence (SEP) which was formed to widen the Nigerian tax base to make available certain types of foreign service providers and companies that gain profits from Nigeria from remote services. The Companies Income Tax (SEP) Order 2020 posits foreign Companies providing digital, technical, professional, management or consultancy services. The provision for foreign companies that earn income from digital transactions to prepare special purpose financial statements (FS) and submit tax returns on Nigerian income may create some challenges. While subjugating foreign companies to tax on taxable profit ensures that only profitable companies are taxed, the FIRS would have to produce tools to confirm the authenticity of the income earned and expenses made in Nigeria. Foreign companies would also become liable to additional cost in preparing FS for Nigerian operations. Nigeria would also need to evaluate its unilateral approach to taxing income from digital transactions and impact on FDI. While the tax reform efforts of the Nigerian Government are to improve revenue collection, increased voluntary compliance has been shown to be more effective in fulfilling these objectives. Where enforcement drives are originated with improved transparency and accountability on government expenditure with palpable public benefits, more taxpayers will be willing to pay tax.

This will reduce administrative cost and improve tax to GDP ratio.


As a result of the scarcity and high mobility of investment capital, many countries have gone through various measures to ensure their tax systems are rich enough and provide enough benefits to attract FDI, without threatening the needed tax revenue needed for permanent development.

Some of the considerations are as follows:

a) Threshold for tax registration and reduction in tax rates

Before the enactment of the Acts, every company in Nigeria was liable to tax at 30% and was bound to pay companies income tax (CIT and value added tax (VAT). Now, companies with turnover below ₦25m are not liable to CIT and are not bound to file VAT returns. Companies with turnover between ₦25m and ₦100m are only bound to CIT at 20%, while companies with turnover above ₦100m are bound to tax at 30%.

The introduction of tax thresholds will greatly affect small and medium scale businesses and help tax authorities to prioritize compliance danger within the limited resources. Tax thresholds and different tax rates are in line with global greatest practices and are common in Africa. The change to the Nigerian tax laws in allowing varying tax rates based on turnover is an acceptable inclusion.

b) Double Tax Agreement (DTA)

Tax treaties are made by countries to mitigate the double taxation or non-taxation that may happen due to the domestic laws that exist in the country of origin of a foreign company or national and the host country.

Notwithstanding that the number of DTAs Nigeria has with other countries is mediocre being the largest economy in Africa, the economic benefits of the existing DTAs and how much they influence investment decisions (amongst other factors) are yet to be observed. Nevertheless, Nigeria may be able to possess some economic incentives as signatory to the African Continental Free Trade Area that provides for a “single market” window for African countries and better benefits to attract investments from other counties outside Africa.

c) Pioneer Status Incentive (PSI)

PSI was brought about by the Industrial Development (Income Tax Relief) Act to create an inflow of investment and foreign exchange to improve the Nigerian economy. The bonus is a three-year tax holiday from the Companies Income Tax, renewable for a further period of two years. It is given to Companies in Nigeria that carry out activities in approved pioneer industries or that manufacture pioneer products.

The concept of granting tax holidays to attract investment in specific sectors of the economy is well-known An important factor to note is the amount of tax revenues abandoned by the Government in providing incentives to taxpayers. A recent examination by the World Bank provides that tax incentives in developing countries usually end up being redundant i.e. most investments would have been carried out even without the existence of such benefits. Tax holidays alone may not attract the amount of FDI Nigeria needs to revive the economy and remain tax competitive. Ensuring an attractive investment climate to entice investors would need more focus on political stability, improved security and ensuring more skilled labor is assessable.

d) Certainty in Tax Administration

Last year, the Chief Judge of the Federal High Court (FHC) in Nigeria issued the FHC (Federal Inland Revenue Service) Practice Directions (Practice Directions), 2021, which was made to take effect on 1st June, 2021. Based on Order V Rule 3 of the Practice Directions, taxpayers are to pay 50% of amounts assessed by the FIRS in an interest yielding account of the FHC awaiting the determination of a case.

This created mixed reactions from stakeholders as certain provisions of the Practice Directions are argued to be ultra vires the powers of the FHC and may be unconstitutional given that Practice Directions cannot introduce new provisions that are inconsistent with existing laws.

The above and other seemingly unfair practices create uncertainty in tax administration and send different signals to intending investors. While there may be grey areas in the tax laws which are liable to diverse interpretation by the taxpayers and tax authorities, tax administration should be referred to the clear provisions of the tax laws and enforcement should be made without threat to the confidence taxpayers and investors have in the tax system.

e) Tax Amnesty

Previous efforts of the tax authorities to widen the tax base include the Voluntary Assets and Income Declaration Scheme (VAIDS) and Voluntary Offshore Assets Regularization Scheme (VOARS). Both schemes provided a period of tax amnesty to all taxpayers who were in default. All defaulting taxpayers who had failed to pay or under-declared their assets and tax liabilities were granted time allowance to come forward and regularize their records with the tax authorities. These taxpayers were stated to be free from prosecution and related penalties upon declaration.

While the tax authorities did generate some revenue from VAIDS, it failed to meet its target. Compared to similar amnesty initiative in South Africa which attracted over 3.3Billion Rands (USD 258.6 Million)11 , VAIDS generated 30 Billion Naira (about 8%) from its target of 350 Billion Naira12. There were also reports about the Executive Order 008, the legislation upon which the VOARS Scheme was premised being inconsistent with provisions of the extant tax laws and thus unenforceable. These schemes may have done little to improve taxpayers’ trust in the tax system and given the present trust deficit, it may be difficult for the tax authority to embark on future similar operations.

As the government seeks to strengthen the tax laws to boost tax administration, it is important to constantly review the effect on the economy and investment climate. It is hoped that actions taken by the tax authorities would align with the government’s objectives to boost the Nigerian tax regime.

Conclusion From the steps taken by the Nigerian government, it is evident that Nigeria’s tax regime contributes its quota in attracting FDI. While being tax competitive is very important, Nigeria’s macroeconomic and political issues including its burgeoning security challenges, among others also need to be addressed in providing an enabling environment for investors.

NB: This article is not a legal advice, and under no circumstance should you take it as such. All information provided are for general purpose only. For information, please contact



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