National Tax Policy Draft Updated)

Draft Document on the
National Tax Policy

DRAFT 1.1
(Revision Date: July 16, 2008)
Presentation by the Presidential Committee on National Tax Policy
ii Updated as at 16th July, 2008

Draft National Tax Policy
Executive Summary
The National Tax Policy provides direction for the future of the Nigerian tax system in
order to help stimulate the economy in a way that will be of benefit to all Nigerians. In
achieving this goal, this document provides a set of guiding principles for all taxation in
Nigeria. It shall provide a stable point of reference for all stakeholders in the system and
a standard on which they would be held accountable. The following points are the
highlights of this document.
• The overriding objective of the National Tax Policy is to provide a stable point
of reference for all Stakeholders in the country on which they shall be held
accountable as this will facilitate economic growth and development.
• The taxes in the Nigerian tax system shall be few in number, broad-based
and high revenue-yielding.
• The overall Nigerian Tax System shall be fair, so that similar cases are
treated equally while different cases are handled based on their respective
peculiarity.
• There shall be a shift in the focus of the tax system from direct taxation to
indirect taxation. Nigeria should seek to have low rates of Companies Income
Tax and Personal Income Tax by international comparison. This would then
be accompanied by a gradual increase in the rate of Value Added Tax (VAT).
An increase in the emphasis on VAT and Customs duties should have an
upward effect on the country’s stable revenue base, at least from the
perspective of the ease of collection and yield.
iii Updated as at 16th July, 2008

• Internal multiple taxation by the various tiers of Government on income,
property, imports, production and turnover should be avoided.
• The Nigerian tax system should minimise and streamline the number of tax
incentives and restrict their use to instances where they can help to achieve
the national objective of building an efficient tax system that encourages
voluntary compliance that cannot be achieved more efficiently in any other
way.
• The Ministry of Finance should be the body charged with providing oversight
function over the activities of the Tax/Revenue Authorities in Nigeria, as well
as being the sole authority responsible for Coordination of all inputs into
national tax policies, including the drafting of any amendments to laws or
legislations on taxation and revenues. Tax policy formulation must be the joint
responsibility of FIRS, Customs, NPC, NNPC and other Agencies.
• The power to impose, increase, reduce, vary or cancel any rate of tax should
be vested on the National Assembly with respect to all tax laws from the
Executive.
• The Joint Tax Board (JTB) should be strengthened as an Institution for the
coordination of Personal Income Tax administration across Nigeria. By giving
it legal powers to function as a policy making body for those taxes for which
the administration is split across States, rather than merely an advisory body,
will ensure an increase in collection efficiency.
• The Nigerian Tax System shall be subject to comprehensive review every

three (3) years. This review should not only be restricted to the existing tax
legislations i.e. CITA, PPTA, PITA, VATA, CGT etc; but cover all aspects in
relation to tax policy, administration and laws.
iv Updated as at 16th July, 2008

• Nigeria shall ensure that all the international tax obligations contracted by it
are respected. Nigeria shall also continue to pursue and expand its frontiers
on international tax treaties.
• Tax shall be collected only by career tax administrators, who are public
servants, and not by Consultants or Agents in ad-hoc capacity.
It is expected that the National Assembly shall be the guardian of Nigeria’s National
Tax Policy. Furthermore, after the approval of Nigeria’s National Tax Policy by the
Federal Executive Council, following consultations with the National Economic
Council (NEC), the Policy shall be implemented administratively, pending enactment
by the National Assembly and eventual inclusion in the constitution
v Updated as at 16th July, 2008

Sections Pages
1. Introduction 1-2
2. Objectives of the Nigerian Tax System and the features

of a Good Tax 3-7
2.1 Objectives of the Nigerian Tax System
2.2 Features of a Good Tax System in Nigeria
3. Stakeholders in the Nigerian Tax System 8-13

3.1 Interrelationship between the Stakeholders in the
Development of a Good Tax System.
3.2 The Roles of the Stakeholders
in Developing a Good Tax Culture in Nigeria
3.3 Guiding Principles for all Stakeholders in the
Administration of Taxes in Nigeria
4. Policy and Administration 14-20

4.1 Funding of the Tax and Revenue Authorities
4.2 Capacity Building and Staff Training
4.3 Operation and Funding for Tax Refunds
4.4 Taxpayer Education
4.5 Self-Assessment
4.6 Tax Registration
4.7 Periodic Review of Existing Tax Laws and Legislations
4.8 Introduction of additional taxation
4.9 Power to vary the rates of tax
4.10 A shift away from direct taxation to indirect taxation
4.11 Centralisation of Revenue Authorities and the
Derivation Principle
5. Using the Tax System to Create Competitive Advantage 21-24

5.1 Reduction in the number of Effective Taxes
5.2 Internal Multiple Taxation
5.3 International Obligations and Double Taxation
Negotiations
5.4 Tax Incentives
6. Conclusions 25-26
vi Updated as at 16th July, 2008

Appendices
Appendix 1: Comparative Tax Rates in selected African Economies 27
Appendix 2: Strategy for Implementation of the Proposed Tax Policy 28-42
Appendix 3: Assessment of Tax Incentives 43-51
Appendix 4: Linkages for Effective Tax Policy 49
vii Updated as at 16th July, 2008

CHAPTER ONE
INTRODUCTION
The National Tax Policy provides a set of rules, modus operandi and guidance to which
all stakeholders in the tax system will subscribe. In line with the Federal Government’s
economic reform agenda, the Federal Ministry of Finance, in collaboration with the
Federal Inland Revenue Service has commenced the process of reform in the system of
taxation in Nigeria. The development of the National Tax Policy is a crucial aspect of
the reform process.
The current reform process of the Nigerian Tax System commenced on 6th August 2002
when the Federal Ministry of Finance inaugurated a Study Group which examined the
Tax system and made appropriate recommendations to entrench a better Tax Policy
and improve Tax Administration in the country. The Study Group submitted its report in
July 2003.
Thereafter, a private sector-driven Working Group was constituted on 12 January 2004

to review the recommendations of the Study Group. Both the Study and Working
Groups’ recommendations were further reviewed and commented upon by various
stakeholders. Both groups addressed macro and micro issues in tax policy and
administration. Among the macro issues discussed were the drafting of a National Tax
Policy, Taxation and Federalism, Tax Incentives and Tax Administration generally.
A clear outcome of the various meetings and consultations was a general agreement
that Nigeria is in urgent need of a National Tax Policy which will prescribe a set of
guiding principles and also provide a stable point of reference for all stakeholders in the
country and on which they shall be held accountable.
1 Updated as at 16th July, 2008

To this end, a sub-committee was commissioned to provide a blue-print of the National
Tax Policy document for onward transmission to the Federal Ministry of Finance.
It is expected that the National Assembly shall be the guardian of Nigeria’s National Tax
Policy. Furthermore, after the approval of Nigeria’s National Tax Policy by the Federal
Executive Council, following consultations with the National Economic Council (NEC),
the Policy shall be implemented administratively, pending enactment by the National
Assembly and eventual inclusion in the constitution.

CHAPTER TWO
OBJECTIVES OF THE NIGERIAN TAX SYSTEM AND THE

CHARACTERISTICS OF A GOOD TAX
2.1 Objectives of the Nigerian Tax System
The Nigerian Tax system should contribute to the well-being of all Nigerians. This
can be accomplished both directly through improvements in the tax policy making
process, and also indirectly through the utilisation of the revenues collected in
judicious government spending.
Below are the stated objectives of a good Tax system which collectively should
achieve the objective of stability and efficiency.
2.1.1 To enable economic growth and development.
The overriding objective of the Nigerian Tax system is to achieve

economic growth and development. As such, the system should allow for
stimulation of the economy and should not stifle economic growth. It is
through sustained economic growth that the potential ability to offer
improvements in the well-being of Nigerians will arise. However, where tax
rates distort incentives for individuals to work or to save, or where the
investment decisions of firms are distorted, then economic growth and
development could be slowed down.
One of the objectives of the Nigerian Tax system shall be to cause as little
disruption as possible to potential growth and development, whist meeting
its revenue requirement.

2.1.2 To provide the government with stable resources that it shall invest
in well-judged expenditures.
For Nigeria to pursue an active development agenda, or to even carry out

the basic functions of government. Its tax system should be able to
generate resources for government to provide basic public goods and
services e.g. education, healthcare, infrastructure, security etc. The only
sustainable way to achieve this is through the continual raising of
revenues through taxation. It is therefore a primary objective of taxation to
provide the government with such resources that it may invest in judicious
expenditures that will ultimately improve the well-being of all Nigerians.
2.1.3 To provide economic stabilisation
Nigeria must seek to use its tax system to help in minimising the negative
impacts of volatile booms and recessions in the economy and also to help
complement the efforts of monetary policy in order to achieve economic
stability.
2.1.4 To pursue fairness and distributive equity
Nigeria’s Tax system both in the present and future must be fair and
concerned with pursuing both horizontal and vertical equity.
For Nigeria to focus on horizontal equity is to be concerned with equal

treatment of equal individuals. The Nigerian Tax system should seek to
avoid discrimination against economically similar entities to the fullest
possible extent, in any new taxation policies and in the ways in which they
are administered. Vertical equity will also address the issue of fairness
among different income categories. The Nigerian Tax System shall
recognise the ability-to-pay principle, in that individuals should be taxed
according to their ability to bear the tax burden. Those with the highest
absolute income should pay the highest absolute tax.

The overall Tax system shall be fair, so that similar cases are treated in
similarly manner while different cases are handled differently.
2.1.5 To correct Market Failures or Imperfections
One of the objectives the Nigerian Tax System is the ability to correct
market failures in cases where it is the most efficient device to employ.
Market failures which the Nigerian Tax system may address are those that
are as a result of externalities and those of natural monopolies.
2.2 Features of a Good Tax System in Nigeria
The following section provides the fundamental features for all taxes, which the
Nigerian Tax system must exhibit. Where any of the criteria are not met in
current or proposed tax legislations, serious debate should take place as to the
desirability of such policies. In addition, any tax that violates several of these
fundamental features shall not be part of the Tax System of Nigeria.
2.2.1 Simplicity, Certainty and Clarity.
Every person carrying out business in Nigeria must begin to truly trust the
Tax system, and this can only be achieved if tax policy, at every level of
Nigeria’s federal structure, endeavours to keep all taxes simple, creates
certainty through considerable restrictions on the need for discretionary
judgements, and produces clarity by educating the public on how the
relevant tax laws impact on their lives.
It is therefore imperative that the Nigerian Tax system must be simple

(easy to understand by all), certain (its administration must be consistent)
and clear (stakeholders must understand the basis of its imposition).

2.2.2 High Compliance Cost
To enable high compliance, the economic costs of time required, and the
expense which a tax payer may incur during the procedures for compliance,
shall be kept to the absolute minimum at all times. Furthermore, tax
administrators shall be focused on treating taxpayer as a client who has a
right to be treated well.
The convenience of the tax payer and minimal compliance cost shall guide
the design and implementation of every tax in Nigeria.
2.2.3 Low cost of administration
A key feature of a good Tax system should be that the cost of administration
must be relatively low when compared to the benefits derived from its
imposition. The simpler the processes of a tax administration, the easier it
will be for taxpayers to comply and the better for compliance.
The more time and money spent on the collection of taxes, the greater the
revenue expectation and the more potentials to cause distortion to
economic growth. Therefore, the whole machinery of Nigerian Tax
Administration should be efficient and cost-effective.
2.2.4 Fairness
All of Nigeria’s taxes should strive to observe the objective of horizontal and
vertical equity as mentioned in section 2.1.4. The overall Nigerian Tax
system shall be fair, so that similar cases are treated similarly, and different
cases are handled differently.
Based on the foregoing, there must be overwhelming reasons for extending

tax incentives and concessions to some preferred sectors over some other
Sectors within the economy.

Where overwhelming reasons are presented for the exemption of any sector
from the main provisions of the general tax law, it must serve to benefit the
overall economy and not just the sector concerned.
2.2.5 Flexibility
Taxes in Nigeria should be flexible enough to respond to changing

circumstances. Not only does this require pursuing new policies that are
reflective of well-grounded economic reasoning, but it also requires the
flexibility to change out-dated or inappropriate rates, or penalties for non-
compliance, so as to establish and maintain the required incentives.
2.2.6 Economic Efficiency
Economic growth and development can be damaged where marginal tax

rates distort incentives for individuals to work or to save, or where the
investment decisions of firms are altered. Whilst many of the distortions are
unavoidable, the extent to which they impact on the economy can be
minimised. The Nigerian Tax System shall at all times strive to minimise the
negative impacts of taxes on economic efficiency.

CHAPTER THREE
STAKEHOLDERS IN THE NIGERIAN TAX SYSTEM
Stakeholders include entities that contribute to and derive benefits from the country’s
Tax system. This broad definition makes it difficult to imagine any individual, corporate
entity or government agency as not being a stakeholder in the country’s tax
administration.
The relevant stakeholders in the Tax system of Nigeria can be broadly categorized into
the:
1 Three Arms of Government
• Executives of the Federal, State and Local Government

• The Legislature
• The Judiciary
2 Tax and Revenue Authorities
• Federal Ministry of Finance

• FIRS, SBIR, JTB, State and Local Governments Revenue Committee and
Nigerian Custom Service
3 Tax Payers and Consultants
• Nigerian Public (tax paying and non tax paying)

• Corporate Organisations
• Organised Private Sector
• Trade Unions
• Tax Consultants and Other Professionals

3.1 Interrelationship between the Stakeholders in the Development
of a good tax system
The Ministry of Finance should be the body charged with providing the
oversight function over the activities of Revenue Authorities in Nigeria, as well
as being the sole organisation responsible for tax policy matters, including
drafting any amendments to laws or legislations on taxation. All levels of
Tax/Revenue Authorities which include FIRS and NCS shall account to the
Federal Ministry of Finance and take directive from the Ministry. Also, no
Government Ministry or organisation or persons will have the laxity to introduce
new taxes without following due process i.e. through the Federal Ministry of
Finance. There are of course specific Agencies of Government with
responsibility for advising Government on Tax Policy direction. Some of these
organisation include the National Planning Commission (NPC) and Nigerian
Petroleum Corporation (NNPC). The NPC has a coordinating role on economic
policy formulation of which National Tax Policy is a component.
The respective States’ Tax and Revenue Authorities are also required to report
to the State Government as represented by the States’ Ministry of Finance.
The relationship between the Federal Tax Authorities as represented by the

FIRS and the respective State Revenue Boards on tax related matters should
be moderated through the Joint Tax Board (JTB). In addition, the JTB should in
addition continue to play an advisory role to government whenever its opinion is
sought.
The Tax and Revenue Authorities should establish formal inter-agency

cooperation with various Law Enforcement Agencies, such as the Nigerian
Police. This becomes necessary in order to assist Tax Authorities to acquire
skill, training and competences on investigation and enforcement activities in
relation to the provisions of the enabling legislations, with respect to the
problems of tax defaulters and recalcitrant taxpayers. Revenue authorities may
also conclude information sharing agreements with EFCC, ICPC and SSS, in
order that proper assessment can be made on taxpayers.
Also, a more structured information-sharing arrangement shall be established

between the Tax and Revenue Authorities on the one hand and government

bodies such as the Central Bank of Nigeria, Consultants, Nigerian Customs
Service, Banks, NNPC, DPR, NDLEA, NAFDAC and the Ministry of Finance on
the other hand.
Finally, the different levels of government as well as the Tax and Revenue
Authorities are expected to provide guidance and information to the tax paying
public. This will elicit higher compliance and cooperation from the tax paying
public.
Federal NPC
Ministry of
Finance
NNPC
Joint Tax Board Office of the Accountant

General of the Federation
Tax
Proceeds
Law Enforcement
Agencies e.g. Economic CBN, Tax Consultants,
& Financial Crime Revenue Professionals, Nigerian
Commission, Nig Police Authorities Customs Service, Banks
etc
Tax Paying
Public
A Pictorial Inter-relationship between all the Stakeholders in the Administration of taxes in Nigeria

3.2 The Roles of the Stakeholders in developing a Good Tax
Culture in Nigeria
All the stakeholders in the Nigeria Tax System have critical roles to play in the
development of an efficient Tax administration in Nigeria.
We state hereunder the respective roles that each of these stakeholders have
to play.
3.2.1 The Role of the Executive arm of Government
The executive arm of government; be it at the Federal, State and Local

levels, plays an indirect yet crucial role in the development of a good
tax culture in Nigeria. This is because they are not empowered to
directly legislate on tax matters (The Legislature is the only law making
body in Nigeria). However, the Ministry of Finance shall have the sole
responsibility to propose to the Legislature any amendment or addition
to existing and new Tax Legislation. This centralisation of the system
for proposing tax policy by the Ministry of Finance will enable sustained
co-ordination in the number and thrust of tax legislations being passed
to the legislature for ratification.
The executive arm of government at the respective levels, are also

saddled with the function of encouraging voluntary tax compliance by
the tax payers. An effective mechanism for achieving this high
compliance by the respective government level is by making the most
efficient use of the tax revenue collected by them.
3.2.2 Role of Federal and State Legislatures / Judiciary
The Constitution of the Federal Republic of Nigeria vests the powers to

make laws on the taxation of income or profits on the legislative arm of
the government comprised of the Senate and the House of
Representatives. It shall therefore be the constitutional responsibility of
the National Assembly to make tax laws or amend existing laws, after

obtaining the recommendations from the Federal Ministry of Finance.
Item 7 of the concurrent Legislative List restricts the states to the
assessment and collection functions only.
The Judiciary on the other hand is saddled with the responsibility of

interpreting and adjudicating on tax matters.
3.2.3 Role of the Tax / Revenue Authorities
The administration of the various tax laws is under the care and
management of the Tax and Revenue Authorities as represented by
the FIRS, the respective States Internal Revenue Service, the JTB etc.
Apart from the general administration of taxes (assessment and

collection of taxes), including accounting for the taxes collected.
Revenue authorities are also saddled with the responsibility for
advising government on treaty negotiation isues.
In the Nigerian Tax System, tax shall be collected only by career tax
administrators, who are Civil Servants, and not by ad hoc consultants
or agents. Similarly, only self assessments or assessments by tax
administrators shall be allowed in Nigeria.
In addition, the Tax Authorities also ensure that in carrying out its tax
assessments and collection role, every claim, objection, appeal,
representation or the like made by any tax payer are sufficiently
considered by it. This will ensure that tax payers have confidence in
the tax administration system in the country.
Finally, the Tax and Revenue Authorities at all levels are expected to
provide guidance to the taxable public. This guidance could come in
the form of information circulars, bulletins and newsletters.
3.2.4 Role of the Taxpayers
The taxpayers have a very significant role to play in the administration

of tax in Nigeria. Apart from making the correct tax returns and

payments, as required under the law, they are expected to, from time
to time provide the Tax/Revenue Authorities with useful information
and suggestions that could assist in improving tax practices in the
country.
3.3 Guiding Principles for all Stakeholders in the Administration

of Taxes in Nigeria.
There are certain universal principles which are necessary to ensure a

convivial interaction between the stakeholders in the administration of taxes in
Nigeria. These principles are:
• affirmation and acknowledgement of all stakeholders’ importance and

contributions;
• provision of specific and general proactive feedback on issues and
developments that are relevant to tax administration;
• ensuring that the principle of good faith is enshrined by all stakeholders,
especially between the tax payer and the Tax / Revenue Authorities on the
one hand and the government and the tax authorities on the other hand;
• fairness in the treatment of all stakeholders by each other. This is
especially so in the area of respecting each party’s viewpoints and in the
allocation of resources.
3.4 Linkages for Effective Tax Policy
There should be solid linkages between the various Stakeholders in the tax
system. These are persons, organisations and associations whose
responsibilities are mainly to influence the achievement of voluntary tax
compliance generally. A suggested linkage relationship is demonstrated in
appendix 4.

CHAPTER 4
POLICY AND ADMINISTRATION
Tax administration in Nigeria is shared across the three-tiers of government. One of the
core success factors for any policy is enshrined in its position on policy and
administrative issues. An effective tax policy document should be one that establishes
a flawless position on crucial tax administration and policy issues.
In the context of the Nigerian Tax Policy, the important administration and policy issues
and the official position and recommendation on such issues are stated below:
4.1 Funding of the Tax and Revenue Authorities
4.1.1 It shall be the responsibility of the Government to provide adequate funding

arrangement for Tax and Revenue Authorities in Nigeria. In order to ensure that
the Tax and Revenue Authorities in the country are well funded, Government at
all levels shall ensure the following:
(i) That a sufficient proportion of revenue collected by any Revenue Authority,

as judged by international comparisons with well-funded, efficient tax
systems, shall be provided to cater for its administration;
(ii) That any unspent portion of such fund allocation in any year shall be
returned back to Government.
(iii) That all other government revenue-generating establishments shall receive
a commensurate sum of money which will be adequate to administer their
operations effectively.
(iv) That not less than 10% of total revenue collection by Tax/Revenue
Authorities shall be appropriated each year by the NASS to FIRS in order to
cater for refund requests from taxpayers.
It is believed that if all tax and revenue organs receive adequate funding as
enunciated above, the administration of taxes by these organs will be greatly
enhanced.

There is therefore the need to institutionalise this arrangement in the Federal tax
statutes, as well as replicate it at the State Revenue authority level.
4.2 Capacity Building and Staff Training
The Government is committed to achieving high level of technical training and capacity
building of all the tax and Revenue officials in the country.
In furtherance of this commitment, Government shall pursue the following policies:
(i) Develop an adequately funded Tax Academy which will be established

for the primary purpose of capacity building of all revenue officials.
(ii) Every revenue official (at least from middle management level and
above) shall be adequately exposed to international training on taxation,
revenue administration and practice.
(iii) Provide a framework that ensures that every Revenue official is fully
acquainted with the global best practice of taxation.
4.3 Operation and Funding for Tax Refunds
4.3.1 Tax Refund Mechanism
Taxpayers are required to apply for refunds in respect of any excess tax
paid to the Government. To be eligible for such refund, a genuine case of
overpayment must be established by the taxpayer.
The Revenue authority is required to subject all claims for refund to

sufficient verification and must honour ALL genuine refunds within 90 days
of the decision of the Service.
4.3.2 Source of Funding for Tax Refund
All Tax and Revenue Authorities who are saddled with tax refund
obligations shall meet these obligations both diligently and efficiently.
Therefore, all Tax Authorities shall request sufficient funding from the

National Assembly or State House of Assembly (whichever is relevant) in
their budgetary allocation, in order to meet these expected refund
obligations.
4.4 Taxpayer Services and Education
4.4.1 It is the responsibility of the Tax Authority to constantly educate taxpayers on the
relevant aspects of the Tax System. This is based on the knowledge that once the
taxpayer is sufficiently educated and enlightened, the cost of tax administration
would be significantly reduced. Therefore, all Tax and Revenue Authorities will
take responsibility for explaining their taxes and making them clear to all.
There is a need for each of the Tax and Revenue Authorities to develop a
comprehensive strategy on taxpayer services of which taxpayer education will be a
key component, these strategies must then be reviewed and approved by the Joint
Tax Board (JTB) on a yearly basis.
4.5 Self-Assessment
All the Tax and Revenue Authorities in Nigeria shall embrace Self-Assessment,
and should put in place structures that will guarantee the realisation of true Self-
Assessment. A successful self-assessment scheme can be achieved on the
condition of existence of a reliable tax-data bank, on which tax authority can rely
upon for the determination of taxpayers’ claims. Government should devote
resources for data bank development.
4.6 Tax Registration
Every company and taxable persons shall be registered for tax purposes. The
Federal Revenue Authority is required to issue a Tax Identification Number (TIN)
upon the registration by taxpayers for taxes. This TIN, via Information
Communication Technology will guide and provide insights into all the tax activities
of the tax payers. This will ultimately reduce the cost of administration and
supervision while enhancing higher compliance.
4.7 Periodic Review of Existing Tax Laws and Legislations

The Nigerian Taxation System shall be subject to a general review every year and
subject to a comprehensive review every three years. The comprehensive review
will not only be restricted to all the existing tax legislations i.e. CITA, PPTA, PITA,
VATA, CGT etc; but would cover all aspects of tax administration and tax policy
matters.
The recommended five (5) yearly review of the tax administration system shall
ensure conformity with the dictates of economic and business trends as well as
with international trend. The comprehensive review shall set out plans and time-
frames for any recommended reforms, as well as establishing the persons
responsible for their implementation. This review exercise shall bring up tax
matters requiring reform to the attention of the Minister of Finance.
4.7.1To create an environment conducive for trade and investment, the tax laws and
regulations must be predictable and certain in their interpretation and applications.
Tax Authorities must ensure that they comply with tax laws and regulations in their
determination of tax cases.
4.8 Introduction of Additional Taxation
The Ministry of Finance is the sole body saddled with the responsibility of
proposing amendments to all tax and revenue laws and legislations for
consideration by the legislators. Therefore, it is the Minister’s responsibility to see
that any additions to the existing tax laws and legislations shall meet as closely as
possible with the criteria for good taxation as highlighted in this document. Any tax
that violates several of the features of a good tax will not be part of the Tax system
of Nigeria.
Before any significant alteration is made to the Tax System, there shall be broad
and detailed consideration on the potential economic impact of the proposed
alteration(s). As part of this, the Ministry of Finance shall commission a study on
the potential economic impact of any proposed alteration to the existing tax laws
seeking recommendations from the relevant Revenue Authorities and stakeholders
with the ultimate aim of assessing the extent to which the tax meets the criteria of
the National Tax Policy.

4.9 Power to vary the tax rates
Tax rates must be responsive to fiscal developments within the economy, and it is
the Executive arm of government that is charged with the responsibility for
managing the fiscal affairs of the nation. The Presidency or Finance Ministry may
propose tax rate variation, but this will not become law until such proposal is
supported and approved by the National Assembly. This is important and aims at
checking any possible arbitrariness on the part of the Executive in matters of tax
rates variation. It is therefore recommended that the power to vary tax rates should
be vested only in the National Assembly with respect to all taxes.
4.10 A shift away from Direct taxation to Indirect taxation.
The current policy of shifting away from direct taxation to indirect taxation with
respect to non-oil taxes is to pursue the goal of encouraging economic growth by
decreasing direct taxes, whilst still meeting revenue requirements. Nigeria should
therefore seek to have low rates of Companies Income and Personal Income taxes
by all international comparison. This will be accompanied by a gradual increase in
the rate of Value Added Tax VAT). An increase in the emphasis on VAT will have
an upward effect on the country’s stable revenue base. The tax system should
regularly look at the consumption side in order to strike a balance between savings
investment and consumption. This is because VAT offers a more regular revenue
flow and has huge prospects for improve tax compliance.
Table1: VAT rates in selected ECOWAS countries

Cote
Country Benin D'Ivoire Ghana Mali Niger Nigeria Senegal Togo
VAT Rate
(%) 18 18 15 18 19 5 18 18
There is great demand for harmonisation in VAT legislations across the

ECOWAS sub-region. This is part of a fiscal transition strategy by ECOWAS
countries to achieve:
(i) a more efficient inland tax collection system based more heavily on
indirect taxation.
(ii) A reduction in economic distortions in sub-regional integration policies and
international conventions on trade liberalisation.

For Nigeria to be in the middle level of the ECOWAS group, it should look
towards having an average VAT rate in a way that will not affect aggregate
consumption. Many economists are quick to point out the inequitable and
inflationary nature of indirect taxes, but they nevertheless always admit that it is a
programatic solution to the problem of tax evasion and avoidance.
4.11 Coordination of Tax Authorities by the Joint Tax Board
The Nigerian Constitution is clear on the role of the Federal Government in

matters pertaining to tax legislation. The Constitution grants the Federal
Government through the National Assembly, the powers to impose any tax or
duty on:
(a) Capital Gains, Incomes or profits of persons and companies; and

(b) Documents or Transactions by way of Stamp Duties
However, for efficient tax administration and by virtue of the concurrent

legislative provisions, States were given administrative and collecting powers in
regards to certain taxes, the most significant of which is Personal Income Tax.
The Joint Tax Board (JTB) should be a strong and effective regulatory
institution over the shared activities of all the Federal and States Tax
authorities. This is in order to allow greater coordination of Personal Income
Tax, and which will make compliance easier for taxpayers, as well as increase
future tax collections.
The JTB should be able to provide technical assistance and support to the
State Boards of Internal Revenue, as well as providing standardised processes
for the filing and collection of Personal Income Tax across the whole of Nigeria.
This requires that the JTB should have extended authority to be more than just
an advisory Board and should have the authority to make decisions on the
administrative processes of Personal Income Tax. All decisions of Joint Tax
Board must necessarily be subject to the final approval of the Minister of
Finance in order to comply with due process requirement.

This process of empowering the JTB may require updating the relevant section
in the Personal Income Tax Act so that the objective of achieving an efficiently
administered Personal Income Tax across the whole of Nigeria is attained.
4.12 Tax Appeal Process

The appeal process must be strengthened so that an aggrieved taxpayer can
have an avenue for redress and thereby have confidence in the fairness of
the Tax System. Dispute Resolution function should be established in support
of the appeal process as a way of reducing court delays and avoiding
exorbitant legal costs.
4.13 Ratification of International Treaties

In order to improve the image or the economic interests of Nigeria, tax treaty
matters must be taken more seriously by all Government Agencies having
responsibilities for the function. The Foreign Affairs must facilitate the
process of negotiation through official channels; ratification process is
normally handled by FMF to the Council Secretariat for FEC approval before
the submission to National Assembly for domestication. The whole process
should be smooth and devoid of delay, particularly by the National Assembly.

CHAPTER 5
USING TAX SYSTEM AS A TOOL IN CREATING COMPETITIVE

ADVANTAGE
The Nigerian Tax System’s central objective as enunciated in Chapter Two is to

encourage economic growth and development. This implies that the Tax System must
also focus on growth facilitation in both foreign and domestic investment. Nigeria should
therefore use the Tax System as one of the many tools for achieving a competitive
advantage for investment. This competitive advantage will emerge if the business
climate in Nigeria becomes superior to the business climate in other countries. The
concern of businessmen over multiplicity of taxation must be addressed properly. The
Joint Tax Board needs to re-double efforts in this regard.
Below are the ways that taxes can be utilised as a means of fostering competitive
advantage.
5.1 Reduction in the Number of Effective Taxes
The taxes in the Nigerian Tax System shall be few in number, broad-based and
high revenue-yielding. This will enable the emergence of a far superior Tax System
than an overly-complicated one with many relatively low revenue-yielding taxes.
This will also in no small way enable easier monitoring and supervision.
5.2 Internal Multiple Taxation
Internal multiple taxation by the various tiers of Government on income, property,

imports, production and turnover shall be avoided. The Joint Tax Board (JTB) shall
ensure the coordination of taxation across Nigeria to avoid the multiplicity of taxes.
5.3 Liberalisation of Import Duty Regime

With the adoption of the Common External Tariff (CET), sanity shall be restored
to Customs administration. Government will purse the Port Reform programme to
conclusion.

5.3 Strengthening of the Oil and Gas Sector
Government shall encourage the Production Sharing Contracts in the Oil and Gas
Sector in order to reduce the demand for cash calls. More transparency and
accountability will be the guiding rules in the industry.
5.4 International Obligations and Double Taxation Negotiations
Nigeria shall ensure that all the international tax obligations contracted by it are
respected. Nigeria shall also continue to pursue and expand on international tax
treaties.
Nigeria is committed to contributing to the goal of expanding trade within the

Economic Community of West African States (ECOWAS). Therefore, the Tax
System should strive to actualise this commitment by realising a common trade
and competition policy in West Africa.
Imposing tax on income which has been subjected to tax in another jurisdiction
(Double Taxation) is harmful to economic growth. Therefore, Nigeria shall avoid
fully taxing the incomes of companies, enterprises or individuals whose income
has already been taxed in another country. Nigeria shall expand on the number of
tax treaties it has with new countries in order to alleviate the problems of double
taxation. This expansion will lead to greater certainty for firms and individuals
operating both inside and outside of Nigeria and will improve the inflow of Foreign
Direct Investment into the country.
5.5 Tax Incentives
Nigeria, like many other countries, has tried to make use of a plethora of tax
incentives to try and nurture specific sectors that are regarded as key sectors.
However, tax incentives, by their nature, on several occasions, come in conflict
with the principles of good taxation because they;
(i) Discriminate in favour of a particular sector thus violating horizontal equity

considerations;
(ii) Require a heavier tax burden from the other sectors in order to maintain a
given revenue requirement, undermining fairness; and

(iii) Over-complicate the tax system, making it more expensive to monitor the
beneficiaries of such incentives, therefore increasing the possibilities for tax
evasion.
There is an urgent need to review the entire process of granting tax

waivers/concessions with respect to custom duties, Value Added Tax, Pioneer
Exemption status etc. The law at present requires that an Order must be issued by
the present requires that an order must be issued by the President to make such
waivers/exemptions valid. The Federal Ministry of Finance, working with the
Justice Ministry should always ensure that the applicable Orders are issued and
gazetted in support of any tax waivers/exemptions. This is not to say that the use
of tax incentives to attract investment is not recognised. An efficient tax system
must be capable of providing such incentives, which should provide benefits to all,
rather than few.
Also, as a matter of policy, a Technical Committee of Government, comprising of

all relevant Ministries, Departments and Agencies should have responsibility for
making recommendation to the Federal Executive Council (FEC) on
Waivers/Exemption.
The pertinent issue for discussion are the terms of reference of the
Waiver/Exemption Technical Committee, location of its secretariat and funding
sources. There had been a few instances where, corporate entities engaged in
business and paying taxes to Government were suddenly granted Pioneer tax
exemption status. This kind of concession should be frowned upon and
discouraged.
The Nigerian Tax System will minimise and streamline the number of tax
incentives and restrict their use to instances where they help achieve a national
objective that cannot be achieved more efficiently in any other way. Without
prejudice to the stand of NIPC and NEPC, Government should se-emphasise tax
incentives and should rather place more emphasis on the creation of enabling
environment for trade, business and investment.
Tax incentives should be comprehensively reviewed and those which create a

greater burden on the economy than their benefit or, serve to unnecessarily
complicate the Tax System, should be removed.

Included in appendix three is a comprehensive list of tax incentives in the
Nigerian Tax System, some of which are difficult to implement and monitor. They
complicate the Tax System and often investors are not aware of their existence.
Therefore some of them are recommended to be removed or altered.

CHAPTER SIX
CONCLUSION
This National Tax Policy document has set out the fundamental objectives of the
Nigerian Tax System and has prescribed the qualities that must be embedded within all
future tax laws. That the Tax System must currently be focused on the main objective of
enabling economic growth and development is a reflection of the deep-rooted need for
improving the per capita income of Nigerians.
This document has stated the roles of stakeholders in the Tax System and the
interactions between them. The issue of high compliance by the taxpayers for all taxes
is of vital importance. The Tax Authority can encourage higher compliance if the
taxpayers are treated as clients and if the whole system of taxation is made simpler and
clearer. The need for mutual respect between all stakeholders in the Tax System is also
a crucial element in providing a modern functioning Tax System.
A major impact of this document should be the further empowerment of the Ministry of
Finance to take oversight of the administrative aspect of the Tax System. The links
between Tax Administration and Tax Policy are so interwoven that considering either
one of these in isolation of the other will risk great policy errors. For a successful and
coordinated mass reform of the Tax System, the Federal Ministry of Finance shall
assume a pivotal role.
Another policy thrust of this document is the need for greater administrative coordination
of the collection of revenues from Personal Income Tax by the JTB. The benefits of the
improved coordination are in terms of both higher compliance and increased efficiency.

A major policy outcome of this document is the commitment of Nigeria to increase the
role of indirect tax. The increased focus on VAT should be intrinsically linked to
decreases in the rates of Personal Income Tax (PIT) and Companies’ Income Tax (CIT)
because of its ease in administration. This policy change, in addition to the overall
simplification of the Tax System, will encourage the establishment of a good business
environment in Nigeria.
Finally, this document has highlighted various tax related issues in creating a good
business environment within the country. In particular, with tax incentives it has shown
the need for a restrained approach to allowing well-intended incentives into the Tax
System. The process of reducing the number of different incentives in the system and
coordinating and harmonising the remaining incentives to common rates shall be an
ongoing process of government.
Overall, this document has provided a set of guiding principles for all taxation in Nigeria.
It shall provide a stable point of reference for all stakeholders in the Tax System to refer
to, and a standard on which stakeholders shall be held accountable.

Appendix One
Comparative Tax Rates in Selected African Economies
Table 1: Value-Added Tax Rates in selected ECOWAS countries
Cote
Country Benin D'Ivoire Ghana Mali Niger Nigeria Senegal Togo
VAT Rate
(%) 18 18 15 18 19 5 18 18
Table 2 Income Tax Rates of Key African Economies
Nigeria Ghana Kenya South Africa
COMPANIES/ CORPORATE INCOME TAX
30% (20% for

Tax rate manufactures, mining, 25% 30% 29%
agric, export)
PERSONAL INCOME TAX

=N=5,000 + 20% $5,634
Personal allowance
Top rate of tax 25% 25% 30% 40%
Threshold (US$) 1,260 960 5,500 40,000

Appendix Two
STRATEGY FOR IMPLEMENTATION OF THE PROPOSED TAX POLICY
Executive Summary
The Tax Strategy for Nigeria is a document mapping out the way the Federal Government of
Nigeria (FGN) intends to achieve a tax system that will significantly encourage investment
within the Nigerian economy, leading to more jobs and higher economic growth. This will be
achieved through the following measures;
Using revenues from Nigeria’s Oil wealth to alleviate the tax burden on
companies, in order to diversify the economy.
Gradually decreasing Companies Income Tax to 20 percent by 2009.
Decreasing the top-rate of Personal Income Tax to 17.5 percent by 2009.
Shifting towards greater reliance on indirect taxation through gradually

increasing Value-Added Tax to a rate that will not affect aggregate consumption
by 2009, in line with achieving stable non-oil revenue flows and to achieve high
compliance in the tax system .Also fulfilling commitments to ECOWAS.
Restricting Tax Holidays to sectors key to Nigeria’s development of basic
infrastructure.
Decreasing the cost of compliance with tax obligations through simplification of
tax laws, regular review process, improving taxpayer services and developing
specific taxation regimes for effectively dealing with Small and Medium
Enterprises i.e. Presumptive Income Taxation and prescription of a turnover
threshold in Value-Added Tax operation.
Eliminating multiple taxation through improved collaboration between FIRS
and Joint Tax Board (JTB), and empowering the JTB to have coordinating
powers for taxation.
All these strategies should be pursued by the FGN, and where necessary, the appropriate
amendments to the tax laws should be pursued.

Table of Contents
Section
1.0 Introduction
2.0 Objectives
2.1 Domestic Investment
2.2 Foreign Investment
2.3 Employment
3.0 Creating a Competitive Advantage in Nigeria’s Tax System

3.1 Adjusting rates to Encourage Investment
3.2 Decreases in Income Tax Rates
3.3 Deliberate Policy Shift towards Indirect Taxation
3.4 Simplifying the Tax Laws to Encourage investment
3.5 Pioneer Status/ Tax Holidays for Developing Infrastructure
3.6 Export Processing Zones (EPZs)
3.7 Import and Excise Duties – CET
3.8 Strengthening the Oil and Gas Tax Regime PPT

Royalty
4.0 Taxation of Small and Medium Enterprises

4.1 Presumptive Income Taxation
4.2 Value-Added Tax (VAT) Threshold
5.0 Large Taxpayers
6.0 Elimination of Multiple Taxation
7.0 Conclusion

List of Tables and Charts
Table/ Chart Page No.
Chart 1: Foreign Direct Investment inflows in

ECOWAS countries as at 2004 - 2
Table 1: Components of Total Revenue in Key

African Economies - 4
Table 2: Income Tax Rates in Key African

Economies - 4
Table 3: Rates of VAT in selected ECOWAS
Countries - 5

1.0 Introduction
The Tax Strategy for Nigeria is an accompanying document to the National Tax Policy.
Whilst the National Tax Policy highlights crucial rules, principles and specifies the
destination to which the tax system should be moving towards, the Tax Strategy for
Nigeria maps out the way in which the country will get there.
The tax system in any country is the key link between the private and the public sector in
growing and shaping the economy. There is no single tax system that can be said to be of
universal ‘best practice’, so the optimal public/ private sector mix of an economy will
depend on the differing circumstances of each country. However, there are general
principles of best practice that should be applied in the context of each country even
though they may require different paths to be taken. The Tax Strategy for Nigeria is an
attempt to do exactly that; to apply good principles of taxation that are tailor made to
Nigeria’s particular circumstance.
2.0 Objectives
The objective of the Tax Strategy for Nigeria is to use the tax system to help grow
investment and create employment; this is part of the intention of Government to grow
the Nigerian economy by an average of at least 10% per annum. All this must be
achieved whilst maintaining stable revenues to enable sustainable Government
expenditure.
2.1 Domestic Investment
Investment arises when companies and enterprises are able to see a likelihood of
future profits through sinking their money into projects at the present time. There
are many costs involved in any investment project which makes the project less
profitable and will impact on whether a firm takes the decision to proceed with it.
Nigeria's poor infrastructure makes investment projects costly, and will make
many investment decisions less likely to be taken than they would in other
countries with better infrastructure.

High taxation on any income will also make a project less likely to be undertaken as
overall profits will be lower and companies will be more reluctant to take the investment
risk. In the short to medium term, in order to try and compensate for poor infrastructure,
the tax system should allow companies and enterprises higher post tax profits to increase
the likely benefits of taking investment risks. This will lead to higher domestic
investment from companies and result in higher economic growth.
2.2 Foreign Investment
As a member of ECOWAS, Nigeria is faced with the prospect that in the not too distant
future, firms will, on a tariff free basis, have access to selling their products in Nigeria's
market without having to actually locate in Nigeria.
When the free-trade zone and common external tariff are established, companies may
choose to locate in any of the other ECOWAS countries, and will choose the country in
which it is most profitable for them to do so. Foreign Direct Investment (FDI) has many
benefits, compared to those derived from merely importing goods and services. Greater
FDI can lead to higher employment, transfer of knowledge and skills (which will lead to
further economic growth), as well as various other positive multiplier effects from the
investment. Nigeria must strive to be competitive and therefore attractive for foreign
firms to invest in. Chart 1 below, demonstrates the FDI inflow that the current ECOWAS
member States had in 2004. As can be seen, Nigeria stands out by far the highest.
However, the overwhelming majority of this is likely to be linked to the Oil and Gas
sector. Nigeria needs to focus on being an attractive place for investment in the real
sector.

For those foreign companies investing in natural resource extraction, there is little choice
where they will locate. If the infrastructure is poor they are forced to adapt to it in order
to locate where the resources are; however for foreign companies in the real sector, this is
not a constraint. Nigeria's poor infrastructure will put the country at a significant
disadvantage compared with ECOWAS countries that are in better infrastructural
positions. To try and counter this disadvantage, Nigeria should make use of the tax
system to make it more beneficial than other countries for investment.
2.3 Employment
Through policies that encourage increases in both domestic and foreign investment, will
come greater employment opportunities in Nigeria. This will help distribute the benefits
of economic growth. It is therefore through creating a Tax Strategy that encourages
investment that higher employment will be achieved.
3.0 Creating a Competitive Advantage in Nigeria's Tax System
In order to achieve the objectives stated under Section 2, Nigeria must have a long-term
objective of providing a good level of infrastructure as a significant way of creating a
good business environment. In the short to medium term, where it may not be possible
for the Government to provide the quality of infrastructure on the scale needed, it should
seek to achieve the objective by making good use of the tax system. This can be done by
decreasing the burden of taxation on companies and enterprises.
3.1 Adjusting Rates to Encourage Investment
Nigeria has immense Oil and Gas resources which give the country a great
opportunity to create fewer burdens on the real sector of the economy and still be
able to finance the Government's expenditure budget. By comparing the
proportion of revenues which Nigeria receives from Oil and Gas with those
received by other African economies, it is clear that Nigeria can achieve
competitive advantage for the real sector through its tax system.

Table 1: Components of Total Revenue in major African Economies
As table 1 demonstrates, Ghana, Kenya and South Africa have a much heavier reliance on
income taxes (both Corporate and Personal) than Nigeria. It is striking when this is considered
alongside table 2 showing the rates for these taxes. For Companies Income Tax, the Nigerian
standard rate of 30% is the highest of the four countries and this is yielding only 15% of the
overall tax revenue.
Table 2: Income Tax Rates in major African Economies
If Nigeria decides to lower its rates of income tax in order to attract investment into the country,
it would be nearly impossible for countries like Kenya, South Africa or any of the ECOWAS
countries to compete, in view of the fact that dependence on income taxes for these countries is
much higher. It is therefore possible that Nigeria can achieve competitive advantage in its tax
system through lower rates adjustment.

3.2 Decrease in Income Tax Rates
Based on the reasons stated so far, the strategy of Government is to reduce

the rate of Companies Income Tax to 20% by 2009.
For Personal Income Tax, the strategy will be to eventually bring the top
rate down to 17.5% of taxable income by 2009.
By lowering the rates of income taxes, not only will investment be

encouraged, there will also be significant benefits in improving
compliance from companies and individuals. The tendency for non-
compliance will be significantly reduced if the tax required is smaller and
the penalties for non-compliance are reasonable and not punitive.
Furthermore, it is important that there are not big differences in the rates
of Companies Income Tax and Personal Income Tax in order to limit
opportunities for tax avoidance.
3.3 Deliberate Policy shift towards Indirect Taxation
Value Added Tax is easier to administer and has better compliance than
Income tax. Inline with the FGN’s commitment to ECOWAS and the
harmonization of VAT within the region, and also to increase the non-oil
revenue with a stable tax base (i.e. tax based on consumption) VAT will
become the principal non-oil tax.
Table 3 demonstrates some of the VAT rates in other ECOWAS countries

and shows Nigeria’s to be very low by comparison at 5%.
Table 3: Rate of VAT in some ECOWAS countries*
Country Benin Cote D’Ivoire Ghana Mali Niger Nigeria Senegal Togo
VAT
Rate (%) 18 18 15 18 19 5 18 18
*taken from ‘Study on harmonization of the Value-Added Tax and Excise Duty Legislations of ECOWAS member States’
Volume 1: Provisional Report Bureau National d’Etudes Techniques et de Development, June 2006

In order to start addressing the issues stated above, Government should begin to embark
on a gradual increase in the rate of VAT in such a way that it will not affect aggregate
consumption by 2009. This will make the revenues accruing from Companies and
Personal Income Tax even less important than they currently are, and further goes to
provide opportunities for using the tax system in order to increase both domestic and
foreign investment.
With these increases in VAT, it is important to adhere to the principle of vertical equity
(as articulated in the National Tax Policy document) which implies that those on the
lowest incomes should not be impacted on by VAT increases as much as those on higher
incomes. In order to achieve this, it is crucial to maintain a relevant list of basic necessity
goods which should remain VAT-exempt or zero-rated, such as basic foods, health goods
and services, educational materials etc.
3.4 Simplifying the Tax Laws To Encourage Investment
In order to encourage investment, it is necessary but not sufficient to lower the overall
rates of key taxes. Part of the tax burden that falls on taxpayers is the administrative
duties that are necessary to comply with the tax laws. Complicated tax laws increase the
cost for taxpayers to comply with their tax obligations, many may have to employ special
tax consultants at a cost to their business, and others may have to spend a lot of time
trying to work out what the law is requiring from them.
The tax laws must be very clear to taxpayers, and this is achieved through good taxpayer
education, and having a system which is simple enough for most people to understand.
As a result, the FGN is striving to make the tax system simpler by removing out-dated or
under-utilised tax incentives (this is addressed comprehensively in the National Tax
Policy). Furthermore, all Tax and Revenue collecting authorities in Nigeria should adopt
wide-spread Taxpayer Education Strategies.
3.5 Pioneer Status / Tax Holidays for Developing Infrastructure
Horizontal equity is a key condition for fairness in a tax system. Under this concept,
similar companies are treated similarly through the provisions of the tax laws. A Tax
Holiday (or Pioneer Status) violates horizontal equity because it involves treating a

company or sector with preferential treatment over other companies or sectors.
This goes to both complicate and undermine confidence in the tax system, as well as
foregoing potentially substantial revenues. In general, any such provision is not
compatible with an ideal tax system.
However, whilst these type of tax incentives should generally be avoided; there are some
specific sectors involved with key infrastructure development that the FGN should make
an exception to. The justification for this is that they are involved in sectors that have
potentially large benefits to society at large, such as Public goods that are usually
provided by the Government. Where the FGN has not made sufficient provision for
certain infrastructures, it will be of immense benefits to provide Pioneer Status to help
facilitate the private sector to bridge these gaps. This fulfils the requirements stated in the
National Tax Policy Document that tax holidays must only be provided where there is no
other more efficient way to achieve the particular national objective.
By targeting infrastructure sectors, this will reinforce the policy to encourage investment
in Nigeria, as through improved infrastructure the cost of investments in general shall
decrease.
The following key infrastructure sectors should be provided with tax holidays under
Companies Income Tax;
• Power Sector
• Railways/Roads Development
• Education
• Health
• Aviation
• Gas
Furthermore, there are sectors which should be given tax holidays because of the
competition they face in heavily competitive global markets;
• Exports
• Agriculture
A key feature of all these tax holidays should be that they are not unlimited. They should
be time bound. The current situation has been to allow pioneer status for three years with

the potential for them to be extended for another two years if deemed appropriate by the
FGN. This policy should be retained as adequate for almost all sectors, and will provide a
realistic time-period for reappraisal.
Careful checks and balances must be in place to make the obtaining of tax holidays a
rigorous process. It should be restricted purely to those companies and sectors where
there is overwhelming evidence that no other policy would be as effective in achieving
substantial investment in that sector.
3.6 Export Processing Zones (EPZs)
In order to sustain the FGN’s policy which is directed at to encouraging export-oriented

industry, and to address some of the major administrative concerns that are associated
with the Export Processing Zones (EPZs), the following suggestions should be looked
into:
1) The FGN should provide a special tax holiday of seven years from Companies
Income Tax as opposed to the usual maximum of five years, this will allow
companies to be able to commit significant investment in Nigeria. Where
Withholding Tax is paid on dividends and interest, this should represents the final
tax payment.
2) Value-Added Tax on products produced in these zones for export will remain
zero-rated in order to allow these companies to claim back the input VAT from
Federal Inland Revenue Service (FIRS).
3) All companies located within the EPZ should continue to file Companies Income
Tax returns even where no tax is payable.
4) There should be no import or export levy or any form of taxation within these
zones, except where the entities transact business outside the EPZ.
5) Contrary to Decree 63 (of 1992) no percentage of EPZ production shall be

allowed into the country. Any firms located in EPZ but desirous of wanting to sell
to the domestic market should be made suffer tax on the profit realized from sales
outside the EPZ.
The fifth provision for the EPZs is due to the great difficulties in taxing those elements of

production that are sold in the domestic market but are produced in the EPZs. This will
make the EPZs fully effective and straight-forward to administer. It is recognized that
there are firms who may have been attracted to the EPZ due to servicing the Nigerian
Market, they will have to relocate, however the FGN should ensure a suitable
compensation package is made available to them.
3.7 Import and Excise Duties
In order to reduce costs of Nigerian manufacturers, and therefore to help make them more
competitive and cheaper for Nigerian consumers, the FGN should make moves (where
not contradictory to ECOWAS commitments) to reduce Import Duties on raw materials
to zero percent. This will encourage the production of both intermediate and finished
goods, which will develop the Nigerian economy further.
Furthermore, in order to encourage the Aviation Industry, the import duties on Aircraft
needs to be made competitively low.
3.8 Strengthening Oil and Gas Tax Regime
The fiscal regime for oil and gas, particularly the Petroleum Profit Tax (PPT), which
applies to Oil producers under Joint Venture contracts (JV) or the more recent Production
Sharing Contracts (PSC) require proper strengthening in view of its growing importance.
As a matter of necessity to ensure transparency and accountability, all Agencies of
Government charged with administration and collection of Oil & Gas revenues e.g.
NNPC, FIRS, NAPIMS and DPR should share information on regular basis in order to
optimize PPT collection. In addition, steps should be taken towards the codification of all
legislations applicable in the Oil and Gas Sector. This will prevent the continued reliance
on unilateral Ministerial orders or presidential side letters which often override the
statutes. As a matter of oil administration policy, all matters affecting taxation, deductible
costs and revenues should by commonly agreed between Government and all the
Agencies charged with responsibility for PPT collection.
4.0 Taxation of Small and Medium Enterprises
Compliance has been a great problem in the Nigerian Tax System, and this largely stems

from the large scale of Nigeria’s informal economy. The administrative burden of the
provisions of general tax laws may be too much for these companies, and therefore
efforts should be made to deal effectively and efficiently with them. This involves
strategies to increase both compliance and revenues whilst keeping the cost of
administration as low as possible.
4.1 Presumptive Income Tax
For those Small and Medium Enterprises that have historically failed to comply with the
tax laws, possibly due to their size and lack of a fixed business address, a simplified
Income Tax shall be applicable. This tax, known as a Presumptive Tax, will require much
less of an informational burden on the taxpayer, and will result in a quick and effective
method of providing an assessment. The method for such Income Taxation will be tightly
controlled and clear guidelines will be issued so that there is limited room for discretion
on the tax inspector’s part.
4.2 Value-Added Tax (VAT) Threshold
In order to establish effective administration of VAT, the Federal Inland Revenue Service
(FIRS) shall operate a threshold of company and enterprise turnover, below which there
will be no obligation to charge or remit VAT. The appropriate turnover threshold level
will be decided by the FIRS and will eventually be introduced.
Any entity with turnover level above the decided threshold should be fully complying
with the provisions of the VAT Act, and this will be strongly enforced.
This threshold level does not oblige these companies and enterprises to not collect VAT
if they wish to recoup their input VAT. However, if they do wish to receive their input
VAT they must be fully registered and complying with the regular monthly returns to
their Integrated Tax Office.
5.0 Large Taxpayers

Good progress has been made in taxing Large Taxpayers with the establishment of the
FIRS Large Tax Offices (LTOs). These LTOs have enabled the development of
specialists in dealing with the biggest contributors to Income Tax Revenues. The FGN

will ensure that even closer relationships are established with the largest taxpayers in
order to ensure full compliance and to minimise tax avoidance and evasion. The
simplification of the tax laws and better taxpayer services as expressed in section 4.2,
together with a strong and effective tax enforcement programs will all help ensure that
biggest taxpayers are maximizing their role in the Nations development.
6.0 Elimination of Multiple Taxation
Multiple taxation from Federal, State and Local Government has been very harmful to
the investment climate of Nigeria. Much of this is attributable to the political system and
is the result of the current inability to coordinate between the various Government levels.
In order to correct these failures, there is need for the relationship between the Federal
Inland Revenue Service (FIRS) and the Joint Tax Board (JTB) to be strengthened.
Furthermore, legislation should be pursued that empowers the JTB to have coordinating
powers for taxation across Nigeria rather than only acting as an information sharing
body. This will help minimize the harmful circumstances where businesses are forced to
pay multiple taxes on the same income, or where consumers will have to pay multiple
taxes on the same expenditure.
7.0 Conclusion
Through the strategies developed in this document, Nigeria will be making the most
effective use of its tax system given the particular situation of the economy i.e. Large oil
revenues and inadequate infrastructure. Through strategies such as reducing both
Companies and Personal Income Tax, the tax climate in Nigeria will be substantially
better for encouraging both domestic and foreign investment, and this will go someway to
compensate for some of the deficiencies in infrastructure that companies operating in
Nigeria are currently facing.
The strategy is focused at pushing Nigeria forward as a competitive economy in Africa

and will help ensure that the country will not lose out on inward investment with the
establishment of the free-trade zone and customs union of ECOWAS.
Finally, it is a sustainable strategy in the sense that it is making use of an unsustainable

resource (i.e. Oil reserves) in order to build up a sustainable real sector of the economy.
The FGN should now start the process to begin reflecting these strategies in the various
legislations, and seek to quickly pass the appropriate amendments. Investment is needed
not for its own sake, but for the sake of improving the living standards of Nigerians.
Through this investment will come more jobs, higher wages and competitive prices. All
this should hopefully provide for a more promising and prosperous future for all
Nigerians.

Appendix Three
Appraisal of Existing Tax Incentives
Category 1
S/N Description of Relevance/Application Rates of Concessions / Relevant Tax
Concessions Comments Section in Statute
i. In-Plant Training Applicable to industrial 2% of cost incurred is Not Available
establishments that have deductible
set up in-plant facilities
ii. Investment in Applicable to industries 20% of the cost of
Infrastructure that provide facilities providing the facilities is
which should have been deductible
provided by Government
e.g. pipe-borne water
supply and electricity
iii. Investment in Applicable to industries Tax holiday of 7 years in
Economically sited in economically addition to 5% capital
Disadvantaged areas disadvantaged Local allowances over and
Government areas. above the initial capital
allowances
iv. Labour intensive Applicable to industries Employment of 1,000
mode of production with high labour/capital persons or more enjoys
ratio. Such industries 15% of cost of plant.
should employ more Graduated rates apply
persons than plants to
qualify.
v. Local Value Content Aimed at encouraging 10% cost of assets for a
local fabrications rather period of five (5) years
than the mere assembly
of completely knocked
down parts (CKD)
vi. Utilisation of Minimum Applicable to industries Tax credit of 20% of cost
Local Raw Materials that attain the minimum is granted for a period of
level of local raw five (5) years.
materials sourcing and
utilization as follows:
Agro-Allied - 70%
Engineering- 60%
Chemicals- 60%
Petro-chemicals- 70%
All the concessions described above are difficult to implement and monitor. They are cosmetic in nature and
investors are often not aware of their existence.

Category 2
Manufacturing Companies
Concessions Comments Section
i. Incentive for Small Companies Relief 1. Companies with less
Manufacturing than N1.0m annual
Companies turnover to pay tax at
the rate of 20% during
the first five years.
Comment: Distortionary
concession to be
abrogated from the
status. All companies
should pay at the same
tax rate.
2. Dividends from small CITA – S19(1)(O)

manufacturing
companies are
exempted from income
tax during the first 5
years.
Comment:
From experience, small
companies distribute
dividends to their owners.
To be abrogated from the
status.
ii. Research & Research & Development Research & Development CITA – S22(1-2)
Development expenses are now expenses should be
expenses deducted for tax treated as normal
purposes in the relevant operational expenses
year. The cost is to be rather than accorded the
treated as capital. status of capital assets in
addition.
iii. Cement Producers For Cement producers in Two (2) years exemption Budgetary
order to encourage them from Income tax
to increase production Comment: IDA – S10
and reduce prices. To be abrogated. Difficult
to implement and
monitor.

iv. Locally made spare Manufacturers of locally The 25% investment tax CITA – S28(F)(1-2)
parts made spare parts, tools credit on equipment
and equipment purchased.
Comment: to be
repealed.
Agricultural Sector
i. Unrestricted capital Unrestricted capital Claim of 100% of capital CITA – S24(7)
allowances allowances for companies allowances still
engaged in agriculture or supportable.
agro-allied business
ii. Exemption from Companies engaged in The concession should CITA – S28(3)(A)
payment of Minimum Agriculture/agro-allied be reviewed. Every
tax businesses are exempted company declaring losses
from the payment of should be encouraged to
Minimum tax make a token contribution
as tax annually.
iii. Enhanced capital Agro-Allied businesses Provision should be 2nd Schedule of CITA
allowances enjoy enhanced capital retained.
allowances of up to 50%
on their plant and
machinery
iv. Processing of Companies engaged in The concession should IDA – S10(I) & S3(6)
agricultural produce the processing of be reviewed. It does not
agricultural produce do seem to be justifiable in
enjoy pioneer industry present times.
status for a period of five
(5) years of its project life.
v. Carried Forward of Losses can be carried Provision should be CITA – S27(3)
Losses forward indefinitely retained.
Solid Mineral Sector
i. Tax holiday Companies engaged in No payment of Income IDA – S10(I) & S3(6)
development of Solid Tax.
minerals to enjoy 3 years
tax holiday Comment:
Irrelevant provision.
Companies do not seem
to take advantage of the
benefits.
ii. Income tax rate Low income tax rate of Comment: CITA S29(1)

between 20% - 30% The provision is
distortionary and should
be abrogated. All
companies should be
assessed to tax at a
single of 30%.
iii. Deferred royalty Deferred royalty payment Comment:
payment depending on the Provision should be
magnitude of investment reviewed. Level of
for companies engaged in investment to be
solid mineral achieved before
development. qualifying for the benefit
not specified.
iv. Depreciation or Depreciation or Capital Comment:
Capital allowances allowances of 75% of The concession should
certified true Capital be reviewed in the light of
expenditure allowed in current trend.
the first year of operation.
Also, investment
allowance of 5%
Roll-over relief available
to such companies.
v. Increase in the rate of Increase in the rate of Comment:
initial and annual initial and annual May be retained in view
allowances allowances from 20% and of the priority recognition
10% to 30% and 20% accorded the sector.
respectively.
Tourism Sector
i. Exemption from tax 25% of income derived Comment: CITA – S28(E)
from tourists by hotels in The provision is
convertible currencies is distortionary and should
to be exempted from tax, be abrogated
provided such incomes
are put in reserve fund to
be utilized within five (5)
years for expansion of the
construction of new
hotels and facilities for
development of tourism.

Tax Incentives to Companies engaged in Export Promotion
i. Exemption from tax Profit of any company in Comment: CITA – S19(1)(q)
respect of goods Clumsy wordings.
exported from Nigeria is Provision should be
exempted from tax reviewed.
provided that the
proceeds from such
exports are repatriated to
Nigeria and are used
exclusively for the
purchase of raw
materials, plant,
equipment and spare
parts.
ii. Tax free import Tax free import of raw Comment:
materials on goods Difficult to monitor the
destined for re-export involvement of such raw
materials. The provision
should be abrogated.
iii. Pioneer Status Granting of pioneer status Comment: IDA (List of pioneer
to manufacturer of Misapplied provision. The industry)
exported goods who concession should be
exports at least 50% of withdrawn.
their annual turnover
Transport Sector
i. Tax Holiday Shipbuilding, repairs and Comment:
maintenance of vessels, May be retained in view
boat, barges, diving and of the priority recognition
underwater engineering accorded the sector.
services, aircraft
maintenance and
manufacturing are
considered pioneer
products. As a result,
they enjoy between 5 - 7

years tax holiday
depending on their
location.
Banking Sector
i. Exemption from tax Interest income earned Comment: CITA – S9(9)
by banks on loans to May be retained in view
companies manufacturing of the priority recognition
for export accorded the sector.
Exemption from tax Interest income earned Comment: CITA – S9(7)
by banks on loans to May be retained in view
companies engage in of the priority recognition
Agricultural activities accorded the sector.
Category 3
Gas Industry Incentives (Downstream Operation)
S/No Description of Relevance/Application Rates of Concessions / Relevant Tax
i. Enhanced investment Enhanced investment May be retained CITA – S28(G)(1)(a)
allowance and tax allowance of 35% on
holiday assets acquired, or a 3-
year tax holiday which is
renewable for an
additional period of 2
years, subject to
satisfactory performance
ii. Exemption from VAT Plant, machinery and May be retained
equipment purchased for
gas utilisation is exempt
from VAT
iii. Enhanced Capital An annual allowance of May be retained CITA – S28G(B)(i)(ii)
Allowance 90% plus an additional
investment allowance of
15% after the tax free
period. Where a gas
company opts for the
enhanced allowance, it
will not be entitled to the
15% investment
allowance
iv. Tax Free Dividend Tax free dividends during May be retained CITA – S28G(C)(i)(ii)
the tax holiday, provided
that the investment for
the business was in

foreign currency or the
value of imported
plant/machinery
introduced is not less
than 30% of the equity
share capital of the
company
Gas Industry Incentives (Upstream Operation)
i. Tax Regime Gas income is subject to May be retained A subsidiary
tax under the Companies amendment
Income Tax Act at the subsequent to 1995.
rate of 30%
ii. Gas transferred Gas transferred from a May be retained in view PPTA – 10A(1)(g)
concession Natural Gas Liquid (NGL) of the priority recognition
facility to the gas-to- accorded the sector.
liquids facilities is subject
to 0% Petroleum Profits
Tax and 0% royalty
iii. Capital investment for Capital investment on May be retained PPTA – 10A(1)(b)
oil development facilities and equipment
required to deliver
associated gas in usable
form at utilisation or
designated custody
transfer points is treated
as part of the capital
investment for oil
development.
iv. Investment required Investment required to May be retained PPTA – 10A(1)(a)
for separation separate crude oil and
gas from the reservoir
into usable products is
also considered as part of
oil field development
Others
S/N Concessions Benefication Comments Relevant Tax
Section
i. Investment Tax ITA is granted to a May be retained CITA – S28F(i)&(ii)
Allowance (ITA) company in respect of
any capital expenditure
made during the
accounting period

ii. Pioneer status for A company engaged in May be retained CITA – S28G(1)(a)
companies engage in gas utilization
LNG projects (downstream operation)
granted an initial tax-free
period of 3 years which
will be renewed for and
additional period of two
years subject to the
statutory performance of
his business.
iii. Graduated Royalty Royalty is approved at Suggested for review. Petroleum Act – S62
rates graduated rates for oil
companies as follows:
• On shore production –
20%
• Production in territorial
waters and continental
self areas up to 100
metres water depth –
181/2%
• Production in territorial
waters of continental self
areas beyond 100
metres – 162/3 %
iv. Double Taxation As a concession to May be retained
Relief Nigeria's treaty partners,
government approved a
lower treaty rate of 7.5%
on dividends, interest,
rent and royalties when
paid to a bonafide
beneficial owner of a
treaty country.
Tax Concessions involving Individuals and Taxes
i. Unit Trusts Dividend distributed by May be retained CITA – S19 (1)(f)
unit trust is tax exempt
and no further withholding
tax shall be deductible
thereof.

ii. Incentive in Income brought into May be retained in view CITA – 19(1)(m)
repatriation of foreign Nigeria through the of the priority recognition
earnings – Nigerians approved channels is tax accorded the sector.
exempt.
ii. Incentive in Foreign investors are free May be retained in view Foreign Exchange
repatriation of foreign to repatriate their profits of the priority recognition (Monitoring &
earnings - Foreigners and dividends net of accorded the sector. Miscellaneous
taxes through an Provision Act No. 17
authorized dealer in freely of 1995)
convertible currency.
iii. Stocks and shares Stocks and shares are May be retained CGT – S(31)(i)
exempted from capital
gains tax

Appendix Four
LINKAGES FOR EFFECTIVE TAX POLICY
Unified Registration
Stakeholder Support Processed/Linkage to
− FEC/NEC/FMF/ Third Party Data
FIRS/JTB − FIRS/CAC/NCS Taxation in Education
− OAGF/BMPIU Curriculum
− Law enforcement
− National Population − Primary
Agencies
Commission − Secondary
− Tax Professionals
− CBN/Banks − Tertiary
− National Assembly
Tax Payer Considerations Tax Policy

− Convenience − Tax Types Organisation for regular
− Number of Taxes − Sectoral Focus
tax policy research and
− Points of Taxation − Tax Base
annual review with
− Services − Rates/Incentives
linkage to legislation
− Education − Competencies
− Admin. Resp
Relationships between National Mapping and

FG, SG and LGs Building numbering
− Policy systems policy and
− Legislative Holistic approach to implementation (to
− Responsibility provision of duties, enable registration and
waivers, exemptions, tax correspondence)
− Collection
− Distribution incentives, etc.

52

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What are the objectives of the National Tax Policy?

What are the objectives of the National Tax Policy?

What principles will guide taxation in Nigeria according to this document?

What principles will guide taxation in Nigeria according to this document?

Draft Document on the

National Tax Policy

ii Updated as at 16th July, 2008

iii Updated as at 16th July, 2008

• The Nigerian Tax System shall be subject to comprehensive review every

iv Updated as at 16th July, 2008

v Updated as at 16th July, 2008

2. Objectives of the Nigerian Tax System and the features

3. Stakeholders in the Nigerian Tax System 8-13

4. Policy and Administration 14-20

5. Using the Tax System to Create Competitive Advantage 21-24

vi Updated as at 16th July, 2008

Appendix 1: Comparative Tax Rates in selected African Economies 27

Appendix 2: Strategy for Implementation of the Proposed Tax Policy 28-42

Appendix 3: Assessment of Tax Incentives 43-51

Appendix 4: Linkages for Effective Tax Policy 49

vii Updated as at 16th July, 2008

Thereafter, a private sector-driven Working Group was constituted on 12 January 2004

1 Updated as at 16th July, 2008

2 Updated as at 16th July, 2008

OBJECTIVES OF THE NIGERIAN TAX SYSTEM AND THE

2.1 Objectives of the Nigerian Tax System

2.1.1 To enable economic growth and development.

The overriding objective of the Nigerian Tax system is to achieve

3 Updated as at 16th July, 2008

For Nigeria to pursue an active development agenda, or to even carry out

2.1.3 To provide economic stabilisation

2.1.4 To pursue fairness and distributive equity

For Nigeria to focus on horizontal equity is to be concerned with equal

4 Updated as at 16th July, 2008

2.1.5 To correct Market Failures or Imperfections

2.2 Features of a Good Tax System in Nigeria

2.2.1 Simplicity, Certainty and Clarity.

It is therefore imperative that the Nigerian Tax system must be simple

5 Updated as at 16th July, 2008

2.2.3 Low cost of administration

Based on the foregoing, there must be overwhelming reasons for extending

6 Updated as at 16th July, 2008

Taxes in Nigeria should be flexible enough to respond to changing

2.2.6 Economic Efficiency

Economic growth and development can be damaged where marginal tax

7 Updated as at 16th July, 2008

STAKEHOLDERS IN THE NIGERIAN TAX SYSTEM

1 Three Arms of Government

• Executives of the Federal, State and Local Government

2 Tax and Revenue Authorities

• Federal Ministry of Finance

3 Tax Payers and Consultants

• Nigerian Public (tax paying and non tax paying)

8 Updated as at 16th July, 2008

The relationship between the Federal Tax Authorities as represented by the

The Tax and Revenue Authorities should establish formal inter-agency

Also, a more structured information-sharing arrangement shall be established

9 Updated as at 16th July, 2008

Joint Tax Board Office of the Accountant