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With the administration of President Bola Ahmed Tinubu ushering in a new fiscal direction, the government has sought to increase national revenue by targeting sectors previously exempt from taxation. The introduction of the Tax Reform Bill aims to expand Nigeria’s tax base by including sectors and transactions that were either untaxed or undertaxed. One of the key changes under the Bill is the taxation of FTZ entities and digital asset transactions.
Previous Position: Tax Exemption for FTZ Entities
Before the introduction of the new Tax Reform Bill, entities operating within Nigeria’s Free Trade Zones (FTZs) enjoyed broad tax exemptions. Section 18 of the Nigeria Export Processing Zone Act explicitly states that businesses within these zones were not subject to federal, state, or local government taxes, including income tax, value-added tax (VAT), and other levies. This tax incentive was designed to attract foreign investment, stimulate export-oriented industries, and promote economic development within the zones.
The New Tax Reform Bill: A Shift in Taxation Policy
With the administration of President Bola Ahmed Tinubu ushering in a new fiscal direction, the government has sought to increase national revenue by targeting sectors previously exempt from taxation. The introduction of the Tax Reform Bill aims to expand Nigeria’s tax base by including sectors and transactions that were either untaxed or undertaxed. One of the key changes under the Bill is the taxation of FTZ entities and digital asset transactions.
Taxation of Free Trade Zone Entities
The new tax regime proposed under Schedule 2 of the Bill significantly alters the fiscal landscape for businesses operating in FTZs. Sections 3, 4, and 5 of Schedule 2 outline the conditions under which FTZ entities may qualify for tax exemptions:
Full Exemption: Entities whose entire (100%) profit is derived from the export of goods or services produced within the zone will remain wholly exempt from taxes and levies.
Proportional Taxation: If at least 75% of an entity’s profit comes from the export of goods or services produced within the FTZ, the entity will be subject to proportional taxation based on the percentage of goods or services sold within the customs territory.
Full Taxation: If 25% or more of an entity’s sales occur within the customs territory, its entire profit will be subject to taxation.
Additionally, the Bill states that all previously tax-exempt entities must now comply with the provisions of the Tax Administration Act.
Furthermore, the Bill proposes that where an FTZ entity outsources manufacturing or related activities to a Nigerian resident company, the income generated will be attributed to the resident company unless the transaction is proven to be at arm’s length. The Transfer Pricing Regulations will now govern services provided to FTZ entities by non-FTZ resident companies.
The Bill also specifies a 15% tax rate on the profits of any entity that is part of a multinational group (MNE) or any company with a turnover of ₦20,000,000,000. This means that while some
Free Trade Zone (FTZ) entities may qualify for partial or complete exemptions, they could still be subject to a 15% tax if they meet these criteria.
The removal of the blanket tax exemption for FTZ entities means that companies operating within these zones must now reassess their business models and revenue streams to determine the tax implications on their operations and ensure compliance with the new regulations.
Important Notice: The information contained in this Article is intended for general information purposes only and does not create a lawyer-client relationship. It is not intended as legal advice from Jackson, Etti, & Edu (JEE) or the individual author(s), nor intended as a substitute for legal advice on any specific subject matter. Detailed legal counsel should be sought prior to undertaking any legal matter. The information contained in this Article is current to the last update and may change. Last Update: October 1, 2024.
