Real Estate & Construction

Create the Bedrock

Infrastructure tax credit scheme

Nigeria has rolled out an infrastructure tax credit scheme that may change the face of the country within the next 10 years.

Developing and populous economies such as Nigeria require investment in infrastructure—and a huge amount of it, too, given the fact that the limited existing amenities are clustered in large cities such as Lagos and Abuja. Many Nigerian cities outside these two megacities look like ghost towns: the road infrastructure is far from acceptable, utilities such as electricity and clean water are hardly reliable, and there is no sign of small things that European and wealthy Asian countries take for granted such as public WiFi connections.

Infrastructure, as you can imagine, is quite expensive to build. Traditionally, there have been three possible sources of cash for building infrastructure, which we shall briefly review. First, lucky, oil-rich nations can dedicate a part of their petrodollars to upgrading their infrastructure, but this is only possible in oil-rich countries with a limited population—and not in a country with a population of over 201 million. What is more, after the oil crashes of 2014 and 2020, crude petroleum is not the same endless source of money that it once was. As such, despite having notable proven oil reserves and steady oil exports, Nigeria cannot count on its petrodollars to improve the infrastructure.

Alternatively, many countries such as Western nations, use taxpayers’ money to build infrastructure. However, tax evasion is quite frequent in Nigeria, especially among smaller businesses. It is a sad reality of the Nigerian economy that the tax structure and tax collection mechanism have never been fully formed to ensure a steady stream of tax revenue for the state and federal governments. Even those who do pay their taxes, often find ways to pay “the lowest tax validly possible and cannot be compelled to pay anything more,” according to Ayooluwatunwase Fadeyi, a Nigerian barrister and solicitor.

Aside from tax revenues, there is one final possible source of funds for building infrastructure across a country, which similar to the previous source, is mostly common in the West and other developed economies. Private investors, hedge funds, and pension funds sometimes decide to invest in infrastructure to use the revenues in the future, but as the national currency, naira, is notoriously prone to devaluation, investors and pension funds have shown little interest in long-term forms of investment such as investing in public infrastructure. This is why Nigeria has been struggling with aging, poorly-maintained, and—at times—nonexistent infrastructure for well over four decades.

The Nigerian government, however, rolled out a new scheme in 2019 by President Muhammadu Buhari which may be a game-changer. The scheme is supposed to generate some USD3 trillion that Nigeria needs to upgrade its infrastructure over the next 25 years. Based on the new scheme, companies—small or large—will be incentivized to invest in infrastructure instead of paying direct taxes.

The aforementioned investment can take many forms and is negotiable between interested companies and the tax authorities. A company, for example, can agree to refurbish the roads in an underprivileged region and enjoy up to 100% of income tax exemption. If the refurbishment of roads is within the specialties of that particular company, this will be a win-win game both for the government and the tax-paying company.

Some large companies have already shown interest in the infrastructure tax credit scheme, including the African telecom giant, MTN. Since the telecom infrastructure in Nigeria leaves a great deal to be desired, MTN’s potential contributions will be useful, especially in remote and disadvantaged areas where mobile phone connection and internet coverage is poor. This half-imaginary scenario about MTN—which may soon turn into a reality—will have many knock-on effects, as well: having a better telecom infrastructure will speed up financial inclusion (through mobile payments which are popular in Nigeria) and literacy (through distance education).

There are yet other companies in key sectors related to infrastructure which will be happy to reclaim their income tax by building infrastructure across the country. Dangote Group, an African conglomerate involved in industrial megaprojects is yet another big name which has shown interest in the scheme. The group’s frontman, Aliko Dangote, has been quoted in the past to say, “Nothing is going to help Nigeria like Nigerians bringing back their money. If you give me USD5 billion today, I will invest everything here in Nigeria. Let us put our heads together and work.” The infrastructure tax credit scheme is perfectly in line with the sentiments expressed by Aliko Dangote in the past, and given the group’s experience in infrastructure projects, its joining can be truly valuable for the scheme, particularly as many other Nigerian business magnates are likely to follow his lead.

It is hoped that the new infrastructure tax credit scheme will decrease tax evasion in Nigeria, while improving the public infrastructure in the country: whereas paying corporate revenue taxes sounds like a soulless, dry, and bureaucratic affair, taking a step toward the betterment of the public’s welfare, especially in underprivileged communities, has a more humane aspect to it. The scheme will be in place for ten years, and if—hopefully—it achieves most of its objectives, it will give a better face and brand image to Nigeria in the next decade.

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