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Tax Bites Tax Bites www.pwc.com/ng Bitrus Baba Are additional tax incentives needed to stimulate the Nigerian mining industry? – Part 1 Introduction It is no longer news that Nigeria's precious black gold is no longer sufficient to sustain the economy. With the decrease in oil prices, Nigeria started looking into other sources of generating revenues, so as to create a more sustainable economy. Taxation was easily a top choice, and the periods following the 2016 recession brought about the introduction of tax bills and regulations, tax policy and business reforms and an increase in enforcing tax compliance by the relevant tax authorities. The Federal Government also began looking at the non-oil sectors such as agriculture and mining, which have been largely ignored since the oil boom. Proponents of diversification will argue that the mining industry is crucial to revive Nigeria's economy. However, the question that comes to mind is, how to generate interest and consequently, investment (foreign and local) in a largely ignored industry plagued with its unique issues, such as illegal mining? Government's response – tax incentives! And so the period following the decline in oil revenues saw the Federal Government trying to woo investors by promising tax holidays and duty waivers on the importation of mining equipment. However, these were not new incentives. The communicated tax breaks/waivers were incentives that had already been available in existing legislation to potential investors intending to invest in the mining industry. So, if these incentives had always been there, would Government's sudden proclamation of said incentives suddenly spur investment into the industry? Perhaps, the promise of the three- year tax holiday, as well as the import duty waiver was insufficient to woo investors. Let's take a look at the existing legislation to review available incentives and determine whether additional tax incentives are needed to attract investment and jumpstart the mining sector. Tax incentives currently available under existing laws Under the Nigerian Minerals and Mining Act (NMMA), a company granted mineral title is entitled to tax relief for a period of three years from the date of commencement of operation, which may be extended for another two years, subject to specified conditions. Additionally, operators in the mining industry are granted exemption from the payment of customs and import duties in respect of plant, machinery, equipment and accessories imported specifically and exclusively for mining operations. A similar tax holiday provision exists in the Industrial Development (Income Tax Relief) Act (IDITRA) for specified 'pioneer' industries which the Federal Government deems as not being carried out on a scale suitable to the economic requirements of the country or where there are favourable prospects for the further development of such industries. Until the official gazette of August 2017 (released in November 2018) was issued, there was no mention of valuable mineral resources as gold, coal, bitumen, nickel and tin. The former gazette of the pioneer industries included mining of lead, zinc, iron, barytes, bentonites and associated minerals. However, gold, coal and bitumen have now been included while nickel and tin remain omitted, despite the purported discovery of nickel and tin's previous importance to the country. Unlike the NMMA however, additional incentives are available to qualifying companies under the IDITRA. The additional incentives include withholding tax exemption on dividend distributed from pioneer profits; and capital allowances and tax losses suspension during pioneer, to be utilised after the expiration of the tax holiday. The Companies Income Tax Act (CITA) contains a provision titled 'mining of solid minerals' which provides that a new company going into the mining of solid minerals will be exempt from tax for the first three years of its operations. There is no mention of a possible extension for another two years after the initial three-year exemption. Additionally, the CITA contains the following tax incentives: · A Nigerian company which commences business, engages in the mining of solid minerals and earns a total gross turnover of less than a million naira, will be taxed at a reduced rate of 20%; and · Accelerated capital allowances at 95% initial allowance on mining expenditure. This provision similarly exists in the NMMA. · Profits are exempted from corporate tax where the minerals are exported from Nigeria, and the proceeds from such exports are repatriated to Nigeria and used exclusively for the purchase of raw materials, plants, equipment and spares. · Profits are exempted from corporate tax where the minerals produced are exclusively inputs for manufacturing products for exports, provided the exporter gives a certificate of purchase of input to the company. Lastly, minerals exported by Nigerian mining companies are zero rated for Value Added Tax (VAT) purposes. The benefit of this is the recovery of input VAT incurred by the mining companies; although this comes with the practical issue of seeking a refund from the tax authority, which could be time consuming to obtain in order to derive the benefit. Some of the non-tax issues plaguing the mining industry Issue #1 – Infrastructure challenges Mining demands a lot of energy. Unfortunately, electricity in Nigeria is expensive. As grid electricity is low in supply, comes with frequent outages and is typically unavailable in remote mining locations, companies have to rely on fossil fuels to power their operations. This would require significant investment in power infrastructure and subsequent recurrent expenditure on fossil fuels. Mining also demands proper transportation systems that give access to mineral deposit sites. As with power, transportation infrastructure is lacking. For example, the critical rail line meant to connect Ajaokuta plant to the iron ore mines and aid with the transportation of the finished steel was never completed. This was a contributory factor to the steel mill never producing any steel. Issue #2 – Cost of finance The cost of loan capital in Nigeria is relatively high compared to other jurisdictions. With interest rates of over 20%, this high cost of borrowing discourages potential borrowers intending to invest in mining, which is a risky and capital intensive industry. Issue #3 – Policy changes A great example is the termination of the concession of the Ajaokuta Steel Factory to the private-sector investor, with the plant now being controlled by the Government. Such unforeseen changes make the investment even more risky and consequently deter investors. Any investor would want guarantee that its business agreement will not be prematurely terminated and that it will be able to repatriate its investment, without concerns about sudden political or regulatory changes. Issue #4 – Host community relations Mining activities often present conflicts between host community members and mining companies, especially where community members are not properly engaged. In extreme instances, there is civil unrest and local community members vandalise mining sites, thereby disrupting operations. This makes security a great area of concern for investors. Prevalent illegal mining activities by community members is also an area of concern. Issue #4 – Dated geological information Available geological information showing location and quantity of mineral resources are dated. This makes investors weary of investing as the reliability of geological data is questionable and investing based on such data could be risky. To be continued… Tax Academy December 2018 session Topic: Tax engagement ecosystem and project management: Balancing stakeholder expectations and leading for results. Date: Tuesday 18 December Time: 9:00am- 1:00pm www.pwcnigeria.typepad.com For enquiries and registration, please call Rukiyat on 08090910121 or 012711700, ext: 54068 or via email to [email protected] or visit our website www.pwc.com/ng …the question that comes to mind is, how to generate interest and consequently, investment (foreign and local) in a largely ignored industry plagued with its unique issues, such as illegal mining? Government’s response – tax incentives!
