The Scheme in Brief:
Following the October 2017 announcement by the Federal Government of Nigeria (“FGN”) of the Road Infrastructure Tax Relief Scheme for the Private Sector (see our Newsletter), the Nigerian President on Friday, 25 January 2019, signed the Executive Order on the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme (the “Order or Scheme”). The Scheme is for a ten (10) year duration that should expire on 24 January 2029.
The Scheme grants income tax credit to private sector entities that provide funding for the refurbishment and rehabilitation of Eligible Roads. The Order defines “Eligible Road” as any road approved by the President as eligible for the Scheme. The President’s approval must be upon the recommendation of the Minister of Finance (the “Minister”) who in turn must have been presented with a list of eligible road projects by the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Management Committee (the “Committee”). The Minister is the chairman of the Committee.
Participants in the Scheme are entitled to full recovery of their costs (“Project Costs”) for the construction or refurbishment of Eligible Roads plus an uplift that is set at the prevailing Central Bank of Nigeria Monetary Policy Rate plus 2% of Project Costs (“Uplift”).
The Project Costs plus Uplift will be recognized as credits for defraying companies income tax (CIT) liabilities, which means that the Uplift will not be regarded as income in the hands of participants of the Scheme.
How the Scheme will work:
A process flow of the expressed workings of the Scheme is diagrammed below:
The FIRS and the RITC Certificate
The FIRS is saddled with the responsibility of annually issuing the RITC Certificate (the “Certificate”). The Certificate will be issued to a participant upon presentation of:
1. a confirmation of authorization to participate in the Scheme issued by the Committee;
2. approval of the Project Costs and completion timeline bid by the Committee;
3. contract award letter; and
4. certificate of work done issued by the Committee.
The RITC Certificate shall contain, the: (i) Project Costs incurred by a participant in the relevant fiscal year; (ii) the Uplift on the Project Costs; and (iii) the RITC due to the participant. Where there is a pool of companies represented by a fund manager or any other person, the FIRS shall, through the Committee, issue separate RITC Certificates to each company in the pool in proportion to their contribution on the advice of the fund manager or representative.
In the event a participant has been issued a certificate of work done by the Ministry of Works through the Committee and the FIRS fails to issue the RITC Certificate within 14 (fourteen) days of issuance of the certificate of work done, a participant shall be entitled to claim its RITC within 14 (fourteen) days of issuance of the certificate of work done by the Committee.
The RITC that can be claimed in any year of assessment shall be limited to 50% (fifty) of the CIT payable by a participant provided however, there is no cap on Eligible Road project in an “Economically Disadvantaged Area”. An Economically Disadvantaged Area is any area or location in any geopolitical zone or state designated as “Economically Disadvantaged” by the President on the advice of the Minister. Factors to determine if an area is economically disadvantaged include: (i) average income level of the inhabitants in such area (ii) availability of basic infrastructure such as electricity, water, sewage, telecommunication, transport, etc. (iii)volume of economic activities being undertaken in the area.
The owner or bearer of RITC cannot claim any other tax credit, capital allowance, relief or incentive on the Project Costs under any other Nigerian law.
The RITC Certificate is a tradeable instrument and a participant or holder of the Certificate can dispose the whole or a part of it to a willing buyer on the FMDQ Over-the-Counter Securities Exchange or any other approved securities exchange (the “Relevant Securities Exchange”). Any participant willing to trade its RITC Certificate shall obtain the approval of the Committee and designate the transaction status of its Certificate as “ tradable on the Relevant Securities Exchange ”. Where the whole or part of a RITC Certificate had been designated as “tradable on the Relevant Securities Exchange” by a participant and that participant (i) no longer wishes to trade on either the whole or part of the RITC Certificate on the Relevant Securities Exchange or (ii) wishes to utilize the whole or part of its RITC Certificate, the participant shall notify the Committee to change the registration status of the whole or part of the Certificate, so as to indicate that it is “no longer tradeable on the Relevant Securities Exchange”.
Every disposal of an RITC Certificate shall be reported to the Committee which shall de-register the participant making the disposal and register the new beneficiary of the Certificate.
The RITC Certificate qualifies as an asset to a participant of the scheme and shall be subject to capital gains tax rules in the event of a disposal.
Our Immediate Thoughts:
The innovations that the Order has introduced to the Nigerian income tax incentives landscape is novel and welcome. The financing of critical road infrastructure through tax incentives; the application of the deemed approval concept of the FGN’s Executive Order 1; and the tradability of RITCs are some of the laudable concepts of the Order. True with most good intentions, the greater challenge of the Order will be in its implementation. The establishment of a relatively elongated and over-lapping bureaucratic process for the implementation of the Order does not disabuse this view.
FIRS’ administration of the RITC is pivotal to the administrative success of the Order. The practicality of a deemed approval of a RITC Certificate by the RITC is a source of concern as it is doubtful that a participant would want to take the risk of a deemed approval especially with the FIRS considering that same FIRS is responsible for recognizing the RITC against applicable income taxes. The FIRS commitment to the success of the Order would have to be demonstrated by its administrative efficiency to the recognition and issuance of RITCs. This includes the FIRS avoiding such future instance as was experienced with the withholding tax (WHT) utilization directive, where holders of WHT Credit Notes had to revalidate them with the issuing authority, the FIRS.
The Committee has its work cut for it on so many fronts, including for questionable organizational processes; for example, although headed by the Minister, the Committee still has the responsibility of advising the Minister. Some clarifications will still be required by the Committee, for example on how it expects the requirement of a competitive bid process for the award of road construction contracts to apply to construction companies who intend to participate in the Scheme, in the circumstance that such companies may rationally use their human, financial and material resources to execute an Eligible Road project without the need for vendors. It is expected that the Committee will set out the applicable rules for these categories of participants.
with the subject: “The Nigerian Road Investment Tax Credit: A Precis of the Incentive”.