Nigeria as a country is always looking for ways to increase foreign and local investments, businesses, and participation in the country and one way of doing this is the establishment of Free Trade Zones. This is not alien to only Nigeria but other countries like Tanzania, Libya, Liberia, Egypt, Mauritius, China Hong Kong, Turkey, etc. Nigeria has 42 licensed Free Trade Zones and 14 functional and operational Free Trade Zones
A Free Trade Zone (FTZ) is a special economic zone where goods may be manufactured, stored, imported, handled under specific customs regulations. FTZs are generally not subject to customs duty, trade barriers, and other regulations affected by companies within the customs territory. A company registered in a Free Trade Zone is called a Free Zone Enterprise.
Custom Territories (CT) are areas in Nigeria that have no exemption from custom regulation, taxes, and other trade barriers. It is the area outside the FTZ where provisions of the tax laws, customs regulations are applied.
Approved Enterprises (AE) operating in the FTZs enjoy several incentives such as
- 100% repatriation of capital projects and dividends;
- Waiver of all expatriate quotas and Free repatriation of foreign capital invested in the Free Trade Zones at any time with capital appreciation on the investment;
- Rent-free land at construction stage within the Zone;
- Free remittances of profits and dividends earned in the Free Trade Zones;
- 100% foreign ownership of all manner of business is allowed in the Free Trade Zones;
- Complete exemption from federal, state, and local governments taxes, levies, duties, and foreign exchange regulations; amongst many others.
The focus of this article is to highlight the tax requirements of an AE operating in the FTZ and the tax implications of transactions. Section 8 of the Nigeria Export Processing Zone Authority (NEPZA) Act (The Act) states that approved enterprises operating within Free Zones shall be exempt from all Federal, State, and Local Government taxes, levies, and rates. Section 18 (1) of the Act further provides that all legislative provisions pertaining to taxes shall not apply within Free Zones.
It is worthy to note that it is only the AE that are exempted from tax, levies, or rates, and as such other companies or entities within the custom territories that carry out transactions or contracts with the AE are all liable to the applicable taxes.
The tax implication of transaction between Free Zones and Free Zone Enterprises with entities within the customs territory shall be applied as follows:
- Purchases made by Approved Enterprises from Companies operating in the Customs Territory – No Value Added Tax and Withholding Tax will apply to the approved entity; however the AE is expected to deduct WHT from the CT and remit to the relevant tax authority.
- Sales made by Approved Enterprises to Companies operating in the Customs Territory – VAT will apply and be paid by the company operating in the Customs Territory and No WHT will be deducted from the AE.
- Purchases or Sales made from Customs Territory by Unapproved Enterprises operating within the Zones – VAT and Withholding Tax is applicable to the Unapproved Enterprise.
- Imported goods conveyed through other Ports outside the Zones but consigned to the Zones – No VAT and WHT will be applicable to the AE provided that the goods are escorted from the Port of Entry to the Free Zone by the Nigeria Customs Service.
- Business activities of Head Offices or Branch Offices of Approved Enterprises located in Customs Territory dealing with Approved Enterprises – All relevant tax laws applicable except as related to purchases and sales covered above.
- Approved Enterprises having a contract of supplies or design with companies in the customs area – VAT and WHT applicable
- Submission of Tax Returns to FIRS by Approved Enterprises – Approved Enterprises are required to submit Tax Returns through the Free Zone Authority to FIRS.
The recent 2020 Finance Act has made amendments to the NEPZA and OGFZA stating that companies registered and operating in the Zone are required to comply with Section 55(1) of the Company Income Tax Act (CITA) and render returns accordingly and in the event of non-compliance, the AE will be liable to penalties as prescribed in the CIT Act.
FIRS also released a circular on the guidelines for the filing of income tax returns by approved enterprises within the export processing and free trade zones, below as some of the highlights of the circular:
Contents of Tax Returns to be Submitted to FIRS
- Audited Accounts
- Tax and Capital Allowances Computations
- A true and correct statement in writing containing the amount of profit from each source
- Duly completed Self-Assessment form
- Evidence of payment of the whole or part of the tax due (if any), into a collecting or designated bank.
- Schedules showing the computation of profits arising from transactions carried out within the Customs Area, and outside the Customs Area
Other Statutory Obligations for FZEs
In addition to its obligation to file tax returns to the appropriate tax office, AE is required to:
- Register with the Service and obtain a Tax Identification Number (TIN)
- Maintain proper books of accounts
- Maintain accurate record of employees and deduct Pay As You Earn (PAYE) from employees’ emoluments and remit same to the relevant tax authority.
- Pay income tax as and when due in respect of transactions within the Customs Area in line with Section 23 (1) (s) of CITA.
- Comply with the Transfer Pricing Regulations in respect of transactions between the enterprise and related parties
- Perform such other obligations as may be required by extant laws.
- Deduct WHT from transactions done with the company within the customs territory.