Harnessing the Nigerian Government’s Tax Incentives for Road Construction

The Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme (the Scheme) is a form of tax incentive granted to Nigerian companies (other than a corporation sole) that engage in the construction and refurbishment of roads designated by the Federal Government of Nigeria as “eligible.”

The Scheme came into effect on Jan. 25, 2019, when Nigerian President Muhammadu Buhari signed Presidential Executive Order No. 007. The Scheme is for a period of 10 years, starting from the commencement date of the Executive Order (i.e., 2019).

The main objectives of the Scheme are to incentivize and promote private sector funding for the construction or repair of eligible road infrastructure projects in Nigeria, increase the focus on the development of eligible road infrastructure projects in a manner that will generate value for money through the private sector, and guarantee participants timely and full recovery of funds provided for the construction or repair of eligible road infrastructure projects in the manner prescribed in the Executive Order.

Applicants (i.e., companies) intending to participate in the scheme are required to register and be certified by the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Management Committee (the Committee). The recommendation of the applicant’s eligibility to participate is determined by the Committee, where it confirms that the applicant’s proposed project is economically viable, cost-efficient and can be completed in a timely manner (within 12 to 48 months).

Road Infrastructure Tax Credit (RITC)

Participants such as Nigerian companies acting on their own or in collaboration with other Nigerian companies and institutional investors are entitled to utilize the project cost incurred in the construction or refurbishment of an eligible road as a tax credit against their companies income tax (CIT) liability, until full cost recovery is achieved. In essence, this credit does not expire.

In addition, participants are also entitled to a single uplift equal to the prevailing Central Bank of Nigeria monetary policy rate plus 2% of the project cost. The uplift will not constitute taxable income in the hands of the participant or beneficiary; however, companies can utilize the uplift as a tax credit against CIT payable. In this regard, a beneficiary is a company appointed by the participant or any person that has purchased or otherwise acquired the right to utilize the whole or part of the RITC initially issued to the participant.

The utilization of the RITC is contingent on the receipt of the road infrastructure tax credit certificate from the Federal Inland Revenue Service. In this regard, the amount of the RITC that may be utilized in any year of assessment is limited to 50% of the CIT payable by the participant or beneficiary. However, RITC issued on account of eligible roads in economically disadvantaged areas can be fully utilized in an assessment year without any form of restriction.

It should also be noted that the Scheme allows the holders of the RITC certificate to register as well as trade the RITC on a relevant securities exchange. Participants are also permitted to undertake disposal of the whole or part of their certificate to willing buyers on a relevant securities exchange. However, such trade must be brought to the attention of the Committee. The Committee is empowered to de-register the participant that sold its RITC and register the new beneficiary.

Harnessing the Benefits Provided by the Scheme by Nigerian Companies

Ordinarily, donations made by companies to certified organizations in Nigeria in accordance with the relevant provisions of the Companies Income Tax Act are allowed for tax purposes to the extent that it conforms with the relevant provisions. However, where a company makes donations to organizations that are not approved by the Companies Income Tax Act, the donations are often disallowed for tax purposes.

Considering the tax incentive provided by the Scheme, a Nigerian company can mitigate the impact of the disallowable donations by registering with the Committee in order to be eligible to carry out road development and refurbishment projects on designated roads in Nigeria. In this regard, the company, upon presentation of the RITC certificate, would be allowed to claim both the project cost and the uplift as a tax credit against CIT payable.

Embarking on such projects will boost the corporate image of the participating company, especially in economically disadvantaged areas, and will possibly reduce or eliminate CIT payable in a year of assessment where the company has unutilized tax credit.

It is advisable that companies intending to participate in the scheme carry out robust financial model analysis to enable them to make a fully informed decision.

Conclusion

In view of the above, participation should be beneficial for those companies participating in the Scheme, as the tax credit should result in a reduction or elimination of CIT payable, specifically where the eligible road projects are carried out in economically disadvantaged areas.

Further, the Scheme provides for the sale of RITC to willing buyers on a relevant securities exchange. In this regard, companies registered with the Nigerian Securities Exchange Commission should be better placed to benefit from the incentives provided by the Scheme, as they have the option of selling the RITC to interested buyers.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Temitope Samagbeyi is Global Compliance and Reporting Tax Partner with EY, Nigeria.

The author may be contacted at: temitope.samagbeyi@ng.ey.