Category: Law

Nigeria is said to lose at least N6 trillion annually to abuse of tax waivers and incentives, which thrives due to weak institutional oversight. How exactly does the abuse occur? Who are the beneficiaries, and how can the loopholes be blocked? Legal and economic experts provided answers and called for an urgent overhaul, writes Deputy News Editor JOSEPH JIBUEZE.

Are tax waivers and incentives still useful? Or do they disproportionately benefit the wealthy while failing to generate meaningful economic advantage?

With Nigeria losing N6 trillion annually due to tax waivers granted to corporations, there are strong arguments for their abolishment.

If they must be retained, legal and fiscal experts say the loopholes must be closed and the waiver system overhauled, otherwise, Nigeria’s economic inequality will deepen.

This is as the government is enforcing strict austerity measures: scrapping fuel subsidies, introducing new taxes, and asking citizens to bear the economic burden with promises of better days ahead.

On March 27, a House of Representatives member, Oluwole Oke, raised the alarm about the country losing N6 trillion annually to waivers and other tax incentives due to abuse.

The House mandated its committees on Industry, Finance and Commerce to investigate the claim and report within four weeks, which ended on April 27.

Checks by our reporter show that the committee may request an extension.

Oke first moved the motion on July 14, 2023, but no report was issued almost two years later.

Asked by our reporter why he returned with the motion, he expressed displeasure with the losses the country suffers.

“While the government must provide the enabling environment for the private sector to thrive, the private sector must reciprocate by paying taxes as due,” he told The Nation.

Oke is hopeful the committee will get to the root of the matter this time.

The lawmaker complained about an opaque tax incentive system that has turned into a parallel economy where political influence often determines who benefits.

Analysts say the current framework lacks transparency, clear performance benchmarks, or accountability mechanisms.

Chairman of the Presidential Committee, Tax and Fiscal Policy Reform, Taiwo Oyedele, had expressed concern in an interview over the implications of the country incurring losses of up to N6 trillion annually in tax waivers.

Oyedele, whose committee prepared the Tax Reform Bills, was quoted as saying: “If you look at our tax expenditure reports over the past three to four years, on average, we are giving away around N6 trillion per annum. That is significant.

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“What we have not been measuring enough is the benefit we are getting from that (waivers).”

Oyedele said his committee was given a mandate to develop abuse prevention measures.

“I can confirm to you that part of the mandate given to us by Mr. President is to look at the incentive regime in Nigeria so that we can, based on data and evidence, design what is appropriate for us as a country,” he said.

The losses from tax waivers raise questions about whether Nigeria’s fiscal policies are designed to serve the public interest or reward a privileged few.

The consequences are severe for ordinary Nigerians. Public hospitals are underfunded, educational systems are deteriorating, and infrastructure projects face delays.

Escalating national debt means that while politically connected corporations enjoy tax holidays, citizens pay more yet receive less.

With the government constantly seeking new ways to raise revenue, critics argue that eliminating unjustified tax breaks for the elite is a more equitable solution than shifting the burden onto the masses.

Scale of the problem

Nigeria loses an estimated $15 to $18 billion annually through illicit financial flows (IFFs), according to the United Nations Conference on Trade and Development (UNCTAD) and Global Financial Integrity (GFI).

IFFs are funds that are illegally earned, transferred, or used across borders.

In 2020, UNCTAD estimated that Africa loses about $88.6 billion annually to IFFs, and that Nigeria alone loses about $18 billion annually to IFFs, making it one of the top 10 countries globally affected.

GFI also reported that Nigeria lost over $200 billion between 2004 and 2013 through IFFs.

Earlier reports from GFI estimated that Nigeria lost an average of $15.7 billion per year between 2003 and 2012.

The High-Level Panel on IFFs headed by Thabo Mbeki in 2015, under the auspices of the African Union (AU), suggested Nigeria may be losing up to $15–$18 billion annually, mostly through trade mis-invoicing and tax evasion.

Urgent action needed

Nigeria faces an annual financing shortfall of over US$10 billion to meet its Sustainable Development Goals (SDGs).

A report, “Taxing the Rich: Nigerian Fair Tax Monitor Thematic Report,” published in April, reveals how progressive taxation of high-net-worth individuals can reduce inequality and significantly boost national revenue.

The report, published by Tax Justice Network Africa (TJNA), Oxfam Nigeria, Civil Society Legislative Advocacy Centre (CISLAC), and Oxfam Novib, reveals the disproportionate tax burden on the poor and the vast untapped revenue potential from taxing the ultra-wealthy.

The findings show that the richest one per cent of Nigerians holds 25.5 per cent of the nation’s wealth, while the bottom 50 per cent own only 4.7 per cent.

At the same time, 99 per cent of high-net-worth individuals evade taxation.

The report highlights the role of tax exemptions, waivers and incentives, which often disproportionately benefit the wealthy while failing to generate meaningful economic growth.

TJNA says strengthening tax compliance through better enforcement, closing loopholes, and increasing transparency are key steps toward a fairer tax system.

“The lack of a comprehensive wealth registry, inadequate auditing mechanisms, and weak institutional oversight have allowed tax evasion to thrive.

“Without decisive action, the widening gap between the wealthy elite and the majority of Nigerians will continue to threaten social cohesion and economic stability,” the TJNA report says.

Why tax waivers?

Tax waivers are aimed at attracting investments and driving economic growth.

One such waiver, pioneer status, allows a company to make significant capital expenditure and a reasonable level of return on profit within its formative years without having to pay tax.

The number of local and foreign companies exempted from remitting tax revenue increased to 105 as of December 2024, according to the Nigerian Investment Promotion Commission (NIPC).

The agency approved tax holidays for 22 new companies under the Pioneer Status Incentive Scheme.

The number of participating firms rose to 104 in the first quarter of 2024, declined to 88 in the second quarter, and dropped to 83 in the third quarter, according to the Pioneer Status Incentive (PSI) report by the NIPC.

According to the report, 89 tax holiday requests were received, 34 were approved in principle, 14 got incentive extensions till 2027, and 30 are pending.

The report says investments made by 107 companies last year amounted to N2.53trillion.

They operate in manufacturing, solid material, pharmaceuticals, information and communication, trade, construction, waste management, electricity and gas supply, tourism, and infrastructure, among others.

How tax waiver abuses occur

Due to a lack of accountability, many tax waivers are granted without a clear, transparent process.

Government officials may award waivers to politically-connected individuals or companies without proper justification or oversight.

The use of discretionary powers has also been highlighted.

Ministries or agencies sometimes have wide discretion in granting tax waivers, especially under the guise of promoting investment. This discretion can be exploited to favour cronies or allies.

Also, some businesses present fake or inflated documentation to qualify for waivers they should not get. This includes over-inflating investment figures or misrepresenting import/export volumes.

Entities may set up shell companies to benefit multiple times from waivers meant for a single company or project. This is often used in the oil, gas, and importation sectors.

Waivers are sometimes extended indefinitely beyond the period necessary for a legitimate incentive, with companies continuing to benefit long after they should be paying taxes.

There’s often little follow-up to assess whether the objectives of the waiver (like job creation or infrastructure investment) were met.

This allows companies to enjoy waivers without fulfilling their obligations.

The Federal Government introduced various tax incentives to attract investment in the oil and gas sector.

For instance, the VAT Modification Order 2024 and the Oil & Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order 2024 provides exemptions on key energy products and infrastructure, including diesel, feed gas, liquefied petroleum gas (LPG), compressed natural gas (CNG), electric vehicles, liquefied natural gas (LNG) infrastructure, and clean cooking equipment.

However, some companies were granted pioneer status retrospectively, leading to refunds of taxes already paid, costing the government approximately N1.85 trillion in revenue.

The Federal Government lost over a billion dollars to waivers under the pioneer status scheme to oil and gas companies in the upstream sector.

The Nigeria Extractive Industries Transparency Initiative (NEITI) put the figure at $1.17 billion between 2009 and 2014.

Between 2014 and 2016, the figure rose to $1.56 billion.

The Senate Committee on Finance reported that Nigeria lost about N17 trillion over five years due to the abuse of tax waivers.

The committee urged the Federal Inland Revenue Service (FIRS) to suspend the tax waiver system and replace it with a more controlled and accountable rebate system.

Need for reforms, by experts

According to a report by Public Services International, the global union of workers in public services, there is no evidence that suggests any cost-benefit analysis is carried out before granting incentives, and no information on revenue forgone is publicly available to the citizens.

It noted that tax holidays and income tax exemptions are not the best options for low-income countries.

“Cost-based tax incentives such as tax credits and accelerated depreciation yield more investment per dollar than tax holidays and corporate tax exemptions, which leads to huge losses in revenue and is oftentimes ineffective.

“Unfortunately, African countries such as Nigeria continue to grant these types of incentives despite the developmental challenges they are facing.

“Incentives such as pioneer status, tax holidays for specific sectors or special economic zones should be phased out carefully.

“This will ensure that Nigeria limits its risks of losing revenue through the granting of incentives,” the report says.

However, a tax law expert, Nnamdi Oragwu, does not think tax breaks and waivers should be abolished.

Oragwu, partner at leading Nigerian law firm Punuka Attorneys & Solicitors, said: “Tax incentives and waivers are the fertilisers for the growth of investment in any country.

“For example, data from the Nigeria Export Processing Zones Authority (NEPZA) and the Oil and Gas Free Zones Authority (OGFZA) indicate that these schemes have attracted $491.8 million and $15.9 billion in FDI, respectively, while generating approximately 211,339 and 160,000 jobs.

“Instead of abolishing them, reforms to enhance transparency and curb abuse should be prioritised to ensure these tools achieve their intended economic objectives.

“I would recommend a comprehensive review of tax waivers and incentives.

“Reliefs should be reserved for industries or companies that concentrate on the promotion of export-oriented industrial linkages, improved treatment for intermediate and capital goods, while reliefs that do not should be gradually expunged.

“The review process should also be data-driven and sector-specific, by evaluating each incentive’s impact on revenue generation, job creation, and foreign direct investment.

“Incentives that contribute measurable value to the economy should be retained or refined, while those that result in abuse or inefficiency should be eliminated to safeguard national revenue.”

On what measures can be adopted to tackle abuses, Oragwu said: “To tackle the abuse of tax breaks and waivers, Nigeria must adopt a stronger financial transparency and performance-based framework to tackle the rampant abuse.

“First, all tax incentives should be codified and centralised under a single regulatory authority, such as the Federal Inland Revenue Service (FIRS), to avoid duplicate incentives.

“Secondly, there should be a mandatory cost-benefit analysis before any waiver is approved, along with clearly defined eligibility criteria and measurable performance benchmarks such as job creation or capital investment.

“Finally, to ensure compliance, there must be regular audits and monitoring, with penalties for abuse including repayment of waived taxes and disqualification from future incentives.”

A development law expert and senior advocate of Nigeria, Dr Olisa Agbakoba, backed the call for a comprehensive review.

“The tax-waiving system is abused,” he noted.

On the way out, he said: “Only the extremely important things should be tax-waived. For others, there should be no tax waivers. There should rather be tax tariffs.”

An economist, Dr Muda Yusuf, said it was erroneous to characterise tax waivers or incentives as a negative phenomenon.

Yusuf, a former Director-General of the Lagos Chamber of Commerce and Industry, said: “Rather than throw away the baby with the bathwater, we should come up with a framework that can ensure that these incentives are not abused.”

Yusuf, now Chief Executive Officer of the Centre for the Promotion of Private Enterprise, stressed the need for a transparent framework for companies to enjoy waivers or incentives, which must be of general, universal application.

He said: “Waivers should not be given at the discretion of any officeholder. The concept of discretion must be completely taken out.

“Such incentives should be sector-specific and project-based rather than company-specific.

“Such standard guidelines should apply to any company that meets the requirement.

“We should consider the impact on jobs, poverty reduction, backward integration and productivity.

“Abuse of tax waivers can be addressed without rubbishing the entire philosophy of tax incentives.”

Govt tackling abuse, says Finance Minister

Minister of Finance and Coordinating Minister of the Economy, Wale Edun, said the Federal Government was addressing abuse of tax waivers and incentives.

Speaking at the Public Wealth Management Conference organised by the Ministry of Finance Incorporated (MoFI), he said: “Measures are being implemented to reduce inefficiencies, eliminate duplications, and prevent leakages in government spending.

“This includes addressing issues such as duty waivers, tax incentives, and contract expenditures to ensure that government funds are utilised effectively.

“We are also implementing a robust expenditure framework that removes leakages and payments to people who are not supposed to be paid, whether it is from duty waivers or tax incentives.

“The measures are already coming through.”

• This report received support from the Thomson Reuters Foundation as part of its global work aiming to strengthen free, fair and informed societies. Any financial assistance or support provided to the journalist has no editorial influence. The content belongs solely to the author and is not endorsed by or associated with the Thomson Reuters Foundation, Thomson Reuters, Reuters, or any other affiliates.