Introduction
Over the past decade, the Nigerian mining sector (the Sector) contributed less than 1% to the Nation's Gross Domestic Product (GDP), year-on-year. This is abysmally low given the variety and reserves of precious minerals that the country is endowed with. To put this in context, similar mineral mining countries in Africa have historically seen their mining sector contribute significantly to their GDPs. For instance, in 2022, while the Sector's contribution to Nigeria's GDP stood at 0.85%[1], it was 12% in Zambia and 8% in both Ghana and South Africa.
Some analysts have argued that the seemingly deficient performance of the Sector in Nigeria is because the data only considers the larger, formal mining sector and does not include Artisanal and Small-scale Miners (ASMs), as well as unregistered and illegal mining activity, which would have likely increased the Sector's economic contribution considerably. Beyond the under-reporting due to informality of the significant informal operation in the Sector, the poor performance can also be linked to a mix of risk factors ranging from inadequate funding, poor infrastructure, perceived weak regulatory framework, fiscal instability, security concerns, inadequate geoscience data and lack of adequate incentives to attract the volume of investment required to put the Sector on a faster growth trajectory. This makes mining business more expensive in Nigeria.
This article analyses some of the key fiscal incentives available to miners in Nigeria, and whether the existing incentives are sufficient to de-risk mining operation, or if additional tax incentives are needed to generate more investor interest and to accelerate growth in the Sector.
Fiscal Incentives Available to Operators in the Sector
There are many fiscal incentives available to miners operating in Nigeria. However, most operators are either not aware of these incentives or do not know how to access them.
The Nigerian Minerals and Mining Act, 2007 (NMMA) and the Companies Income Tax Act (CITA) provide certain incentives for companies operating in the Sector. In addition, there are several other general incentives applicable, but not limited to, mining companies across other legislations e.g., the Pioneer Status Incentive (PSI). Some of the key incentives are analysed below:
i. Tax Holiday:
One of the most popular incentives applicable to mining companies in the country is the "tax holiday" granted to them. Based on the provisions of the NMMA and CITA, miners with valid titles can enjoy a tax holiday for an initial period of 3 years from commencement of operations, which is renewable for an additional 2 years (making a total of 5 years), subject to meeting certain conditions. During the tax holiday, the company is exempted from paying companies income tax (CIT). Furthermore, any dividend distributed to shareholders during the tax holiday period will not be subject to withholding tax (WHT).
ii. Customs Duty Exemption:
Mining companies with valid titles can also enjoy customs and import duty exemptions on plant, machinery, equipment and accessories imported exclusively for mining operations. However, the beneficiary will be required to defray the previously waived duties, whenever such assets are eventually disposed locally. Hence, the incentive ensures that the imported plant, machinery, equipment and accessories are solely for the purpose of being utilised (by the importer) for mining operation and not for onward sale.
iii. Relaxed Immigration Requirements:
The NMMA also provides for the grant of expatriate quota and resident permit to approved expatriate personnel coming to Nigeria exclusively for the purpose of conducting mining operations. Furthermore, such expatriate personnel also qualify for personal remittance quota free from any tax imposed by any enactment for the transfer of external currency out of Nigeria. This incentive offers miners the opportunity to source for and import requisite talents needed to advance their mining operation in the country, while granting assurance to the expatriates about the safety of their earnings from excessive tax, especially where such earnings are intended for transfer to their home countries.
iv. Accelerated Capital Allowance (CA) Claim:
Mining Companies can claim accelerated CA on qualifying mining expenditure (i.e., 95% initial allowance and retention of 5% until the asset is disposed). Generally, mining businesses are capital intensive. Hence, being able to claim majority of their capital expenditure in the year it was incurred not only encourages companies to invest in capital projects, but also enables miners to manage their tax exposures, thereby ensuring quicker return on investment (ROI).
However, the fact that mining companies (unlike companies engaged in upstream and midstream gas operations, the agro-allied industry or those engaged in the trade or business of manufacturing) suffer restriction on the quantum of CA claimable in any year of assessment (subject to sixty-six, two-third percent (66 2/3%) of assessable profits), counteracts the effectiveness of this incentive.
v. Generous Foreign Currency (FX) Regime:
Mineral title holders are permitted to retain export proceeds in a domiciliary account for the purpose of acquiring spare parts and other mining inputs. Furthermore, the Mining Act grants mining companies free transfer of FX through the Central Bank of Nigeria (CBN) for the servicing of certified foreign loans and the remittance of foreign capital in the event of the sale or liquidation of the business. This incentive shields miners from FX losses that may occasion any devaluation of the Naira, and enables them to have sufficient funds (in FX) to fund their operational needs.
vi. Tax-deductibility of Environmental Cost:
Actual amount expended out of reserves made for environmental protection, mine rehabilitation, reclamation and mine closure cost shall be tax-deductible, subject to certification by an independent qualified person. This incentive is quite important as it creates a win-win situation for both the miners and the Federal Government (FG), as miners get a commensurate benefit for costs set aside and / or invested in returning their mine site to its original form, post mining operation, while it also ensures that the environmental impact of mining are well managed.
vii. Potential Waiver of Royalty Payment:
The Minister may grant a special concession for the royalty payable on any mineral to be either waived, reduced or deferred for a number of years, subject to meeting certain conditions and upon the approval of the Federal Executive Council (FEC). This incentive could facilitate the survival rate of ASMs, during their early years of operation.
Other General Incentives also Applicable to Mining Companies
i. Pioneer Status:
The Industrial Development (Income Tax Relief) Act (IDA or 'the Act') which was enacted to promote and incentivize industries and / or products considered extremely pivotal to the development of the country, also grants tax incentives including, but not limited to, exemption from income tax for a period not exceeding five (5) years, subject to the fulfilment of certain conditions. Mining/quarrying is one of the industries eligible for this incentive with some specific products earmarked for this purpose (essentially the minerals declared as strategic).
While similar tax holiday incentive under the IDA is replicated in both the CITA and the NMMA (as noted above), the respective laws afford the beneficiaries of the tax holiday incentive different levels of additional fiscal benefits other than exemption from income tax. Nevertheless, for the sake of clarity and certainty, it is expedient for the FG to harmonize the tax holiday provisions in the referenced pieces of legislation to mitigate potential concurrent/"double" dipping, which is clearly not the intent of the drafters of the laws. In the interim, mining companies are encouraged to seek expert advice on the law best suited for them to enjoy the tax holiday and other associated incentives.
ii. Road Tax Credit:
The Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme ("the Scheme") enables companies wishing to construct or refurbish any road identified and designated by the FG as an "eligible road" to recoup total costs ("Project costs") incurred in the construction or refurbishment of such "eligible road" as a Tax Credit against their future CIT liability, until full cost recovery is achieved. As an incentive, eligible companies will be granted a single non-taxable uplift on project cost. The uplift will be included in the total tax credit available to each participant.
This incentive encourages private sector participation in infrastructural development within the host community of the operator and its environs and being able to recoup their investment in form of tax rebates, creating a win-win situation for the FG, the operators and the host communities.
iii. Small Companies' Incentive:
The profits of small companies (i.e., companies with an annual gross turnover of ₦25 million or less) are exempted from taxes, while companies with turnover greater than ₦25 million but less than ₦100 million) can enjoy a reduced CIT rate of 20% of taxable profits (instead of 30%). This incentive is quite important as it grants ASMs reduced tax rate in their early formative years, thereby facilitating voluntary formalisation and survival rate.
iv. Export Expansion Scheme:
Significant portion of the minerals mined in Nigeria are exported. Hence, operators can benefit from the export expansion grant (EEG) scheme which grants Nigerian exporters between 5% to 15% of their annual export value as credit utilizable for the payment of import and excise duties and taxes. It could also be discounted for cash (depending on exporters' product category). Previously, successful applicants were paid in the form of Export Credit Certificate (ECC). However, promissory notes are currently issued to both new applicants and for clearing the outstanding backlog of claims.
v. Tax Exemption of Income:
Export proceeds repatriated to Nigeria and used exclusively for the purchase of raw materials, plants, equipment and spares are fully exempted from tax. Given that majority of minerals explored in the country are ultimately exported either raw or after minor processing, such operators could benefit from this incentive. This incentive could shield the profits (export proceeds) earned by a mining company from income tax.
vi. Funding via Public-Private Partnership:
Funding opportunities, though not incentives, could facilitate taking FIDs on mining projects. For example, in 2023, the Africa Finance Corporation (AFC) and the Solid Minerals Development Fund (SMDF) partnered to co-fund and co-develop commercial scale 'eligible' mining projects in Nigeria. The partnership, through a dedicated project development facility, is aimed at fast tracking the development of priority mining projects in Nigeria, mitigate risks and create a pipeline of high-quality projects with economic impact.
The Case for More Targeted Incentives
From the foregoing, there already exists a host of incentives available to mining operators in the country. Arguably, Nigeria provides more incentives than is obtainable in most African countries with mining footprint. Despite this plethora of incentives, why has the country not attracted the much-needed FDIs to develop the Sector? The authors have attempted to provide insight as to why this is the case, and what the FG could do overcome the issues, below:
i. The current set of incentives are largely generic; they appear not targeted. Therefore, the FG should refine the incentives to be targeted solely at stimulating the Sector as discussed below:
- The dearth of geophysical data in the country can be speedily ameliorated by introducing incentives for exclusive investments in mining research and development and / or geophysical data gathering. Such incentives will encourage public-private investments in exploration and data expansion projects. With private sector participation, the country will be able to move the needle significantly within a reasonable timeframe.
- Given the recent discovery of Lithium in commercial quantities[2], incentivising investment in exploration of the mineral, as an example, will be beneficial to the country. Asides the economic gains that the nation stands to reap from this front, it will also facilitate the journey towards the country's energy transition and sustainability.
- Considering the significant impact that mining operation across the value chain poses to the environment - including pollution of the atmosphere from the energy required to mine, transport and process minerals; the FG, on the road to achieving its net-zero carbon emission goals, can consider incentivising investments in climate-smart clean and / or greener mining practices as a means of meeting international obligations under the Paris Agreement. Examples of green mining investment include investment in solar power rather than reliance on fossil fuels for powering the processing of minerals, and the use of eco-friendly explosives (e.g., concentrated Hydrogen Peroxide (H202)) rather than the widely used Ammonium Nitrate explosives (which upon explosion, releases toxic gases to the atmosphere) amongst others. This is what operates in some other mining jurisdictions.
- For example, South African legislation currently provides several green grants[3], incentives and reliefs that aim to encourage and reward companies for implementing measures to combat climate change. The incentives include benefits linked to energy efficiency savings, the purchasing of renewable electricity generating equipment and acquiring new environmental treatment and recycling asset and solar incentives, amongst others.
ii. The FG can also consider creating mining clusters or special economic zones (SEZ) solely for mineral processing plants. Operators in such zones will enjoy free trade zone status which will encourage mineral beneficiation in the county and will further enhance our export proceeds and foreign exchange earnings capability.
iii. Finally, considering the capital-intensive nature of mining business, the FG can consider expanding the goods exempted from Value Added Tax (VAT) to include plant, machinery and equipment imported / purchased for mining purpose (like we currently have for agricultural business). Appropriate restrictions may be included to ensure that such equipment are not resold or re-exported, otherwise importers risk losing the VAT waiver incentive.
Conclusion
It is no gainsaying that fiscal incentives alone are not enough to attract and retain FDIs needed to grow the Sector. The FG need to double down on ensuring an enabling environment devoid of significant risks, is created to encourage setting up of mining businesses across the entire value chain and to improve the overall ease of doing their business in the country. The FG should also consider introducing targeted incentives as discussed above, to align the existing fiscal framework with current realities. This will play an important role in boosting the economy, thereby leading to wealth generation, GDP growth, job creation and enhanced foreign exchange earnings.
Indeed, the current administration is making impressive strides in the area of automation and digitalisation of mining regulatory process, including application for licenses, payment of rent, royalties and / or levies and access to geophysical data (especially with the launch of the Mineral Resource Decision Support System[4]) amongst others, all aimed towards improving the ease of doing business. Hence, the recent gains in digitalisation of the regulatory process, when juxtaposed with the stream of available incentives, suggest that the country is prioritising the Sector for an outsized growth.
Finally, it is evident that with proper professional guidance, mining operators can significantly de-risk their businesses and achieve quicker ROI through adoption of a mix of the available incentives as applicable. Hence, potential and / or existing investors in the Nigerian mining space should ensure that they conduct adequate feasibility studies and consult their professional advisers prior to making investment decisions, to optimise their taxes and by extension, maximise their ROI.
Footnotes
1. Q4 GDP 2022 Fn.xlsx (live.com)
2. Nigeria - Mining - Lithium – A Potential Game Changer For The Nigerian Mining Sector (mondaq.com)
3. https://www.fanews.co.za/article/economy/43/general/1198/budget-2023-and-green-incentives-investment-in-renewable-energy-is-a-fundamental-business-decision/36501
4. Nigerian Mineral Resources Decision Support System – Nigeria Geological Survey Agency (ngsa.gov.ng)
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.