Tax incentives are aspects of a country's tax law designed to encourage economic activity by reducing tax payments for companies. In Nigeria, a major tax incentive is Pioneer Status Incentive which provides tax holidays. Tax incentives fall into two categories: cost-based like tax credits; and profit-based like tax holidays. While incentives can attract investment, there are also costs like lost government revenue and non-transparent incentives can enable corruption. Governments must evaluate incentives periodically and set clear goals and expiration dates to assess effectiveness.
Tax incentives are aspects of a country's tax law designed to encourage economic activity by reducing tax payments for companies. In Nigeria, a major tax incentive is Pioneer Status Incentive which provides tax holidays. Tax incentives fall into two categories: cost-based like tax credits; and profit-based like tax holidays. While incentives can attract investment, there are also costs like lost government revenue and non-transparent incentives can enable corruption. Governments must evaluate incentives periodically and set clear goals and expiration dates to assess effectiveness.
Original Description:
Tax Incentives, meaning and types and advantages and disadvantages
Tax incentives are aspects of a country's tax law designed to encourage economic activity by reducing tax payments for companies. In Nigeria, a major tax incentive is Pioneer Status Incentive which provides tax holidays. Tax incentives fall into two categories: cost-based like tax credits; and profit-based like tax holidays. While incentives can attract investment, there are also costs like lost government revenue and non-transparent incentives can enable corruption. Governments must evaluate incentives periodically and set clear goals and expiration dates to assess effectiveness.
Tax incentives are aspects of a country's tax law designed to encourage economic activity by reducing tax payments for companies. In Nigeria, a major tax incentive is Pioneer Status Incentive which provides tax holidays. Tax incentives fall into two categories: cost-based like tax credits; and profit-based like tax holidays. While incentives can attract investment, there are also costs like lost government revenue and non-transparent incentives can enable corruption. Governments must evaluate incentives periodically and set clear goals and expiration dates to assess effectiveness.
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(a) TAX INCENTIVES
1.0 Introduction
* A tax incentive is an aspect of a country's tax law designed to
incentivise or encourage a particular economic activity by non-payment or reduction in tax payments for a company in the said country for a specific period of time.
* The IMF defines tax incentives as any special tax provisions that are granted to qualified investment projects or firms that provide a favourable deviation from the general tax law. Included in the examples given by the IMF in their definition are tax holidays, which are widely used in Africa and happen to be the most abused type of tax incentive in Nigeria in the form of pioneer status.
* A typical example of tax incentive in Nigeria is the Pioneer Status
Incentive (PSI) being administered under the Industrial Development (Income Tax Relief) Act, Chapter 17, LFN, 2004. The granting of the incentives is based on some conditions to be complied with. The grant of pioneer incentive in Nigeria is the responsibility of the Nigeria Industrial Promotion Commission.
1.1 Types of Tax Incentives
Tax incentives are generally categorized into two:
(a) Cost-based tax incentives (such as tax credits and accelerated
depreciation allowances) and
(b) Profit-based tax incentives (such as tax holidays or reduced tax
rates). The types of incentives that come under these two broad categories can greatly vary based on sector, income type, business size, and business location. The incentives can be temporary or permanent and can offer partial exemption or full-exemption.
1.2 General tax based incentives in Nigeria Tax laws.
Tax based incentives: Personal income tax act
Tax based incentives: Capital gains tax act Tax based incentives: Companies income tax act Tax based incentives: Value added tax act 1.3 Considerations for granting Tax incentives.
When considering the introduction of tax incentives, governments
should take into account the following (summarised) best practices on the use and design of tax incentives:
Governments should assess in advance tax incentives targeted to
boost investment. If introduced, the tax incentives should be evaluated (using cost- benefit tests) on a periodic basis to gauge their effectiveness. To enable proper evaluation and assessment, the specific goals of a given tax incentive need to be explicit at the outset. “Sunset clauses” calling for the expiry of the incentive should be included to provide opportunity to assess whether the availability of the incentive should be extended or not.
1.4 Positive and Negative sides of Tax Incentive
Tax incentives can have both positive and negative impacts on an
economy. Among the positive benefits, if implemented and designed properly.
1.4.1Positive Aspect of Tax Incentives
Tax incentives can attract investment to a country.
Other benefits of tax incentives include increased employment,
Higher number of capital transfers, research and technology
development
Improvement to less developed areas for businesses established
in the rural areas.
It is assumed that there will be increase in economic growth and
government tax revenue (after the expiration of the tax holiday/incentive period)
1.4.2 Negative aspects of Tax Incentives
However, tax incentive can cause negative effects on a government's
financial condition, among other negative effects, if they are not properly designed and implemented.
1.5 Costs to Tax Incentives
There are four typical costs to tax incentives:
(i) Resource allocation costs: Resource allocation cost refers to
lost government tax revenue resulting from the tax incentive. (ii) Compliance costs: This refers to the situation when the grant of tax incentives is lop-sided. That is leading to too much investment in a certain area of the economy and too little investment in other areas of the economy. Therefore, the higher and the more complex the tax incentive, the higher the compliance costs because of the larger number of people and firms attempting to secure the tax incentive (iii) Revenue costs: Revenue cost is associated with enforcing the tax incentive and monitoring who is receiving the incentive and ensuring that they deserve the granting of the incentive. The cost incurred in monitoring is as good as revenue forgone. (iv) Corruption costs: This relates to people abusing the tax incentive. Corruption occurs when there are no clear guidelines or minimal guidelines for qualification.
