In a surprising turn of events, Nigeria’s Federal Inland Revenue Service (FIRS) has announced the discontinuation of the issuance of Tax Exemption Certificates for Pioneer Status Companies, Non-Governmental Organizations (NGOs), and entities in Free Zones. The move, which effectively nullifies a significant advantage previously enjoyed by businesses in economic zones, has left many startups and established companies teetering on the brink of uncertainty.
According to a statement from the FIRS, the agency made it clear that businesses currently holding exemption certificates could continue to enjoy their benefits until the certificates expire. Afterward, however, no further renewals would be granted. This new policy leaves businesses, particularly those in free zones, scrambling to adjust their tax strategies while navigating the complex and shifting Nigerian business landscape.
A Changing Tax Landscape
On June 28, Nigerian President Bola Tinubu signed into law four new tax bills, including significant changes that directly affect both local and multinational businesses. These new tax reforms, which have sent shockwaves through the startup community, require Nigerian companies to pay taxes on profits no matter where those profits are generated. This means businesses now face taxes on income even if it never touches Nigerian soil — an unprecedented step in the country’s taxation system.
The new tax regime also brings in a “top-up” mechanism for multinational companies. If a foreign subsidiary of a Nigerian parent company pays a tax rate lower than Nigeria’s minimum effective tax rate of 15%, the parent company must bridge the gap. In addition, foreign individuals or companies with significant economic presence in Nigeria will now face tax obligations, even on income derived from assets deemed to be Nigerian, such as property or shares in Nigerian companies. This includes taxing gains from selling shares — especially those that lead to changes in ownership structures.
An Economic Tug-of-War
For companies operating in Nigeria’s free zones, these changes are a bitter pill to swallow. The cessation of tax exemptions is a major blow to companies like Itana, which has built its entire brand on offering tax advantages for tech startups operating in Lagos State’s Lekki Free Zone. Positioned as Nigeria’s first digital tax zone, Itana provides a streamlined, almost utopian business experience for companies aiming to escape the bureaucracy and inefficiency traditionally associated with doing business in the country. Itana’s founders have spent years working within the framework of Nigeria’s free zone laws, which were previously seen as a safe haven for businesses, particularly in the tech sector. Now, with the discontinuation of tax exemption certificates and the new tax laws in play, Itana and other startups are left grappling with an increasingly uncertain future.
The new tax bills may well encourage more companies to seek out jurisdictions outside of Nigeria, leaving the country’s economic zones vulnerable.
While the FIRS claims that the goal of the new tax regime is to ensure that “all taxpayers comply with applicable laws and procedures,” the truth is that the sudden shift has left many stakeholders scrambling for clarity. The government’s move to stop issuing tax exemption certificates is undoubtedly a blow to the very businesses that were helping to drive Nigeria’s tech sector forward. For Itana and others in similar positions, this decision raises a question that remains unanswered: What next?
What Next?
The discontinuation of tax exemptions could potentially signal a shift towards a more competitive and transparent tax regime, but it also highlights the inherent instability and unpredictability that often defines doing business in Nigeria.
It is worth noting that while the new tax laws may have been introduced as part of President Tinubu’s broader economic reforms, the ripple effect on businesses operating within the country’s free zones cannot be underestimated. For the time being, Itana and similar entities must brace for a period of upheaval — one that could redefine the very structure of Nigeria’s free zones.
But of course, business in Nigeria isn’t ever simple. What remains to be seen is whether the government’s reforms will incentivize growth or create yet another wave of frustration among the very companies it seeks to support.