In its pursuit of increased foreign and local investments, Nigeria has strategically established Free Trade Zones (FTZs) – a practice not unique to Nigeria but embraced globally by countries like Tanzania, Libya, China Hong Kong, and others. Nigeria boasts 42 licensed FTZs, with 14 currently operational.
A Free Trade Zone (FTZ) is a designated economic zone where goods can be manufactured, stored, and handled under specific customs regulations. It provides unique advantages such as exemption from customs duties, trade barriers, and other regulations affecting companies within the zone. Businesses registered in an FTZ are termed Free Zone Enterprises.
Key Incentives for Approved Enterprises (AE) in FTZs:
- 100% repatriation of capital projects and dividends.
- Waiver of expatriate quotas and free repatriation of foreign capital.
- Rent-free land during the construction stage within the Zone.
- Free remittance of profits and dividends earned in the FTZ.
- 100% foreign ownership of businesses.
- Complete exemption from federal, state, and local government taxes, levies, duties, and foreign exchange regulations.
Tax Requirements for FTZs:
According to Section 8 of the Nigeria Export Processing Zone Authority (NEPZA) Act, approved enterprises within FTZs are exempt from all Federal, State, and Local Government taxes, levies, and rates. This exemption extends to all legislative provisions pertaining to taxes within FTZs, as stated in Section 18 (1) of the Act.
However, it’s crucial to note that only the AE within FTZs enjoys tax exemptions. Other entities within custom territories conducting transactions with AE are subject to applicable taxes.
Tax Implications of Transactions:
- Purchases by AE from Companies in Customs Territory: No Value Added Tax (VAT) and Withholding Tax (WHT) apply to the AE, but the AE must deduct WHT from the Customs Territory entity and remit it to the relevant tax authority.
- Sales by AE to Companies in Customs Territory: VAT applies and is paid by the Customs Territory company, with no WHT deducted from the AE.
- Purchases or Sales by Unapproved Enterprises within FTZs: VAT and WHT apply to Unapproved Enterprises.
- Imported Goods Conveyed to FTZs from Other Ports: No VAT and WHT apply if goods are escorted by the Nigeria Customs Service from the Port of Entry to the FTZ.
- Business Activities of Head/Branch Offices in Customs Territory with AE: All relevant tax laws apply, except for purchases and sales covered above.
- Contracts between Approved Enterprises and Companies in Customs Area: VAT and WHT are applicable.
- Submission of Tax Returns by AE to FIRS: Approved Enterprises are required to submit Tax Returns through the Free Zone Authority to FIRS.
Recent Amendments and Circular:
The 2020 Finance Act introduced amendments, requiring companies registered in FTZs to comply with Section 55(1) of the Company Income Tax Act (CITA) and render returns. FIRS issued a circular outlining guidelines for filing income tax returns by approved enterprises within FTZs.
Contents of Tax Returns:
- Audited Accounts.
- Tax and Capital Allowances Computations.
- A true statement of profit from each source.
- Completed Self-Assessment form.
- Evidence of payment of tax due.
- Schedules showing profits from transactions within and outside the Customs Area.
Other Statutory Obligations for FTZ Enterprises:
- Register with the Service and obtain a Tax Identification Number (TIN).
- Maintain proper books of accounts.
- Deduct PAYE from employees and remit it.
- Pay income tax for transactions within the Customs Area.
- Comply with Transfer Pricing Regulations.
- Fulfill other obligations as required by laws.
In summary, understanding the tax implications of transactions within FTZs is vital for both Approved Enterprises and entities within Customs Territories to ensure compliance with Nigerian tax laws.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
