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04 April, 2013

Current issues in investing in Nigeria’s free trade zones


To be rich is glorious”. With these five words Deng Xiaoping, former chairman of the Chinese Communist Party, and the man credited with transforming China from an economic underachiever to the second largest economy in the world, began an economic transformation that the whole world stands in awe of today. Deng realised that the unified communist political and economic model left economic development in China hamstrung. He therefore separated politics from business and used a more market oriented economic model to serve development ends. As part of this drive, China developed Special Economic Zones in various provinces. The zones provided local businesses and foreign investors with tax, regulatory and infrastructural benefits that were not generally available in the rest of China. In the years and decades that followed, they transformed their immediate provinces and served as a catalyst for economic growth on the east coast of mainland China with knock on impacts for the whole country.
Free Trade Zones are not new in world history. Variants of them span over 100 countries across the globe and when used properly, they can be an effective tool in economic development. In December 1992, the Federal Government of Nigeria passed Decree No. 63 - the Nigeria Economic Processing Zones Act (NEPZA) CAP N107 LFN 2004, to provide for a framework to establish Free Trade Zones in different parts of the country. A Free Trade Zone or FTZ is an area designated as such by the President.
The Nigeria Export processing Zones Authority grants all entities licensed to carry on approved business within the zone a number of benefits that businesses outside the zone do not enjoy. For one, the zone is notionally viewed as being outside of Nigerian territory and therefore all participants in the zone have certain benefits which confer on them administrative convenience and tax benefits not enjoyed by those outside the zone.
In relation to the FTZs, all other parts of Nigerian territory is referred to as the Customs Territory. Below, I consider the important legal and administrative issues that a foreign or local business will consider in making the decision to be located in a FTZ. Particularly, I will consider recent regulatory developments. With the Nigerian economy averaging a year on year GDP growth rate of about 7%, investors are bound to look to the most business friendly areas of the country as a base to access its 160 million strong market.
Today, there are more than 20 FTZ initiatives at different stages of development and the Authority lists 11 of them as being operational on its website. Some of these include the Calabar Free Trade Zone, the LADOL Free Zone, the Lekki Free Trade Zone in Lagos, the Onne oil and gas Free Zone and the Ogun Guangdong Free Trade Zone. In addition to the NEPZA, FTZs are also regulated by the Oil and Gas Free Zones Act, the Investment Procedures, Regulations and Operational Guidelines (2004). In 2010 the Lekki Free Trade Zone Regulations were introduced specifically for the Lekki FTZ.
Structural Overview
NEPZA provides a regulatory framework for all FTZs in Nigeria. An FTZ may be set up by the federal government but it may also be promoted by a private sector participant or by a state government. Some of the successful FTZs today are partnerships between private entities and state governments. The President is empowered to designate an area as an FTZ. Having obtained such a designation the FTZ will continue to work with the NEPZA Authority and all entities operating within the zone will route applications for the grant of certain permits through the FTZ to the NEPZA authority. The structure is created such that an entity within an FTZ can obtain all incorporation, customs, immigration, police and other public services within the zone. The unique legal/regulatory framework of FTZs also ensures that while Nigerian laws continue to apply to entities operating within the zone, section 24 of the Act allows the Minister to exempt certain laws from applying within the zone. The law is however clear that taxes (generally speaking) that apply to businesses operating in Nigeria will not apply to businesses operating in the zones.
Tax
By far, the most attractive economic benefit of being located in an FTZ is the reduction in transaction costs that a company will enjoy through tax exemptions. The Act specifically exempts all entities operating within the zone from all Federal and State taxes, levies and rates. A company operating in the zone is generally exempted from paying Companies Income Tax, Withholding Tax, Value Added Tax, Petroleum Profits Tax and so on. These exemptions, on the face of it, appear absolute however, to fully benefit from them, a company must adopt a legal structure that protects it from tax exposure to the rest of Nigeria (i.e. the Customs Territory).
One way to do this is to conduct all business activity within the FTZ. First, all imports into the zone are tax exempt, so whether the imports are for transactions or for the purposes of adding value to a final product for sale within the zone, they will enjoy a tax free status as long as they are destined for the zone. Also, a manufacturer within the FTZ can avoid company and sale related taxes if it ensures that delivery of its products are made within the zone. Retail trade can only be undertaken with approval of the NEPZA Authority. Where delivery or sale is however to be done outside of the zone, inside Nigeria’s Customs Territory, the calculus changes as all activities carried out in Nigerian Customs Territory are generally exposed to Nigerian tax. Taking goods from within the zone into Nigerian customs territory will be viewed as importing into Nigeria and the goods will be subject to customs and excise duties. This is worth noting as investors, knowing this, may seek to rely on other potentially available tax benefits that apply within Nigerian Customs Territory.
A caveat is necessary here. While the exemption from tax is wide it is not absolute. Employees, for example, are not exempted from paying Personal Income Taxes.
Corporate Benefits
To start business in Nigeria, a foreign entity is typically required to register a Nigerian company. This requirement of the Companies and Allied Matters Act is however done away with with respect to operators in an FTZ. By section 10 of the Act they are only required to obtain a licence to carry out an approved activity from the NEPZA Authority.
With respect to work permits, foreign workers usually start work in Nigeria by obtaining temporary work visa known as a “Subject to Regularization” visa and later make these permanent by obtaining permanent work documentation or CERPAC (combined settlement and work permit for expats) from the Nigerian Immigration Service. They must have Nigerian work permits to commence work within the country. Where such work permits are not immediately forthcoming they can obtain certain visa types to commence work before the work permits become available. NEPZA avoids the bureaucratic delays that may accompany work related immigration processes by providing in section 20 that application for immigration and work permits may be made to the NEPZA Authourity.
Current Developments
A number of developments have occurred in the last few years. For one, the Lekki FTZ is buzzing with activity. It is reported to have already attracted over N170bn though still at its nascent stage. It has about 50 investors already committed to investing in multimillion dollar projects in the zone and has a varied array of investors in comparison to other FTZs.
This is particularly so because while section 16 of the NEPZA typically excludes oil from being imported or stored in the zone other than as the Minister determines, the 2010 Lekki Free Trade Zone regulations allow for the storage and use of petroleum products within the zone. The regulations were made pursuant to authority granted to the Minister in sections 16 and 27 of the NEPZA Act. The zone which includes Chinese partners is also reported to be the largest of the 19 FTZs that China has invested in outside of China.
The Onne Oil and Gas Free Zone opened in the Onne area of Rivers State in 1997 and is the only such FTZ dedicated to oil and gas activities. The zone has attracted multimillion dollar investments and has over 150 investors currently operating in the zone. The Minister for information is recently reported as saying that it has created over 30,000 jobs for Nigerians. It was created by a separate legislation, the Oil and Gas Free Zones Act, CAP O5 LFN 2004.
FTZs have come to stay in Nigeria but their success will depend on investments into them and how well their activities are coordinated. Time will tell whether they will contribute to make Nigeria rich and glorious.

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