BY ADEWOLE OROBIYI
The mining sector has been in existence in Nigeria as far back as the 1900s, and in the past was a major revenue source for the Nigerian government. By the 1940s, Nigeria was a major producer of tin, columbite and coal and it was not until the discovery of oil in 1956 that the development of the sector regressed, as government and other stakeholders in the industry began focusing on the new resource.
Mining activities before 2007 in Nigeria were carried out in accordance with the provisions of the Federal Minerals and Mining Act (FMMA) of 1999. In 2007, the Nigerian Mining and Minerals Act (NMMA) was enacted, repealing the FMMA of 1999, for the purpose of regulating the exploration and exploitation of minerals in Nigeria.
The sector has immense revenue generation capacity for the country, considering the untapped value potential yet to be unlocked and utilized.
The sector is poised for robust near- and mid-term growth as investors move to make the most of the opportunities in iron ore, gold, zinc, limestone, bitumen, barite and lead mining. Efforts are also being channeled by government into the mining of metals such as titanium, tungsten, lithium and cobalt, which have various applications in industries such as aerospace, telecommunications and electric vehicle manufacturing. It is no news that the mining sector forms a significant part of the gross domestic product of certain economies in West Africa and Africa as a whole.
The Covid-19 pandemic has adversely impacted the level of development in the Nigerian oil and gas sector and the country’s economy as a whole, largely due to the fall in global oil prices and widening budget deficit and this has also encouraged the government to diversify the economy by focusing on other sectors such as agriculture, tourism, and mining.
Improving Revenue Generation
The mining sector, which has seen very little development since the discovery of oil, is starting to see improvements as stakeholders are now working to get the most value from the mining of the abundant deposits of metals in parts of the country. The government is also intensifying efforts to improve revenue generation by encouraging both local and foreign participation in the sector.
The sector is plagued with illegal artisanal miners who are gaining value with no obligation to the government in the form of royalties and taxes. Notwithstanding, there is promise that the right investments can deliver value to stakeholders.
Given the government’s drive to encourage investment in this sector, companies looking to operate should be aware of certain tax incentives available to mining companies as enshrined in the NMMA.
While the tax incentives for mining companies are mainly contained in the NMMA, the enabling statute governing the taxation of mining companies in Nigeria is the Companies Income Tax Act (CITA). The Finance Act 2019 which was passed early 2020 also provides certain amendments to some of the provisions of the CITA which may impact the operations of mining companies in Nigeria.
Some of the tax and regulatory incentives provided by the NMMA are highlighted as follows:
Accelerated Capital Allowance
Eligible persons can claim capital allowance of 95% on qualifying capital expenditures. Section 24(1) of the NMMA provides that a license holder shall be entitled to capital allowance of 95% of qualifying capital expenditure incurred in the year in which the investment is incurred on all certified exploration, development and processing expenditure, including feasibility study and sample assaying costs as well as all infrastructure costs incurred regardless of ownership and replacement.
This implies that the company can claim an initial capital allowance on the qualifying capital expenditure at an accelerated rate of 95% when determining taxable profits.
For example, where a company has huge taxable profits in an accounting year, and the company has incurred significant capital expenditure in the same year, it can reduce its taxable profits by deducting an accelerated capital allowance claimed from the taxable profits. The downside of such benefit is that the company may be exposed to huge tax payable in year two and above, depending on the additional capital expenditures incurred in those years.
Exemption from Custom Duties
Operators in the mining industry are granted exemption from payment of customs and import duties in respect of plant, machinery, equipment and accessories imported specifically and exclusively for mining operations, as provided in Section 25 of the NMMA.
Permission to Retain and Use Earned Foreign Exchange
Mining companies are permitted to retain and use foreign exchange derived from their mining activities. Section 26 of the NMMA provides that where the holder of a mineral title earns foreign exchange from the sale of its minerals, the company may be permitted by the Central Bank of Nigeria to retain in a foreign exchange domiciliary account a portion of its foreign exchange earnings. The foreign exchange retained should be used exclusively for the acquisition of spare parts and other inputs for the mining operation.
Tax Relief Period
Mining companies are eligible for a tax relief period for three years and subsequent extension for another two years by the Minister of Mines and Steel Development if it is satisfied with the rate of expansion, standard of efficiency and level of development of the company in the mineral operations for which the mineral title was granted. This also includes the implementation of any conditions upon which a lease was granted and the training and development of Nigerian personnel in the operation of the mineral concerned.
Tax Deductibility of Environmental Cost
The NMMA provides for the establishment of a tax-deductible reserve for environmental protection, rehabilitation, reclamation and mine closure costs by companies engaged in the exploitation of mineral resources. The appropriateness of the reserve must be certified by an independent qualified person.
This implies that the companies can establish a reserve for the lodgment of funds related to environmental protection and mine rehabilitation. Companies are also mandated to record the reserve in the audited financial statements. The tax deductibility is restricted to the actual amount incurred for the purpose of the reclamation and a sum equivalent to the reserve amount should be set aside every year and invested in a dedicated account or trust fund managed by independent trustees.
Annual Capital Cost Indexation
The NMMA provides for the application of an annual capital cost indexation to mines starting production within five years from the date of enactment of the NMMA, whereby the unclaimed balance of capital costs is increased yearly by 5%. This implies that mining companies can claim an added allowance on unused capital allowance for qualifying capital expenditure incurred within the first five years’ production.
A renewed focus on the mining and metals sector would enable Nigeria to improve revenue generation in the country.
There are a number of incentives available for the sector which should attract investors.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Adewole Orobiyi is Manager, Business Tax Services, with Ernst & Young.
The author may be contacted at: firstname.lastname@example.org