November 29, 2022
Providing the right infrastructure required for sustainable growth and development is always a challenge even for developed countries. Infrastructure development is capital intensive, involves multi-layer engagement with various stakeholders and can be time consuming. According to the World Bank, with the right policies in place, investments of 4.5 percent of GDP will enable lower-and-middle-income countries to achieve the infrastructure-related Sustainable Development Goals.
On 23 September 2022, President Muhammadu Buhari disclosed that Nigeria needs ₦348trillion over a 10-year period to bridge the nation’s infrastructure gap. Without considering other factors such as inflation and population growth, going by the 2023 proposed budget which earmarks ₦4.93trillion (excluding statutory transfer component) for capital expenditure, it will take the Federal Government (FGN) about seventy years to bridge the infrastructure gap.
From the above, it is evident that the burden of bridging the infrastructure gap is too heavy for the FG to bear alone. The reality of the FG’s helplessness was correctly captured by Mr. Muhammad Nami, the Executive Chairman of Federal Inland Revenue Service (FIRS) who pointed out that, “The challenge of road construction in Nigeria has always been funding. Yes, there are contracts for the construction of roads, but funding these constructions is the challenge.”
Given the above, designing a framework for public-private sector partnership in bridging the infrastructure gap as it relates to roads became imperative. It is against this backdrop that the FG issued the Road Infrastructure Development and Refurbishment Investment Tax Credit (RITC) Scheme, 2019 (the Order).
It has been over three years since the issuance of the Order, which was aimed at providing for public-private partnership (PPP) intervention in the construction, refurbishment and maintenance of critical road infrastructure in the country. The participants in the Scheme are entitled to tax credits against future companies income tax (CIT).
This article is aimed at evaluating the impact of the Scheme on the construction and rehabilitation of critical roads in the country.
Specifically, the “Tax for Roads” initiative gives participants an entitlement to utilize the total investment cost incurred in the construction or refurbishment of an eligible road as a Tax Credit against their future CIT liability, until full cost recovery is achieved. Without the RITC, CIT paid to the FG can be used for other purposes that do not directly benefit the companies paying the taxes. The RITC gives companies an opportunity to influence how their CIT payments will be spent and having tax paid ploughed into the development of critical roads that affect their business is a major incentive.
Given that most roads will take more than a year to complete, the Scheme provides for the cost of funds and allows participants to add an “uplift” equivalent to the prevailing CBN Monetary Policy Rate plus 2% of the Project Cost. It is important to note that a tax payer cannot unilaterally rehabilitate a road and seek for tax credits in return. The road has to be an Eligible Road which is defined as a road approved by the President based on the recommendation of the Minister of Finance. In practice, a tax payer can submit an application to the Minister of Finance for a road to be designated as eligible under the Scheme.
The roads that can be covered under the Scheme are not limited to Federal roads.
A summary of the process required to obtain the RITC is as follows:
A company does not have to complete the construction or rehabilitation of a road before the RITC Certificate is issued. The benefits of the tax credit can be enjoyed as the company concludes the various milestones earmarked for the completion of the project. Hence, several RITC Certificates can be issued throughout the lifespan of the construction of the road.
Unlike construction of eligible roads in Economically Disadvantaged Areas where RITC can be claimed fully in a given Year of Assessment (YOA), the RITC claimable on roads constructed in other areas is limited to fifty percent (50%) of the annual CIT liability. The remainder of the Credit may be carried forward until fully utilized. However, a company cannot claim RITC and still claim any other form of allowance including Capital