Tax credits, development levy to steer capital into infrastructure, energy

Nigeria is turning to its tax system to finance infrastructure and energy projects, introducing new tax credits and a consolidated levy aimed at mobilising private capital into sectors long constrained by funding gaps.

The urgency behind the reforms reflects a deeper fiscal challenge. “Our tax-to-GDP ratio is one of the lowest in the world. How on earth do you want to build an economy when your tax-to-GDP is this low?” Olusegun Alebiosu, CEO of FirstBank, said.

Nigeria’s tax-to-GDP ratio has risen to about 13.5 percent as of late 2025, up from below 10 percent in previous years, with a target of 18 percent by 2027.

Despite the improvement, the country remains below the 15 percent benchmark cited by the World Bank as the minimum required to fund core government functions.

Nigeria’s tax effort also trails several African peers, Ghana at about 16 percent, Kenya close to 15 percent, and Senegal at roughly 20 percent.

The new tax framework, designed to close that gap, moves away from direct public funding towards a model that relies on incentives and pooled contributions, even as authorities seek to widen the tax net without increasing headline rates.

“The development levy consolidates multiple levies into a 4 percent charge, with part allocated to infrastructure funding,” Albert Folorunsho, managing consultant at Pedabo, said during a recent FirstBank webinar themed Tax Reform and the Real Economy.

“In addition, the economic development incentive grants a 5 percent tax credit on qualifying capital expenditure.”

The framework creates a dual mechanism raising pooled funds through a levy while encouraging private investment through tax reliefs, signalling a structural shift in how Nigeria finances capital-intensive sectors such as energy, real estate, and transport.

But while the policy targets large-scale investment, its most immediate impact may be felt among small businesses.

“Small companies with turnover under 100 million naira gain deep tax exemptions, total income tax exemption, no development levy, and VAT filing exemption,” said Uche Uwaleke, a professor of capital markets.

The exemption applies to firms with annual turnover below 100 million naira or fixed assets under 250 million naira, a threshold designed to accommodate capital-intensive startups with low initial revenue.

Folorunsho said the effect is already visible. “The exemption is very deep. The rate at which a lot of informal businesses are getting formalised confirms the reform’s positive effect.”

The incentives are aimed at expanding Nigeria’s tax base by drawing informal operators into the formal economy while easing the burden on smaller firms.

Yet confusion persists over what is subject to tax, particularly among individuals and small business owners.

“Tax is not on your account balance. The basis of calculating tax is not bank accounts,” Folorunsho said.

“Taxable income excludes bank account balances; turnover defines small business status,” added Olarinde Olufemi, a member of the UN Subcommittee on Environmental Tax.

Authorities have also moved to dispel concerns around monetary gifts. “A gift is what you receive without any consideration. If you have just received a gift, it is not liable to tax,” Folorunsho said, noting that only payments linked to services rendered are treated as taxable income.

For pensioners running small businesses, pension income remains exempt, while any additional income is assessed based on turnover. Where annual turnover falls below 100 million naira, such businesses qualify for the same exemptions.

Complexity also persists for Nigerians earning across borders.

“Income from foreign employment is taxed based on residence. Nigerian residents earning abroad must declare and pay tax in Nigeria,” Olufemi said.

“Money remitted to Nigerian accounts is not taxed as income, but interest earned on such funds is subject to 10 percent withholding tax.”

Beyond incentives, the reforms introduce tougher measures to curb tax avoidance, a response to years of multinationals shifting profits out of Nigeria through offshore structures.

The framework includes anti-avoidance rules targeting multinationals that shift profits through offshore structures. Under an indirect transfer rule, the sale of foreign entities that hold Nigerian assets will be treated as a taxable disposal of those assets in Nigeria.

Even as authorities push ahead, implementation challenges remain.

“Over 30 draft guidance notes are being finalised to simplify compliance under the new law,” Olufemi said, noting that delays in issuing guidelines have created pressure for taxpayers.

For businesses, the reforms present both opportunity and risk. While tax credits could unlock investment in infrastructure and energy, compliance requirements are becoming more embedded in operations.

“All of these costs are going to be passed on to the customer, by either the bank that is on-lending to them or whatever the case may be,” Folorunsho warned.

With Nigeria facing a significant infrastructure gap, the government is increasingly relying on private capital to bridge the deficit. The tax framework is central to that strategy, using incentives to redirect investment flows.

But as the reforms take hold, a key tension remains: while incentives may unlock investment and support small businesses, the broader cost of compliance could be passed on to consumers.