Tax incentives: How Nigeria can attract investment without sacrificing revenue

NIGERIA’S new tax regime faces a defining test: attract investment and create jobs without surrendering the revenue needed to fund development. By replacing tax holidays under the Pioneer Status Incentive with investment-linked credits under the Nigeria Tax Act 2025, the government is betting that rewarding actual capital expenditure will deliver better economic returns than blanket tax exemptions. But as revenue pressures mount and businesses contend with high energy, transport and financing costs, the reform’s success will depend on a fundamental shift in priorities: making Nigeria cheaper and more predictable to do business in, rather than relying on tax concessions to compensate for structural weaknesses.

At the October 2026 International Monetary Fund (IMF) and World Bank Annual Meetings in Bangkok, discussions on taxation and fiscal sustainability have reinforced the importance of designing tax systems that mobilise revenue without undermining investment, employment and productivity.

The IMF’s October 2026 Fiscal Monitor argues that better-designed taxation can improve economic performance even when governments have limited room for tax cuts. Its central message is that the structure and administration of taxation matter as much as the amount collected.

For Nigeria, the challenge is to ensure that incentives produce additional factories, jobs, technology transfer and domestic economic activity rather than merely reducing companies’ tax liabilities.

Moving beyond tax holidays

Tax incentives have long been used to attract foreign direct investment, stimulate manufacturing and encourage businesses to establish operations in developing economies. However, their effectiveness depends on whether the concessions materially influence investment decisions.

Where a company would have invested without a tax holiday, the government loses revenue without securing additional economic benefits. Similarly, incentives that encourage multinational companies to shift taxable profits between jurisdictions may generate little employment or technology transfer in the host economy.

These risks are particularly significant for Nigeria, where infrastructure deficits and substantial development needs compete for limited public resources.

Theo Emuwa, Senior Partner at Aelex, said international investors often prioritise the quality of infrastructure and the overall cost of doing business above tax incentives.

“One thing people may want to note is that when you ask international investors what are the biggest things, the most important things you look for when deciding to invest in a country, taxation is not usually number one,” he said in an interview with CNBC Africa.

Emuwa argued that tax concessions cannot compensate for fundamental weaknesses in the investment environment.

“Many countries go trying to provide tax incentives, waivers, exemptions to attract investment, but investment doesn’t always come, whereas what a lot of businesses look for is infrastructure. Do you have power supply? Do you have water supply? Do you have transportation to move my goods from factory to market? That’s what they’re looking for.”

He added that even a zero tax rate might not make an investment commercially viable where electricity, logistics and other operating costs remain prohibitively high.

ALSO READ: FG presents $78.5bn investment pipeline at IMF/World annual meeting

The implication for Nigeria is that investment promotion must combine predictable tax rules with reliable power, efficient ports, better roads, security and regulatory certainty. Otherwise, incentives risk becoming an expensive substitute for reforms that would improve the operating environment for businesses generally.

Economic development incentive and the 15 percent minimum

Nigeria’s introduction of the EDI signals a move towards linking investment support more closely to qualifying expenditure rather than granting blanket exemptions from corporate income tax.

Under the former Pioneer Status Incentive, eligible businesses could receive income tax holidays for three to five years. The new approach is intended to reward qualifying investment through a tax-credit framework, making the relationship between public support and actual capital deployment more explicit.

Emuwa said the shift could benefit capital-intensive investments, although its implications would differ across sectors.

The incentive may be particularly relevant to businesses committing substantial resources to industrial facilities, equipment and productive infrastructure. Service businesses with relatively low capital requirements may have less to gain from an arrangement primarily linked to qualifying investment expenditure.

The government will therefore need transparent eligibility rules and an assessment mechanism that distinguishes additional investment from spending companies would have undertaken regardless of the incentive.

The reform also operates against the backdrop of international efforts to establish a minimum effective tax rate for large multinational enterprises.

Explaining Nigeria’s approach, Emuwa said: “So in Nigeria, if your effective tax rate is less than 15 percent, you’ll pay a top-up tax in Nigeria.”

The provision reflects the principle underpinning the global minimum tax initiative associated with the Organisation for Economic Co-operation and Development (OECD) and the G20. Nigeria has incorporated aspects of the minimum-tax approach into its domestic tax framework, although the scope and application of the rules must be distinguished from participation in every element of the OECD/G20 agreement.

For multinational groups covered by applicable minimum-tax rules, tax holidays may become less effective if the benefit is offset by a top-up tax payable in Nigeria or another jurisdiction.

This strengthens the case for incentives that encourage real economic activity instead of relying solely on low headline tax rates.

The OECD’s broader work against base erosion and profit shifting also seeks to limit arrangements that allow companies to transfer profits to low-tax jurisdictions without corresponding economic substance. For Nigeria, the policy objective should be to ensure that investment incentives support production and employment while protecting the domestic tax base.

What IMF’s findings mean for Nigeria

The IMF’s October 2026 Fiscal Monitor provides a broader economic argument for improving tax design rather than relying exclusively on higher rates or additional levies.

Its estimates indicate that reducing value-added tax distortions affecting production and consumption could generate economy-wide welfare gains of up to 0.8 percent of gross domestic product (GDP) in emerging market and developing economies.

Removing tax-induced increases in the cost of capital could raise long-term GDP by an estimated 2.1 to 2.7 percent. Reforms that strengthen incentives to work could increase employment rates by about 1.2 percentage points in emerging market and developing economies.

The report also finds that countries with stronger operational tax administrations collect approximately 1.7 percentage points of GDP more in revenue than countries with weaker systems, comparing the 67th and 33rd percentiles of administrative strength.

These are cross-country estimates, not forecasts of gains Nigeria will automatically achieve. Nevertheless, they demonstrate how improved administration and fewer distortions can support both economic activity and public revenue.

For Nigerian businesses, one important area is the treatment of value-added tax (VAT) paid on inputs. When businesses cannot recover eligible input VAT, the tax becomes an additional production cost, potentially raising prices and discouraging formalisation.

Emuwa noted that the new tax framework expands the ability of businesses to deduct eligible input VAT beyond the narrower treatment previously available to some categories of expenditure.

“Up until now, VAT did not allow you to deduct VAT which you pay for inputs to your business, except it was raw materials,” he said, explaining that costs such as electricity, telephone calls and internet services could create unrecoverable VAT expenses under the earlier arrangements.

“But now they’ve changed that, and now you can deduct that input VAT.”

The reform could ease costs for service providers and other businesses that incur substantial eligible overhead expenses. Its benefits, however, will depend on effective implementation, clear guidance and timely refunds or credits where businesses are entitled to them.

Although improved input-tax recovery may reduce VAT receipts in some circumstances, the wider objective is to avoid taxing intermediate production repeatedly and to make the tax system more neutral across sectors.

For Nigeria, where businesses face high energy and logistics expenses, reducing avoidable tax costs could improve competitiveness without requiring a general reduction in corporate tax rates.

Enforcement without discouraging enterprise

A better-designed tax regime will achieve little if compliance remains weak or enforcement is unpredictable.

Nigeria’s revenue authorities are under pressure to identify taxable economic activity, improve filing and payment compliance, and close gaps created by informality and under-reporting. The Nigerian Revenue Service (NRS) is targeting approximately ₦40.7 trillion in revenue in 2026, following reported collections of ₦28.3 trillion in 2025.

Achieving the target would require substantial improvements in collection and compliance, making the effectiveness of tax administration central to the government’s fiscal strategy.

Emuwa believes the revenue authorities can improve collections by using technology and data to identify businesses whose commercial activities appear inconsistent with their tax filings.

“What was happening many years ago is that the revenue service wasn’t going out to collect what was supposed to be collected,” he said.

He argued that authorities must identify taxpayers, compare reported liabilities with available information and pursue cases where the evidence suggests underpayment.

“These days, you can see from your computer companies that are doing business, and you can identify, well, this company seems to be doing business, but we haven’t heard from them, and you can go after them.”

He described the trend as a move towards greater sophistication and proactive enforcement rather than simply more aggressive taxation.

However, stronger enforcement must be accompanied by clear rules, reliable taxpayer services and proportionate compliance requirements. Businesses should be able to understand their obligations, challenge incorrect assessments and obtain eligible refunds without excessive delays.

Poorly implemented enforcement could raise costs for compliant businesses while leaving the underlying problems of informality and weak administration unresolved.

Nigeria should therefore prioritise better taxpayer registration, data integration, risk-based audits and simpler filing processes. These measures can help collect taxes already due without automatically increasing statutory rates.

Protecting investment and jobs

The need to balance revenue mobilisation with economic growth was also highlighted at the IMF–World Bank meetings in Bangkok.

Taiwo Oyedele, Nigeria’s Minister of Finance and Coordinating Minister of the Economy, cautioned against imposing additional tax burdens on vulnerable citizens and productive sectors during a period of economic pressure.

Presenting the communiqué of the Intergovernmental Group of Twenty-Four, he said: “This is the wrong time to impose new taxes or increase the tax burden, particularly on vulnerable populations and productive sectors of the economy.”

His position reflects the difficulty of financing development while protecting households and businesses from additional costs that could suppress consumption, investment and employment.

Dr Muda Yusuf, economist and chief executive officer of the Centre for the Promotion of Private Enterprise, has similarly warned that excessive taxation could undermine business expansion.

“Because if there is too much pressure on investors, it will be difficult for them to grow their business, to create jobs,” he said.

Yusuf also cautioned against allowing the drive for revenue to overshadow broader economic and social priorities.

“When you have too many accountants or tax people in government, there is a tendency that there will be dominance of the financial objectives, sometimes to the detriment of the social objectives, investment objectives, or growth objectives,” he said.

These arguments do not suggest that Nigeria should abandon revenue mobilisation. Rather, they underline the importance of evaluating tax measures by their wider economic consequences, including their impact on employment, prices, household purchasing power and private-sector expansion.

The debate over vehicle-related fiscal measures illustrates the tension. Higher tariffs on used vehicles can increase acquisition and transportation costs, potentially affecting households and businesses dependent on road transport. Exemptions for electric vehicles, mass-transit vehicles and selected locally produced alternatives may support environmental objectives and domestic production, but their effectiveness depends on affordability and the availability of substitutes.

The same principle applies to investment incentives: the intended benefit must be weighed against the revenue forgone and the costs imposed on other parts of the economy.

Making incentives deliver measurable returns

Nigeria can improve the effectiveness of its investment regime by linking incentives to clear economic objectives and regularly measuring their results.

First, the government should publish the estimated fiscal cost of major tax incentives. Tax expenditure reporting would help policymakers and the public compare the revenue forgone with the investment, jobs and other benefits generated.

Second, incentives should have transparent eligibility criteria, defined durations and periodic reviews. Where a concession fails to produce additional investment or measurable public benefits, it should be revised or withdrawn.

Third, the EDI should be implemented with safeguards against inflated investment claims, artificial transactions and the reclassification of routine expenditure as qualifying capital investment. Independent verification would strengthen accountability.

Fourth, the government should prioritise infrastructure and regulatory reforms that benefit a broad range of investors. Reliable electricity, efficient transport networks, predictable regulations and faster customs procedures can reduce costs for existing businesses as well as prospective investors.

Finally, tax administration must be strengthened alongside taxpayer protection. Timely VAT refunds, clear guidance and accessible dispute-resolution mechanisms can improve compliance and make Nigeria more attractive to businesses seeking certainty.

The IMF’s findings support this direction: efficient tax design and stronger administration can improve economic performance while protecting revenue. Emuwa’s argument adds a practical warning that investors ultimately assess the full cost of operating in a country, not merely the tax rate.

Nigeria’s transition from Pioneer Status to the Economic Development Incentive provides an opportunity to make investment support more transparent and accountable. But changing the name or structure of an incentive will not guarantee new capital, employment or technology transfer.

The real test is whether public concessions lead to investment that would not otherwise have occurred, generate productive jobs and broaden the tax base over time.

For an economy with substantial development needs and limited fiscal space, the objective should not be to offer the largest tax breaks. It should be to create the conditions in which businesses can invest profitably, workers can find jobs and government can collect sustainable revenue to finance public services.

Nigeria can attract investment without sacrificing revenue, but only if incentives are treated as carefully measured public investments rather than open-ended giveaways.