This is not so much a tale of two cities but a tale of two countries, Nigeria and the United Arab Emirates (UAE), and their respective tax regimes. For when it comes to starting up a business overseas, fledgling companies need every financial edge they can muster, from top-notch business banking to simple and transparent taxation.
Nigeria’s tax system is complex and multi-layered, says the highly respected Oxford Business Group (OBG), which has historically resulted in wide-spread tax evasion. According to the Ministry of Finance, says the OBG, more than 75% of smaller enterprises fail to pay taxes, while revenues collected amount to 7% of GDP, a figure the Nigerian government has said it wants to see increased to 22% within two years.
However, citing figures from a report for the World Bank, published late last year by consultancy PricewaterhouseCoopers (PwC), Nigeria was rated 170 out of 189 countries for ease of paying tax, down from 155 previously.
Taxation in most West African countries is a challenging policy issue, given the large size of the region’s informal sector. But, says the OBG, according to PwC, Nigeria has some relative strengths, including its “total tax rate”, defined as the sum of various taxes (such as corporate, labour, property and turnover taxes) expressed as a percent of profit for a hypothetical medium-sized business. By this measurement, Nigeria’s 33.8% was below both the global average of 43.1% and that of Africa, at almost 53%.
However, it fared poorly in other categories. One such example was the number of tax payments that the hypothetical company had to make, which stood at 47, well above international standards. But it was the time a business had to spend to meet its tax obligations – 956 hours annually as against the African average of 230 hours or the global average of 268 hours – that dragged Nigeria’s rating down.
The contrast with the UAE couldn’t be any starker. For this dynamic Persian Gulf state leads the world in the ease of paying taxes – yet again. The number of payments required in a year is only four while the time spent fulfilling tax obligations amounts to a mere 12 hours annually.
However, ease of paying taxes doesn’t mean the UAE grabs all it can from hard-pressed foreign-owned businesses. In fact, the opposite is the case, which perhaps helps to explain why setting up an overseas venture in the capital Abu Dhabi, or in Dubai, the largest metropolis in the UAE, is such an attractive proposition.
But there’s so much more to it than that, not least the free-zone business environment where red tape and bureaucracy is deliberately kept to an absolute minimum. There are yet more mouth-watering incentives on offer from the UAE government, such as zero personal or corporate tax rates; 100% foreign ownership allowed; 100% repatriation of capital and profits; no foreign exchange controls; purpose-built infrastructure options; and little or no restrictions on hiring and firing employees.
Finally, free zone businesses can be set up in a matter of days, not weeks or months as in so many other countries. Check out the OBG economic update on Nigeria here.
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