National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet)

and G. B. Abang (FMST)

Trade Promotion, Incentives and Industrial Growth: Trade promotion and foreign exchange earnings are critical and strategic responsibilities of governments worldwide. In fact trade rules have become weapons of political rivalry. To advance trade and earn foreign exchange countries promote export of goods and services and provides a conducive environment for foreign investors, either to invest in existing industries or as pioneer investors. A major tool for encouraging investments are series of trade and investment incentives for exports in most cases. However, the extent and the form of export incentives vary from country to country depending on the countrys economic structure (including its fiscal structure), its overall resource availability, its export potential, and the effectiveness of export incentives in realizing its export potential. Within its overall budget constraint, each WTO Member country must decide how best to structure its export incentives that are consistent with the WTO rules and at the same time achieve the objective of export promotion1. Nigeria offers good investment opportunities and incentives in targeted areas and sectors. However, there are many barriers to investment, including poor infrastructure, complex taxes, vague property laws, unpredictable enforcement of regulations, corruption, and crime. While the law provides protection for property rights, including intellectual property rights, enforcement of the law is weak. Political instability caused by religious and ethnic rivalries is also a deterrent to investors. Corruption is extensive, as reflected in Nigerias ranking of 121st out of 180 countries in Transparency Internationals 2008 Corruption Perceptions Index2. What Does Export Incentives Mean?3 Monetary, tax or legal incentives designed to encourage businesses to export certain types of goods or services. A government providing export incentives often does so in order to keep domestic products competitive in the global market. Types of export incentives include tax exemption on profits made from exports. 4 Export incentives make domestic exports competitive by providing a sort of kickback to the exporter. The government collects less tax in order to deflate the exported good's price, so the increased competitiveness of the product in the global market ensures that domestic goods have a wider reach. This level of government involvement can also lead to international disputes that may be settled by the World Trade Organization (WTO). Nigerias fiscal policy since 19605 Fiscal Policy Department of the Budget office formulate and implement the fiscal policies of the Federal Republic of Nigeria. The responsibilities includes:

Export Incentives in India Within WTO Framework By Rajeev Ahuja. Working Paper No. 72: Indian Council For Research On International Economic Relation July, 2001. 50p. 2 http://www.estandardsforum.org/nigeria/business-indicators?id=155 accessed Fri 3 June 2011 3 Dictionary of Trade Terms by J. A. Aremu, Bankole Olubamise and Mercy Essienenkak, Lagos: DevNet, 2006, 131p. 4 Visit Investopedia http://www.investopedia.com/terms/e/export-incentives.asp accessed Friday 3rd June 2011. 5 http://www.budgetoffice.gov.ng/fiscalpolicy.html

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST)
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y y y y y y y

Formulation of Governments fiscal policy on the required adjustments and changes in taxation, revenue and expenditure for purposes of economic growth, stabilisation and equity. Evaluation and reporting on the impact of fiscal policy on the economy; Review of fiscal developments in the economy, trends and patterns of taxation, revenue, expenditure, budget balance, borrowing, etc. Secretariat of the Tariff Review Board. Preparation of annual report on fiscal policy measures and tariff amendments. Traff Administration and Import Duty Monitoring. Export Expansion Grant (EEG). Ecowas trade Liberalisation Scheme. Manufacture in Bone Scheme.

Major Fiscal Policies since 19606 includes: y y y y y y y Import Substitution Industrialization 1960s Nigerian Indigenization Policy 1972 Nigerian Enterprises Promotion Act 1977/Indigenization Policy 1981 Structural Adjustment Programme (SAP) 1986 Trade and Financial Liberalization policy 1989 Bank of Industry 2001 Small and Medium Scale Equity Investment Scheme (SMEIS) 2000 1. TAX HOLIDAY: - This simply means the exemption of infant or new industries from the payment of profit tax for some years of operation such as five year . The aim is to protect them from international competition and enable them build up enough funds for expansion purposes. 2. TARIFF PROTECTION: - This is the imposition of heavy import duties on foreign goods so as to protect local industries from international competition. 3. IMPORT DUTY RELIEF: - This is the granting of import duty relief to industries, particularly new ones for the importation of capital equipment by the Government. This helps newly establishment firms to be able to procure capital equipment cheaply, thereby increasing their productivity. 4. REDUCTION OF EXCISE DUTY:- This simply means reduction in the amount paid as taxes for the goods and services produced in the country. This helps to reduce business cost of production, especially newly established ones 5. DUTY DRAWBACK SCHEME:- The scheme was aimed at boosting exported goods thereby increasing the countrys foreign exchange base. 6. TOTAL BAN ON CERTAIN FOREIGN GOODS:- This is the banning of some foreign goods with the intention of protecting local industries engaged in production of similar products as well as to encourage increased local production.
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Various Investment Support Schemes in Nigeria

Industrial Policies and Incentives in Nigeria Overtime:1960 till Date By Famade, Oyeleke Oyedele Matric No: 138260 Teacher Education, University Of Ibadan, Nigeria. May, 2009. 11p.

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) 7. PROVISION OF SUPPORTIVE ACTIVITIES:- This involves Government provision of aids, such as building of industrial estates e.g. The Export Incentive Promotion Decree of 1986 which gave production and marketing incentives to export production and the completion of the Export processing zone (EPZ) in calabar in 1995. 8. PROVISION OF LOANS:- In Nigeria, there are guidelines on credit allocation to financial institutions in the country such as commercial banks merchant banks and industrial development banks to the industrial sector. 9. PROVISION OF ACCELERATED DEPRECIATION ALLOWANCE:- This is a form of tax relief granted by Government thereby allowing industries to set aside huge sum of covering wear and tear of their equipment and machines in the early years of operation. 10. DIRECT GOVERNMENT PARTICIPATION:- This direct participation of Government in certain strategic industries either alone or through joint participation with foreigners or local entrepreneurs 11. APPROVED USER SCHEME:- This has to do with the giving of concessionary rates of duty to certain selected items of industrial imports of manufacture. 12. EXPORT INCENTIVES:- Export promotion incentives in Nigeria include; the refund of import duty on raw material for production of export goods, refund of excise duty paid on export manufacture , exemption from import levy of 30 percent of raw materials imported for production in 1986. 13. ESTABLISHMENT OF SPECIAL INDUSTRIAL DEVELOPMENT FINANCIAL INSTITUTIONS:- This include the Nigeria Industrial Development Bank (NIDB) and Nigeria Bank for commerce and Industries (NBCI). 14. RAW MATERIAL RESEARCH AND DEVELOPMENT COUNCIL(RMRDC):- This outfit was set up by government after SAP to aid in research into the use of domestic raw and intermediate materials and to enhance domestic fabrication and usage of machinery and equipment. It was meant to complement the effect of Federal Institute of Industrial Research (FIIRO), Oshodi, and the Product Development Agency (PRODA). 15. FREE TRADE ZONES: Nigeria has five export processing zones that were created to encourage export-oriented investment. The Nigerian Export Processing Zone Authority permits duty-free importation of equipment and raw materials into the export processing zones. After paying duties, up to 25 percent of production may be sold domestically; and foreign exchange regulations and taxes. In addition, restrictions on repatriation do not apply to investors in export processing zones.7

See U.S. Department of Commerce, "Doing Business in Nigeria: A Country Commercial Guide," 2008. http://www.estandardsforum.org/nigeria/business-indicators?id=155

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) 16. EEG: The export Expansion Grant scheme is a very vital incentive required for the stimulation of export oriented activities that will lead to significant growth of the non-oil export sector. The Federal Government is committed in its efforts to bring about tremendous growth in non-oil exports and is resolved to enhance efficiency, transparency and accountability in the administration of the key incentive for non-oil export development. Eligibility i. ii. An exporter must be registered with the Nigerian Export Promotion Council (NEPC) An eligible exporter shall be a manufacturer producer or merchant of products of Nigerian origin for the export market (i.e. the products must be made in Nigeria). An exporter must have a minimum annual export turnover of N5 million and evidence of repatriation of proceeds of exports. An exporter-company shall submit its baseline data which includes audited Financial Statement and information on operational capacity to NEPC.

iii. iv.

Global Comparisons of Types of Incentives for Exporters India89: a. Free Trade Zones: No excise duties are payable on goods manufactured in these zones provided they are made for export purpose. Goods being brought in these zones from different parts of the country are brought without the payment of any excise duty. Moreover, no customs duties are payable on imported raw material and components used in the manufacture of such goods being exported. b. Electronic Hardware Technology Park / Software Technology Parks: This scheme is just like FTZ scheme, but it is restricted to units in the electronics and computer hardware and software sector. c. Advance License / Duty Exemption Entitlement Scheme (DEEC) : In this scheme advance license, either quantity based (Qbal) or value based (Vabal), is given to an exporter against which the raw materials and other components may be imported without payment of customs duty provided the manufactured goods are exported. These licenses are transferable in the open market at a price. d. Export Promotion Capital Goods Scheme (EPCG): According to this scheme, a domestic manufacturer can import machinery and plant without paying customs duty or settling at a concessional rate of customs duty.
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http://www.indianindustry.com/trade-information/export-incentives.html http://www.icrier.org/pdf/rajeev72try.PDF

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) e. Deemed Exports: suppliers are entitled for the following benefits in respect of deemed exports: i. ii. iii. iv. Refund of excise duty paid on final products Duty drawback Imports under DEEC scheme Special import licenses based on value of deemed exports

f. Manufacture under Bond: This scheme furnishes a bond with the manufacturer of adequate amount to undertake the export of his production. Against this the manufacturer is allowed to import goods without paying any customs duty, even if he obtain it from the domestic market without excise duty. The production is made under the supervision of customs or excise authority. g. Duty Drawback: It means the rebate of duty chargeable on imported material or excisable material used in the manufacturing of goods in and is exported. The exporter may claim drawback or refund of excise and customs duties being paid by his suppliers. The final exporter can claim the drawback on material used for the manufacture of export products. In case of re-import of goods the drawback can be claimed. The following are Drawbacks: i. Customs paid on imported inputs plus excise duty paid on indigenous imports. ii. Duty paid on packing material. Drawback is not allowed on inputs obtained without payment of customs or excise duty. In part payment of customs and excise duty, rebate or refund can be claimed only on the paid part. In case of re-export of goods, it should be done within 2 years from the date of payment of duty when they were imported. 98% of the duty is allowable as drawback, only after inspection. If the goods imported are used before its re-export, the drawback will be allowed as at reduced per cent. United Kingdom: The UK is the world's fifth largest economy, and its growth has outpaced that of other large European Union economies. Foreign and domestic investors enjoy equal treatment, and there are few restrictions on foreign investment. Although the government is authorized to block foreign acquisitions, it rarely does so. Incentives are offered for employment-generating investments in targeted depressed regions; but these incentives primarily take the form of grants and do not include tax concessions. The UK legislation protects property rights, including intellectual property rights, and enforces that protection and UK contracts are secure. In the event of expropriation, the government would provide prompt and appropriate compensation. United States:
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The United States has a market-based economy, in which government expenditure, including consumption and transfer payments, is high. The United States encourages

National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) foreign investment and provides for equal treatment of foreign and domestic investors. However, foreign investors face restrictions in some sectors and the government has the power to prohibit acquisitions that potentially impair national security. Although the federal government does not provide incentives to foreign investors, they are offered by some state and local governments. Property rights and contracts are guaranteed. Corruption is of no concern, as reflected in the United States ranking of 19th out of 180 countries in Transparency Internationals 2009 Corruption Perceptions Index. Exporters needing assistance can turn to the Export-Import Bank of Washington (Eximbank), which is a government agency. The report states that "Eximbank finances, guarantees, and insures payment for goods of U.S. origin" (p. 10). Export credit assistance is also available through the Foreign Credit Insurance Association, and other governmental agencies deal with trade issues arising in the context of emergencies or provide assistance to developing nations interested in establishing or maintaining trade relations.10 Australia11: In 1997, the government introduced the Manufacturing-in-Bond program that "allows export manufacturers to import components and materials free from up-front customs and excise and sales tax charges, provided the goods produced are subsequently exported." On the basis of the export of computer software, then the company claiming the export grant rebate must not only have incurred the expenditure, but also must either own copyright in the software or be granted an exclusive licence in the copyright of the software. Having an exclusive distribution right or an exclusive right to exploit will not be sufficient for a company to claim an export grant rebate, where the export grant claim is for the export of computer software. It is common for the development company within a group of companies to hold copyright, but to grant marketing rights to a related company, who enters into distribution agreements for international markets. This may cause the export grant application by the marketing company to fail. If an assignment of copyright as outlined above is not possible, then the marketing company may qualify for an export grant based on the export of know-how. It is a requirement by Austrade that know-how must be documented, so again care must be taken that copyright in the knowhow is owned by the company claiming the grant, even if copyright in the software itself it owned by another company within the group. Austrade will look at each claim based on its circumstances, but clearly the agreements that have been entered into with overseas distributors, will set out whether the export is an export of the software only and thereby intellectual property or whether it is an export of software and know-how. The provision of after sales service, modifications, updates and adaptations as an ongoing obligation, would suggest that services and/or know-how is being provided. Provided the company claiming the export grant owns the know-how (and any copyright within the know-how), then it will qualify for the grant.

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HLB USA, "Doing Business in the United States," March 2009. Available from HLB International website

http://www.austrade.gov.au/Export/Export-Markets/Industries/ICT/default.aspx

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) Computer software and programming services would generally be claimable as eligible external services. Where a company is exporting disks produced in Australia, then the export would be an export of goods rather than of intellectual property12. South Africa13 The purpose of the Export Marketing & Investment Assistance Scheme (EMIA): The purpose of assistance under the EMIA scheme is to partially compensate exporters for costs incurred in respect of activities aimed at developing export markets for South African products and services and to recruit new foreign direct investment into South Africa. EMIA Schemes Individual Assistance
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Primary Export Market Research and Foreign Direct Investment Research Scheme Individual Inward-Bound Mission Individual Exhibitions and In store Promotions Sector-Specific Assistance Schemes:
o o o

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Generic Funding Project Funding Project Funding for Emerging Exporters

Group Assistance
y y y y y

National Pavilions Outward-Selling Trade Missions Outward Investment Recruitment Missions Inward-Buying Trade Missions Inward Investment Missions

Conclusions: Promoting trade and industry in developed and developing countries share many similar incentive and trade promotion regimes, but there are also deep differences based on the fiscal policy of each country. A major notable challenge in Nigeria in the numerous agencies involved in different trade promotion regime. Proposed Fiscal Incentives for Software Policy: 1. All Software Companies should enjoy a 5-year tax free holiday.
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http://www.exportgrants.com.au/computer.html http://www.trevenna.net/exporting/exportincentives.htm

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National Fiscal Policy and Trade Incentive Regime: a Case for Software Industry Development By Bankole Olubamise (DevNet) and G. B. Abang (FMST) 2. All Software companies should be granted Export Free Zone Status or relocate there. 3. Federal, State and Local Governments should establish an software venture capital fund to be accessed by youths. 4. Federal, State and Local Government should established special training programmes for young software entrepreneurs, with post-training support services. 5. Software industry should be apriority agenda in the South South (emerging economies D8, G77, ACP, BRICS etc.) cooperation for Nigeria to be a destination for Software outsourcing. 6. Ensure full implementation of the ICT4D Strategic Plan and specifically the egovernment strategic plan in Nigeria at all levels with Nigerian/Indigenous software as key driver. 7. Each state of the Federation should establish a functional ICT Park restricted to units in the electronics and computer hardware and software sector. 8. The Federal Government through the Ministry of Commerce should take maximum advantage of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). 9. The National Copyright / intellectual property regimes should adequately protect Software development ( intellectual property) 10. Special concessions (duty waivers, subsidies, primary industry, pioneer status, EEG etc.) should be accorded software industry by investment and export promotion agencies (SMEDAN, NIPC, NEPC)

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