• Govt may be losing N25 billion in duty leakage on one input
• NCS: We have strengthened our operation to improve efficiency in zones
• If you can’t stop smuggling from zones, you fail in your responsibilities, NEPZA tells NCS

Sharp practices, weak regulations and official graft may be undermining the economic benefits of free trade zones (FTZ) across the country.

The special business areas, which are designated as export processing zones (EPZs), are gradually becoming tax evasion havens, with enormous consequences for tax revenues, The Guardian understands.

Nigeria would be losing billions of naira yearly to duty waivers enjoyed by the operators as stipulated by the extant laws. The losses in duty waiver are ordinarily not a problem as the country is expected to recover the losses through job creation and export gains.

In principle, the processed commodities are to be exported either to other countries or Nigeria, during which duties would apply as an EPZ is considered as a country within a country.

But multiple sources familiar with the operations of the zones told The Guardian that the operators circumvent relevant laws to smuggle the finished goods into the Nigerian market where they compete unfairly with homogenous goods manufactured by local companies that pay full duties on inputs and raw materials.

The Guardian was informed of inter-ministry and agency meetings held to resolve petitions on such sharp practices. But sources privy to the petitions said anti-market operations continue.

Many of the EPZ operating firms are owned by foreigners. But their anti-market practices are said to be aided by politically exposed Nigerians with interests in the companies.

An investigation also suggests negligence on the part of the enforcing agency, Nigeria Customs Service (NCS), which is represented across the 14 active hubs in different parts of the country.

On one hand, the operators have complained of Customs’ overzealousness and highhandedness, which they allege have negative impacts on their operations. However, some sources alleged that the NCS posts at the manufacturing hubs have ‘commercialised’ their monitoring responsibilities and look the other way while trucks haul goods out of the free zones to be sold at customs territory.

The prevailing laws allow operators to sell 25 per cent of the produced goods to the market while 75 per cent are to be exported. But investigation suggests that the rules have been jettisoned by the operators, which are trading ethical business conducts for economic survival.

This may cost the government billions of naira yearly. Operators who are informed about the companies’ production, marketing and under-declaration said the government can significantly increase its earnings if it blocks the leakages.

Leading the list of imported inputs by companies operating in the special economic zones are palm olein, ethanol and many other raw materials used for chemical and allied industries. According to data, ethanol ranks high on inputs with a substantial local capacity gap.

Industry data put the local yearly consumption of ethanol at 1.2 billion litres with local capacity estimated at 30 per cent. Of 840 million litres imported yearly, about 20 per cent is said to be brought into the country by FTZ operators.

Ethanol attracts a duty of 10 per cent, which is waived for FTZ operators. At $0.8 per litre of ethanol, the government forfeits $16.8 million or N25.2 billion yearly to sustain ethanol utilisation at FTZ.

In 2023, Nigeria imported 475,000 metric tonnes of palm olein (palm oil). The volume was significantly higher than 425,000 metric tonnes imported in 2022. The Guardian could not independently assess the proportion of the import volume brought into the country through FTZ. However, sources said it is substantial as the operators leverage waiver to import rather than source the commodity from the local market.

At about $1000 per metric tonne of palm, a 25 per cent import by FTZ operators last year alone suggests the government lost over $40 million to the companies operating in FTZ last year on palm oil, which attracts 35 per cent duty.

Meanwhile, The Guardian understands that much of the ethanol by-products are sold to the Nigerian market without duty payment.

Apart from revenue losses, the practice has increased the odds against competitors who would be forced to accept losses in some cases to be able to compete with the FTZ firms who get inputs cheaper following the duty waivers.

There has been a proposal for reforms of the FTZ legal framework. Some experts have suggested import duties should apply uniformly and refunds are only given to FTZ operators for the volumes of goods they eventually export to achieve fair competition.

An operator who pleaded anonymity said a proposed multi-billion processing plant by a major player is stalled owing to sharp practices at FTZ.

There has been overwhelming economic rationalism in the operation of the zones. Recently, the Minister of Trade and Investment, Dr Jumoke Oduwole, played up the justification when she said FTZ schemes have attracted over $300 billion in investments and contributed over N650 billion to government revenue since their establishment.

The Federal and state governments, which operate a number of the zones, consider them as pet projects and treat them with utmost care for the perceived economic injection, increasing the risk of condoning misconduct and negligence by regulatory agencies.

YET, NCS claimed it is working hard and professionally with other agencies to ensure that business entities in the zones play by the rules.

Speaking with The Guardian at the weekend, the National Public Relations Officer of the Nigeria Customs Service (NCS), Abdullahi Maiwada, said the NCS is strengthening its oversight operations in the zones across the country and that as the lead agency in the special business hubs, it is up to speed with enforcement of the rules.

“Our primary function in these zones is to ensure that goods brought in undergo value addition, and when they are exported into Nigerian territory, the appropriate duty is calculated based on this value addition,” Maiwada stated.

To enhance efficiency, Maiwada said that the NCS has restructured its operational framework by unbundling existing commands, establishing the Ogun 2 Command, which now focuses on monitoring the Guangdong Free Trade Zone and other FTZ within Ogun, ensuring compliance with laws and preventing smuggling.

Similarly, the creation of Port Harcourt 3 Command, he said, is to oversee oil and gas free trade zones and ensure stricter enforcement of customs laws in oil and gas free trade zones. He said the NCS has set up a high-level investigative committee to assess operations within free trade zones in Kano.

He revealed that the committee has also been given a week’s deadline to evaluate activities, identify potential fraud and submit findings and recommendations for better enforcement.

RESPONDING, the Nigeria Export Processing Zones Authority (NEPZA) dismissed the claim of sharp practices and tax evasion, saying most firms follow “due process” and comply with the laws. It however asked NCS to take full responsibility for monitoring the tax obligations of the operators.

The Head of Corporate Communications NEPZA, Dr Martins Odeh, dismissed the allegation that companies operating in the zones divert goods meant for export to the Nigerian market without paying relevant duties. He refuted the claims during a telephone conversation yesterday.

He insisted that most companies within the FTZs adhere to due process and that any claims suggesting otherwise are false.

“All those stories people are hearing that enterprises in free trade zones bring in goods into the Nigerian customs territory without payment are false. The majority of them follow due process,” Odeh stated.

He emphasised that goods brought into the Nigerian market from free zones are treated as considered exports and that regulatory agencies such as the NCS are responsible for ensuring compliance.

“The customs services and all other agencies responsible for checking these activities should do their job. If they are not checking, then they are failing in their responsibilities,” Odeh said.

EARLIER, the Comptroller General of the NCS, Adewale Adeniyi, accused companies in the zones of violating the law regulating their operations.

Adeniyi stated this during the House of Representatives public hearing on the tax reform bills organised by the Committee on Finance. His statement was in response to an allegation by the Nigerian Chambers of Commerce, Industries, Mines and Agriculture (NACCIMA) that tax and levies are imposed on companies operating in FTZ by Customs.

“The sticky issue over the years has been the compliance of free trade zone operators with the provisions of the law. The law allows them to import every manufacturing input they need, 100 per cent sometimes, including things that are prohibited into the customs territory…

“I think there was a need to produce all the services we can provide to the local markets. From the local market to the federal market the regulations of change allow them to export 25 per cent of volume and factory into the local market, into the local customs territory and subject to extant laws affecting goods that are imported into Nigeria. I cannot stand here and tell you that this has been observed absolutely at full compliance,” Adeniyi told the lawmakers.