Pioneer Status in Nigeria

                              

Over the years, the Nigerian Government in a quest to boost its economy has put in place various incentive schemes towards attracting inflow of foreign exchange to complement domestic supplies.

The existence of feasible opportunities for growth and profitable returns on investments informs the decisions of investors, therefore the government will naturally seek to increase its revenue in such economy. This is done through tax and levies. As a result before an investor decides to invest in a region it must take in account the tax provisions of that region. 

The importance of tax provisions cannot be over-emphasized. Aside from providing funds for the government, the essence of a good tax system in any economy is to produce an end result that will improve the welfare of the general public. With the right knowledge about taxation, a taxpayer can enjoy some tax relief.

  

A company incorporated in Nigeria is expected to pay income tax on its profits accruing in, derived from, brought into or received in Nigeria. However, in certain instances, government grants tax incentives to boost investment.

Tax exemption is generally regarded as an industrial investment device; many developing countries like Nigeria offer it as one of their major incentives.

Tax exemption, otherwise known as Tax holiday,  simply means a period of exemption from payment of taxes imposed by the government and this may be complete or partial. The grant of pioneer status, therefore, gives a company a preferred position in getting established, usually through exemption from income.

The pioneer status grants companies making investments in qualifying industries and products a tax holiday from the payment of company income tax for an initial period of three years, with the possibility of an extension for one or two additional years.This enables the company to make reasonable levels of profit within its formative years or initial period of expansion. The profits made are expected to be invested back into the business. Any industry or company that has pioneer status is prevented from running any other business other than their pioneer industry.

The Nigerian Investment Promotion Commission (NIPC) is the body in charge of administering this incentive to any deserving company . The pioneer status scheme is governed by the Industrial Development Income Tax Relief Act 2004 (herein referred as The Act') and the Pioneer Status Incentive Regulations 2014. 

Requirements for acquiring the pioneer status include;

         1. An applicant must be a company incorporated in Nigeria and must have incurred a capital expenditure of not less than N10 million.

       2. The applicant company must state whether the company or proposed company when established is going to be indigenous controlled company.

          3.  A non-refundable fee of N200,000 which will be credited to the consolidated Revenue Fund of the Federal Government of Nigeria is expected to accompany the application.

4      4. An applicant company shall pay to the NIPC, a 2% service commission charge to be determined from its estimated savings (that is, the savings which the company would make as a result of the tax exemption).

     In so doing, the applicant company is mandated to submit to the NIPC, its 5 year financial projections to assist the NIPC in evaluating the 2% Service Charge to be paid to the commission. Where the applicant company records negative pre-tax earnings in its projections, the service charge shall be calculated on the higher of Either 0.5% of its net assets or 0.25% of its turnover.

5        5. When making an application for Pioneer Status to the NIPC, the applicant must submit the relevant regulatory license to operate in the sector or business economy. However, there are some industries stated in the Act for which there are no regulatory requirements.

Prior to the enactment of the Regulations, the Industrial Development (income tax relief) Act provides for its fee (processing fee) of N100 only for grant of pioneer status. This has now been increased to N200,000. Also, the Regulations brought about an increase in the required capital expenditure of not less than N150,ooo for a foreign-owned company; and not less than N50,000 for an indigenous company. The NIPC requires a capital expenditure of not less than N10 million. 

When applying for pioneer status, the applicant company must consider the following;

1.   All applications are to be addressed to the Minister.

2.  State the status of the company whether the company or proposed company when established is going to be indigenous or foreign controlled company.

3.  The particulars of the assets on which qualifying capital expenditure will be incurred by the company including their source and estimated cost on or before production day; during a period of 3 years following production day.

4.   Specify location of Assets.

5.  Estimate and state the probable date of production date of pioneer products by the company or proposed company.

6. Specify any product or by product not being a pioneer product proposed to be produced by the company, then give a reasonable estimate of the quantities and value of such product and by-product during a period of one year from production day.

7.   In the case of a company already incorporated give the name, address and nationality of each Director of the company and the number of shares held by him. In the case of a proposed company give the name, address and nationality of foreign promoter.

8. A declaration signed by the applicant that all the particulars contained in the application are true and an undertaking to produce proof if required, to the satisfaction of the Minister.

The pioneer industries and products are identified by a list published in an official gazette. Currently some of the industries on that list are: rubber plantation and processing, real estate development and utilities, manufacture of cement, pharmaceutical, iron and steel from iron ore, gas cylinders, solar energy powered equipment and gadgets and maintenance of aircrafts.

The Federal Government in trying to encourage the establishment or growth of the industry and the economy, decided to look at its priority sectors in the Nigerian Industrial Revolution Plan (NIRP) and the Economic Recovery and Growth Plan (ERGP). They recently approved and published a list of 27 industries and products that would qualify to enjoy the pioneer status. They include;

1. Mining and processing of coal;
2. Processing and preservation of meat/poultry and production of meat/poultry products;
3. Manufacture of starches and starch products;
4. Processing of cocoa;
5. Manufacture of animal feeds;
6. Tanning and dressing of Leather;
7. Manufacture of leather footwear, luggage and handbags;
8. Manufacture of household and personal hygiene paper products;
9. Manufacture of paints, vanishes and printing ink;
10. Manufacture of plastic products (builders’ plastic ware) and moulds;
11. Manufacture of batteries and accumulators;
12. Manufacture of steam generators;
13.  Manufacture of railway locomotives, wagons and rolling stock;
14. Manufacture of metal-forming machinery and machine tools;
15. Manufacture of machinery for metallurgy;
16. Manufacture of machinery for food and beverage processing;
17. Manufacture of machinery for textile, apparel and leather production;
18. Manufacture of machinery for paper and paperboard production;
19. Manufacture of plastics and rubber machinery;
20. Waste treatment, disposal and material recovery;
21.  E-commerce services;
22. Software development and publishing;
23. Motion picture, video and television programe production, distribution, exhibition and photography;
24. Music production, publishing and distribution;
25. Real estate investment vehicles under the Investments and Securities Act;
26.  Mortgage backed securities under the Investments and Securities Act; and
27. Business process outsourcing.

In conclusion, it is unarguable that the pioneer status scheme is based on the Government’s desire to encourage the growth of new or relevant industries that will reduce the country's dependence on imports. The Regulations has created a more uniform process for the application and grant of the pioneer status.

Furthermore, while aiming to standardize and promote investment in Nigeria, the Regulations have no doubt increased the cost associated with grant of pioneer status. Some small scale industries who may be deserving of pioneer status may not meet the N10 Million standard. This could potentially cut off small/ local industries that could benefit from pioneer status.

However, the rationale for the increase may be to prevent abuse of the incentive and to ensure that investors (local or foreign) make substantial capital expenditure to be eligible for pioneer status. On a bright end, the NIPC Application form for pioneer status which hitherto cost N 40,000 can now be downloaded from the website of the NIPC or obtained from the office of the NIPC free of charge.

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