INTRODUCTION
The Federal Government of Nigeria, through the Nigerian Investment Promotion Commission (NIPC), recently granted pioneer status tax holiday to 25 companies – https://punchng.com/fg-grants-three-year-tax-holiday-to-25-companies/. With this development, it is sought here to critically examine the law and procedure applicable to pioneer status, while analyzing the impact of the latest grants on the concerned industries and on Nigeria’s overall economic well being.
THE PIONEER STATUS INCENTIVE
Pioneer status is a tax incentive which gives a company relief from the payment of Companies Income Tax for the period specified in the grant, and an extended period, if any. It is created by the Industrial Development (Income Tax Relief) Act, Cap. I7, Laws of the Federation of Nigeria, 2004. Section 1 of this Act provides that, where the Nigerian government is of the opinion that any sector or industry in the economy is not being undertaken on a scale suitable to the economic advancement of Nigeria or that it is in the public interest to encourage the further development or establishment or advancement of trade in such sector or industry, the President of Nigeria is authorized to publish in a Gazette, a list of such industries who qualify for pioneer status.
From the above provision of the Act, the industries and products to which pioneer status pertains are those that are either new or in which investment does not yet match the expected economic advancement of the country. Its underlying objective is to encourage and boost investment in such industries and products. It considers the substantial capital expenditure of a company in its formative years, and hence enables it to realize a significant level of profit before coming under the burden of tax.
Pioneer industries and products are identified by a list published in the official gazette on the directive of the President. A company engaged in an industry or product so listed may apply for issuance of the Pioneer Status Certificate, and upon the issuance, the Minister for Trade and Industry effects publication of the company’s name in the gazette. The Federal Government has continually expanded the list of pioneer industries and products. Official Gazzette No. 84 of August 14, 2017 lists the broad industries and specific products and services in the pioneer list. The industries are: Agriculture, Mining and quarrying, Manufacturing, Electricity and Gas Supply, Waste Management, Construction, Trade, Information and Communication, Professional Services, Financials and Administrative Services. Specific areas of most of these industries as contained in the gazette are however highly limited in scope. The Gazette added 27 specific areas mainly under manufacturing.
By Section 10 of the Industrial Development Act, Pioneer status gives a tax relief period of three years, commencing from the Production Day at the initial instance, and two subsequent renewals of one year each, or a single renewal of two years, amounting to a maximum of five years. These extensions are not automatic, as the Act prescribes their requisite conditions. For this reason, a single grant of the entire five years does not conform with the law, and would likely spark dissension with the Federal Inland Revenue Service.
THE LAW AND PROCEDURE
The Industrial Development Act provides that applications for Pioneer Status Certificate are to be made through the Minister for Trade and Industry to the President who approves it. However, approval and cancellation of the certificates are delegated to NIPC by virtue of the broad functions of NIPC on investment promotion and incentives under Section 4 of the NIPC Act.
Pioneer Status Incentives Regulations of 2014 (“the Regulations”) released by NIPC prescribes a capital expenditure threshold of N 10,000,000 for a company applying for Pioneer Status. This threshold applies to both Indigenous and foreign companies. Before the release of the Regulations, Section 6(11) of the Industrial Development Act provides that a foreign company must have incurred a capital expenditure of not less than N 150,000, while an indigenous company must have incurred a capital expenditure of not less than N 50,000 on or before its Production Day to qualify for Pioneer Status. Thus under the Regulations, both local and foreign-controlled companies eligible for Pioneer Status are subject to the same criteria in respect of capital expenditure. However, a company seeking the certificate must be incorporated in Nigeria.
Determination of the Production Day as repeatedly mentioned above is crucial in the application process. As earlier indicated, the initial term of the pioneer status counts from the Production Day. Also, the stipulated minimum capital expenditure is required to have been incurred on or before the Production Day. Section 25 of the Industrial Development Act defines “production day “as the day on which the trade or business of a pioneer company commences for the purposes of the Companies Income Tax Act. In the process of the application, the applicant is to approach the Industrial Inspectorate Division of the Federal Ministry of Trade and Industry who inspects the company’s projects, determines the Production Day, and issues a certificate to that effect.
The Regulations further mandate the applicant company to submit, when making the application for Pioneer Status, the relevant regulatory license which enables that company to operate in the sector or business activity under which it is applying.
Perhaps the most controversial introduction of the Regulations is a service charge of 2% of the applicant company’s estimated tax savings, derived from financial projections on the five-year pioneer period. This is to be paid in the course of the application. But if the company’s projections signal losses instead, the service charge would be the higher of 0.5% of the company’s net assets and 0.25% of its turnover.
In August 2017, the Federal Ministry of Trade and Industry released the Pioneer Status Application Guidelines which outlines the steps in obtaining pioneer status certificate. Under the guidelines, an application for the initial grant must be made in the company’s first year of production/service, while an extension application must be made not later than one month after the expiration of the initial period.
POSITIVE IMPLICATIONS OF THE LATEST GRANTS
Hostile economic factors currently facing the nation like the nosedive of global oil price and the Covid-19 pandemic warrant sustained incentivization of Nigeria’s industrialization. Therefore, this addition of 25 companies from diverse sectors to the list of pioneer status companies is strategic and laudable. Apart from generally boosting industrial development, it gratifies the relentless campaign for economic diversification in a season when plummeting oil price has forced Nigeria to offer its oil to the world at next-to-nothing prices.
A CALL FOR REFORM
Maximizing the impact of pioneer status on the Nigerian economy however requires a significant retouch on the enabling laws.
The Industrial Development Act is out tune with current realities in many respects. For instance, it sets the lower limits of capital expenditure at N50, 000 and N150, 000 for indigenous and foreign companies respectively, which are grossly low. Pioneer status is meant to encourage substantial investment in an industry in order to realize optimum capacity. It would be unrealistic trying to achieve this by drawing such low capital inputs as stated above to pioneer status. The Regulations which harmonized the minimum capital expenditure for both indigenous and foreign-controlled companies to N10, 000, 000 is a weak instrument for that purpose. Regulations can only facilitate implementation of or compliance with a substantive law, but cannot amend the law. Besides, the regulation in this case is enabled by Section 30 of the NIPC Act. Neither the NIPC Act nor the Industrial Development Act itself amended Section 6(11) of the Industrial Development Act which provides for N50, 000 and N150, 000 capital expenditures. Thus as it stands, the Regulations conflict with Section 6(11) of the Industrial Development Act. Should both legal instruments contest for priority before the court, the Act would prevail over the Regulations, and the N50, 000 and N150, 000 would subsist as minimum capital expenditures for pioneer status in Nigeria.
The 2% projected profit required by the Regulations as service charge in the application process is a three-pronged flaw which also calls for legislative remedy. It aggravates the procedural rigours in the application; diminishes the flavour of the incentive; and creates a huge uncertainty on the mode of computing the profit projection on which that 2% is to be charged. With copious fees already stipulated for the application processes, this further imposition of a service charge, tied to projected profit, is ed taxation of the same potential profit in respect of which tax exemption is being sought through pioneer status.
The Finance Act which came forth in January 2020 was a missed opportunity of rectifying the above and other identifiable legislative shortfalls on pioneer status. All the same, it is not too late.
Dr. Jerome Okoro – Partner, Tax, Energy Law and Dispute Resolution at Hermon Legal Practitioners. jerome@hermonlaw.com. 08035487564.