Nigeria’s economy is growing rapidly. In recent times, there has been keen interest from the international sphere in its emerging markets. These days and in relatively every field we have returnees from diaspora seeking to take advantage of the available growth opportunities. Until recently, the international market was drawn mainly to Nigeria’s oil wealth. Now, we have international investments in Media, Power, Real Estate, Telecommunications, etc.
Investment decisions are informed by the existence of viable opportunities for growth and profitable returns on such investments. Where these opportunities exist in an economy, the government of such economy will naturally seek to increase its revenue. 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-flogged. An investment can go bad due to unfavourable tax laws.
PIONEER STATUS INCENTIVE
In Nigeria, the government understands that an unfavourable tax environment can inhibit the growth of any economy, so it has put certain incentives in place to encourage investments and business expansion. One of these incentives is the pioneer status incentive.
The pioneer status incentive is tax holiday given to companies for a period of time, to encourage the growth and development of the Nigerian economy. A new company or an existing company with an expansion plan may apply for a certificate of pioneer status which lasts for 3 years and is renewable upon application for 2 years. It may also be a seven-year tax holiday in respect of industries located in economically disadvantaged local government areas of the country.
The Nigerian Investment Promotion Commission (NIPC) is the body in charge of administering this incentive. The NIPC has published a list of pioneer industries, that is, industries that qualify to apply for the pioneer status incentive (please see excerpt below).
LIST OF PIONEER INDUSTRIES/PRODUCTS
|1||Cultivation, Processing and Preservation of food crops and fruits||Preserved canned foodstuff and fruits, tea, coffee, refined sugar, tomato puree/juice etc.|
|2||Integrated dairy production||Butter, cheese, fluid milk and powder, ice cream (by products, livestock, minor edible products).|
|3||a) Deep sea trawling and processing b) Coastal fishing and shrimping||Preserved sea foods, fish and shrimps, fishmeal|
|4||Mining lead, zinc, and iron and steel from iron ore||Iron and steel products|
|5||Manufacture of iron and steel from Iron ore||Iron and steel products|
|6||The smelting and refining of non-ferrous base metal and the manufacture of their alloys||Refined non-ferrous base metal and their alloys|
|7||Mining and processing of barytes, bentonites and associated minerals||Barytes, bentonites and associated minerals|
|8||Manufacture of oil well drilling materials containing a predominant proportion of Nigerian raw materials||Barytes, bentonites and associated minerals|
|9||The manufacture of cement||Cement, clinker|
|10||Manufacture of glass and glassware||Sheet glass, pharmaceuticals and laboratory glass wares|
|11||Manufacture of lime from local limestone||Lime|
|12||Quarrying and processing of marbles||Marbles and processed marbles|
|13||Manufacture of ceramic products||Refractory and heat insulating constructional products, laboratory ware|
|14||Manufacture of basic and intermediate||i) Basic and intermediate organic chemical; ii) Basic and intermediate in-organic chemicals;iii) Fertilizers;iv) Petro-chemical;v) Caustic soda and chlorinevi) Pesticide and insecticide|
|15||Formulation and manufacture of pharmaceuticals||Pharmaceuticals, health vitamins|
|16||Manufacture of yeast, alcohol and related products||Yeast, industrial alcohol and related products|
|17||Manufacture of paper pulp||Paper pulp|
|18||Manufacture of yarn and man-made fibres||Yarn and synthetic fibres|
A new list was recently approved which you can obtain here.
The Government may also direct that an industry be categorised as pioneer and therefore qualify for up to 5 years tax holiday if:
- the industry is not being carried on in Nigeria on a scale suitable to the economic requirements of Nigeria; or there are favourable prospects of further development in Nigeria of that industry; or
- it is expedient in the public interest to encourage the development or establishment of such an industry and the products of the industry to be a pioneer product
A pioneer status may also be granted if the new investment provides for some level of support and alignment to the efforts of the government in terms of poverty alleviation, by direct and indirect employment of more Nigerians.
An applicant for the pioneer status must be a body corporate, registered in Nigeria; and must have incurred capital expenditure of not less than N10 million. The NIPC recently released pioneer status incentive regulations. These regulations came into effect on 30 January, 2014. In this regulation, there is an additional charge; a service charge of 2% based on estimated tax savings derived from the five-year financial projections of the Company. This amount is to be paid to the NIPC.
BENEFITS OF PIONEER STATUS INCENTIVE
Tax holiday: 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 ploughed back into the business.
Tax free dividends paid during the tax holiday: Dividends are the returns payable to investors/shareholders of a company. These dividends are subject to withholding tax (WHT) before distribution to investors/shareholders. The WHT deducted from the dividend, reduces the amount received by the investors/shareholders. When a company has pioneer status, these dividends are not subjected to WHT. As a result, the investor/shareholder receives the full amount of dividends due.
Capital allowances and Tax Losses: Capital allowances are tax deductions allowed on the costs of a company’s assets. These deductions are granted in lieu of depreciation. They are used to reduce a company’s profits which may be subject to tax, thus reducing the tax payable. Where a company has pioneer status, its profits are not subject to tax, so it is not advisable to use its capital allowances to reduce its profits. The pioneer status provisions allow for these unutilized capital and losses to be carried forward. This way, qualifying companies are entitled to further years of tax relief when their period of pioneer status expires.
This incentive is one of the many incentives available to encourage investment in the Nigeria. In order to take maximum advantage of this incentive, it is advisable that an interested company applies for this incentive when its profits are on the increase or when it anticipates that its profits will increase and would like to maximise the returns to investors/shareholders.
The author, Ashabi Vincent is a Tax Consultant and a Senior Content Partner with Nairametrics. This article originally appeared in Nairametrics on the 20th of August 2014. It has recently been updated 7th of August 2017.