PIONEER STATUS INCENTIVE SCHEME; EXPANDED COVERAGE AND REVISED GUIDELINES: RESPITE IN THE THICK OF TAX DRIVE?

Since the drop in crude oil prices in 2014/2015, the Nation’s focus had been drifting away from oil revenue to taxation. Hence the intensifying tax drive by all levels of government and the several measures taken by the Federal Government to increase government’s revenue from taxation. These measures included the mandate of the Presidency to State Governments in 2015 to generate and enhance internal revenues; the 45-day tax amnesty window opened by the Federal Inland Revenue Service (FIRS) in 2016; and the subsisting Voluntary Assets and Incomes Declaration Scheme (VAIDS) and its attendant national campaigns/ Tax Thursdays. 

In the midst of all the tax, tax, tax, it felt good for stakeholders to receive the news of the revision of Nigeria’s Pioneer Status Incentive Scheme on 7 August 2017, following critical reforms after almost two years of administrative suspension placed on the scheme. The reforms resulted in addition of 27 new industries to the ‘List of Approved Pioneer Industries’ and the issuance of a new set of application guidelines which now provides a better insight into the step by step processes involved in a ‘New’[1]and ‘Extension’[2]applications respectively. We will examine these new revisions in details.

Pioneer Status Incentive (PSI) is a fiscal incentive provided for under the Industrial Development (Income Tax Relief) Act (“IDA”) 1971 for grant of income tax relief to eligible companies operating in designated pioneer industries and/or producing pioneer products. Such income tax holiday is granted for up to five years (three years in the first instance, extendable for an additional maximum period of two years). The agency charged with the administration of the PSI is the Nigerian Investment Promotion Commission (NIPC). 

In addition to income tax holiday, pioneer companies enjoy other benefits such as carry forward of capital allowances on pioneer period fixed assets for post-tax holiday period assessable profit offset, carry forward of tax losses after pioneer period, and tax-free dividends from the pioneer profits.

MAKE UP OF THE NEW LIST OF PIONEER INDUSTRIES/PRODUCTS

In addition to the hitherto subsisting list, the Federal Executive Council has approved the inclusion of the following industries as eligible for the PSI:

  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 programme 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.

The pioneer products under each of the industries are yet to be specified though (as is in the master list), since this new list is yet to be published in an official Federal Government Gazette. NIPC therefore recommends that applicants experiencing any ambiguity whatsoever with determining eligibility under the new list should write to the Executive Secretary of the NIPC to seek formal clarifications. Suggestions as to additional industries that may be included as eligible for the PSI are also welcomed through the same medium.

As much as it is heartwarming that certain industries with broad coverage and the potential to benefit many players have now been included in the list (e-commerce services, software development, motion picture, music and business process outsourcing), intending applicants may still be discouraged by the huge minimum tangible non-current asset base requirement of N100million provided for in the new guidelines. It is common knowledge that most service or software development businesses are more non-tangible asset base intensive.

PREREQUISITES FOR PSI ELIGIBILITY

The new guidelines specify these basic conditions which applicants must satisfy in order to be eligible to apply in the first place:

  1. The applicant must make a new application in the first year of production/service and must apply for an extension within a month after the expiration of the initial tax relief period of three years or an extension of one year.
  2. The activity or business engaged in must be listed as a pioneer industry or pioneer product.   
  3. The applicant company must have a non-current tangible asset of over one hundred million naira (N100 million). This automatically disqualifies smaller businesses or service companies with smaller tangible asset bases from benefitting from the Incentive.
  4. Evidence of all required legal and regulatory compliance documentation must be available.
  5. The applicant must demonstrate the tangible impact its activity (project) will have on Nigeria’s socio-economic space, including economic diversity and growth, industrial and sectoral development, employment, skills and technology transfer, export development and/ or import substitution.
  6. Full payment of fees promptly, when due.
  7. During the pioneer period (if granted), a performance report must be submitted to NIPC annually for monitoring and evaluation purposes.

We will continue this article tomorrow, to give guidance on how to apply (or extend the tax relief period) and to highlight the major changes effected in the new application guidelines.

HOW TO APPLY- NEW APPLICANTS

New applicants are to apply for the PSI as follows: 

  1. Write to NIPC first and foremost, describing the project profile. Those seeking clarifications as to whether they qualify are encouraged to do so at this stage. 
  2. Request for date to present the project.
  3. Present project on agreed date after which NIPC provides feedback and requests payment of application and due diligence fees.
  4. Pay application and due diligence fees within a week.
  5. Submit completed part 1 of application form to the executive secretary of NIPC and provide supporting documents in hard or soft copy.
  6. NIPC reviews application and performs regulatory, legal and compliance checks, requests date for verification visit and visits the project.
  7. NIPC makes decision on application, notifies the company of this decision and requests payment of service charge to be made within a week.
  8. Make the service charge deposit to NIPC and send payment confirmation them.
  9. NIPC issues approval in principle and sends duplicate by email and copies to FIRS, IID and State Ministries.
  10. Complete part 2 of the application form and submit to IID in soft or hard copy.
  11. IID reviews application for completeness, requests inspection visit and determines production day after visiting.
  12. IID issues production certificate, sends duplicate by email and notifies NIPC.
  13. NIPC issues Pioneer Status Incentive certificate, sends duplicate by email and sends copies to FIRS and IID.

The application process takes about 6 months to complete.

HOW TO APPLY- EXTENSION APPLICANTS

Applicants seeking to extend their already obtained 3-year pioneer period, by a further 2 years can do so by following the steps outlined below:

  1. Write to NIPC, then, request date to present project to NIPC.
  2. Make presentation on the agreed date and await feedback with payment request of application and due diligence fees from NIPC within a week.
  3. Make payment of application and due diligence fees to NIPC.
  4. Submit completed extension application form to the executive secretary of NIPC and provide supporting document in hard or soft copy.
  5. NIPC reviews application, requests date for monitoring and evaluation visit, and visits the project.
  6. NIPC makes decision on extension application.
  7. NIPC issues PSI Extension Certificate, sends duplicate by email and sends copies to FIRS and IID.

This process takes about 4 months to complete.

IMPORTANT CHANGES IN THE NEW APPLICATION GUIDELINES

In comparison with the “Pioneer Status Incentive Regulations”of 2014, issued to provide operational guidelines for applying for the PSI, the recently issued Application Guidelines present certain revisions as follows: 

  1. More robust and elaborate application guidelines: The revised application guidelines provide elaborate, end to end guide on processing of PSI – starting from a comprehensive overview of the PSI regime; explanation of the meaning of PSI, how a company can qualify, hierarchy of regulatory bodies, application flow chart (for New and Extension applications), project presentation formats, supporting documentations, form completion and package submission guide, fees schedule and compliance requirements during the pioneer relief period. This makes the application process very transparent and much easier to follow. 
  • Introduction of a new process of writing to NIPC and presenting project prior to making payments and submitting application forms: The new guidelines now require all intending applicants to write a letter of intent first to NIPC, agree and present project before being formally invited to make the statutory payments, complete and submit application forms in the required format. Prior to the revision of the guidelines, applicants were expected to pay the statutory non-refundable application fee of N200,000, complete and submit the application forms before ever getting to present the project which may eventually not qualify for PSI. This new introduction is good, since it gives room for more certainty on the eligibility of the project for PSI before much resources are committed into the application. 

A flip side to this development however, is that the new phase of writing and presenting project is envisaged to last for at least 5 weeks. Companies making new applications are mandated to do so within their first year of production, so an applicant company that commences the writing phase close to the end of its first year of production would be concerned as to whether the writing and presentation phase would be considered to be ‘application’ in the real sense of it, in case they do get to the payment/ form submission stage before the first year deadline elapses. 

  • Revision of service charge from 2% of projected pioneer profits to 1% of actual annual pioneer profits: Stakeholders had expressed dissatisfaction at the inclusion of a 2% of projected pioneer profits service charge element in the PSI Regulations of 2014. Eligible companies also perceived it as a disincentive since it contradicts the whole essence of income tax relief under the PSI. Further, no one could precisely predict the future performance of a new and pioneer business in a volatile economy such as ours, therefore, notification of service charge by the NIPC based on projected financials was not considered appropriate. These concerns may have now been partly addressed by the revision of the service charge payable rate and modality to 1% of actual annual pioneer profits. The hitherto lump sum payment on application for PSI has also now been revised and made payable in June of every succeeding year.

…to be continued tomorrow

  • Introduction of due diligence fee and service charge deposit: On application, a due diligence fee of N500,000 and a service charge deposit of N2,500,000 have now been introduced in addition to the hitherto application fee payable of N200,000. The due diligence fee is to cater for the travelling expenses of NIPC and IID officers during their verification and inspection visits respectively. Both payments are allowed to be offset from the annual service charge payable over the pioneer period. They would not be refunded in a situation where the pioneer company makes losses during the pioneer period. 
  • Requirement for a minimum tangible non-current asset base of N100million: This new requirement in the guideline presupposes that no small business can apply for PSI. One also wonders the rationale for this blanket requirement, even without regard for PSI qualifying service (non-production, hence not capital intensive) companies. Further, it is not clear whether the hitherto minim capital investment threshold of N10million is still applicable in addition to this minimum non-current asset threshold. 
  • Additional documentation requirements to accompany application forms: The supporting or accompanying documents to the PSI application form ‘1’ has now been reviewed to include requirements for certificates of compliance with:
  • Pensions
  • Nigeria Social Insurance Trust Fund (Employee Compensation levy); and
  • Industrial training fund

These certificates, in practice, are only processed at the end of a preceding calendar year. It is unclear whether NIPC may give any concessions in a situation where an applicant company is yet to complete one calendar year of commercial production/ service since this is the ideal situation pre-set by the PSI regime.

  • Submission of annual performance report during the pioneer relief period: Beneficiaries of PSI are now required to submit a performance report annually to NIPC, not later than 30 June of the following calendar year. The annual performance report is expected to contain:
  • The company’s actual audited financial information
  • Formal covering letter to the Executive Secretary of NIPC
  • Company and project information (if different)
  • Production and financial performance
  • Number of employees and emolument
  • Training cost
  • Skills and technology transfer
  • Raw materials and components
  • Export earnings and destinations
  • Infrastructure developed
  • Environmental, social and governance projects
  • Utilization of tax savings
  • Declaration signed by Chief Executive Officer / Managing Director; and
  • Evidence of payment of annual service charge of 1% of actual pioneer profits

This requirement, in our opinion, while assisting to keep the project and its socio-economic value adding proposals on track and in check, poses an additional performance/ compliance burden on beneficiaries of the PSI.

  • Biennial Review of the Pioneer List: According to the new guidelines, there will be a review of the Pioneer List at most every two years for possible additions and deletions from the List. It further provides that any approved additions will become effective immediately after approval, while it will take three years for any approved deletions to become effective. This means that an industry/product, which was not previously on the Pioneer List, becomes entitled to all the benefits of pioneer status immediately after its approval by the responsible authorities. But industries/products on the list will still be entitled to all the benefits associated with the pioneer status, subject to a maximum period of three years after the removal of such industry/product from the Pioneer List has been approved. 

This is a step in the right direction as it provides enough notice period for delisted industries to put their affairs in order.  Also, the periodic review of the list is crucial to deal with the ever-changing dynamics of business. 

  • Accessibility:All relevant documents to the application for PSI (for New and Extension applicants) have now been made available for download online by NIPC via (http://www.invest-nigeria.com/pioneer-status-incentives-document/). These documents include the application forms for new PSI and extension applications, application process flowchart, NIPC’s service fee schedule, the annual performance report form, and the application guideline document itself which explains in simple terms the process flow of applications. The availability of these relevant documents online will ease applicants’ accessibility to them, aid their understanding of the expected application processes, and ultimately enhance the ease-of-doing-business in the country.

It is however still unclear whether the provisions of the PSI Regulations of 2014 are now being superseded by these new guidelines since certain requirements, for instance, the minimum capital investment threshold ofN10m and the minimum service charge payable (0.5% of net asset and 0.25% of turnover) in case of negative projected pre-tax earnings were not mentioned anywhere in the new guidelines. No relationship whatsoever was also mentioned or established to exist between the PSI Regulations of 2014 and these new application guidelines. 

CONCLUSION

“It is a paradoxical truth that tax rates are too high and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut tax rates”  

We believe that this statement attributed to John F. Kennedy holds true in the Nigerian economy now more than ever before. With the prolonging recession, leading to aggressive cash outflow management by businesses, suasion and tax incentives are the sure ways government can elicit voluntary tax compliance/ payment from taxpayers in its intensifying effort to raise government revenues through taxation. 


[1]First time application.

[2]Application for extension of pioneer period for an additional two years, after the initial 3-year period.