The tax incentives in Nigeria are tax reliefs or exemptions granted by the Nigerian Government to qualified multinational investment projects or companies whose income or profit are derived from, brought into, accruing in or received in Nigeria, to attract foreign direct investment for the growth and development of the Nigerian economy.
Tax incentives are categorized into cost-based tax incentives, which include tax credits and accelerated depreciation allowances, and profit-based tax incentives which include tax holidays and reduced tax rates. The type of tax incentives granted is dependent on the sector, income type, business size, and business location.
There are several incentives available in Nigeria to encourage foreign direct investment, one of which is the Pioneer Status Incentive (PSI). It is a profit-based tax incentive governed by the Industrial Development (Income Tax Relief) Act, Cap 17 Laws of the Federation of Nigeria, 2004 that has been established in line with the modern tax regimes as a means of attracting and boosting investment and economic development in the different sectors of the Nigerian economy.
The principle of pioneer status as a tax incentive is that companies in industries designated as pioneers are relieved from paying company income tax in their formative years to enable them to make a considerable profit for re-investment into the business. It is a tax holiday granted for five years (initial period of three years and renewable for additional two years) to qualifying industries that meet the criteria, from paying corporate income tax. Companies qualified for pioneer status also enjoy the benefits of exemption from 10% withholding tax on dividends paid out of business profits. The pioneer status is administered by the Nigerian Investment Promotion Commission (NIPC).
An industry is designated as a pioneer industry if the industry's business is currently 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 or it is expedient in the public interest to encourage the development or establishment of such industry in Nigeria, as provided in Section 1 of the IDA.
There are currently 71 industries eligible for pioneer status, which include manufacturing, solid material, pharmaceuticals, information and communication, trade, construction, waste management, electricity and gas supply, tourism, infrastructure, etc. To qualify for pioneer status, the applicant must be engaged in an activity listed as a pioneer industry or product.
Application Process for the grant of pioneer status Incentive
The following steps must be taken to apply for pioneer status:
- An applicant must make a written application for pioneer status to be submitted to the NIPC in the first year of production or service to be accompanied by evidence of all required legal and regulatory compliance documentation.
- Request a date to present the project to the NIPC covering company overview, project overview, project impact, financial analysis, etc.
- Provide a project profile, indicating pioneer industry/product, share capital, and non-tangible current assets.
- NIPC provides feedback and requests payment of application and due diligence fees within a week.
- Once the applicant pays the prescribed fees, the next step is to submit Part 1 of the application form to the Executive Secretary of NIPC with supporting documents.
- NIPC reviews the application and performs legal, regulatory, and compliance checks and after review, NIPC requests a date for the verification visit.
- After a verification visit has been conducted, NIPC makes a decision on the application and notifies the company of its decision, and requests payment of service charge deposit within a week.
- Upon payment of the service charge deposit to the NIPC, the NIPC issues an Approval in Principle to the company.
- The applicant is also to complete the Part II application form and submit same to the Industrial Inspectorate Department (IID).
- The IID reviews the application for completeness and requests an inspection visit to determine production day.
- Upon determination of a project's production day, the IID will issue a Production Day Certificate to the applicant and notifies the NIPC of the issuance.
- Finally, upon receipt of the copy of the production day certificate from the IID, the NIPC will issue a Pioneer Status Incentive Certificate to the applicant and sends a copy to the FIRS and the IID. The Pioneer Certificate will state the period of which the pioneer status incentive is valid.
Note that to qualify for this tax incentive (pioneer status), a joint venture or wholly foreign-owned company and an indigenous company must have a non-current tangible asset of over N100,000,000 (One Hundred Million Naira).
Consideration to qualify for pioneer status
In granting pioneer status to the company, the applicant must demonstrate the tangible impact its activity will have on Nigeria's economic diversity and growth, and the NIPC will also consider among others the following factors;
- The employment generation- the company is expected to provide jobs as show evidence for capacity building, transfer of technology, and develop local know-how for indigenous employees to boost entrepreneurship and investment in the economy.
- Value addition- the value addition a business creates in the production process is measured in granting pioneer status. It involves the process of transformation of a primary product into finished goods within the economy without necessarily assembling the goods in Nigeria.
- The NIPC considers the Nigerian local content which focuses on the promotion of value addition in Nigeria through the use of raw materials, products, and services in order to encourage the growth of indigenous capacity, in granting pioneer status.
- The export potential of the business is also taken into consideration on the belief that the investment will generate an inflow of foreign exchange into the Nigerian economy before it can qualify for pioneer status.
- In granting pioneer status, the NIPC will consider the potential of the company contributing sustainable development e.g. building of schools, provision of water, electricity, road networks, etc, to the community in which it is established.
Finally, during the pioneer period, the beneficiaries of pioneer status are required to submit an annual performance report to the NIPC for monitoring and evaluation purposes and also required to comply with the requirements of the Industrial Development (Income Tax Relief) Act and other regulations of the NIPC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.