Anda di halaman 1dari 12







DATE: 20TH JUNE, 2013

ABSTRACT Nigeria as a nation requires the economic development of her economy and a in a bid to ensuring this, enacted the Industrial Development (Income Tax Relief) Act which provides for pioneer status. This paper examined the Pioneer Legislation in Nigeria and its tax implications. It highlights conditions that must be met for a company to be granted pioneer status and also rules to be followed once the pioneer application is approved by government. Attempts was also made to show that relevant tax authority should not leave pioneer companies unmonitored even though they are not assessed to tax at the period of the tax holiday. It was observed that pioneer status results in several tax implications: tax refund as result of retrospective operation of pioneer provisions, managing of profit/income to reduce tax, commencement rule after tax holiday. Relevant tax authorities are encouraged to ensure close monitoring of pioneer companies, carryout audit/investigation before tax refund on retrospective operations and before extension of pioneer status periods. Key Words: Pioneer Status, Tax Holiday, Tax Incentive, Tax Implications.

INTRODUCTION The Nigerian government has over the years put in put place many different and overlapping incentives schemes to attract both local and foreign investment. One of such investment incentives available to industries in Nigeria is that of the Industrial Development (Income Tax Relief) Act which grants tax holidays to companies in the industries that meet the conditions of being designated pioneer industries. Tax exemption is generally regarded as an industrial investment device; many developing countries including Nigeria offer it as one of their major incentives. Basically, tax incentives are designed to encourage investments in certain preferred sectors of the economy and sometimes geared towards attracting inflow of foreign exchange to complement domestic supplies for rapid economic development. Thus, the grant of pioneer status, therefore, gives a company a preferred position in getting established, usually through exemption from income tax. Pioneer companies are companies engaged in manufacturing, processing, mining, servicing and agricultural industries whose products have been declared pioneer products on satisfying certain conditions. In such period (period of exemption), the company is exempted from payment of taxes imposed by government and this exemption may be complete or partial. Tax incentives in form of tax holiday may be given wholly where no tax is paid at all for a given period or partially where only part of the tax imposed is paid for a period also (Asada and Alubo, 2000). The grant of pioneer status to an investment in Nigeria is aimed at enabling the industry concerned to make a reasonable level of profit within its formative years. The profit so made is expected to be ploughed back into the business. In granting a company pioneer status the industry or products is regarded as one that is not already carried on in the country or the existing industry is not producing enough to meet the current or expected requirement. The concept is further broadened to include any industry or product which there is a favourable prospect of development. The policy relating to pioneer industry is based on the desire of the government to encourage the development of new or relevant industries that will reduce the countrys continuous dependence on imports. The pioneer

industries and products are identified by a list published in the official gazette. However, the number of Nigerian companies applying for and obtaining pioneer status approval has declined considerably in the last decade with the attendant decrease in the benefits inherent in the possession of pioneer status certificate (Oserogho, 2009). This is despite the subsisting applicable legislation in the Nigerian Statute book, the Industrial Development (Income Tax Relief) Act. PIONEER LEGISLATION IN NIGERIA The law governing the operations of pioneer companies was first laid out under the aid to pioneer industries ordinance No 10 of 1952. This was repealed by the Industrial Development (Income Tax Relief) Ordinance No 8 of 1958. This ordinance was subsequently repealed by the Industrial Development (Income Tax Relief) Act 1971, otherwise known as CAP 179 LFN, 1990. However, the current investment incentive available to companies in Nigeria is under the Industrial Development (Income Tax Relief) Act CAP 17 LFN 2004 which grants tax holidays to companies in the industries that meet the condition of being designated pioneer industries. The Industrial Development Act provides that where the Nigerian government through the council is of the opinion that any sector or industry in her 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 a sector or industry, the president of Nigeria is authorised to publish in a gazette, a list of such industry or industries to whom pioneer status certificate may be issued upon their successful application. Any industry that is not listed in the schedule of industries, to which pioneer status could be granted, is at liberty to apply for the inclusion of such an industry in the pioneer status list. See the current list of pioneer industries and products in the attached appendix. The Nigerian government is also at liberty to, from time to time; amend its list of pioneer industries, enterprises and products. According to Ojo (2003:589), mentioned that certain conditions that must be met for a company to be granted a pioneer status. To apply for the grant of this status, the application must be on the prescribed forms duly signed and

accompanied with a fee of a hundred naira. The application should state the grounds on which it relies and it includes: (a) whether the company or proposed company is indigenously controlled, (b) particulars of the assets on which capital expenditure has been or will be incurred, stating their sources and costs as at or before production day; and during a period of three years following production day. Such particulars should also include where the assets are to be situated and the probable date of production, (c) any product and byproduct (not being a pioneer product) to be produced, stating reasonable estimate of volumes and values of such products and by-products, during a period of first twelve months from the production day, that is when production in commercial quantity commences, (d) Particulars of loans and share capital (or proposal in this regard) and source from which capital is to be raised or has been raised, (e) For a company already incorporated, give name, address and the nationality of each Director and their respective shareholdings; and for a proposed company, the names, addresses and the nationality of each promoter of the company. In addition, a joint venture company or wholly foreign-owned company must have incurred a capital expenditure of not less than N5million (US$33,000) whilst that of a qualifying indigenous company should not be less than N150,000 (US$991). In furtherance, there are applicable rules that pioneer companies must adhere to, ones they pioneer status application is approved by the government. Ojo (2009) summarised the rules as stated below: a. Where the government approves an application made on behalf of a proposed company, the company must be incorporated within four months of approval. b. Application must be made to the Board of Inland Revenue within one month of the grant of pioneer certificate of its qualifying expenditure. c. A pioneer company must not carry on any business different from its pioneer enterprises, where it does; the income derived there from shall be subject to tax. This is to say that any profit earned by a pioneer company from any operations or activities whatsoever other than its pioneer enterprises shall be deemed to be derived from Nigeria and shall be liable to tax.

d. A pioneer company should not grant any loan unless permission has been granted by the Ministry of Industries. e. In computing its allowable trading loss, only a reasonable amount of Directors remuneration, interest or charges paid to shareholders or any one controlled by him will be allowed as deductible for income tax purpose. f. A pioneer company may only carry forward such losses as exceed the aggregate of all its profits while the net losses thus computed shall be deemed to have been on the first day after the tax free holiday. g. The allowance in respect of all qualifying capital expenditure incurred during the tax free period may only be relieved against trading profits arising after the holiday period. h. Dividends may not be distributed in excess of a certain balance on the profit and loss account. This account is described as an account to which profits exempt from tax are credited as well debited with the dividend also exempted from tax and bonus issues to shareholders. i. Any profits on the statement issued by the Board in respect of the income of a pioneer company for each of the assessable profits of the pioneer company for any year of assessment and shall be exempt from tax under the principal act (S. 16(1) of IDA) j. During its tax relief period, a pioneer company shall: i. not make any distribution to its shareholders by way of dividend or bonus, in excess of the amount by which the account maintained for the exempt profits is in credit at the date of such distribution; ii. Not grant any loan without first obtaining the consent of the Minister. The consent of the Minister shall only be given if he is satisfied that the pioneer company is obtaining adequate security and a reasonable interest for any such loan. It should also be noted that a pioneer status to a company can be cancelled under some certain conditions. Akinyomi (2011) summarised them as follows: (a) Where the production day has been certified as a date which is more than one year later than the estimate thereof given the companys application for a pioneer certificate, except the Council is satisfied that the delay is due to causes outside the control of the company or to other good and sufficient cause. (b)Where it is discovered that the qualifying capital expenditure incurred on or before the production day is less than one hundred and fifty thousand naira for an indigenously controlled company and five million naira in any other case. (c)The pioneer company concerned applies for the cancellation of the certificate. (d) The pioneer company has contravened any other

provision of the Industrial Development Act or has failed to fulfil any estimate or proposal made in its application for a pioneer certificate or any condition contained in its pioneer certificate. The Act (Industrial Development) also provides for the conditions for extension of the relief period as follows: 1. The company must apply in writing to the Federal Inland Revenue Service. 2. The application must be made within one month after the expiration of the initial tax relief period or of any extension thereof. 3. The application shall contain particulars of all capital expenditure incurred by the company by the required date. The Act further provides that the Service shall be satisfied on the ensuing matters while considering the application for extension: a. The rate of expansion, standard of efficiency and the level of development of the company. b. The relative importance of the industry to the economy. c. The need for extension having regard to the location of the industry. d. The implementation of any scheme; for the utilization of local raw materials for the processes of the company, and for the training and development of Nigerian personnel in the relevant industry. e. Any other matter as may be required. THE KEY CONCEPTS IN PIONEER LEGISLATION The following definitions are therefore necessary for a better understanding of pioneer status: Pioneer company: Is a company certified by any pioneer certificate to be a pioneer company to enjoy a pioneer status. A pioneer company produces and sells the relevant product(s). Pioneer certificate: A certificate given under industrial development income tax act certifying other things, a company to be a pioneer company. Pioneer industry: Any trade or business of the kind included in the list of pioneer industries published in the federal gazette aimed at stimulating economic development in industry or trade. Pioneer product: Goods and services of the kind included in any list of pioneer products published in the federal gazette or that of state. the relevant pioneer products refers to the pioneer products and the

permissible by-product or products specified in the pioneer certificate of any company (Aguolu, 2004). ACCOUNTING DATE OF PIONEER STATUS The tax relief period of a pioneer company shall commence on the production day of the company and shall continue for three years in the first instance. The tax relief period may at the end of the three years be extended if it meets the requirements for such extension for: a period of one year and thereafter for another period of one year commencing from the period of extension. Or for one period of two years. If the company is established in a disadvantaged rural area, the maximum period shall be seven years. However, at the end of the tax relief period of a pioneer company, the following are assumed: the pioneer trade or business of that company has permanently ceased; the company has set up and commenced a new trade or business on the day next following the end of its tax relief period. And the pioneer trade or business will make up its accounts so that the pioneer period is neither more than nor less three calendar year, the pioneer shall be made for a period not exceeding one year commencing on its production day, and a successive period of one year thereafter and the period not exceeding one year at the date when its tax relief period ends. FILLING OF RETURNS AND EXAMINATION/AUDIT OF PIONEER COMPANY Every company is under obligations by the provisions of the Principal Act (CITA) to prepare and file its tax returns to the relevant tax authorities CITA section 41(1). Hence, a pioneer company is not exempted from this rule. The act has therefore laid down the following as the procedure the accounts of a pioneer company should be made up: a period not exceeding one year commencing on its production day, successive periods of one year thereafter, a period not exceeding one year ending at the date when the tax relief period ends, and in the case of the new trade or business, the opening figures of those accounts shall be the closing figures as shown in its last accounts of the tax relief period. The examination/audit of the accounts of a pioneer company is carried out in the same procedure as in the case of other company under the Principal Act. The accounts are to be examined or audited in depth notwithstanding the fact that the company would not be assessed to tax. The examination or audit of

the pioneer company account is to ensuring that it does not exploit its status to avoid or evade tax on its profits accruing from its non-pioneer activities and other statutory deduction like Withholding Tax and Value Added Tax as the case may be. Hence, such examination or audit will enable the relevant tax authority to: Ensuring that the pioneer company remits accurate Value Added Tax to Federal Inland Revenue Service accordingly where the pioneer product(s) are Vatable; Ensuring that all Withholding Tax deducted at source by the pioneer company is remitted to the appropriate relevant tax authority; Certify the qualifying capital expenditure at the end of each accounting year; Certify the profits or loss at the end of an accounting period; Ensure the reasonableness or fairness of charges in respect of remuneration paid to the directors of the company, interest, service, agency, or others similar charges made to persons who are shareholders of the company; Direct how certain receipts and expenses should be treated; Ensure that no distribution of profits in excess of the balance in accounts is made during the tax relief period. In determining whether or not a loss has actually been made by the company, the tax authority has absolute discretion to exclude any sum as may be in excess of an amount appearing to it to be fair and reasonable in respect of charges relating to remuneration, interest, agency, and other fees paid to the shareholders. The act gives the tax authority the power to direct that receipts which are part of the pioneer profits but which should have been treated as profits of the following period be so treated, and that expenses incurred in the first year of the new trade are properly attributable to the tax relief period. TAX IMPLICATIONS OF PIONEER STATUS In view of the discussion so far, it is obvious that pioneer status has several tax implications, amongst them are as enumerated below: 1. The retrospective operation of pioneer provisions allows pioneer certificate to operate from a prospective date such that any taxes already paid which



4. 5.





would not have been paid if the pioneer certificate had been issued on the retrospective date will be refunded to the company within stipulated period ICAN (2006). Research has shown that the existence of exemption period due to tax incentives in the form of pioneer status has positive and significant relationships with the willingness of companies to manage their profit/loss in order to reduce their taxes. The pioneer status complicates the regular company or business tax legislation and tax shelters made available to tax payer through all sorts of means is a veritable source of tax avoidance and/or evasion for smart tax payer who may take the advantage of the loopholes that may result there from. The trade or business carried on by the pioneer company shall be deemed to have permanently ceased at the end of its tax relief period. In respect of that trade or business, the pioneer company shall be deemed to have set up and commenced a new trade or business on the day next following the end of its tax relief period. Hence, the commencement rule shall apply in the computation of tax payable in the new trade or business. The pioneer company shall make up accounts of its old trade or business for the following: a period not exceeding one year commencing on its production day; successive periods of one year thereafter; and a period not exceeding one year ending at the dates when its tax relief period ends. The closing figures in respect of the pioneer companys assets and liabilities as shown in the last accounts in respect of its tax relief period shall be used as the opening figures for the accounts of the companys new trade or business which is deemed to commence immediately after the companys tax relief period. The Relief provides a tax incentive for investment and also dividend declared during the relief period are not taxed in the hand of the shareholders. Such dividend must be declared out of the pioneer account profit but not more than the balance standing in that account. Loss incurred by the pioneer company during the pioneer period and certified by the Federal Inland Revenue Service, may be relieved after the pioneer period as such loss is deemed to have been incurred on the first day of the new trade or business.

CONCLUSION This paper has examined Pioneer Legislation in Nigeria and its tax implications. Pioneer Legislation is used as a mechanism to promote development and

economic growth in certain areas that are less developed in the sector. The pioneer status gives limited period of tax holiday and income/profit generated within the period is ploughed back into the business for probable expansion. Many companies has benefited in pioneer status, however, companies obtaining the pioneer status has reduced compared to the expectation of government in enacting the law. Notwithstanding the fact that pioneer status grants tax holiday to such companies, relevant tax authorities should also perform their statutory responsibility of examining/auditing of returns filed by the pioneer companies even though they are not assessed to tax within the period. This will ensure that pioneer company will do the right thing at the time of tax holiday and subsequently, when the period elapses, they old record which forms part of the opening records will meet the required standard and procedure. Thus, the tax authority will review such records on commencement of new trade or business without any difficulty. RECOMMENDATIONS I. There should be close monitoring of pioneer companies by relevant agencies especially Federal Inland Revenue Service in order to identify non-pioneer product(s) and tax the income there from accordingly. This is because a pioneer company may trade in a non-pioneer products or earns income from any other source during the pioneer period, the profit/income so derived shall be fully subjected to tax under the relevant tax laws during the pioneer status and tax exemptions are only granted on pioneer product(s), hence the need for the close monitoring. Any tax refund resulting from retrospective operation of the pioneer provisions should be verified through detailed field audit/investigation as the case may be. More investigative approach should be used as companies under pioneer status may have applied for pioneer status as a means of tax avoidance thereby denying government revenue accruable to it. Notwithstanding a company meeting the requirements for extension of pioneer status, it should be subjected to audit for periods elapsed before the probable extension of the tax holiday (pioneer status).




References Aguolu, O. (2004), Taxation and Tax Management in Nigeria (3rd Edition), Enugu Merridain Associates 284p. Akinyomi, O. J. (2011), The Pioneer Income Tax Relief as an Investment Incentive in Nigeria, International Journal of Development and Management Review No 1 Vol 6 pp 34 42. Asada, D. and Alubo, A. O. (2000), The Legal Regime of Tax Incentive in Nigeria: An Appraisal for Management, Journal of Public and Private Law University of Jos, pp 99 113. Federal Republic of Nigeria (2004), Companies Income Tax Act CAP C21 LFN, Abuja, Federal Government Printers. Federal Republic of Nigeria (2004), Industrial Development (Income Tax Relief) Act CAP 17 LFN, Abuja, Federal Government Printers. ICAN, (2006), Tax Management and Fiscal Policy, Lagos, VI Publishing Ltd 337p. Ojo, S. (2009), Fundamental Principles of Nigerian Taxation (Revised Edition), Lagos, Sagribra Tax Publication 788p. Oserogho & Associates (2009), Tax Benefits of Pioneer Status Approval in Nigeria, Business Day on Line December 17, 2009.