Reformed Pioneer Status Incentive in Nigeria: Any Contradiction to Tax Revenue Drive?


Thursday, September 21, 2017 4:38PM / Deloitte

The Federal Government of Nigeria recently approved the eligibility of 27 additional industries for possible grant of pioneer status incentive (PSI). This move is coming on the heels of the National Economic Recovery and Growth Plan (ERGP), which aims to stimulate and strengthen economic growth by boosting the level of economic participation of certain key industries.

PSI is governed by the provisions of Industrial Development (Income Tax Relief) Act (IDITRA or the Act) and administered by the Nigerian Investment Promotion Commission (NIPC). The incentive is granted for an initial period of 3 years and can be extended for an additional 1 year or up to 2 years subject to meeting certain eligibility criteria.

In 2015, the Federal Government (FG) suspended the grant of PSI in order to carry out a comprehensive review of the incentive scheme due to perceived abuse, inefficiencies and revenue leakages. The result of this review is a reformed PSI framework with wider coverage but more stringent conditions. The reformed PSI framework, which includes a new Application Guidelines (the Guidelines) echoes the government’s agenda for economic repositioning of the country. This article examines key highlights of the reformed PSI and the likely implications for businesses and other stakeholders.

Amendment to the list of eligible industries for PSI and timeframe for implementation of changes

The reformed PSI framework brings to the fore, an additional list of 27 approved industries thus bringing the total number of of pioneer industries to 71 from the erstwhile list of 44 industries. This move is clearly complementary to FG’s ERGP.

The Guidelines also provide that the list of pioneer industries be reviewed at most every two years, with additions taking immediate effect, while deletions, will become effective only after three years of approval.

Inclusion of seemingly superfluous items

Companies involved in mining activities already have exemptions under the Companies Income Tax Act and the Nigerian Minerals and Mining Act (NMMA) and these exemptions are similar to the reliefs granted under PSI. Thus, the inclusion of “mining and processing of coal” as a pioneer activity appears superfluous.  Understandably, there are other reliefs under the PSI that are not be covered by these other laws.

A major concern is the potential regulatory overlap that may arise from uncertainty as to the intentions of Government for granting similar reliefs under multiple pieces of legislation.  Presently, the incentives on mining (include tax holiday) are granted in two different pieces of legislation. Taxpayers could be tempted (and rightly so) to try to claim reliefs under the two separate but similar incentive schemes (provided they meet underlying criteria).  In this regard, would taxpayers be entitled to claim reliefs under the two incentive regimes – e.g. must the tax relief period run concurrently or would a consecutive arrangement be allowed?

Alternatively, the inclusion of mining on the list of eligible industries may be deemed to be complementary to the tax relief provided for under the NMMA or a reinforcement of the provisions of the NMMA and not as a separate incentive. A clarification of the intention here would not be out of place.

Predictable and clearer timelines for PSI applications

The timelines for PSI applications, as well as receipt of feedback from NIPC are now quite certain. New applications must be made within the first year of production of the eligible product, while investors seeking extension of their pioneer status must do so within one month upon expiration of the initial tax relief period of three years. The grant of PSI is subject to certification of the beneficiary’s asset base by Federal Inland Revenue Service (FIRS).

The one year rule surrounding fresh application raises a question as to the fate of already existing businesses in newly eligible industries. NIPC has clarified that existing businesses operating in any of the newly approved pioneer industries are not eligible for the PSI, except where such companies set up a new business line and is within its first year of operation.

There may be need to revisit this arrangement, considering the intent of the scheme. If government wants to stimulate Nigeria’s economic development by encouraging investments in certain industries, an attempt to disenfranchise investors that took the risk to invest in such industries even when incentives were not available may not be beneficial in the long run. It also does not provide a level playing ground for investors in the same industries. This is clearly anti competition.

In the same vein, it is unclear whether an emerging company from a merger or reorganization of business, which is well over its first year of operation in a pioneer industry would be classified as a new entrant for the purpose of PSI.

Asset base eligibility threshold

The minimum capital expenditure investment requirement to qualify for PSI has been increased from N10 million to N100 million. Such investment expenditure are required to be in respect of tangible non-current assets (NCA).

As laudable as this initiative is, it is however not without criticism as it appears to be discriminatory against micro, small and medium scale enterprises (MSMEs) who may struggle to meet this requirement. Contrary to the spirit of the ERGP, many MSMEs risk being disenfranchised of the benefits of PSI. Further, some of the eligible industries such as e-commerce and mortgaged backed securities under the Investment and Securities Act, typically require more investments in intangible NCA. The fate of such industries remains to be seen.

Qualifying assets certification requirement

Under the new guidelines, assets of companies engaged in approved activities must be certified by FIRS before application for an extension of PSI is made and this must be done within a month before expiration of the initial tax relief period.

A challenge with this requirement is that FIRS has not published guidelines around the process and the timelines for this certification. We understand that the certification process by FIRS may sometimes stretch beyond the available two month window allowed, bearing in mind that application for extension of PSI is expected to be completed within one month of expiration of the initial period.

It may therefore be necessary for the relevant regulatory agencies to collaborate in order to ensure efforts of taxpayers in meeting this requirement are not frustrated.

In conclusion, the reform of PSI is a laudable initiative and is well suited to the current economic realities of the country. Further, the Guidelines are in line with the anti-corruption drive of the present administration as it limits the opportunities to perpetuate any act of corruption.

However, it may seem that there is a paradox between Federal Government’s desire to generate more tax related revenue and its renewed focus on granting tax holidays to companies. An in-depth look would reveal the fact that the two objectives are intricately interwoven as grant of tax holidays would position the beneficiaries towards the path of accelerated growth and this would increase the government’s tax revenue after the pioneer period. This is in addition to other macro-economic benefits the economy stands to derive from business expansion occasioned by the tax holidays.

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