Pioneer Company(Advanced Taxation)
1. Act
The relevant act is the Industrial Development (Income Tax Relief) Act of 1971. The act was actually effective from 1st April 1970, meaning that its effective date was backdated.
2. Pioneer Industry
This is any industry that the National Council of Ministers(now, Federal Executive Council) says is a pioneer industry. The list of pioneer industries can be downloadedhere. The supplementary list can be downloaded here. In my opinion, you should know at least 5.
These lists are included in Nigeria’s Official Gazette. The list is not a fixed list because industries have been added and struck out in the past, e.g the Telecommunications Industry has been struck out.
3. Existence
A pioneer company is like a ghost to FIRS. From FIRS’ point of view, it is not existing. This is why commencement rules apply after the pioneer period.
4. Pioneer Period
The minimum period is three years, while, the maximum period is 5 years.
The 3 years can be increased by 2 years or 1 year. If it is increased by one year, the company can apply for another 1 year extension because it will have only been a pioneer company for 4 years.
5. National Council of Ministers
It may declare an industry a pioneer industry if:
i. The industry is not carried on in Nigeria on a scale suitable to Nigeria economic requirement. This means the industry is needed by Nigeria, but, the production level of the industry is not enough, e.g the telecommunications industry was made a pioneer company because the industry needed better infrastructure, cheaper products, better quality of service, e.t.c
ii. The industry has a very good potential. An example is the Liquefied and Natural gas industry. Nigeria can make a lot of miney from this industry but investor were discouraged from investing in this industry due to various reasons. Companies in this industry enjoy a pioneer period of 10 years.
iii. It is in public interest to promote the industry. Declaring an industry a pioneer industry reduces costs, this cost reduction can then be passed onto customers in form of cheaper prices. For example, manufacture of cement is a pioneer industry probably to reduce the cost Nigerians will incure in building their houses.
6. Application for a Pioneer Certificate
i. Fee
The application fee is a grand-sum of N100. This is not refundable.
ii. Service Charge
A service charge of 2% of projected tax savings will be paid to NIPC
iii. Application
This will be made on application form called- NIPC Form 2. This form can be obtained free of charge.
iv. Consideration
For any application to be considered at all, the company must have a qualifying capital expenditure of N50k (if it is indigenously-controlled) or N150k(if it isn’t) before its production day. This figures are actually out of date, but, will be used for the purpose of the exam.
v. Indigenously-controlled company
This is a company controlled by Nigerians living in Nigeria.
vi. By whom?
The application can be made by an existing company or a a group of company on behalf of a proposed company.
vii. Justify
The applicant must justify why the company should be made a pioneer company.
viii. The application shall:
a. State whether the company is/will be indigenously-controlled
b. State likely production day
c. state by-products to be produced and estimate the quantity and value of the by-products for a period of 1 year after the production day
d. give details about the company’s loan capital and share capital
e. give details of Directors/Promoters- Name, Address, Nationality...
7. Material date
The tax relief period doesn’t always start immediately. The company will be given time to stabilize its self before its pioneer period will start. Starting the pioneer period when the company is not good to go will be unfair to the company.
This is because when you first start a business, it is likely to be loss-making initially. Counting this initial period as part of the pioneer period will not benefit the company because even if the company were not a pioneer company, it woudn’t still pay tax due to its loss.
The material dates are:
i. Service company- the date the company is ready to provide services on a commercial scale
Ii. Any other company- the date the company begins producing marketable quantities of the product, i.e, enough quantities to satisfy the market
8. Production day
This is the day from which they will start counting the tax relief period.
The company must apply to the Industrial Inspectorate Director (IID) of the Federal Ministry of Industries to certify the date of its Production Day within 1 month after its material date. He may request for any other information he requires.
9. QCE
The company has 1 month after certification of its Production day to apply for the certification of QCE it incurred before its production day. This application will be made to FIRS. FIRS may ask for any other information it requires.
The proceeds of QCE sold before the production will be deducted from the total QCE.
10. Advantages of being a Pioneer Company
i. It does not pay tax
ii. WHT will not be deducted from dividend it pays to its shareholders
iii. Being a pioneer company is a boost to a Company’s reputation
iv. The tax relief enjoyed increases the retained earnings available for expansion
v. Their gearing is lower because their profit is not reduced by tax.
11. Circumstances a Pioneer Certificate(PC) will be cancelled
i. The company applied for cancellation. Is this likely?
ii. The company contravened any IDA ’71 provision
iii. Production day is certified more than a year after the estimated production date
iv. The company did not fulfill any condition stated in the PC
v. Certified QCE is less than the minimum required QCE
12. Cash
A pioneer company usually has more money than its non-pioneer counterpart.
Example
Company A(Pioneer)- TaxableProfit- N1m, Tax=nil, Retatined taxable profit=N1m
B(Non-Pioneer) )- TaxableProfit- N1m, Tax=N0.3m, Retatined taxable profit=N0.7m
As you can see, a pioneer company usually has more money. It can abuse this by, for example, paying excessive dividend or giving out uneconomic loans to its Directors. There are some safeguards.
13. Safeguard
i. Dividend paid can’t exceed the (bank) balance in the account in which profits are credited.
ii. The Minister of Industry must approve any loan.
14. Offences
Offences can be commited with the tongue or with a pen.
i. Making any false statement regarding any material issue(mouth)
ii. Production of any invoice that is false in any material matter or any invoice that has been tampered with or an invoice not actually prepared by the person by the person that should have prepared it.
15. Difference between invoices and receipt
Invoices are required by VATA. VATA also states what they must contain.
16. Penalties
i. N1k fine OR
ii. 5 years jail term OR
iii. Both
For a pioneer company, every Director, Manager and Secretary is individually liable EXCEPT he/she can prove that the offence took place without his her knowledge or agreement.
The Fine looks very cheap, but, it was a lot of money when the act was enacted in 1971.
17. By-Product
This is a non pioneer-product produced by a pioneer company. For example, if Dangote Cement is a pioneer product, then, Dansa will be a By-product.
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