. 160 more applications pending
Clara Nwachukwu
Nigerian Investment Promotion Commission (NIPC), has revealed that 31 companies are currently enjoying Pioneer Status Incentive (PSI) based applications processed between 01 April and 30 June 2021, even as160 more applications are still pending.
According to the NIPC PSI Report released today, current beneficiaries cut across manufacturing, power, mining, oil and gas, construction, agriculture, ICT, transportation, hospitality, health and a host of others.
In Nigeria, the PSI is one of the available tax incentives aimed at attracting investment into critical sectors of the economy. 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.
PSI Beneficiaries (Click to view table)
The second quarter (Q2) Report also shows that 28 new applications and five extension applications were received during the period. Seven approvals-in-principle were granted, and no extension application was approved and no approvals were denied.
The Report further reveals that eight companies had their production date certificate confirmed.
The granting of PSI has remained controversial because of the difficulty in assessing their effectiveness, which is also open to corruption and abuse, and also whether the incentive is meeting the intended objectives, thereby leading to the Federal Government’s review of the process in the recent past.
The review was also as a result of fall from crude oil revenue following dwindling oil prices, which led to the focus on alternative sources of income, particularly taxation.
Why companies seek pioneer status
According to experts at Pricewaterhousecoopers, companies apply for PSI because aside from the five-year cumulative tax holidays, they also enjoy other key benefits, including:
• Deduction of fixed asset costs after tax holiday – Fixed assets acquired during the tax holiday period are considered to have been bought post pioneer. This allows companies to get full tax deduction for the cost of these assets after the tax holidays including investment allowance where applicable.
• Tax losses – Tax losses incurred during the tax holiday can be used as set off against taxable profits earned after the tax holiday.
• Tax free dividend – Dividends paid out of pioneer profits are tax exempt whether paid during pioneer or post pioneer period.
Generally, many countries grant preferential tax treatment to certain sectors of the economy or to certain types of activities. The United Nations (UN), identified such sectors as manufacturing activities and pioneer industries, as well as export promotion, locational incentives and investments that result in significant transfers of technology.
“If properly designed and implemented, tax incentives are a useful tool for attracting investments that would not have been made without the provision of tax benefits. Tax incentives are justified if they correct market inefficiencies or generate positive externalities,” the UN said in one of its publications, titled: Design and Assessment of Tax Incentives in Developing Countries.
Transparency and sustainability issues
Just as critics have noted, the UN also observed that processes are difficult to substantiate, since problems exist with regard to estimating the costs and benefits of tax incentives. “Even when tax incentives succeed in attracting investment, the costs of the incentives may exceed the benefits derived from the new investment.”
The organisation therefore suggests that one method of cost-benefit analysis is to estimate the cost in terms of forgone revenue and/or direct financial subsidies for each job created, adding that tax incentives are justified if they correct market inefficiencies or generate positive externalities.
Although targeted at attracting enhanced foreign direct investments (FDIs), into the critical sectors, the UN equally cautioned that “Corruption can constitute a major barrier to foreign investment in a country but it does not, however, prevent foreign investors from benefiting from a corrupt system.”
Corruption can constitute a major barrier to foreign investment in a country but it does not, however, prevent foreign investors from benefiting from a corrupt system.
As a result, the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), and the World Bank have projects that try to reduce corruption and provide assistance to countries to establish anti-corruption programmes.
One element of such programmes is the monitoring of foreign investment projects and particularly the granting of investment incentives. “If a tax incentive is found to have been improperly obtained, the attendant privileges should be withdrawn and any tax that has been avoided should be repaid, in addition to any other legal sanctions.”
This publication is a result of a project, undertaken jointly by the Financing for Development Office (FfDO) of the UN Department of Economic and Social Affairs (UN-DESA), and the Inter-American Center of Tax Administrations (CIAT), aimed at strengthening the capacity of national tax administrations (NTAs) in developing countries in Latin America to measure net benefits of tax incentives. The ultimate goal of the project was to support the development of a theoretical framework and an empirical methodology to design and assess tax incentives, which could assist in identifying possible reforms aimed at improving their efficiency.
