The paper is an attempt to discuss the various issues relating to Pioneer income Tax in Nigeria. It is intended that the paper will discuss the history of taxation in Nigeria and go on to briefly identify the various tax statutes applicable in Nigeria. It will also point out a foray of available tax incentives in Nigeria among which arc capital allowances tax free dividends and business tax rates.
Pioneer legislation and pioneer conditions will be discussed as a prelude to understanding pioneer industries in Nigeria. An attempt will be made to highlight the advantages, and shortcomings of pioneer statute. The paper will x-ray the various conditions and rules necessary to operate an efficient pioneer industry regime. Finally, we shall discuss the taxation implications of pioneer status as• well as the problems, solutions and recommendations to the problems of pioneer companies in Nigeria.
Tax is defined as a “levy imposed by the government against the income, profit or wealth of the individual, partnership corporate organization” Tabansi,- Ochiogu). Also, Ola (1987) sees taxation as “the demand made by the government of a country for compulsory payment of money by the citizens of the Country” Tax is essentially conceived to mean the transfer of resources from the private sector to the public sector in order to accomplish some nation’s economic and social goals.
Okezie (2003) identifies the objectives and uses of taxation to include main objectives and secondary objectives.
Main objectives:-
(a) To raise revenue for government expenditure
(b) To influence economic activities in the Country, through tax policies on production, investments and savings.
Secondary objectives:
a. To bridge the gap or inequalities between the poor and the rich
b. To restrain or curtail consumption of undesirable goods and services.
c. To correct a Country’s balance of payment, i.e. the difference between a Country’s import and export.
d. To protect home or indigenous industries thereby encouraging industrialization.
e. To combat inflation -government can increase tax rate and reduce reliefs
f. To encourage investments by building in tax incentives into Nigeria’s tax laws.
HISTORICAL AND LEGAL DEVELOPMENT OF TAXATION IN NIGERIA
The history of taxation in Nigeria dates back to the era of the Sahara trade and the introduction of Islamic religion in Nigeria between 800 A.D and 1400 AD. The rulers in the Northern Nigeria were known as “SAFAWA” Kings, who grew rich due to gifts and levies paid to them by their subordinates as taxes on cattle and agricultural crops. The Islamic religion later introduced various forms of taxes namely: Zakat, Kurdin Kasa, Shukka Shukka, Jangalia, Kha rant etc. The Zakat was imposed on educational and charitable purposes.
In the south, the Obas and Ezes relied on tributes, arbitrary levies, special contributions at special festivals or events, fees, presents, all collected through the head of families, as its system of taxation.
The first legal backing of taxation was in 1904 when Sir Fredrick Lugard introduced the Native Revenue Proclamation. This Proclamation was further enhanced in 1906. The tax revenue proceeds was shared equally between the local or native authorities and the British or central Government authority. These enactments were followed by many other legislations which the Colonial masters introduced during their era.
After independence in 1960, the government enacted three major tax laws, namely:
i. Federal Income Tax Act (FITA) 1961
ii. Income Tax Management Act (ITM A) 1961
iii. Companies Income Tax Act (CITA) 1961
These enactments form the bedrock of modern taxation in Nigeria. The income Tax Management Act (ITMA) 1961 model for all the personal income tax laws operational in regions, with amendments in some regions. However, in 1993 through Decrees 104 the EGW enacted the Personal Income TAX Act 1993 to repeal all previous tax laws on Personal Income TAX in Nigeria.
The Company Income TAX Act (CITA) 1961 was applied to companies in Nigeria. The law was repealed and later replaced with the Companies Income Tax Act (CITA) in 1979 with amendments in 1993.
3. THE COMPANIES INCOME TAX ACT.
The law regulating the taxation of Companies in Nigeria is the Companies Income Tax Act 1979. The Act is contained in Chapter 60, of the Federation of Nigeria (LFN) 1990 and is amended by subsequent Decrees (ACTS) including the Finance (Miscellaneous Provisions) of 1993 and other subsequent amendments thereto. The administration) of CITA rests on the shoulders of the Federal Board of Inland Revenue which has the following powers and duties:
I. It is responsible for the administration of the Companies Income Tax Act and Decree. It assesses and collects the necessary company taxes.
2. It can sue and be sued in its official name
3. It can acquire, hold or dispose any property held as security and account for the proceeds to the Minister of Finance.
4. It may authorize any person within or outside Nigeria to perform or exercise any of its powers except those stated under the first schedule to the Act.
5. It may (with consent from Finance Minister) appoint the Joint Tax Board to perform or exercise any of its duties or powers.
TAX 1NCENTIVES IN NIGERIA
The government of Nigeria has over the years allowed tax incentives and belief as follows:
1. Pioneer Companies- Tax holiday subject to a maximum of 5 years, is granted to companies with pioneer status on the basis of newness and relevance of the products by the Companies. We shall know this fully in this paper.
2. Export Free Zone Exempt Profit -100% exemption for profits obtained from export-oriented undertaking established within and outside an export Free Zone for 3 consecutive assessment years.
3. Solid Minerals Mining - For a new company going into the mining of solid minerals for the first 3 years of its operation.
4. Hotels Income Exempt from Tax- 25% of income in convertible currencies derived from tourists, provided the income is put in a reserved fund to be utilized within 5 years for the building expansion of new hotels, conference centers and new facilities for tourism development.
5. Spare parts Fabrication- For a Company engaged wholly in the fabrication of spare parts, tools and equipment for local consumption and export; 25% investment tax credit is allowed on qualifying capital expenditure, S. 28 F (1) of CITA.
6. Locally Manufactured Plant- 15% investment tax credit is allowed for a company, which produces totally manufactured plant, machinery or equipment.
7. Replacement of Obsolete Plant- 15% investment tax credit for a Company, which has incurred an expenditure for the replacement of all obsolete plant and machinery. .
8. Investment Tax Relief- Relief is granted for 3 years to Companies located at least 20km away from essential infrastructure such as electricity, water, tarred roads and telephone services, when expenditures are incurred on such infrastructure
9. Investment Allowance -10% tax relief for Companies in the first year of purchase of plant and machinery used for agricultural Production and manufacturing by agricultural and manufacturing and companies. This is in addition to the normal initial and annual allowances.
10. Rural investment Allowance -granted to Companies established in
rural areas lacking infrastructural facilities. The same rates are applicable as in Investment Tax Relief as follows:
-No facilities at all 100%
-No electricity at all 50%
-No water at all 30%
-No tarred road at all 15%
-No electricity at all 5%
II. Tax free interest Relief is granted on the following interest charges:
-Full tax exemption on interest on foreign currency deposit account of a non-resident Company opened in or after 1st January, 1990
-Full exemption on interest on foreign currency domiciliary account accruing on or after 01/10/1990.
-graduated Tax Relief on interest on foreign loans or interest payable on any loan granted by a bank for manufacture for export.
- Interest on loan granted by bank on or before 1st January, 1997’ to a Company engaged in agricultural trade or business, or for the fabrication of any local established by the Company under the Family Economic Advancement Programme. The incentives arc based on the conditions that the moratorium is not less than I 8 months and the interest rate is not more than the base lending rate at the time the loan was granted.
12. Deductible Capital Allowance- Full capital allowance are granted to agricultural and manufacturing companies in respect of assets in use In agricultural production and manufacturing.
13. Research and development- 20 % investment tax credit on qualifying expenditure is available to companies engaged in research and development for commercialization. Levies paid to National Science and Technology Fund is also allowed as deduction in arriving at company’s taxable profits.
14. Tax-free Dividends -This comes through:
- Franked Investment 1ncome (FII) provisions
- Three year tax- free dividend on foreign currency equity ordinary shares imported into Nigeria
- Five year tax Free dividend for companies in priority sectors in Nigeria such as agricultural production and processing, petrochemical or liquefied natural gas production, and
-Tax-free dividends to priority companies for the period of tax holidays
-Dividends distributed by Unit Trust Companies
-Five: year tax incentive for dividends from small companies in the manufacturing sector
-Dividend received from investments in wholly export-oriented businesses
-Dividends, interest, rent, royalty derived from foreign
- Profits of a Nigerian company in respect of goods exported from Nigeria provided that the proceeds arc repatriated to
• Nigeria and used for the purchase of raw materials, plants, equipment and spare parts.
The Interest on foreign currency domiciliary account in Nigeria accruing on or after 1 ‘ January, 1990.
I5. Tax Treaties with other Countries -‘This is aimed at:
- Eliminating double taxation through the granting of credit for taxes paid by a Nigerian company in the other company etc.
- The protection of tax incentive legislations of the government which would otherwise be nullified by the tax measures of the other country
- The creation of a stable tax regime, which a prospective investor can rely on
- Concessions of treaty-rules for investment income which are lower than domestic rates and are available to treaty partners only.
16. Gas Industry Incentive -granted to companies engaged in gas utilization (downstream operations) such as tax free period of up to 5 years and accelerated capital allowances.
17. Small Business Rate- 20% tax rate for 4 years for a company whose turnover is N/M in the year of assessment. This is applicable to companies whose business falls under manufacturing, agricultural ‘production, or mining of solid minerals or wholly export trade companies.
The paper dwells on incentives for companies which are granted the pioneer status.
PIONEER LEGISLATION AND PIONEER CONDITIONS
One of the investment incentives available to industries in Nigeria is that under the Industrial Development (Income Tax Relief) Act 1971, The Act which is now under Chapter 179 of the laws of Federation of Nigeria (LFN) 1990 came into force on 1” April,
1970 throughout Nigeria.
Where the National Council of Ministers (the Council) is satisfied
that-
a. Any company is not being carried on in Nigeria on a scale suitable to the economic requirements of Nigeria, or
b. It is not carried out at all or
c. There are favourable prospects of further development in Nigeria of any industry, or
d. It is expedient in the public interest to encourage the development or establishment of any industry in Nigeria, the council may declare such industries pioneer industries and of their products to be a pioneer products.
The following conditions must be met for a company to be granted a pioneer status.
1. It may apply at any time for the issue of a pioneer certificate in relation to any pioneer industry or product with non-refundable fee of Nl00
2. A company that wishes to engage in an industry or product which not been designated pioneer may submit an application for the industry to be included in the list.
3. Where an application is successful, the company is issued with a pioneer certificate in which the conditions for enjoying the income tax relief be stated.
4. For any application for pioneer certificate to be considered, the estimated cost of qualifying capital expenditure to be incurred by the company as or before production day shall not be less than;
N50,000 in respect of indigenous controlled company
N50,000 in the case of other companies
6 THE KEY CONCEPTS IN PIONEER LEGISLATION
The following definitions arc therefore essential for a better understanding of pioneer status.
Pioneer company - a company certified by any pioneer certificate to, be a pioneer company to enjoy a pioneer status. A pioneer
company produces and sells the re1cvant product or products.
Pioneer certificate - A certificate given under industrial development income Tax Act certifying among 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 a state. The relevant pioneer product refers to the pioneer product or products and the permissible by-product or products specified in the pioneer certificate of any company.
ADANTAGES OF PIONEER STATUS
The following advantages accruable from pioneer status:
1. A Company holding a pioneer certificate shall be on a tax holiday for a period stated on the certificate. The relief is given by way of complete exemption from income tax during the period covered by the pioneer certificate. This is usually for a period of three years at the first instance commencing on the date of the production day.
2. Pioneer status stimulates economic development in industry and trade so essential products are made available to the population.
3. It provides an investment incentives to companies whether local or foreign, and in the case of the later allows for inflow of foreign equity capital.
4. It enhance employment opportunities since more companies will take advantages of the pioneer income tax relief, there will also be more entrants to the industries.
5. It enhances the inflow of foreign exchange and consequently helps to stabilize exchange rate.
6. It enjoys carry forward loss relief’s and capital allowance on qualifying expenditure.
7. The Retrospective operation of pioneer provisions allows pioneer certificate to operate from a prospective date such that any taxes already paid which would not have been paid if the pioneer certificate had been issued on a retrospective date will be refunded to the company within stipulated period.
8 APPLICATION FOR PIONEER STATUS- CONDITIONS AND RULES
Application for pioneer status can be made by a company incorporated in Nigeria or by a group of persons on behalf of a company which is to be incorporated later with a non-refundable fee of N 100. On a prescribed form the company shall make the following declarations.
i. Whether the company is, or the proposed company when incorporated shall be an indigenous controlled company;
ii. Particulars of the assets on which qualifying capital expenditure will be incurred by the company including their sources and estimated costs
- on or before production day, and
- during a period of three years following the productions day.
iii. The place in which the assets are to be situated;
iv. The probable date of production;
v. Any product or by- product, not being a pioneer product, to be produced and a reasonable estimate of the quantities and value of such product or by-product during a period of one year from the production favour;
vi Particulars of the loan and share capital ( or proposal in this regard) including the amount and date of each issue and the resources from which the capital is to be or has been raised;
vii In the case of a company already incorporated, given the name, address and nationality of each director and the number of shares held by him.
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