Between Oil Companies and Pioneer Status

Recently, some oil companies were awarded pioneer status. Pioneer status for the uninitiated is that tax free status granted to companies whose products have been declared pioneer products upon satisfying further administrative requirements of the Minister of Trade and Investments (or the designated agency administering the Industrial Development Act).

The pioneer industries and products are identified by a list published in the official gazette. A company granted pioneer status will not suffer income tax and withholding tax for an initial three years and a further two years. All the GSM companies enjoyed this privilege when they came into Nigeria.

In summary, government losses money for every pioneer status granted but it is compensated by the impact of such companies on the economy especially by their ability to generate jobs.

The Industrial Development (Tax Relief) Act, Cap. 17, LFN 2004 (IDA) is the primary Act that regulates the issuance of pioneer certificates to companies. This legislation also governs the operations of the pioneer companies (companies awarded a pioneer status).

The grant of Pioneer Status to companies is targeted at assisting companies in particular industries to enhance their growth and profitability within a time frame in its formative years. Pioneer companies are companies generally engaged in the manufacturing, processing, mining, servicing and agricultural industries.

Where, an Industry is not listed in the schedule to the IDA, the President may then rely on section 1 of the IDA to designate a company or Industry as a pioneer company product. The IDA is a subsidiary legislation of the Companies Income Tax Act which is the legal basis for taxing non-oil and gas companies; whereas, oil producing companies are subjected to tax under the Petroleum Profit Tax Act (PPT).

Please note that it is only the President that may approve the publication of a Pioneer Industry or Product. It should therefore be taken for a fact that the list of Pioneer Industries published by the National Investment promotion Council (NIPC), which includes petroleum operations, clearly envisages PPT companies enjoying pioneer status when it included “mineral oil prospecting and production" in the list of approved industries. Thus, we may as well say the President has sanctioned PPT companies enjoying pioneer status by including them in the list. If our assertions be correct, the tax payer has no business defending the legality or illegality of a validly obtained pioneer status.

But this is not as simple as it appears. The NIPC has granted some oil companies Pioneer Status while the Federal Inland Revenue Service (FIRS) disputes the legality of such “pioneer.” It is easy to see why. The FIRS wants to collect more money for the federation account and a Pioneer Status grants a company tax free income. This is between 65.75% and 85% for an oil producing company that wins oil on its own account. Kindly note that; the IDA makes copious reference to the “Principal Act;” which the Interpretation clause describes as the Companies Income Tax Act (CITA).

Thus, it would appear that the IDA possesses a status similar to a regulation despite being an Act of Parliament. The short title of the Act reads “this Act may be cited as the Industrial Development (Income Tax Relief) Act and shall be read as one with the Principal Act.” There is a basis therefore for the FIRS to conclude that the IDA is clearly a subsidiary legislation to CITA. The IDA’s umbilical cord is firmly attached to CITA. This would appear to suggest that the subject matter of the IDA is exclusively companies taxed under the Companies’ Income Tax Act.  If this is correct, the Pioneer Status granted oil companies would be useless if they are liable to pay tax under the PPTA. This could not have been the purpose for including the petroleum industry in the list of pioneer industries by the NIPC.

Nigeria Investment Promotion Commission (NIPC) Act
The Nigerian Investment Promotion Commission Act, Cap N117, LFN 2004 (NIPCA) establishes the Nigerian Investment Promotion Commission (NIPC). The NIPC is established inter alia to promote, encourage, coordinate, and monitor investments in the Nigerian economy and consequently advise the Federal Government on policy matters.

The commission has wide –ranging discretionary powers albeit advisory – This would become binding when ratified by the FEC.

The NIPC is a government agency in the Federal Ministry of Trade and Investment (formerly Ministry of Industry). There is no clear mandate for NIPC to manage the issuance of pioneer certificates in the NIPCA. However, the minister of commerce (now Trade & Investment) who is saddled with the administration of NIPCA has delegated the power to the NIPC which the minister also supervises. Its statutory powers and functions cover every possible tax incentive, holiday and relief including pioneer certificates for companies investing and doing business in Nigeria.

Where does this confusion leave the tax payer? What are the options for oil companies that currently hold pioneer status that are disputed by the FIRS. I charge for advice.

Eben Akinyemi, an Associate of the Institute of Chartered Accountants of Nigeria, is a Partner at the transactions and tax advisory firm, Stransact Partners.