The ‘modified’ Pioneer Status Incentive

The Federal Government came up with a ‘modified’ version of the Pioneer Status Incentive scheme a couple of weeks ago. To quickly summarise – the pioneer status allows companies in certain industries to enjoy tax free status for three to five years after they have made investments in that sector. The idea being that some sectors (risky and untried) of the economy might need an extra sweetener to make them attractive to investments (given the alternatives in the economy).

In reality, the policy has been a mess. The sectors of the economy that need this ‘sweetener’ have proven to be dubious ones i.e. sectors that have already been well established as profit making with nothing pioneering about them. As with many other Nigerian policies, it was also very badly worded which made abuse incredibly easy. And we know that once a policy is being abused in this way, the beneficiaries will die on the line, to stop it from being changed.

The changes that the current government has made to the policy have some good and bad to them. Let’s try to enumerate them. Start with the bad…

The Bad
The worst thing about all of this is that after looking at this problem for two years, this is the best that APC could come up with. A feeble and pathetic attempt to change an obviously bad law. There were previously 71 industries/sectors on the list of investments that qualify for pioneer status. Two have now been removed and 27 new ones added giving us a total of 96. If the previous system ran out of control, it is unclear how making it even more unwieldy solves any problem.

In other countries, when a law is badly worded, the taxman or a business goes to court to seek clarification and interpretations of the law. This never happens in Nigeria and everyone just carries on with their own interpretation. The minister of Industry, Okey Enelamah, has now swapped one problem for another. Without any legal backing or interpretation, he declared that pioneer does not mean new industries but industries that are ‘not yet mature’. You can see the problem – what stops the next minister from changing this definition and saying pioneer means ‘industries that are dying but not yet fully dead?’ We need to do away with this kind of arbitrariness.

As I’ve mentioned several times, the biggest beneficiary of this policy has been Dangote Cement. Between 2010 and 2015 alone, Dangote Cement made N1trn in profits and paid an astonishing N12bn in taxes i.e. a 1% tax rate. All this for ‘pioneering’ the production of something that has been in production before Jesus Christ was born and has been produced in Nigeria since the 1950s. The bad wording of the law allows the company to use a particularly aggressive interpretation where it claims pioneer status multiple times on the same plant simply by extending it. For example, it has claimed pioneer status four (4) times on the Obajana plant alone by building four lines there which means that it has avoided paying taxes on profits from that plant since 2009 and won’t pay any until at least 2019.

By changing the definition to ‘maturity’, based on nothing more than word of mouth, you can bet all the money you have, that another round of abuse and aggressive interpretation is on its way. Raise your hand if you know any business that will accept that it is now ‘mature?’ By keeping the scheme in place, the government now sees it as one of its biggest levers for attracting investment. But, if not paying taxes is the way to attract investments, no one will be investing in America where corporate taxes are quite high. Getting rid of the policy and making any incentives universal will allow the government think broadly and avoid being easily captured by vested interests.

The Good
Ok, so there are many bad things about the policy. But, perhaps unwittingly, there are also some good things about the way it has been reformed. Widening the policy to almost 100 sectors is a good thing in a roundabout way. If like me, you believe the policy should be eliminated altogether, the next best thing is to make it available to as many people as possible. It is now less of an unfair advantage for anybody since almost everyone now has access to it – it is almost the same thing as scrapping it.

Dear Nigerians, make sure you take advantage of this new list. You will have yourself to blame if you don’t. As a famous Nigerian philosopher once said – give yourself brain. Even if your business or industry is not on the list of 96, why not open a website selling something and make it part of your business? E-commerce is on the list. But please don’t mention my name as the person who gave you the idea.

Companies like Dangote Cement are also going to be ‘phased out’ of the scheme. It would have been better to just remove them immediately given that the same government claims it is desperate for tax revenues. But again, this is the next best thing.

Finally, since the government is trying to widen and deepen the tax base, this might be a good way to do it. Think of this as a ‘promo’ offer to new industries. It might encourage many companies to formalise themselves as registered companies instead of remaining in the informal economy. If the incentive works to attract such businesses, after enjoying no taxes for three (3) years, they are in the system and can start to contribute to the tax take after that. Hopefully in three to five years’ time, Nigeria should have more registered businesses paying taxes than it would have had if not for the incentive.

But that’s all theory. The biggest challenge with these things is that people find ways not to come off it. And given how loose the definition is and how long the list now is, it is possible that the same government that is desperate for taxes, ends up simply giving money away when everyone finds a way to get on the scheme.

We shall continue to observe.