The Nigerian Pioneer Status Regime A Comprehensive Review1

Introduction
The year is 2015 and the new government of President Buhari is just settling into the business of
governance. The excess crude oil account is depleted, the Naira is one of the worst performing
currencies over the last year (2014 2015) and, oil prices are around 50% lower than they have
been for the last couple of years. Naturally, the country is experiencing financial challenges.
Already, due to significantly reduced federal allocations, several state governments are beginning
to owe staff salaries. It is unclear how much the Federal Government can continue to sustain
petrol subsidies and pressure is mounting to cancel them. But despite the horrid outlook, there is
finally a new political party in power and there are many campaign promises to fulfill.
Government needs cash and fast.
Faced with conditions like these, governments around the world typically focus on a limited array
of options - either privatize strategic government assets, which demand significant capital but,
due to mismanagement, tend to yield dismal revenues; or borrow from domestic and
international capital markets; and/or increase taxes and plug unproductive/unnecessary
loopholes and incentives.
In this paper, the focus will be on this last option specifically, a critical look will be taken at a
longstanding and, increasingly notorious tax exemption the Pioneer Status Tax Relief (the
Relief) provided pursuant to the Industrial Development (Income Tax Relief) Act Cap. I6 Laws
of the Federation of Nigeria (LFN), 2004 (the Act). An attempt will be made to examine the
use/abuse of the Relief and to recommend whether it should be retained or cut as the Federal
Government searches for funds.
Origin
The introduction of the Relief in Nigeria dates back 63 years. In the last years of colonial rule in
Nigeria (1952 1954), the colonial government adopted an industrial development policy, which
was continued by the incoming indigenous government. The government of the time recognized
the importance of foreign investment in filling the domestic savings, foreign exchange and
technology gaps between the level of industrialization in Nigeria and in the developed world. The
view at the time was that a formidable array of economic-environment difficulties beyond those

Dipo Okuribido ACTI

encountered by businessmen in advanced economies constituted a major reason for the paucity
of profitable investment opportunities for Nigerian businessmen.2 To even the odds, the Aid to
Pioneer Industries Ordinance No. 10 of 1952 (AIP) was enacted, permitting the establishment
of certain industries characterized as pioneer industries and offering income tax relief and
protection for investments. Subsequently, in 1957/58, the first Industrial Development (Income
Tax Relief) Ordinance No. 8 of 1958 (Cap 87 Laws of Nigeria 1958) (the Ordinance) was
enacted, repealing the AIP.3 The Ordinance provided for the publication of a list of pioneer
industries which would be given a five-year tax-free holiday (counted in respect of only the years
in which the company earned a profit). The Ordinance also provided for the exemption of tax on
dividends distributed to shareholders during the tax holiday period. The Ordinance was
subsequently repealed by the Act, which was enacted in 1971 but with an effective date of April
1, 1970. Since then, it appears that the Act has only been amended once (in 1972) although over
the years its implementation has tended to vary significantly.
The Act
According to its long title, the Act was enacted primarily for the purpose of making provision for
tax relief for certain industries that may be issued with pioneer certificates by the minister.4 The
Act has 26 sections but is broadly divisible into three parts
(i)

the Pioneer Conditions (sections 1 9) which deal with the declaration of pioneer
industries and publication of the list thereof, the conditions for being certified as a
pioneer industry and the terms of the certification;

(ii)

the Income Tax Relief (sections 10 20) which detail the terms of the income tax
relief, the extent of its application and impact on related matters such as dividends,
capital allowances etc.; and

(iii)

miscellaneous and general provisions (sections 21 26) which prescribes offences,

repeals/savings and definitions.

Nigerian Capitalism, Sayre P. Schatz, University of California Press, 1 Jan 1977

Several other investor-friendly laws were enacted along side the Ordinance, notably including the Industrial
Development (Import Duties Relief) Act 1957 which provided for the repayment of import duties in respect of materials
imported into Nigeria for use in manufacture or processing of goods or in the provision of services in certain specified
circumstances.
4
Defined in section 25 of the Act as the Minister of Industry (now the Ministry of Industry, Trade and Investment).
3

To date, a total of about five (5) Orders have been issued as subsidiary legislation to the Act,
detailing pioneer industries, and in some instances, prescribing the possible tenure of tax relief in
relation to such industries.5
Section 1 of the Act provides for the publication of pioneer industries and product lists. Under the
section, the President is authorized to direct publication in the official gazette, of a list of such
industries and products, which the President is satisfied (i)

are not being carried on in Nigeria on a scale sufficient to the economic requirements of
the country;

(ii)

have favourable prospects of further development; or

(iii)

it is expedient in the public interest to encourage the development or establishment of

the industry/product in Nigeria.

Following the publication of the aforementioned list of pioneer industries and products, any
companies in Nigeria may apply to the President for the issuance of a pioneer certificate. Section
1 also vests the President with specific powers to delete items from the list and to refuse
applications for pioneer certificates once the requisite industries/products have been removed.
Further to the foregoing, the Act is conspicuously silent on detailed criteria to be taken into
consideration by the President. This leaves the President not only with significant discretion as
regards becoming satisfied of the existence of any of the foregoing conditions but also, in relation
to the full purport of any of the declarations. For instance there is no guidance on what impact
the particular industry or product may have on the Nigerian economy and, the President may still
deem even marginal industries that are unlikely to make significant contributions to Gross
Domestic Product as pioneer industries.
Section 3 of the Act specifically addresses terms of a pioneer certificate, prescribing that a
pioneer certificate may prescribe permissible by-products, which may be produced by the pioneer
company in addition to the pioneer product (although the quantity of by-products could also be
limited). As regards the commencement of the tax relief period, section 5 of the Act suggests
that this may be retrospective whilst section 6 of the Act provides for the certification of a

A 6th order relating to the Act was issued in 2014 but as subsidiary legislation to the Nigerian Investment Promotion
Commission Act Cap N117 Laws of the Federation of Nigeria 2004 (this will be discussed further subsequently in this
paper).

production start date based on which the tax relief period will typically be computed. The
presumption here is that whilst the pioneer application may have been submitted early on in the
life of a business, actual production will typically be postponed for a few years whilst the
manufacturing/production facilities are being developed. Pursuant to section 6 of the Act, within
one month of the date when the company is ready to commence production/provision of the
service, a pioneer company is required to apply to the Director of the Industrial Inspectorate
(Director) (Ministry of Industry) for a certification of a production commencement date.
Section 6 of the Act also provides for the certification of qualifying capital expenditure by the
Federal Inland Revenue Service (FIRS). To ensure transparency, section 9 of the Act provides
that the Minister will procure the publication in the gazette, of the names of companies granted
pioneer status and applicable industries/products.
As regards the tax relief period, section 10 of the Act provides that this shall continue for an
initial three-year period and, thereafter may be extended by the President for either a single
period of two years or an initial further period of one year, with a possible final further period of
one year. The Act specifically sets out conditions for extension of the tax relief period. These
include
(i)

the rate of expansion, standard of efficiency and level of development of the company;

(ii)

the implementation of schemes for utilization of raw materials or training of and

development of Nigerian personnel; and

(iii)

the relative importance of the industry in the economy of the country.

In relation to the foregoing, the Act does not prescribe any applicable thresholds and the degrees
of expansion or importance are left to the discretion of the President.
In relation to circumstances where the relevant pioneer company has other businesses and
operations, section 12 of the Act provides that any profits earned from such operations will be
subject to tax in Nigeria notwithstanding that they are earned during the tax relief period. The
Act also provides (section 14) for the accumulation of capital allowances (in respect of assets in
use by the business) and loss reliefs (in respect of losses suffered by the business during the
pioneer period), which may then be reclaimed by company following the expiration of the tax
relief period. Pursuant to section 14 of the Act, the subsequent utilization of the capital

allowances and loss reliefs will be in accordance with standard rules under the principal tax
statute.
Sections 16 and 17 of the Act expressly set out the tax exemption to which pioneer companies
will be entitled. Such companies are still required to file tax returns however the profit identified
in the tax returns is exempted from tax. In section 16 in particular, but throughout the Act,
reference is made to the principal Act. This is defined restrictively in section 25 of the Act to
mean the Companies Income Tax Act Cap C21 LFN 2004 (CITA). This would seem to suggest
that the exemption to be granted under section 16 only relates to tax under the CITA and does
not necessarily extend to other categories of income tax such as the Education Tax (charged
under the Tertiary Education Trust Fund (Establishment etc.) Act 2011) or Petroleum Profits Tax
(charged under the Petroleum Profits Tax Act Cap P13 Laws of the Federation, 2004). Section 17
of the Act extends the tax exemption provided under the Act to dividends paid by a pioneer
company in respect of profits, which are exempt from tax by virtue of the companys pioneer
status. In this regard, section 17 (3) of the Act specifically references the Personal Income Tax
Act Cap P8 LFN 2004 (PITA) in addition to the Principal Act. This ensures that the exemption in
respect of dividends applies to both companies and individuals/partnerships who are charged to
tax under the PITA as opposed to the CITA. Dividends need not be distributed during the tax
relief period in order for the exemption to apply.
Pioneer Industries and Products
Following the enactment of the Ordinance in 1958, an initial list of pioneer industries and
products was published. This list was not repealed by the Act and so continued in force until a
further list was published and gazetted in 1982 pursuant to the Act. Since then there have been
further amendments to the list. While some of these have been made by orders as prescribed in
section 1 of the Act (see for instance the Industrial Development (Additional List of Pioneer
Industries) Notice S.I. 11 of 2008), other amendments however appear to have been made by
the Nigerian Investment Promotion Commission (NIPC). Most notable of those in this later
category is the inclusion of mineral oil prospecting and production/petroleum in the list of
pioneer industries/products in 2012.6 Recently, in May 2015, the Minister of Industry, Trade and
Investment (the Minister) published in the official gazette The List of 44 Pioneer
Industries/Products Approved by the National Council of Ministers in 1989. The gazette
publication does not contain any explanatory notes but it would appear that the Minister is

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The legality of the NIPCs amendments of the pioneer industries list and administration of aspects of the Act will be
discussed subsequently in this paper.

seeking to regularize a previous revision of the list of pioneer industries, which, though published
by the NIPC, may however not have been properly gazetted.
The current list published by the NIPC on its official website contains 73 items including
industries and services as varied as utility services (i.e. power generation using gas, coal or
renewables, transportation and telecommunication); integrated dairy production, manufacture of
cement, formulation and manufacture of pharmaceuticals, refining or recycling of waste oils,
manufacture of furniture and furniture components and, development of hotels, resorts and
recreational facilities. As recently as 2005, companies enjoying pioneer status included
manufacturers of noodles, book printers, and producers and bottlers of fruit juices and soft
drinks.
Available reports from the NIPC show the quantum of investment and the number of jobs created
with each investment. However, when one considers the established and available market for
some of the products and industries on the list and the relatively inelastic demand for such
products, it would seem sensible to presume that even without the tax holiday, investors would
likely still have been willing to make significant investments in the particular industry. In such
instances the argument for still granting pioneer status might be the likely impact of the industry
on other aspects of the economy. While some industries such as utility services and perhaps
cement manufacturing clearly have significant knock on effects on the economy, for other
industries such as noodles production and bottling of soft drinks and juices, the wider economic
impacts are more difficult to appreciate.
In evaluating the appropriateness of any item on the pioneer industries list, it is pertinent to
remember that the tax holiday comes at a cost to the government in the form of forgone taxes.
The logic behind the system ought to be that the government is willing to forego such revenue
either as a necessary investment in developing an industry which will subsequently make
significant tax contributions to government or, because the wider impact of the particular
industry more than compensates for the cost. Such compensation could come in the form of
significant additional direct and indirect employment, or lower cost essential items, which can
boost quality of life for citizens generally (for instance, items for home construction). Where
industries and products have potential for only marginal contributions to the economy, then the
standard for whether the cost to government is critical/necessary for building the industry is even
higher. If the costs are not necessary then there would seem to be no real reason for extension
of the Relief to such industries since, even in the absence of the Relief, market forces and
potential return on investment is sufficient incentive for investment in the industry.

In our view, based on the foregoing analysis, the appropriateness of certain items on the list can
be criticized and one sure way for improving the financial situation of the government would be
to remove some items from the list.
Administration
The Act does not provide for the establishment of any independent bodies to administer the
Relief, rather powers are primarily vested in the Minister. Specifically, section 2 of the Act, which
deals with the process of applying for the pioneer certificate, provides that applications are to be
addressed to the Minister. The Act also empowers the Minister to amend and cancel pioneer
certificates (sections 4 and 7) and to publish the list of pioneer industries (section 9).
In line with the foregoing, up until 1988, the Relief was administered by the Ministry of Industry.
However, in 1988, as part of efforts to streamline licence approval processes, particularly for
foreign investment, the then military government passed the Industrial Development Coordination Committee Decree (the Decree), which established the Industrial Development Coordination Committee (IDCC). The primary purpose of the IDCC was to improve the
investment climate in Nigeria and attract investors by centralizing and simplifying processes for
granting of all pre-investment approvals. The IDCC was composed of representatives from eleven
(11) different ministries and economic departments including the Ministry of Industry. The IDCC
was specifically charged with responsibility for receiving and considering applications for
concessions and incentives, which could be granted by the Ministry of Industries, including the
Relief.
In 1995, the Decree was repealed by the Nigerian Investment Promotion Commission Act Cap
N117 LFN 2004 (NIPC Act), which established the NIPC as a successor to the IDCC. The NIPC
Act provided that the NIPC Board would have representatives of several ministries including the
Ministry of Industry. The NIPC Act also conferred the NIPC with many functions similar to those
of the IDCC. However, the conferred functions and rights did not include any specific references
to the Act, the granting of the Relief or the revision of the pioneer industries list. The NIPC Act
did provide in section 23 that the NIPC could issue guidelines and procedures specifying incentive
packages for the promotion of investment.
The NIPCs shared history with the IDCC would appear to be the basis on which the NIPC
currently administers the Relief and, to the extent that it is a commission under the supervisory

purview of the Minister,7 there has been no objection from the Minister to the NIPCs continued
administration of the Relief. Notwithstanding the foregoing, our view is that the NIPC is not
legally authorized to publish or revise the list of pioneer industries nor is it empowered to grant
the Relief.
Presently, the process of applying for the grant of the Relief starts with the submission of a
formal application letter addressed to the executive secretary of the NIPC together with a duly
completed NIPC Form II and a number of supporting documents including the corporate
documents of the relevant applicant, the Certificate of Business Registration of the applicant
(issued by the NIPC), the applicants business plan and its tax clearance certificate.8 Applications
are required to be submitted within a year of commencement of commercial production. Upon
submission of the application and requisite documents, a processing fee (currently set at
N200,000) will need to be made to the NIPC. Previously, upon payment of the processing fee,
applicants then waited for a consideration of their applications and a final approval (typically
following an inspection of the facilities (if any)) however, a few years ago, the NIPC developed a
practice of charging an ad valorem service charge of 2% of estimated savings prior to the
issuance of the pioneer certificate.
In January 2014, the practice of charging the service charge was formally established by the
Pioneer Status Incentive Regulations S. I. No. 2 of 2014 (the Regulations), issued by the
NIPC. Pursuant to the Regulations, as part of the application process, the applicant company is
expected to submit its five years financial projections, which will then be utilized by the NIPC in
the computation of the applicable service charge to be paid. The Regulations provide that where
the projections show negative pre-tax earnings then the higher of 0.5% of the applicants net
assets or 0.25% of its turnover will be applied in determining the applicable service charge.
Normally, within two days of the NIPCs determination of the applicable service charge, an
invoice will be issued to the applicant company with details for payment.
The Regulations raise many questions for which no clear answers are provided. For starters, the
calculation of the tax savings and the service charge appear to be based on five years worth of
tax savings however, under the Act, the Relief can only be granted for three (3) years in the first
instance with no guarantee of extension. Whether the balance of any service charge paid will be

The Minister currently recommends the executive secretary to the President for appointment.
Where the applicant is a new company, a nil tax clearance certificate can normally be procured upon payment of a
nominal fee.
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refunded if the Relief is not extended is not clarified in the Regulations.9 Also, the Regulations do
not clarify whether the service fee will be refunded in the event that the Relief is not granted. In
practice, the NIPC typically does not invoice for the service fee until an internal decision has been
taken as regards the grant of the Relief and the invoice typically signifies that the Relief will be
granted. Beyond these questions however there are graver concerns as regards the legal validity
of the Regulations. The Long title indicates that the Regulations are purportedly issued in the
exercise of powers of the NIPC under section 30 of the NIPC Act. The said section provides that
the Minister may make regulations: (a) providing for anything requiring to be prescribed under
this Act, and (b) generally for carrying out the principles and objectives of this Act. As previously
noted, the NIPC Act does not specifically reference the Act or the Relief. In our view, section 30
does not suffice to empower the issuance of the Regulations.
Performance
Since the original introduction of the incentive in 1958, there has been a significant growth in
foreign and local investment in Nigeria across a wide range of sectors and industries. However
given the length time and the significant and numerous developments such as commencement of
large-scale oil production, population growth etc., it is difficult to clearly connect the growth in
investment to the existence of the Relief. Although the NIPC tracks certain indices in relation to
companies granted the Relief, these mainly focus on the quantum of the investment, the number
of jobs created, additional infrastructure provided and corporate social responsibility contributions
of the investments. There is however no available data on the criticality of the Relief to the
investment decision of the relevant companies. In this regard, writers have deferring views with
some analyses suggesting that in the majority of the cases, the Relief was not critical to the
investment decision and investments would still have been made even in the absence of the
Relief. It is critical that the NIPC and or the Ministry of Industry, Trade and Investment
commission studies to evaluate the overall benefits of the Relief to varying industries, balanced
against the tax losses to government. Such data will help to sift the wheat from the chaff in the
list of pioneer industries.

Owing to the previous practice by the NIPC of issuing the Relief for 5years in the first instance, there is currently no
precedent for this scenario however, with the reversal of the practice and the limiting of the terms of Reliefs, there are
likely to be several instances in the near future.

Issues
Over the years, there have been a number of abuses of the regime provided for under the Act.
The most notable of these relates to the tenure of the Relief. Presently, a cursory search of
material published by government agencies will reveal different tenures for the Relief. Some
Ministry of Industry and Central Bank of Nigeria reports stipulate that the Relief is for a tenure of
seven years. Of more concern however is documentation of the NIPC itself. The Investors Guide

to Nigeria published by the NIPC in 2006 describes the Relief as a five-years tax holiday to
qualified or (eligible) industries anywhere in the Federation and seven-year tax holiday in respect
of industries located in economically disadvantaged local government area of the Federation.
This description, though in conflict with the provisions of the Act, has for some time been
consistent with the NIPC practice. Essentially, for a significant length of time, rather than grant
the Relief for an initial three (3) years period and, then consider any applications for extension,
the NIPC has simply granted the Relief for five years at once. This is likely the reason for
computation of the service charge based on an assumption of five years of tax savings. It is
however noteworthy that following a recent re-shuffle of officials at the NIPC, a concerted effort
is now underway to regularize the tenure of Reliefs granted and the NIPC has written to most
companies who were granted the Relief for a five year term, notifying them that in line with the
Act, the term of the Relief will now be three years. While this is commendable, it does throw up
some issues. For companies who are past the third year of the Relief period, should the Relief
lapse immediately upon notification, should the companies be required to refund tax savings for
the additional years or should it be deemed that their Relief certificates had been renewed?
Where a renewal is deemed should this be for the full two years or a single additional year? For
companies who have paid a service charge based on five years of tax savings, should the
trimming of the Relief period to three years trigger a refund of the balance of the tax savings? It
is difficult to provide definite answers to these questions, which will be fair to all parties. In our
view, notification letters are not sufficient. The NIPC and the Minister should not shy away from
the fact that mistakes have been made but should rather develop (in consultation with industry)
reasonable transitional rules to facilitate migration back to the three year Relief period provided
under the Act. Such transitional rules may include an understanding that where companies can
demonstrate prerequisites for renewal then the Reliefs can be deemed renewal from the end of
the first term otherwise, the tenure can be treated as having expired.
Aside from the issues regarding the term of the Relief, another point of controversy regarding the
application of the Relief has been the 2012 inclusion of prospecting and production of oil and
gas and the grant of the Relief to several independent oil companies. This inclusion is

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controversial for two reasons. On a general note, it is difficult to view prospecting and production
of petroleum as a pioneer industry in Nigeria requiring an incentive like the Relief. Even without
the Relief, from the 1950s there has been significant foreign and local investment in the Nigerian
oil and gas industry and, it is a notorious fact that the returns from the industry are substantial.
Given these facts it is difficult to see why the Relief ought to be extended to petroleum
production. In response to these arguments however it can be said that while there has indeed
been significant foreign investment in the Nigerian oil and gas industry, the participation of
indigenous companies has been somewhat marginal. There are a variety of reasons why
government may be seeking to boost indigenous participation in the industry and if the Relief can
help achieve this then there may be a case for extending its application accordingly. More difficult
to address however are the legal objections. First as regards the inclusion of the item on the list
of pioneer industries, petroleum operations in Nigeria are subject to tax under the Petroleum
Profits Tax Act Cap P13 LFN 2004 (PPTA) however, the Act does not provide for the exemption
from income tax generally but only from tax under the CITA. This means that even if the Relief
were extended to petroleum operations it would be useless since petroleum operations are not
subject to the tax from which they are sought to be exempt. Furthermore, virtually all of the
operations in respect of which the Relief has been issued in the petroleum industry are
brownfield operations, which have been acquired from international oil companies or other
independent/indigenous companies. It is arguable that such brownfield operations are past the
first year of commencement of operations and should thus not qualify for the grant of the Relief,
particularly as the original owners of the assets had been paying taxes in respect of same. While
there are indeed laudable reasons for supporting and encouraging more indigenous companies to
take on more than a marginal share of petroleum operations in Nigeria, it is however not clear
that the extension of the Relief is a necessary and or cost effective way of encouraging such
indigenous participation.10 In any event, such an extension of the Relief does not appear to be
supported by the existing legal framework so even where it is determined that the Relief should
be extended, legislative changes will be required to properly effect the extension. The practical
implication of this position however is that companies engaged in petroleum operations but
currently enjoying the Relief may subsequently be challenged and foregone government
revenues recovered. In these hard times, such recoveries may be a useful source of additional
revenue for the government.

10

An alternative policy, which has been adopted by the government in Nigeria is the adoption of a reduced tax rate for
indigenous operators. See for instance the 50% tax rate currently supposed to be applied in respect of marginal field
operations.

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Related to the foregoing is the issue of whether or not the Relief should be applicable to Tertiary
Education Tax (TET) (charged under the Tertiary Education Trust Fund (Establishment etc.) Act
2011) (TETA). As with petroleum profits tax, since the Act does not reference the TET or the
law pursuant to which it is established, it is arguable that the Relief does not extend to TET and
companies enjoying the Relief ought to remain bound to account for TET. In truth this nonreference may more likely be due to some oversight on the part of the legislators. The
predecessor of the TETA (i.e. the Education Tax Act) pursuant to which the TET was originally
introduced was only passed in 1993. This means the TET did not exist at the time of enactment
of the Act. Given the close relationship between the TET and the tax under the CITA (CITA
provides the basis for the computation of both taxes), it is not infeasible to presume that the
National Assembly would likely have extended the application of the Relief to the TET had it
occurred to it. However, such presumptions ought not to be sustainable from a legal perspective.
It is trite that the express mention of one thing is the exclusion of all others. In line with this
principle of statutory interpretation, the express mention of the CITA ought to exclude the
application of the Relief to all other taxes charged under any other laws including the TET. The
legal presumption must be that if the National Assembly had intended to extend the application
of the Relief then, at the time of the original enactment of the Education Tax Act in 1993, the Act
could have been duly amended. Further to the foregoing, we are not able to agree with any
assertions that the Relief ought to also apply to TET. We are however aware that in practice,
companies granted the Relief claim exemption from taxes under both the CITA and TETA.
Conclusions and Recommendations
From all of the foregoing discussions it is clear that the legal regime for the Relief is due for an
overhaul. Existing practices need to be streamlined with subsisting laws and the economic and
opportunity cost rationale for the grant of the Relief needs to be carefully monitored and taken
into account in extending or reducing the pioneer industries list and granting the Relief to more
companies. A more efficient administration of the Relief would likely have the dual impact of
plugging government finance leakages and improving the effectiveness of the Relief as a tool for
growing strategic industries and businesses with significant direct and indirect impact on the
Nigerian economy.

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