MODULE 11 PIONEER LEGISLATIONS (INDUSTRIAL DEVELOPMENT: INCOME TAX RELIEF)

Transcription

1 MODULE 11 PIONEER LEGISLATIONS (INDUSTRIAL DEVELOPMENT: INCOME TAX RELIEF)

2 OUTLINE Conditions for pioneer status Conditions for application of pioneer status Production Day/Material Day Certification of Pioneer Certificate Tax Relief Period Conditions for Extension Restrictions on Trading and Payment of Dividends Offences and Penalties

3 Conditions for pioneer status The industrial Development (Income Tax Relief) Act 1971 came into existence on 1 st April, the Act makes provision for the exemption of companies which meet certain requirements from payment of tax for a minimum period of three years and a maximum period of five years. This Is one of the tax incentives offered by the Federal Government to encourage the establishment or development of certain industries in the country. The Act is now referred to as the Industrial Development (Income Tax Relief) Act, Cap. 17, LFN Under section 1(1) of IDA 2004, the President may direct publication in the Gazette of a list of pioneer products. Before any industry is included in the list of pioneer industries and the pioneer products, the President must be satisfied that: - the industry is not being carried on in Nigeria at all; or - the industry is being carried on in Nigeria on a scale which is not suitable to the economic requirements of Nigeria; or - the industry has favorable prospects of further development in Nigeria; or - it is in the public interest to encourage the development or establishment of such industry in Nigeria. An application may be made for the inclusion of any industry in the list of pioneer industries and pioneer products by a company incorporated in Nigeria or by a group of persons on behalf of a company which is to be so incorporated. The president may from time to time, on any ground which appears to him sufficient, amend the list of pioneer industries and pioneer products.

4 List of Pioneer Industries 1. Cultivation and processing of food crops, vegetables and fruits. 2. Manufacture of cocoa products. 3. Processing of oilseeds. 4. Integrated dairy production. 5. Cattle and other livestock ranching. 6. Bone crushing. i. Deep Sea trawling and processing; ii. Coastal fishing and shrimping; iii. Inland lake fishing and processing. 7. Manufacture of salt. 8. Mining of lead and zinc ore by underground mining methods. 9. Manufacture of iron and steel from iron ore.

5 Conditions for application of pioneer status Based on the list of pioneer industries and products published, an application may be made at any time for the issue of pioneer certificate to any company in relation to any such pioneer industry or pioneer product. The Act stipulates that no application for the issue of a pioneer certificate to any company shall be made unless the estimated cost of qualifying capital expenditure tp be incurred by the company on or before production day (if the application is approved) is an amount which: (i) in the case of an indigenous controlled-company is not less than N50,000; or (ii) in the case of any other company, is not less than N150,000. An application for a pioneer certificate should be addressed to the Minister of Industries and should be in the prescribed form and stating the grounds upon which the applicant relies. The applicant for the issue of a pioneer certificate to any company must state in the application: 1) whether the company is, or the proposed company shall be, an indigenouscontrolled company; 2) particulars of the assets on which qualifying capital expenditure will be incurred by the company, including their source and estimated cost- On or before production day, and During a period of three years following production; 3) Place in which the assets are to be situated;

6 4) estimate and the probable date of production day of the company or proposed company; 5) any product and by-product (not being pioneer product) proposed to be a produced by the company or proposed company, and give a reasonable estimate of the quantities and value of such product and by-product during a period of one year from the production day; 6) particulars of loan and share capital, or the proposed loan or share capital of the company, or proposed company, including the amount and date of each issue o proposed issue, and source from which the capital is to be or had been raised; 7) in the case of a company already incorporated, the name, address and nationality of each director of the company and the number of shares held by him; and 8) in the case of a proposed company, the name, address, nationality of each promoter of the company.

7 Cancellation of pioneer Certificate The pioneer certificate issued to a pioneer company can be cancelled if: a) The Director certifies that the date of production day of a pioneer company is more than one year later than the estimated date given in the company s application for a pioneer certificate. Nevertheless, the President may not revoke the pioneer certificate if he is convinced that the delay is due to circumstances beyond the control of the company or to other good and sufficient cause. b) The FIRS certifies that the qualifying capital expenditure incurred by the pioneer company or on before the production day is less than 50, in the case of indigenous-controlled company or 150,000 in the case of any other company. The pioneer company applies for the cancellation of its certificate. c) The pioneer company has contravened any provision of the Industrial Development (Income Tax Relief) Act or has failed to fulfill any estimate or proposal made in its application for a pioneer certificate or any conditions contained in its pioneer certificate. In the case of c), the Minister shall cancel the pioneer certificate. In the other circumstances, the Minister shall report to the President who may either revoke the pioneer certificate or restrict the tax relief period of the company as he may consider appropriate. The effective date of cancellation of a pioneer certificate of a company shall be: - the pioneer date if the pioneer company has been in operation for less than one year after the pioneer date; and - the date of the last anniversary of the pioneer date if the pioneer company has been in operation for not less than one year after the pioneer date. The pioneer date is the date from which a pioneer certificate takes effect.

8 Production Day/Material Day Production Day: Production day means the day on which the trade or business of a pioneer company commences for the purposes of the principal Act. Section 6(1) of Industrial Development Act 2004 requires a pioneer company to apply in writing to the Director, Industrial Inspectorate Division of the Federal Ministry of Industries not later than one month after the material date requesting him to certify the date of its production day. The company is to propose a date to be certified as its production day and give reasons for choosing that date.

9 Material Date means: in relation to a pioneer company engaged in a pioneer industry consisting of the provision of services, the date which the company is ready to provide such services on a commercial scale; and in relation to a pioneer company engaged in a manufacturing, processing, mining, agricultural or any other pioneer industry, the date on which the company begins to produce a pioneer product in marketable quantities. After considering any application made as above, together with such other information as may be called for, the Director shall insure a certificate to the pioneer company certifying the date of its production date. It should be noted that the period of the tax holiday shall commence from the production day.

10 Tax Relief Period A tax relief period or tax holiday is a period of years during which a taxable person is granted freedom from payment of tax on part or the whole of his/its income or profits. In other words, the tax payer is not required to pay tax during the tax relief period or tax holiday. The pioneer is usually granted a tax relief period of three years commencing on the date of the production day of the company. At the end of three years, the President may grant an extension of the tax relief period for a period of: a) one year and the thereafter for another period of one year starting from the end of the first period of extension; b) or two years at once.

11 Conditions for Extension The extension of the tax relief period will not be granted except the President is satisfied as to: the rate of expansion, standard of efficiency and the level of development of the company; the implementation of any scheme; for the utilization of local raw materials in the processes of the company; for the training and development of Nigerian personnel in the relevant industry; the relative importance of the industry in the economy of the country; the need for the extension, having regard to the location of the industry; and such other relevant matters as may be required. In order to obtain a certificate of extension of the tax relief period, the pioneer company must apply in writing to the FIRS not later than one month after the initial tax relief period of three years or of any extension thereof. The application shall contain particulars of all capital expenditure incurred by the company by the requisite date (i.e. the date when the tax relief period expired).

12 The FIRS shall consider the application together with such further information as it may call for and shall issue a certificate to the company certifying the amount of the qualifying capital expenditure incurred by the company by the requisite date. Where a pioneer company has incurred a loss in any accounting period falling within its tax relief period, the FIRS shall issue a certificate to that effect. Where a company is not satisfied with any certificate given by the FIRS or any notice of refusal to give a certificate, it can object to or appeal against the certificate or the notice of refusal as if it were a notice of assessment given under the provisions of CITA

13 Restrictions on Trading and Payment of Dividends Restriction on Dividends and Loans During it tax relief period, a pioneer company shall not; - distribute any dividend or bonus to its shareholders in excess of credit balance in the account maintained for exempted profits as the date of such distribution; - grant any loan without first obtaining the consent of the Minister. The Minister s consent shall only be given if he is satisfied that the pioneer company is obtaining adequate security and a reasonable rate of interest for any such loan.

14 Offences and Penalties If any person makes or presents any declaration or statement or produces any invoice or undertaking which is false in any material particular for the purpose of obtaining a pioneer certificate or of complying with any provisions of the Act, he shall be guilty of an offence and shall be liable on conviction to a fine not exceeding N1,000 or imprisonment for five years or both. A person shall not be guilty if he proves that he has taken all reasonable steps to ascertain the truth of the statement made or contained in any document sp presented or produced or to satisfy himself of the genuineness of the invoice or undertaking. Where the offence is committed by a body corporate, or firm or other association of individuals: Every directors, manager, secretary or other similar officer of the body corporate; Every partner or officer of the firm; Every persons concerned in the management of the affairs of the association; or Every person who was purporting to act in any such capacity as aforesaid, shall severally be guilty of that offence and liable to be prosecuted and punished for the offence, unless the act or commission constituting the offence took place without his knowledge, consent or connivance. The institution of proceedings for or imposition of, a fine or term of imprisonment shall not relieve any person from liability to payment of any sum for which he is or may be liable under any undertaking given by him under any provision of the Act.

15 Illustration Strong Cement Limited was incorporated on 1 st October, 2006 to manufacture cement and was granted a pioneer certificate for three years with its production day certified as at 1 st January, At the end of the pioneer period, the company continued in business and adopted 30 th September as its accounting year. Relevant information is provided below: a) Accumulated profits as at 31 st December, ,000,000 b) Adjusted profits for the nine months ended 30/09/2010 1,020,000 c) Year ended adjusted profits 30 th September, ,800,000 d) Capital expenditure incurred by the company include: Date QCE 13/02/2007 Buildings 6,000,000 22/04/2007 Plant and Machinery 5,000,000 26/04/2007 Motor Vehicles 3,000,000 3/12/2008 Plant and Machinery 2,000,000 4/10/2010 Buildings 2,500,000 16/01/2011 Motor Vehicles 4,500,000 N

16 All the capital expenditure and the losses were certified by the FIRS. During the pioneer period, the company imported the same product for which it was granted pioneer status and made profits of N4,800,000 and N6,000,000 for the years ended 31 st December, 2007 and Required: Determine the company s income tax liabilities for the relevant years of assessment. Note: ignore investment allowance.

17 Solution STRONG CEMENT LIMITED Determination of Income Tax Liabilities for the Relevant Years of Assessment Year of Assessment 2007 N N 1/01/ /12/2007 Assessable profits 4,800,000 Income tax liability at 30% 1,440,000 Education tax at 2% of assessable profit 96, /01/ /12/2007 Assessable profits 4,800,000 Income tax liability at 30% 1,440,000 Education tax at 2% of assessable profit 96, /01/ /12/2008 Assessable profits 6,000,000 Income tax liability at 30% 1,800,000 Education tax at 2% of assessable profit 120,000

18 2010 1/01/ /12/2010 Assessable profits: (1,020, /12 x N10,800,000) 3,720,000 Less capital allowance 8,247,500 Relieved capital allowance Unrelieved capital allowance c/f (3,720,000) 4,527,500 (3,720,000 Income tax liability at 30% Nil Education tax at 2% of assessable profit 74, /01/ /12/2010 Assessable profits: (1,020, /12 x N10,800,000) 3,720,000 Less capital allowance Unrelieved capital allowance b/f 4,527,500 Current year capital allowance 1.972,500 Total allowance 6,500,000 Relieved capital allowance (3,720,000) (3,720,000) Unrelieved capital allowance c/f 2,780,000 Income tax liability at 30% Nil Education tax at 2% of assessable profit 74,400

19 2012 1/10/ /09/2011 Assessable profits 10,800,000 Less capital allowance Unrelieved capital allowance b/f 2,780,000 Current year capital allowance 4,785,000 Total allowance 7,565,000 Relieved capital allowance (7,565,000) (7,565,000) Unrelieved capital allowance c/f Taxable profit 3,235,000 Income tax liability at 30% 970,500 Education tax at 2% of assessable profit 216,000 Nil

20 Workings: Computation of Capital allowance Building Plant & Motor Total Machinery Vehicle Allowance Initial allowance (I.A) 15% 50% 50% Annual allowance (A.A) 10% 25% 25% Year of Assessment N N N N /01/ /12/2010 Cost 8,500,000 7,000,000 3,000,000 I.A (1,275,000) (3,500,000 (1,500,000) 6,275,000 A.A (722,500) (875,000) (375,000 1,972,500 Total Allowances 8,247, /01/ /12/2010 TWDV b/f 6,502,500 2,625,000 1,125,000 A.A (722,500) (875,000) (375,000) 1,972,500 Total Allowances 1,972, TWDV b/f 5,780,000 1,750, ,000 Cost 4,500,000 I.A (2,250,000) 2,250,000 A.A (722,500) (875,000) (937,500) 2,535,000 Total allowances 4,785,000

21 Notes: The profits made during the pioneer period from the pioneer company are exempted from tax, while the profits made from the importation of similar products are taxable. Capital allowances granted in each year of assessment are not restricted to 66 2 /3% of the assessable profits since the company is a manufacturing concern. Calculation of the initial allowance = Cost x Rate of initial allowance 2010 N Building = 15% x N8,500,000 = 1,275,000 Plant & Machinery = 50% x N7,000,000 = 3,500,000 Motor Vehicle = 50% x N3,000,000 = 1,500, i. Motor Vehicle =50% x N4,500,000 = 2,250,000 _ Calculation of annual allowance = Cost Initial allowance No. of Years for A.A 2010 i. Building = N8,500,000 N1,275,000 = 722, ii. Plant & Machinery = N7,000,000 N3,500,000 = 875,000 4 iii. Motor Vehicles = N3,000,000 N1,500,000 = 375, Motor Vehicle AA1 = N1,125,000 3 = 375,000 A.A2 = N4,500,000 N2,250,000 = 562, ,500

22 Review Questions 1. In relation t Industrial Development (Income Tax Relief) Act, state the tax relief period usually granted to a pioneer company. Under what conditions can an extension of the tax period be granted? 2. What are the circumstances that could lead to the cancellation of a pioneer certificate earlier issued to a company? What is the effective date of cancellation of pioneer certificate of a company?

23 3. Dapo Limited was incorporate on 1 st July, 2010 to produce automotive spare parts and was granted a pioneer certificate for three years with its production day certified as 1 st January, The adjusted profits of the company for the first three years were as follows: N Year ended 31/12/11 20,000,000 Year ended 31/12/12 22,000,000 Year ended 31/12/13 35,000,000 The Federal Inland Revenue Service discovered that during 2011 and 2012 the company also imported and sold the products for which it was granted pioneer status and the profits arising there from were included in the above stated profits as follows: N Year ended 31/12/11 2,000,000 Year ended 31/12/12 3,900,000 You are required the compute the company s tax liability, if any, for the relevant years of assessment.

24 References Adejola, P. A (2015): Revision Pack on Taxation for Professional, Conversion and Undergraduate Students, Arogbodo Press, Abuja. Bassey U. O (2013): Companies Taxation in Nigeria, the CIBN Press Ltd, Lagos. Seyi Ojo (2006): Fundamental Principles of Nigerian Tax, Sagribra Tax Publications, Lagos 2003.