Im­pli­ca­tions of the new Pi­o­neer Sta­tus in­cen­tives in Nige­ria's tech in­dus­try

In recog­ni­tion of the im­mense po­ten­tials of the tech­nol­ogy sec­tor, e-com­merce and soft­ware de­vel­op­ment now qual­ify for pi­o­neer sta­tus in­cen­tives.

Financial Nigeria Magazine - - Contents - In­tro­duc­tion

The Nige­rian tech­nol­ogy in­dus­try has wit­nessed ex­plo­sive growth at a geo­met­ric pro­gres­sion of 34% year-on-year in the last decade; be­com­ing the fastest-grow­ing and one of the largest con­trib­u­tors to the econ­omy. Its con­tri­bu­tion to GDP grew from less than 1% in 2001 to about 11% in 2015. (www.guardian.ng).

The emer­gence of tech com­pa­nies like MainOne, In­ter­switch and An­dela, has led to the emer­gence of Nige­ria's soft­ware de­vel­op­ment mar­ket; and a boom­ing ecom­merce in­dus­try, with com­pa­nies like Ju­mia, Konga, Dealdey, Paga, Pay­porte caus­ing a huge dis­rup­tion to the tra­di­tional re­tail mar­ket. Given its ex­po­nen­tial growth rate, it is no sur­prise that the e-com­merce in­dus­try at­tracted over $200,000 of For­eign Di­rect In­vest­ments in 2015, with a po­ten­tial for growth to $13 mil­lion by 2018. (www.in­no­va­tion-village.com).

On Mon­day, 7th Au­gust, 2017, the Fed­eral Ex­ec­u­tive Coun­cil ap­proved the in­clu­sion of new in­dus­tries to the pi­o­neer sta­tus list fol­low­ing its re­form of the scheme, which had been on sus­pen­sion since Septem­ber 2015. The re­form was ini­ti­ated to in­crease trans­parency and process ef­fi­ciency, im­prove the Fed­eral Gov­ern­ment's abil­ity to mea­sure the im­pact of the in­cen­tives and bring the scheme in line with the cur­rent eco­nomic re­al­i­ties and the Eco­nomic Re­cov­ery and Growth Plan (ERGP).

In recog­ni­tion of the im­mense po­ten­tials of the tech­nol­ogy sec­tor, e-com­merce and soft­ware de­vel­op­ment now qual­ify for pi­o­neer sta­tus in­cen­tives. The Nige­rian In­vest­ment Pro­mo­tion Com­mis­sion (the NIPC) has since re­leased the new guide­lines for ap­pli­ca­tion for Pi­o­neer Sta­tus In­cen­tives in Nige­ria (the Guide­lines) to en­cour­age and at­tract in­vest­ments into th­ese sec­tors of the econ­omy, which have been iden­ti­fied as hav­ing the great­est po­ten­tial to im­pact de­vel­op­ment and eco­nomic growth.

This ar­ti­cle con­sid­ers the im­pact of the pi­o­neer sta­tus in­cen­tives on the tech­nol­ogy sec­tor; it also prof­fers rec­om­men­da­tions on how the ob­jec­tives of the Fed­eral Gov­ern­ment will be bet­ter served with re­spect to the im­ple­men­ta­tion of the scheme within the tech­nol­ogy in­dus­try.

Overview of the Pi­o­neer Sta­tus In­cen­tives

Pi­o­neer Sta­tus is an in­cen­tive granted pur­suant to In­dus­trial De­vel­op­ment (In­come Tax Relief) Act 2004 (the IDITRA) and is aimed at pro­vid­ing new busi­nesses, which re­quire huge cap­i­tal out­lay; a buf­fer to en­able the timely re­coup­ment of cap­i­tal in­vest­ments in­curred at their start-up stages dur­ing the pe­riod of the grant (typ­i­cally for a pe­riod of three years in the first in­stance).

Ap­pli­ca­tion for pi­o­neer sta­tus is ex­pected to be made in the first year of busi­ness. Com­pa­nies seek­ing to ap­ply must also demon­strate in real terms; tan­gi­ble im­pact

that their busi­nesses will have on the econ­omy; and must have non-cur­rent tan­gi­ble as­sets worth at least N100 mil­lion.

The in­cen­tives en­joyed by qual­i­fy­ing busi­nesses in­clude:

i. Tax hol­i­day:

A three-year tax hol­i­day in the first in­stance with pos­si­bil­ity for ex­ten­sion by one or two ad­di­tional years. (Clause 2.1 of the Ap­pli­ca­tion Guide­lines for Pi­o­neer Sta­tus In­cen­tive). This en­ables the com­pany to re-in­vest its oth­er­wise tax­able profit into the busi­ness;

ii.Tax-free div­i­dends:

Qual­i­fy­ing com­pa­nies are ex­empt from de­duct­ing the statu­tory 10% with­hold­ing tax from dis­tri­bu­tions paid to share­hold­ers. This makes in­vest­ments in qual­i­fy­ing com­pa­nies at­trac­tive to in­vestors, es­pe­cially Pri­vate Eq­uity and Ven­ture Cap­i­tal Firms. (Sec­tion 17 of the IDITRA);

iii. Tax losses:

Tax losses in­curred dur­ing the tax hol­i­day can be set off against tax­able prof­its earned after the tax hol­i­day (Sec­tion 14(3) IDITRA); and

iv. Cap­i­tal al­lowances:

Even though qual­i­fy­ing com­pa­nies are not sub­ject to tax dur­ing the relief pe­riod; cap­i­tal ex­pen­di­ture in­curred dur­ing the tax relief pe­riod shall be deemed to have been in­curred on that day fol­low­ing the end of the pi­o­neer pe­ri­ods, such that they re­main de­ductible after the Tax relief pe­riod. (Sec­tion 14(2) IDITRA).

Im­pact on Sec­tor Growth

The in­clu­sion of soft­ware de­vel­op­ment and e-com­merce (two of the crit­i­cal sub-sec­tors in the tech­nol­ogy in­dus­try) as qual­i­fy­ing in­dus­tries on the pi­o­neer sta­tus list is ex­pected to stim­u­late en­tre­pre­neur­ial drive and emer­gence of new busi­nesses (es­pe­cially amongst the youth) and fur­ther as­suage some of the chal­lenges plagu­ing the in­dus­try. It is ex­pected that th­ese in­cen­tives would:

i. En­cour­age For­eign In­vest­ment:

The in­clu­sion of soft­ware de­vel­op­ment and ecom­merce on the pi­o­neer sta­tus in­cen­tives list will en­cour­age the emer­gence of pri­vate eq­uity and ven­ture cap­i­tal play­ers in the tech­nol­ogy in­dus­try. This would most im­por­tantly in­crease the in­flow of For­eign Di­rect In­vest­ment into the sec­tor.

ii. Bridge Lo­cal Data and Tech­nol­ogy In­fra­struc­ture Gap: Cur­rently, the

coun­try suf­fers from a dearth of tech­nol­ogy in­fra­struc­ture, es­pe­cially in­ter­net con­nec­tiv­ity (which has be­come es­sen­tial to ev­ery as­pect of hu­man en­deav­our) on ac­count of the cost of in­ter­net tran­sit, and the cost of lay­ing fiber op­tic ca­bles, re­sult­ing in the use of in­ter­na­tional band­width for lo­cal data needs. The tax in­cen­tives granted to lo­cal busi­nesses will in­cen­tivize them to in­vest in tech­nol­ogy in­fra­struc­ture re­quired to op­ti­mize their busi­nesses.

iii.Min­i­mize Brain Drain:

The pi­o­neer sta­tus in­cen­tives will en­cour­age many en­trepreneurs to es­tab­lish their busi­nesses lo­cally whilst many in­dus­try ex­perts would also stand a bet­ter chance of get­ting com­pa­ra­ble work op­por­tu­ni­ties lo­cally, thereby min­i­miz­ing ex­pert mi­gra­tion, which is par­tic­u­larly preva­lent in the tech­nol­ogy in­dus­try.

iv. Cre­ate Em­ploy­ment Op­por­tu­ni­ties:

With in­crease in the num­ber of lo­cal busi­nesses comes in­creased job op­por­tu­ni­ties for Nige­ri­ans, en­hanced labour pro­duc­tiv­ity, and im­proved busi­ness ef­fi­cacy.

v. En­hance Dig­i­tal Econ­omy:

With the in­clu­sion of e-com­merce, small and medium scale re­tail busi­nesses would be em­pow­ered to in­crease their mar­ket reach and po­ten­tial to be­come global brands with­out any need to re­lo­cate their busi­nesses.

vi. En­hance Sur­vival and Growth of

Star­tups:

Tech­nol­ogy start-ups will have a bet­ter chance for sur­vival on ac­count of the tax in­cen­tives they will en­joy in their for­ma­tive years.

Rec­om­men­da­tions

The in­clu­sion of the tech­nol­ogy in­dus­try to the pi­o­neer sta­tus in­cen­tives list is no doubt a step in the right di­rec­tion. How­ever, the in­ten­tion of Gov­ern­ment will be bet­ter served if the fol­low­ing rec­om­men­da­tions are con­sid­ered in the im­ple­men­ta­tion of the scheme:

I. Re­duc­tion of Ap­pli­ca­ble Statu­tory Fees:

The fees payable by ap­pli­cants may be viewed ex­ces­sive, es­pe­cially for tech­nol­ogy com­pa­nies whose in­fra­struc­ture spend is al­ready sig­nif­i­cant. Fur­ther, the fees are non­re­fund­able, even when an ap­pli­ca­tion is de­clined. This is a great dis­in­cen­tive to many busi­nesses who may oth­er­wise have qual­i­fied. The Fed­eral Gov­ern­ment may, there­fore, con­sider a re­duc­tion in the cost of ap­pli­ca­tion or make the fees re­cov­er­able for un­suc­cess­ful ap­pli­cants.

ii. Elim­i­nat­ing Bureau­cracy:

The ef­forts of the NIPC at cre­at­ing an en­abling en­vi­ron­ment for in­vest­ment in Nige­ria is quite com­mend­able. It is, how­ever, nec­es­sary to con­sol­i­date its pro­cesses and qual­ity of ser­vice de­liv­ery through the use of tech­nol­ogy in the ap­pli­ca­tion, pre­qual­i­fi­ca­tion and ap­proval pro­cesses.

iii. In­tro­duc­tion of other sec­tor-spe­cific

in­cen­tives:

In view of the po­ten­tial of the tech­nol­ogy sec­tor in eco­nomic de­vel­op­ment, Nige­ria should take a cue from China whose eco­nomic growth has been bed-rocked on huge in­vest­ments in its tech­nol­ogy sec­tor.

The pool of in­cen­tives en­joyed by tech­nol­ogy busi­nesses in china in­clude: tax hol­i­days; re­duc­tion in cor­po­rate in­come tax rate to 15% for High and New Tech­nol­ogy En­ter­prise Sta­tus (HNTE); de­duc­tion of in­come de­rived from qual­i­fy­ing tech­nol­ogy trans­fer; re­fund of value-added tax for soft­ware and in­te­grated cir­cuit en­ter­prises (http://app1.hkicpa.org.hk/APLUS/1105/p df/38-40-china-tax.pdf); de­duc­tion of 75% of Re­search & De­vel­op­ment costs in­curred by small and medium size tech­nol­ogy en­ter­prises (www.chi­nadaily.com); and ease of cri­te­ria for at­tain­ing the HNTE Sta­tus in or­der to ben­e­fit from the var­i­ous tax in­cen­tives, etc. (www.eco­v­is­bei­jing.com).

Con­clu­sion

The re­cent visit to Nige­ria by the CEOs of two of the world's big­gest tech­nol­ogy com­pa­nies (Google and Face­book), and the pres­ence of global tech com­pa­nies such as Mi­crosoft, Google and more re­cently, YouTube is a val­i­da­tion that the Nige­rian Tech­nol­ogy In­dus­try is earn­ing its pride of place amongst vi­able in­vestor des­ti­na­tions. It is, there­fore, time to har­ness the po­ten­tials of the sec­tor by cre­at­ing an en­abling en­vi­ron­ment for such busi­nesses to thrive.

MainOne CEO Funke Opeke

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