Are We Really Serious About Increasing Revenues? By Feyi Fawehinmi
In 1907, the businessman, Samuel Herbert Pearse, built a hotel in Lagos. In 1939, Chief Green Mbadiwe built Greens Hotel on Ahmadu Bello Way in Kaduna State. By all accounts, the hotel business has been going on in present day Nigeria even before Lord Lugard’s amalgamation of 1914.
Following a Freedom of Information request submitted by Enough Is Enough Nigeria to the Nigeria Investment Promotion Council, it was revealed that, between 2005 and 2015, the NIPC granted pioneer status to at least nine different hotels – Tourist Company of Nigeria, Pc (Federal Palace Hotel), Rockview Hotels Ltd, Sandralia Hotel Ltd, La’don Hotel, UPDC Hotels Ltd, Eko Hotels Ltd, Chelsea Hotels, Ikoyi Hotels Ltd, Ajuji Intercontinental Hotels and Towers Ltd and Sandralia Hotel Ltd.
The pioneer status, according to the NIPC, allows a company make reasonable amount of profit in its formative years without having to pay taxes on those profits. To qualify, the business must be in one of 71 approved industries. In other words, a company with pioneer status can avoid paying 30 per cent of its profits as taxes to the Federal Government for the five years it has the pioneer status. Pioneer status can also be renewed.
Strictly speaking, the nine hotels on the list of 346 companies that have received pioneer status in the last 10 years have done nothing wrong. They have simply taken full advantage of a terribly designed law by the government. One must ask, why exactly is a hotel a business that qualifies for pioneer status? It is an activity that has been going on in Nigeria for over 100 years now. The risks of running a hotel in Nigeria are now well-known to the extent that they can be run efficiently and profitably. And most important of all – there is no evidence whatsoever that this “incentive” is the difference between someone starting a hotel in Nigeria or not. Logically, we can be sure that way more than nine hotels have been built in Nigeria in the last 10 years. So getting the pioneer status is merely a “nice to have” for companies who are lucky or connected enough to get it.
Now that oil prices are a fraction of what they were a few years ago, the government is desperate to make up the giant hole in its finances with revenues from elsewhere. As a result, the Federal Inland Revenue Service has lately been cracking down on businesses across the country. Its approach is to take no prisoners at all – the newspapers are filled with stories of how the FIRS turned up on the doorsteps of businesses and told them they were owing eight years of taxes. Where the businesses are not able to pay immediately, they are shut down. Given that the economy is now in recession, it is a scorched earth tactic to be shutting businesses for not paying taxes.
People should always pay whatever taxes they owe. There are no ifs or buts about that. But taxes also have a moral element to them. For example, it is never right or sustainable for poor people to pay taxes while rich people pay nothing at all. A government that allows an often meaningless and unjust incentive like the pioneer status while shutting down businesses at the same time cannot possibly be doing the right thing by its people.
One stark example is Dangote Cement. In the last six years, the company has declared N1tn in profits and paid N12bn in taxes. That is, the government has forgone around N300bn in taxes from a company that is the most profitable cement company in the world. On the list of beneficiaries of pioneer status from the NIPC, there are five different Dangote companies. Lafarge Cement too has been a beneficiary of pioneer status. It is difficult to see the logic behind all this when cement has been produced in Nigeria since 1957.
The list of companies that have been beneficiaries of the pioneer status cover almost every sector of the Nigerian economy including steel, noodles, packaging, construction, chemicals, sugar, agriculture, oil and gas and every other conceivable economic activity. It is practically impossible to know the exact amount of tax revenue the government has forgone from these 346 beneficiaries but if Dangote Cement alone has avoided N300bn in taxes, it is safe to say the pioneer status incentive has cost the country trillions of naira in revenues over the last 10 years.
Should a law that is so badly written and easy to abuse continue as it is? At a time when the very existence of the Nigerian state is under threat with the collapse in oil prices, should the government continue to give up tax revenues from a few favoured companies while cracking down on other businesses?
The first problem to solve here is that a list of pioneer industries cannot be a static one. Technology is constantly evolving and the future is likely to be very different from the past. Simply having a list of 71 industries that cover practically the entire economy is inviting abuse. It also demeans the value of the incentive as it loses its power as an incentive. For example, now that the All Progressives Congress government has made it clear that agriculture is the direction it wants to steer the country, why not restrict the pioneer status to specific areas of agriculture it wants to encourage? This will serve as a clear and powerful signal to investors as to where they can put their money.
Secondly, there should be limits to the actual amount of taxes that a company can avoid using the pioneer status. This will help avoid a situation where the numbers become very large and the government cannot do anything about it because of a badly designed law. Say the limit is N50bn in avoided taxes. After that point, the company will start to pay taxes regardless of whether it still has the pioneer status or not.
Finally, the pioneer status should be given to companies who actually pioneer something. Giving pioneer status for activities that have been going on in Nigeria for decades should be ended immediately. If it has been done for century-like hotels, it surely can be done without the incentive of not paying taxes.
Decisions like scrapping the pioneer incentive are part of what a country does if it is serious about diversifying away from oil. The incentives were handed out like confetti in the days when oil prices were high and petrodollars were plentiful. It has been two years since oil was last at $100 per barrel. It is hard to see such prices coming back anytime soon. The government must now be responsible with the way it hands out privileges to a select group of companies or individuals. Whatever incentives the government chooses to hand out should be carefully costed and made available to all Nigerians.
It is time to end this pioneer status madness. Enough is enough!
Fawehinmi, an accountant based in Abuja, tweets @DoubleEph