How To Solve The Alhaji Problem
I know my people.
As I’ve written about Alhaji Putin, it won't be long before someone says I’m working for Lafarge or Alhaji’s enemies. So, to the extent that we agree there’s a problem with someone paying N12bn in taxes on N1trn profits, what’s the way forward?
What is clear from the numbers is that you can't easily say a crime has been committed. The accounts are published openly and I doubt Alhaji puts them out to indict himself. So there’s something else wrong.
Imagine you’re a Senator or Minister or the President and I say to you ‘Sign this bill into law. It will allow a company make N1trn in profits and pay only N12bn in tax’. Will you sign it? Even if you are a thief, you are unlikely to sign it because at least if the tax is paid to the government, it increases your own chance of stealing it.
It is highly unlikely that the intent of the law was for people to make huge amounts of profits while paying negligible taxes. The device used by Alhaji (and many many many other Nigerian companies) is the pioneer status incentive. It’s perfectly legal. But it’s problematic.
Where Should The Pioneer Status Sit?
The pioneer status incentives are available on the page of the NIPC here. To me, that’s the first problem — the person handing out the incentives is not the one who collects taxes. The guys at NIPC probably have no idea the impact of the incentives they give out on the nation’s overall finances.
At the very least, the guys at FIRS have an idea of the amount that the country will forgo when it gives out such incentives. They have tax records and are in a better position to say — ‘if we give this person pioneer status for 5 years, based on what we know, they are likely to make xxxbn in profits which means we will give up xbn in taxes’.
So the first thing to do is to move the power to hand out that status from the NIPC to FIRS to better align incentives.
Apply Limits
When you look at the NIPC page linked earlier, you see that the government has no downside protection in the way the rules have been drafted. You can give someone pioneer status for 5 years and due to, say, external factors, it turns out to be a wildly profitable period for the thing they are producing. That person might end up making N1Gazillion in profits and it will all be tax free.
That sounds more like a lottery where the government is guaranteed to lose.
To use a completely random example from here — if you buy a new car, the car company might offer you free servicing for 3 years. But they always add a second condition — 30,000 miles. So the full offer becomes ‘free servicing for 3 years or 30,000 miles, whichever one comes first’. This is to protect them against someone who might drive the car from morning to night daily and end up needing to service the car every 3 months. You can call it a fair use policy.
This pioneer status business needs a ‘fair use’ policy. If it sits with FIRS, they can then determine the (cumulative) profit levels at which the ‘free’ ends. N100bn? N200bn? N300bn? How much profit is ok for someone to make before they start paying some of it in taxes?
I don't know what the answer is but I doubt it is N1trn.
So a revised status will look something like this — ‘5 year tax holiday for pioneer status or xxxbn in profits, whichever one comes first’.
Okafor’s Law for Taxes
This is a family friendly blog so I will not tell you what Okafor’s Law means. But if you are determined to know, a google search will quickly bring you up to speed.
One of the most annoying things about the pioneer status for me is this particular point. I used Seplat to illustrate how it works a couple of years ago.
Imagine an asset called Agbanilagbatan (AGB). The asset is owned by a foreign a company and it has been paying taxes on it for 20 years. The company decides to leave Nigeria and sells the AGB asset to a Nigerian company. As soon as the Nigerian company completes the purchase, it applies for pioneer status from NIPC and is granted it for 5 years.
All of a sudden, the AGB asset that has been paying taxes to the government for 20 years will no longer pay taxes for 5 years just because the ownership changed hands. This is completely mad and unnecessary.
Once an asset has been a tax paying one, it should no longer qualify for pioneer status under any circumstances.
Don't take my word for it. In 2012, Nuhu Ribadu’s task force report (PDF) on the petroleum industry in Nigeria specifically mentioned this point:
The Dividend Loophole
A friend left this comment on Facebook about a point I did not even previously know:
You may wonder why Alhaji Putin is generous in dividend payments. Here is another mad provision in the pioneer status laws (obtained form Nairametrics)
“Dividends are the returns payable to investors/shareholders of a company. These dividends are subject to withholding tax (WHT) before distribution to investors/shareholders. The WHT deducted from the dividend, reduces the amount received by the investors/shareholders. When a company has pioneer status, these dividends are not subjected to WHT. As a result, the investor/shareholder receives full amount of dividends due.”
So not only do you get to pay zero taxes on corporate profits, when you distribute the profits as dividends, they don't get taxed either.
At this point, you have to ask what exactly the pioneer status is trying to achieve? Is it to encourage investment? I imagine so. In that case, allowing the dividends to be collected tax-free makes no sense. If the intention is to encourage investment, then they should go a step further to encourage the profits made to be re-invested.
To put it another way, you should discourage the consumption of those profits. Once the profits have been distributed as dividends, they are no longer available to the company to be reinvested.
The law should be clear on what it wants to achieve. If you re-invest your profits, we are happy with you. But if you choose to consume it, pay us our taxes, pioneer or no pioneer.
One Pioneer Per Location
I found this part of the Dangote Cement report interesting
Look at the comment on the Income tax line — ‘lower due to pioneer status on Ibese 3+4 and Obajana 4’.
Now if you go to the 2014 annual accounts(PDF) on Page 122, you see the note below
Look, let’s be serious here — how can you ‘pioneer’ the extension of an existing plant? In theory, you can keep adding lines and keep extending the pioneer status of what is really one plant in one location.
Just give one pioneer status for a plant and that’s it. In any case, the government should want to encourage investment in the economy as quickly as possible. If you allow this loophole, someone who might have invested $10bn in 4 years might decide to spread out that investment over 20 years instead.
There are other things wrong with this whole pioneer exemption business but these ones are the most obvious to me.
How about something really radical? Get rid of all these fiddly exemptions and lower tax rates for everybody across the board. When you think about it — what the government is really saying is by handing out pioneer status for investors is that the tax laws are a discouragement for investors. So to encourage investment, it removes them.
That is not a sign of confidence by the government in its own tax laws.
FF
Alhaji Putin’s Republic ◄ P R E V I O U S
