Granting of Pioneer Status doesn’t exactly benefit real estate companies – Tax Expert

In August this year, the Federal Executive Council approved 27 new industries and products to enter into the pioneer status. This incentive scheme was to give tax holidays to these industries for three years, to enable them to grow and expand investments. Among these industries are real estate industries.

Correspondent of Nigeria Real Estate Hub (NREH), Esther Adeniyi interviewed a tax expert in Nigeria on this recent development. The interview was both informative and enlightening.

Generally discussing about the pioneer status, we spoke with a tax expert who said that the Pioneer Status Incentive (PSI) Guidelines that serve as a framework for the implementation of pioneer status was not without flaws. One of the ways to properly measure impact would have been to evaluate the rate of success and profit margin in the industries granted pioneer status. Another issue is the bureaucratic process in obtaining the pioneer status certificate.  In light of ease of doing business in Nigeria, this process should have been automated. Companies should be able to enjoy the incentive once they can demonstrate that they operate in these industries. The whole gamut of application, physical meeting, verification exercise etc. can be eliminated. Also, PSI is for only three years. In our view, most companies struggle to break-even in their first three years. Therefore, the incentive is almost useless to such companies.

The tax expert also answered some of the questions we had on PSI.

NREH: How does the government benefit from the taxation of valued assets?

 Tax Expert: The government generates revenue from tax on sale and purchase of valued asset such as land, stamp duties on such transaction, land registration fee and consent fee, where there is a sale or purchase of land.

 

NREH: Real estate is a capital intensive sector, what measures are the government and private sectors putting in place to encourage these aspiring investors?

 Tax Expert: With the recent developments in the real estate sector, there have been a lot of initiatives in the past three years to encourage investment in the real estate sector. Some of these initiatives are:

• The automation of building permit process – In 2016, the World Bank’s report on Ease of Doing Business in Nigeria ranked Nigeria 169 out of 190 countries on ease of doing business. As a result, the Presidential Enabling Business Environment Council (PEBEC) was taxed with the job of increasing the ease of doing business in Nigeria. Obtaining construction permit was a parameter that flowed into Nigeria’s position. Thus, one of PEBEC’s mandate was on automation of the process of obtaining a building permit.

Before now, the process was long and arduous. However with the recent change, you can now apply on the internet, obtain a verification number and be assigned a verification team for the inspection automatically.

• Another initiative is the recent inclusion of Real Estate Investment Vehicles in the list of 27 new pioneer industries.
• There were some other initiatives that the government put in place. One was the US$2billion Memorandum of Understanding signed by the Real estate developers of Nigeria, REDAN and Shelter Affairs. I think that most real estate companies can tap into that if they want to assist the government in providing housing. They can get part of that loan to develop housing estates.
• There was also a Federal Government (FG) ₦1trillion Mortgage fund that was put in place by Professor Yemi Osinbajo to develop housing in Nigeria, real estate companies can tap into that fund too. There is also the Family Home Fund which was structured as a real estate trust that the Federal government tried to put in place for affordable housing. Real estate companies have a lot of finance options to encourage investment.
• For the private sector, most of them are under the radar. However, the FG decided in 2017 to increase affordable housing in Lagos. So if the FG deems that a housing project is in line with its strategic initiative to increase affordable housing, the company carrying out the project can approach the Nigerian Mortgage Refinance Company to help raise long term funds for that initiative.

The Nigerian Mortgage Refinance Company raises long term funds to provide lending. They give such fund to financial institutions and then the financial institutions give loans to mortgage companies. The issue before now was that financial institution do not give loans to real estate companies as real estate projects are long term investments. However, with this initiative, the Nigerian Mortgage Refinance company gives money to the financial institutions to address this issue.

 

NREH: How does the grant of pioneer status to real estate companies in Nigeria benefits the real estate sector?

Tax Expert: Basically, pioneer status incentive is a tax holiday granted for 3 years and renewed for an additional 2 years. This tax savings help companies to manage cash flow.

There are however some constraints which may serve as a disincentive to companies who wish to enjoy the incentive. One of these is the higher charges based on the new guidelines issued sometime in July 2017. Prior to this, the old fees were the application fee of ₦200,000 and then the service charge which is an annual charge of 2% of your projected tax savings. Based on the new guidelines, the fees have increased. The new guideline requires an application fee of ₦200,000, a service charge which is fixed and non-refundable of ₦2.5million with a due diligence fee of ₦500,000 and also the annual service charge of 1% of actual pioneer profits. If you compare the old guideline and the new guideline, you realize that there is roughly about ₦3.1million additional charges that you have to pay.

So the question is that is it still advantageous? Am I not better off saving this additional ₦3.1million and paying taxes when I have to pay taxes? Also, I may not even enjoy the Pioneer Status benefit if I have an accounting loss.

Another constraint of the pioneer status is that it is just for 3 years plus 2 additional years totalling 5 years. Most companies make losses within their first 3 years of commencing business. Thus, there may be no profit and no enjoyment of the incentive. In my view, if the incentive was for a longer period like 10 years, it would probably have more impact.

Also, there is no monitoring of the benefits enjoyed. If pioneer status is given and no benefits are enjoyed, the pioneer status period elapses and there is no impact. If there was a monitoring system, a proper framework may be put in place so that the first three profitable years are tax free and not just the first three years.

 

NREH: Do you see this tax incentive boosting the real estate industry in the long run?

 Tax Expert: In the long run, it should incentivise the industry. In the long run, with the assumption that more companies will invest in the real estate sector and the issues highlighted above are addressed, it should incentivise it. However, the real estate industry will grow in the long run not because of pioneer status incentive, it will grow because it has the capacity to grow.

 

NREH: Some of the requirements for the pioneer status may seem not to favour small real estate companies. How do they survive?

Tax Expert: The purpose of the pioneer status incentive was for the government to boost sectors with little or no investment. However, the initial intention of the Government was to incentivise large scale companies. The Federal Government (FG) is looking at large investors, those that were willing to bring in capital investments into the country.

Therefore, what has to change is the FG’s framework for pioneer status for small companies. There should be different requirements for such companies such as turnover, asset base etc. Small real estate companies cannot compete with the bigger guys. The only way to compete is on their own level.