Oil Sector Reforms & Taxation

There are very few bills that have become as famous as the Petroleum Industry Bill (PIB) and yet several years after its introduction, it is yet to be passed. It is becoming clearer that it may indeed never be passed; at least not in its current state.

The PIB is a bill based on the report of the Oil & Gas Implementation Committee (OGIC) set up in 2000 by the Obasanjo administration to carry out a comprehensive reform of the Nigerian oil and gas industry. There was a general consensus among relevant stakeholders that practically all laws regulating the industry needed to be holistically updated to reflect the changing dynamics of the global oil and gas industry. On the government side, there was a particular need to increase the take derivable from the industry, especially in the light of windfall profits arising since the price of crude shut above the $100 mark.  

Also, there was a need to strengthen and restructure government institutions such as the Nigerian National Petroleum Corporation (NNPC) and the Department of Petroleum Resources (DPR).

The current model for sharing revenue among the federating States in Nigeria is that all revenue is paid into the Consolidated Revenue Fund (CRF) from which it is shared out monthly. This means that the NNPC would on a monthly basis, pay its share of revenue from oil lifting in its various Joint Ventures with the International Oil Companies (OICs) into the CRF. This share of revenue is not the same as profits.

This is why the Corporation would run again, cap in hand to government to request cash to fund its share of joint venture cash calls. This model of running an oil company the size of NNPC is not sustainable if the Corporation is to become a truly modern and competitive business. It is not surprising that the thrust of the oil sector reforms is that the NNPC would become a truly commercial company perhaps with its shares listed on the Nigerian Stock Exchange and pay taxes on its profits rather than turn over its turnover to government as is the current practice.

Independent Joint Ventures
There is also talk of each of the current producing IJVs transforming to limited liability companies (Independent Joint Ventures –IJVs) that would raise its own funds from the market. The key question for some of us is –can the Federal Government wait for dividend before funding its budgetary expenditure? What happens in the immediate aftermath of the passage of the oil sector reforms if there is a drop in the CRF when the new NNPC does not turn over its sales into the CRF? How would this gap be funded? These are questions for the policy makers to worry about.  For us, it is the tax issues thrown up by the reforms that we seek to focus on.

There was a lot of ambiguity in the previous versions of the PIB that was circulated. The fiscal changes proposed under the PIB radically changes the current tax practice applicable in the Nigerian oil and gas industry. New taxes have been introduced and consequently new processes for industry players. There is a new Hydrocarbon Tax (HCT) to replace the existing Petroleum Profits Tax (PPT). In addition, oil companies would now be required to pay Companies Income Tax (CIT) from which they are currently exempt. Tax estimates for HCT/CIT to be determined and paid monthly. Also, there is talk of additional withholding tax on income that had suffered HCT & CIT whereas currently any income that had suffered PPT is exempt from further tax. There are indications that oil companies would be assessed to both CIT and HCT on actual year basis even though other companies are assessed to tax on preceding year basis.

There are other uncertainties in the taxation of oil and gas companies. For example, Ring fencing Petroleum Mining Licenses (PML –the new name for Oil Mining Leases) –that each PML is held by a separate legal entity– means that individual tax returns have to be filed in respect of each license area. This would certainly be more onerous than the current practice. It will be unattractive for oil companies because costs of non-producing fields cannot be offset from revenue of producing fields and this would limit new investments, the very thrust of the oil sector reforms.

The PIB introduces many new changes to the current tax regime in the oil and gas industry. Many of the changes will require a re-orientation among tax and corporate finance practitioners in the industry. It is likely that there will be many false starts and practical adjustments, as well as the need for some direction from the Federal Inland Revenue Service (FIRS). Since the payment of taxes would be novel to the NNPC, the new NNPC Plc would need to enhance and empower its tax function, perhaps promoting its tax department to a Directorate.

Yet the biggest question the PIB is seeking to answer is whether or not the Nigerian government can remove its hands from stifling businesses and begin to stimulate business. This in plain language is what deregulation is all about. The Nigerian government has never been known to willingly hands off businesses. Look up all the industries that where privatised and you will understand my assertions. A new regime would likely begin a new round of probe the moment it is clear that deregulation has deranged all the avenues for patronage built into the system. Are we truly ripe enough to deregulate and eliminate the avenues for patronage that we are used to? PIB may do to the Minister of Petroleum what GSM did to the Minister of Communications –reduced influence!

These are just some of the permutations. It is important that those responsible for policy formation understand the importance of knowledge dissemination in the build up to the release of a new policy document, especially one as important as the PIB.

Eben Akinyemi, an Associate of the Institute of Chartered Accountants of Nigeria and the Chartered Institute of Taxation of Nigeria, is a Partner in the transactions advisory firm, Stransact Partners.