A few issues have cropped up on the nature of incentives local oil companies should enjoy. The Chief Executive Officer, Ascension Consulting Services and Director-General, Ascension Academy Institute Limited, Alatoye Azeez, speaks on these and other issues in this interview with EMMANUEL UDODINMA.
There seems to be confusion on the granting of pioneer status to certain companies. What is your take on this?
The truth is, there should be no cause for confusion on this matter because the laws are pretty clear. The Industrial development (Income Tax) Relief Act of 1971, now Cap 17 Laws of the Federation of Nigeria, 2004 firmly supports the action by government.
In section 1 of that Act, the President is empowered to grant tax holiday to “any industry.” Pioneer status is one of the government’s tax incentives schemes advanced for the development of any industry and to encourage investment in particular sectors of the economy, to grow that sector and raise it to a level where it can satisfy the country’s needs.
So, the government deliberately reduces the tax that accrues to it from a sector, or waives it totally to make funds available for further investment in that sector. Meanwhile, it could also be used to discourage investment where the government increases the taxes and makes the business unprofitable. Example is the tobacco industry.
The cause of this confusion is not its unsuitability for the economy, but whether a particular sector qualifies for this pioneer status and its attendant tax exemptions. If there is no need for growth in that sector and the government grants the incentive, then, it would be a misplaced grant. If the government however identifies a shortfall in a sector of the economy, it can announce a tax incentive to entice more investors and therefore get more products to boost the economy.
The Federal Government plans to make Nigeria a prime investment destination. In what significant ways can taxation be deployed to make that happen, especially in Nigeria’s oil and gas sector?
The Federal government announced in 2005 that it intends to increase its daily oil production quota from 2.5mbpd to 4mbpd by 2010. The target for that is now 2020. Previously, the industry was quite comfortable with 2.5mbpd. However, faced with the challenge of producing an additional 1.5mbpd, additional investment was required and the government wanted the indigenous and marginal filed operators who are Nigerian businesses, to step up to the challenge.
To demonstrate its seriousness, the government approved pioneer status for the industry, which means that whatever amount of taxes they need to pay, they could hold back and add to it to raise more funds from the banks for further exploration and production businesses.
The objective of the government is the increase production of the 1.5million barrels to achieve the four million barrels. Some people are of the view that the government should grant production based incentive. Also, providing Tax Free Zones is another avenue that taxation can be deployed.
In the tax free zones, no tax is supposed to be payable once the operator within the zone is an approved entity and limits its activities to the zone. Nigeria currently boasts about 22 free trade zones. The Onne Oil and Gas Free Trade Zones (OGFTZ) in Port Harcourt, Rivers State is one of such.
How has the government’s Pioneer Status Incentive (PSI) played out in the oil and gas sector?
PSI has made substantial contributions towards the achievement of the government’s objectives for the indigenous and marginal field operators. A good example: when the International Oil Companies (IOCs), particularly Shell, started divesting their onshore assets, if the indigenous and the marginal field operators had not taken them over, the oil production level would have dropped owing to the exit of the IOCs.
Lately, the President promised the indigenous oil and marginal field operators support so that they contribute up to 1.2mbpd from the current 200, 000bpd. If this target will be achieved by year 2020, it is important that security of their assets and investments is guaranteed.
So, while it could be said that the government is yet to achieve the set target that is now reset for the year 2020, we can say that there has been a remarkable achievement that pushed the local producers’ contribution from a total of about 80,000bpd to about 200,000 bpd.
Since the PSI was introduced, has there been any breaches regarding its grant by government to companies?
The government cannot be compelled to grant PSI. In fact, the process for obtaining it is a complex one that involves applications, making business cases, inspections and approval processes by no less than three government agencies. If all these procedures are duly followed, I believe that the question of breaches would not arise.
Some of the issues that people have raised are that oil and gas companies are not under the Companies Income Tax (CIT) and therefore the government should not have given them. There are two questions here. Firstly, is there a business that is not allowed to deduct its business expenses and capital allowances that are wholly exclusively and necessarily incurred for the business? Secondly, if as claimed, those deduction are sufficient, why are the IOCs divesting? Are they tired of making profits or what?
If Nigerian companies are taking up the security challenges of the operating environment, and the government supports them, is the government commendable or condemnable. In my own view, I think the government has taken the right decision and it cannot be said to be an infraction when the grant and the procedures are legally supported. Another issue is whether people who do not have oil blocks were not given pioneer status so that they can claim tax benefits. This is a very naïve proposition. This is not a payment by the Government like Export Expansion Grant (EEG) or fuel subsidy. This is something that you generate and you re-invest in further exploration and development activities for further production. So if you don’t have a block and you are given pioneer, you will simply be a looser because the two per cent processing fees you pay to the government is lost and besides, all your efforts will be a total waste as there is no benefit to such a company.
What industry or companies would you regard as the biggest beneficiaries of the PSI arrangement and why?
There are actually two classes of beneficiaries: direct beneficiaries and indirect beneficiaries. The direct beneficiaries are the government and the local oil companies. The indirect beneficiaries are the employed individuals and communities with improved corporate social responsibilities. Most of those criticising the PSI may be doing so because they are insufficiently informed about the scheme.
The government benefited by way of increased oil production which would not have happened had the divested assets not been put back to work by the LOCs. This means more income to the government in royalties that is based on production. It means more revenue to the government in transaction taxes, including withholding taxes and value added taxes.
Secondly, the oil companies will benefit to the extent that there is a base fund they could use to raise more funds from the banks for more exploration activities. If such base funds are not available, the only option left to them is to operate at the level they are, or at their own pace and not at the government’s pace. Apart from the government and the companies, the Nigerian masses are indirect beneficiaries of the PSI schemes in terms of employment and corporate social responsibilities to the communities. This has a catalytic effect on the quality of life and can arrest potential insecurity by mopping able men from the street.
In terms of management and implementation of the PSI policy, what concerns could government genuinely have?
One of the genuine concerns that the government could have is whether the tax relief was utilised as applied for. Since this is measurable in number terms, it is fairly simple. Two key tools that the government could use to ensure compliance is monitoring and enforcement of the terms of grant. Another aspect of concern is whether the local companies are employing or have employed as they promised during the process of the grant. Finally, the government should be able to control the approvals where necessary. Again, this is also measurable. As to monitoring, the Nigerian Investment Promotion Commission is empowered to monitor compliance with the terms of the grant and Section 7 of the IDITRA is very clear. The Government can cancel or restrict any grant and this is why I say that the whole scheme is wholly within the control of the government.
How can the benefit(s) of PSI be maximised?
There must be clear definition of what it is meant to achieve. The second issue is where the objectives have not been met, what does it do? It simply has to move on with the scheme at the appropriate time to ensure that not only it meets its objectives but that it exceeds it. The local oil companies would do themselves a lot of good if they invest wholly the fund in further productions and even beyond the years of the pioneer period, keep on growing their capital base so that they can have the strength of the IOCs.
Why is the average Nigerian largely ignorant of the PSI policy?
Firstly, it is a challenge of the overall literacy level in the country. Apart from the professionals especially the lawyers, accountants and tax practitioners, hardly would you see anyone that understands how this scheme works. What many people think is that it is a payment to the oil companies just like the EEG or the fuel subsidy. They would even say that the government declared bonaza! Some people are not ignorant but are either selfish or simply mischievous. For instance, it is a good selfishness if a tax collector who is retiring in the next three years raises strong objection to PSI. It is understood because it would reduce its own current collection but increases its successors collections. This objection is understood and acceptable. A better way to manage this is to exclude the scheme from yardstick of current performance and consider the investment of previous administration in subsequent collections. All these are intellectual works that needs to be well coordinated at the government level. There are other people whose industry is not their turn to benefit. Of course, it cannot be said that those categories do not understand but the issue is that they are not benefiting and therefore, to them the scheme is not fine by them. It is for the government to stand its feet and achieve its set targets for the scheme. Government is a continuum and this type of scheme would benefit the nation. Therefore, it should not be seen from personal perspective but in the overall benefit of the country.
What steps do you think government should take to improve the PSI at this time?
The first thing is for the government to carry people along through enlightenment programme. This would give people opportunity to contribute to the grant. Secondly, there is need for reform in all aspects of our legal system. The law should be reviewed such that where amendments are needed, it could be easily made. Thirdly, the grant should be subjected to rigorous intellectual processes such that no one will come and say that a government scheme is deficient. Fourthly, there must be monitoring of the scheme to ensure that the government objectives are met and finally, there must be enforcement of the terms of grant. The government should have the courage to caution deviation from the terms of grant and either cancel or restrict it as the law provides.
Government should adopt a scientific approach on the issues of PSI, enlighten the people on a continuous basis, strengthen its monitoring and enforcement procedures to enable the country continue to enjoy the benefits of the PSI scheme.
