Boosting Indigenous and Marginal Field Operators Through Pioneer Tax Status Incentive -By Azeez Alatoye

Azeez Alatoye

Considering that our country’s main revenue is from crude oil, and we need to increase production, is it inappropriate for government to support and build indigenous companies to multinational capacity? It is purposeful if we all work towards creating a viable indigenous oil and gas sector. This in turn for Nigeria means increased employment, increased social responsibilities and increased transaction taxes ahead of the increased direct taxes.

Oil currently accounts for 80 percent of Nigeria’s annual revenue. Analysts in the sector have continued to express that the country has failed to achieve optimal output in its crude oil production due to inadequate investment in the sector. An analysis of data obtained from the Nigerian National Petroleum Corporation (NNPC) shows that low output is one of the reasons government has been unable to generate revenue for socio-economic development.

In 2006, the government made plans to increase crude oil production from 2.5 million bpd to ​​4 million bpd by the year 2010, when this was not achieved, the target was moved to 2020. So, when International Oil Companies (IOCs) began divesting from the oil assets, and Nigerians began to take over with an added advantage of their capability to handle communal hostilities, the Federal Government’s response to improving the oil and gas sector was to offer the Pioneer Tax Status (PTS) to them, to enable the indigenous sector to build a capacity that will offer them the platform to effect bigger role in Nigeria’s oil and gas sector on the long run.

One concurrent benefit of this is that an increase in production to 4 million barrels would also imply that government will receive 85 percent of the profits thereupon. The National Tax Policy was approved by the National Executive Council, and then administered by the Federal Ministry of Finance. Page 40 to 41 of the Pioneer/Tax Holiday stated that: “The following key sectors should be accorded priority in the grant of tax incentives: Energy Sector (Power, Oil and Gas), Mining, Railways/Roads Education, Health, Aviation, Exports and Agriculture.”

It is also important to note that precautionary steps are taken for peculiar situations like when the price slid to a $100, the tax holiday was put on hold. This is because the local operators understand that the incentive is to help generate better revenue for the government.

All the indigenous companies still come under the Income Tax Act. This implies that local Oil Companies are also issued Income Tax Clearance Certificates. The Industrial Development Income Tax Act, 1971 (now 2004) specifies ‘any industry’ and does not contain any exclusionary clause. It is in effect incorrect to say that it is wrong to grant Pioneer Tax Status to oil companies.

The benefits accrued from the pioneer status is that established Indigenous Players, get the capacity to bid, and thereby harness their resources towards acquiring new proposals from IOCs, which would in turn earn additional taxes and revenues for the government of Nigeria. The renewed interest in the Pioneer Tax Status makes it important to enlighten people on the gains inherent in the PTS offered to indigenous oil companies, based on a maligned perspective recently published in The Nation newspaper of Thursday August 20, 2015 with the title: “EFCC moves in as $4.5b tax scandal hits agency.”

The Nation’s report referred to the tax concession as a “bonanza after buying over marginal fields from some International Oil Companies (IOCs).” It alleged that on May 10, the former Coordinating Minister for the Economy, and Minister of Finance, Dr. Ngozi Okonjo-Iweala brought the nation’s attention to government’s loss of $20b revenue due to tax holidays fraudulently granted to companies by NIPC officials. On May 25, 2015, the former minister denied this information credited to her.

The report also alleged that, “The NIPC officials granted tax holidays for a straight five-year period, contrary to the provision of Section 10 of the Act, which states that the tax relief period for a pioneer company shall commence from the production date of the company and shall continue for a period of three years in the first instance, and may be extended for a period of one year and thereafter for another one year, or for a period of two years, subject to the satisfaction of Mr. President that certain requirements, such as rate of expansion, standard of efficiency, level of development of company, among others, are met.” Actually, the law indicates that three years plus one and one years or three years plus two years is to be granted.

The report also reported that: “former Executive Secretary of NIPC, Mrs. Saratu Umar was sacked at the twilight of the Jonathan administration for allegedly “refusing to grant tax holidays to some oil companies.” Setting the record straight, Mrs. Umar became the Executive Secretary of NIPC after the pioneer status stopped because of the slide in crude oil prices.

The poor understanding of the pioneer status, and presentation of distorted facts in The Nation newspaper report and others like it could portend damaging future to Nigeria’s indigenous oil and gas companies and concurrently, the nation’s economy, as reports like The Nation’s will only make foreign investors question the loans and advances made available to the local oil companies, placing in perspective tax incentives ploughed back to the business. Therefore, if the tax-base of the loan is withdrawn, foreign investors will be materially exposed and may have to recall their associated loans and advances. This is not what the nation needs at this time.

There is no reason to allege fraudulence to the number one item on the National Tax policy, considering that, the listing of these items are in line with section 2 of the Industrial Development Income Tax Relief 2004. In it, the President has the executive power to grant pioneer to “any industry: that is yet to meet Nigeria’s economic requirement.”

Considering that our country’s main revenue is from crude oil, and we need to increase production, is it inappropriate for government to support and build indigenous companies to multinational capacity? It is purposeful if we all work towards creating a viable indigenous oil and gas sector. This in turn for Nigeria means increased employment, increased social responsibilities and increased transaction taxes ahead of the increased direct taxes.

Azeez Alatoye is Managing Partner, Ascension Consulting Services.