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What benefits for multibillion oil and gas tax holidays?

By Daniel Adugbo

Every year, some companies operating in Nigeria’s oil and gas sector receive gifts of billions of dollars in form of tax incentives and exemptions from the standard tax regime that others have to follow.

The concept of tax holidays are not uncommon practice in the global business community. Angola has notably offered as much as 12 years tax holidays to encourage investments in its natural gas industry, while other countries like Oman, Malaysia, Qatar, Trinidad and Tobago have offered up to 10 year tax holidays to attract in oil and gas investments.

More generous tax incentive schemes currently exist in free trade zones in Nigeria where participants are granted absolute exemption from all forms of taxes and levies chargeable by any level of government. Several well-known corporations in the country have and are currently investing in these zones on the basis of such perpetual and overarching tax incentives.

The main reasoning behind granting tax relief is the idea that it will promote investments that attract capital, contribute to job creation and promote investments into a specific sector.

But while this has been the predominant narrative, evidence suggests differently.

With the decline in the price of crude oil, Nigeria is now face a growing problem of revenue generation including collecting taxes to fund public goods and services such as health, education, infrastructure and to fund the reduction of poverty.

International institutions such as the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) now increasingly warn against excessive and unnecessary tax incentives.

‘Wasteful’ giveaway

ActionAid last month released a report and found from its investigations that Nigeria lost around $3.3bn as a result of an extraordinary ten-year generous tax breaks it granted Shell, Total and ENI for their investment in the Nigeria Liquefied Natural Gas (NLNG) Ltd.

The NLNG is a joint venture between the NNPC, Shell, Total and Eni to exploit Nigeria’s huge reserves of gas. It is Nigeria’s major company in the liquefied gas sector and the three foreign companies hold a 51 per cent stake in it.

NLNG has since said ActionAid claims are false and misleading, arguing that the reality is that the Federal Government’s initial investment of $2.5bn, bolstered by the associated tax incentives, has so far yielded over $33bn in the form of dividends, taxes and feedgas purchases for the country over the past 16 years.

But disagreeing with NLNG’s reaction, the Policy, Advocacy, Communications and Campaigns Manager, ActionAid Nigeria, Tunde Aremu told our reporter that it is not just about what has been paid but what has been lost.

While the disagreement over the necessity of granting such special tax relief to NLNG rages on, former minister, Ngozi Okonjo Iweala had last year also raised alarm that the government had lost billions of dollars between 2010-14 to tax holidays fraudulently granted mostly oil/gas companies.

The Nuhu Ribadu led Petroleum Revenue Special Task force (PRSTF) , 2012 found that at least five companies: Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria Limited, Suntrust Oil Company Nigeria Limited; and Niger Delta Petroleum Resources Limited had been granted pioneer status by the Nigerian Investment Promotion Commission (with others pending or undetected) for their exploration and production activities.

NEITI had in numerous reports said the country witnessed a colossal loss due to waiver granted to some oil and gas firms. Some of the companies granted tax waivers had outgrown the pioneer status, but they still hold on at the expense of the country’s development, the transparency body noted.

A better deal?

Only a few developing countries publish ‘tax expenditure’ reports detailing the tax revenue given away through incentives for particular people, companies or behaviours.

Indeed, it seems that even the Nigerian government itself is not aware how much revenue is foregone, which of course means it cannot have assessed the costs and benefits of its policies.

A Professor of Law and Co-Director, Institute for International and Immigration Law, Thurgood Marshall School of Law, Emeka Duruigbo said the relevant question to ask is whether Nigeria had better options than the deal it got.

Justifying the need for these incentives, a tax consultant and partner, Ascension Consulting Services, Lagos, Ademola Olanrewaju told our reporter that many other countries give incentive up to 15 years such as Singapore, India, Ghana, Cote’d’Voir, the list is endless.

To underscore the importance of tax reliefs to investments in the sector, Olanrewaju said, “One of the locals that got pioneer status incentive increased production from 3000 barrels per day (bpd) to 23,0000, bpd the transaction tax on this far outweighs the income tax that could have been ordinarily zero.

Another company that got pioneer status incentive was able to contribute 10 percent gas to the power company that supplies to National grid. The gas would have been flared by the IOCs,” he said.

Disputing Olanrewaju’s position, Aremu pointed out that the issue of wasteful tax incentive it is not just peculiar to the NLNG.

“We are asking the Nigerian government to review those policies, to go back to their legislators and check it again and see what is wrong, ” he said.