Who Pays The Taxes Around Here? Not Seplat

First let me state a couple of points

1. I hate taxes. I am from the school of thought which defines taxation as the art of plucking the goose with the least amount of hissing. So you will never catch me arguing for higher taxes (except when there’s an externality that needs to be dealt with or bad behaviour corrected). Nevertheless, I think that what is worse than taxation is a system that allows different people to play by different rules. If taxes are levied at a 99% rate, I can live with them insofar as some people are not finding a way to game the system and end up paying only 10%.

2. I don’t really understand the oil and gas business. My knowledge of how things work there is perhaps no more than basic. So part of my reason for writing this post is to learn some more. I invite you to use the comments section under this post.

Industrial Development Act

Nigeria has something called the Industrial Development Act which was passed to encourage investment in the country. If you build a new plant or industry, you get exempted from paying taxes on it for a number of years. This is a good thing of course because if a company had a choice between investing in say Kenya and Nigeria and Kenya does not offer such incentives, then this law can easily swing things in Nigeria’s favour.

But rather than speculate, let’s quote from the law itself as amended in 2004:

Pioneer conditions

1Publication of list of pioneer industries and products and issuing of pioneer cer- 
tificates

(1) Where the President is satisfied that-

(a)       any industry is not being carried on in Nigeria on a scale suitable to the eco-
nomic requirements of Nigeria or at all, or there are favourable prospects of
further development in Nigeria of any industry; or

(b)       it is expedient in the public interest to encourage the development or estab-
lishment of any industry in Nigeria by declaring the industry to be a pioneer
industry and any product of the industry to be a pioneer product,

That’s from Section 1 of the act. Pretty straightforward to interpret that this is something that should apply to new industries in the country i.e. something we are not currently doing but we want to or something we are doing but not enough. So we can safely conclude that a pure water manufacturing company should not be able to get pioneer status based on the letter and spirit of that law.

So far so uncontroversial. If we move down to Section 10 of the law, we see how long the pioneer status is supposed to last for:

10. Tax relief period

(1) The tax relief period of a pioneer company shall commence on the date of the
production day of the company, and subject to sections 3 (6) and of 7 (2) of this Act, the
tax relief period shall continue for three years.

(2) The tax relief period of a pioneer company may at the end of the three years be
extended by the President-

(a)      for a period of one year and thereafter for another period of one year com-
mencing from the end of the first period of extension; or

(b)       for one period of two years.

So the maximum period for pioneer status is 5 years. Again, nothing controversial here. Let’s skip some more legal jargon and go to Section 16 to see what exactly this pioneer status does for a company:

16. Profits exempted from income tax

(1) Subject to the provisions of subsection (2) of this section and section 17 (6) of
this Act, where in the application of Parts IX and X of the principal Act, a statement is-
sued under section 14 (4) of this Act has become final and conclusive, any profits shown
by that statement shall not form part of the assessable profits or total profits of the pion-
eer company for any year of assessment and shall be exempt from tax under the principal
Act.

(2) The Board may, in relation to any statement issued under section 14 (4) of this
Act, declare that the whole or a specified part of the profits is not in dispute, and any such
undisputed profits shall be exempt from tax under the principal Act pending the statement
becoming final and conclusive.

I highlighted the section above for emphasis. Once you have been granted pioneer status, after fulfilling the necessary conditions, you don’t pay any taxes on the profits you make in the 5 year period of the pioneer status (assuming the initial 3 years is extended). The best example of a company using this pioneer tax status is perhaps Dangote Cement:

Screen Shot 2014-06-21 at 13.57.35

Looking at the numbers above (page 3 of the Dangote accounts) you see that rather than pay any taxes, the company actually got a tax credit as a result of the new cement plants like Obajana that it built. This is how the system works. In the case of Dangote, we know for a fact that cement production in Nigeria has increased as a result of his investments and he has built new plants that weren’t there previously.

For a quick primer on the IDA, click here (PDF).

Seplat

Which brings me to the purpose of this post. Seplat was in the news recently when it raised $500m on the London and Lagos Stock Exchanges. It’s one of, if not the most, successful beneficiaries of Nigeria’s Local Content Act which has been transferring assets in the oil industry to Nigerians to allow them participate and grow their skills.

Seplat acquired 45% of 3 oil-producing assets from Shell and Agip namely OMLs 4, 31 and 41 in July 2010 when they were producing around 18,000bpd. My rudimentary knowledge of the O&G industry tells me that the difference between an OPL (where the P is for Prospecting) and an OML (where the M is for Mining) is that an OML is one that is already producing oil i.e. all the exploration and investment has been done and the oil is already coming out of the ground. In other words, buying an OML is like buying a shoe that comes with socks inside it, if you like. An OPL on the other hand has not produced any oil but it is a given that there is oil in the asset i.e. plenty of investment is required to get the oil flowing.

I’m told, reliably, that not only did Seplat buy the OMLs, it even ‘bought’ Shell staff as part of the deal. That is to say, it was handed the keys to the working asset along with people who had experience operating it. This is not to say that Seplat has not done anything since purchasing the assets – it has increased production in the fields mainly by boosting community relations which in turn has greatly reduced the piracy challenges that Shell was finding difficult to manage in those sites.

 

Having said all that, let’s go to page 28 of the investment prospectus the company released to investors when it was preparing for its IPO:

Screen Shot 2014-06-21 at 14.24.28 This is very interesting to say the least. Upon acquiring these assets, Seplat somehow obtained pioneer status on them. Think back to the spirit of the act above on how a company gets pioneer status and then apply to that a company buying working assets and simply continuing a business that was already in operation. How exactly does this work? As you can see from the extract above, the company is exempted from every possible tax it would normally be liable for.

Indeed we can see the effect in the company’s 2013 accounts (page 18):

Screen Shot 2014-06-21 at 14.37.27

From 2012 to 2013, profits increased by 45%. In 2012, the Nigerian government collected taxes on these assets to the tune of $95m. By 2013, these same assets that generated tax for the government had somehow become ‘pioneer’ and ended up paying a big fat zero in taxes. Zilch.

Alhamdulillahi.

What is going on here? I have no idea, but maybe you do. It is indeed difficult to understand how an extant company that was previously paying taxes to the government somehow ‘transformed’ into a pioneer company that pays no taxes.

Tax To GDP Ratio

Why does all this matter? Well, one consequence of rebasing our GDP to $510bn is that it has exposed how little the government is collecting in taxes as a share of GDP. Indeed, the Finance Minister said it in April that this percentage – tax to GDP – declined from 22% to 12% following the rebasing:

But now with this recalculation, our revenue to GDP ratio is 12 per cent and our non-oil revenue ratio to GDP is four per cent, which means that we live worse than before.

“As you know, our revenue ratio to GDP before was 20 per cent, just about in the middle of the emerging market economy, not as good as the 22 per cent that we want to be.

“For tax revenue to GDP, we now have to redouble our efforts to get back to the 20 per cent ratio at least to where we were before,” she said.

What this means is that there is a lot more tax out there to be collected which is a no brainer given the amount of work that needs to be done in Nigeria in all spheres of our development. If you’ve been following the news recently, you will have noticed that every other day the Federal Inland Revenue Service (FIRS) is embarking on one ‘crackdown’ or the other in the name of boosting the government’s tax collection. A random example from last week was when the FIRS carried out ‘enforcement activities‘ against NICON Hotel and NICON Insurance over the companies’ failure to pay N90m it owed in taxes. In the days and months ahead, we are going to be seeing more of such ‘crackdowns’ especially because the Nigerian government has only managed one surplus in the last 13 months – everything it earns, it spends and then borrows more. The deficit – the extra the government had to borrow on top of what it earned – for the first 4 months of the year alone stood at N430bn. The tax forgone from Seplat is at least N15bn (assuming it paid the same tax for 2013 as it did in 2013).

Conclusion

Who pays the taxes around here? Is it the little guy who gets harassed by FIRS and has his business shut down for not paying a couple of millions? I haven’t bothered to check any of the other local content guys but I am almost certain that I will find the same arrangement there. The pioneer status is now evidently meaningless and is something that can be obtained by interpreting the laws very loosely. As I said earlier, I have no problem with anyone not paying taxes as long as the option is available to everybody and not just some connected people. Can we all be pioneers and not pay any taxes? If that’s the case, sign me up!

This is just one aspect of the byzantine laws that are so easily abused in Nigeria. There are waivers and there are concessions that have been abused in the past. All these things increase the government’s desperation for revenues and that in turn contributes to the harsh business environment of Nigeria where all sorts of government agencies turn themselves to parasites on small businesses with all sorts of taxes and levies.

But maybe this is all fine and Seplat is indeed a pioneer company? So what have I missed?

FF

*P.S Thank you to the person who helped me with information in writing this post. You know yourself.

 

 Addendum

Someone sent me some interesting comments but wants to remain anonymous. They raise some very interesting points I missed out.

I wanted to fill you in on some areas that you may find interesting:

1. The IDA which you referred to, is actually a subsidiary legislation to the Companies Income Tax (CIT) Act.  It makes several references to “The Principal Act” which it then defines as the CIT Act. So technically, the tax exemptions in the IDA only relates to companies liable to CIT, rather than Petroleum Profits Tax (PPT).  Also, the powers granted to the President or Executive Council to exempt companies from tax (which is what the IDA was enacted to accomplish) is in line with Section 23(2) of the CIT Act.  No such powers are given under the PPT Act.

2. So why does a company taxed under the PPT Act enjoy Pioneer Status from the IDA (a CITA subsidiary legislation)?  Well strictly speaking, it shouldn’t, based on the above point.  And this was the FIRS’ position on the matter until sometime last year, as far as I know.  What changed?  It received a directive from the Presidency that it should honour the Pioneer Certificate issued to oil and gas companies by the NIPC.

3. I must say that there are arguments that could be made for the NIPC to grant a pioneer certificate to an O&G company (I must admit they are not water tight).  For instance:

  • The original pioneer list provided in the IDA can be expanded by the Executive Council.  The powers of the Council in the IDA has been granted to NIPC (See Sections 22 and 23 of the NIPC Act).
  • The NIPC a long time ago (nobody knows exactly when) expanded the pioneer list to include “Mineral Oil Prospecting and Production” and “Petroleum” as pioneer industry and pioneer product respectively.  You can find a full list on the NIPC website.
  • The presidential directive may have legislative backing.  Section 51(1) of the FIRS Establishment Act subjects the FIRS to the general direction of the Minister of Finance.  The provisions of this Act takes precedence over those of the PPTA (which has no provisions of tax exemption powers, like I mentioned in 1 above).
  • A Pioneer Status Incentive (PSI) Regulation was issued in January 2014 by the NIPC.  It provides that an applicant must have incurred a capital expenditure of N10million (small change abi?).

4. You missed out on something interesting, which adds to the question on how an extant company suddenly becomes a pioneer one.  The PSI Regulation also provides that an application must be submitted within one year of the applicant’s commencement of commercial production.  The IDA (Section 6(1)) also has something similar.  You would think that this should fall within a commencement years of the business.  However, the NIPC, in practice, gives a discretionary waiver of the timeline for this application.  Therefore, whenever you apply, you may get it. And the tax relief period will commence on the date of the Production Day certified by the Federal Ministry of Industry, Trade and Investment.

5. From what I know, Seplat was one of the O&G companies to obtain pioneer status only recently.  A few others have obtained same in the past. I know one that has even come out of its 5 year pioneer period. Seplat most likely needed it to make their prospectus smell a lot nicer.  So they joined the band wagon.  I guess their case is more popular because they went public.

6. Finally, there are strong rumours that the Government is reviewing its policy on granting pioneer status to indigenous O&G companies, as it is causing a serious decline in revenue from PPT.  You mentioned that Seplat’s pioneer period commenced on 1 January 2013. Isn’t it odd that it commenced last year when they only obtained the certificate this year?  As you may be aware, PPT is paid in installments in advance, so it already paid a significant amount of its 2013 tax.  Now they are requesting a refund.  They might just be the harbinger of a policy reversal.

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35 thoughts on “Who Pays The Taxes Around Here? Not Seplat

  1. Pingback: Who Pays The Taxes Around Here? Not Seplat – Y! Opinion

  2. Feyi. The only logical explanation is seplat has assumed that the FIRS will inteprete the acquisition as a new company rather than the investment it is. However, for producing companies, new investments do not grant any tax incentive. The only incentive you get on new investments is the ITC, which is a 50% uplift on capital costs for PSCs and a 10% ITA uplift for JVs. My educated guess is that when FIRS comes to do the inevitable tax audit, they will be duly charged tax for the 5 years.

  3. Even more interesting is the fact that the pioneer status was granted for the 5 year period at a go. That’s certainly against the letters and spirit of the law. It is suppose to be for a 3 year period and then 1 or 2 as stated in the law. That’s the level of the anyhowness we’ve sunk to.

      1. This one is not of Seplat’s doing. It’s now standard practice for the NPIC to grant a straight 5 year tax holiday. You know, the extension after the initial 3 year period is subject to meeting a number of conditions which requires monitoring. But as per anyhowness, no one has time for monitoring. So just give every successful applicant 5 years and move on.

  4. “the company actually got a tax credit as a result of the new cement plants like Obajana that it built.”

    Isn’t there a double asterisk ** sign against that tax figure and on the same page an explanation was given by the company on why there’s a tax credit – changes in deferred taxes.

    I agree on the SEPLAT thingy though, and it’s clear many people take advantage of good govt policies to cheat the system. Just check out the import duty waiver racketeering

  5. The key lies in clause 1(b) – it is considered expedient in the public interest for development/establishment of local operators in the oil industry in Nigeria, as demonstrated by the Local Content Act itself. Therefore the FG has decided to forgo some tax revenue now in the hope of spurring more investment by the likes of Seplat which (hopefully) leads to higher tax receipts (PPT as well as corporate income tax) in future when local companies taking over these OMLs increase production .

  6. My worry/wonder is the open ended nature of pioneer industry: pioneer or need of further development. What exactly is further development?
    Secondly, my idea about what’s happening in the power sector worries me. Everyone is having a tax waiver. Everyone. And these are things we can (should) easily manufacture.
    But… Anyhowness.

  7. Very interesting analysis and comments. Whilst the President has the right to extend the definition of pioneer industries, pioneer relief as mentioned in your addendum, only applies to relief from Companies Income Tax and not from Petroleum Profits Tax. There is therefore no legal basis for oil and gas companies to claim these tax holidays.

    My primary concern is why the government would make such a poor policy choice contrary to the express provisions of the law and I also worry about how many more of these “choices” have been made quietly. The National Assembly should be exercising its government oversight functions to get to the bottom of this scandal.

  8. There’s a directive from the Ministry of Industry to permit indigenuous O&G companies to have pioneer status because of the “huge capital investment” required for the business.

    And yes, currently there’s no interaction b/w IIDA and the PPTA but as with the increasing number of indigenous, it is not unlikely that an amendment to clearly define the interaction may be considered, and very speedily.

    Another interesting part of this acquisitions is that the acquisition cost for the OML can likely be treated as “capital expenditure” and since it’s incurred in thge tax relief period, the indigenuous companies can obtain a certificate of acceptance for the “fixed assets”.

    Don’t worry yourself about Seplat or Oando or the other lottery winners in the divestments. Just buy your Seplat shares cos of course, taxes on dividends they will pay are also tax exempt.

    P.S: If you decide to go commercial, speak with your tax consultants cos I’m sure your blogging qualifies for pioneer status too.

    Everyone’s a pioneer

  9. Rightly so. Smelt the racket when I read the prospectus. I actually believed they came to dump stinking shares on the gullible public at the Seplat IPO. Valuation was based on the profits, which were exaggerated by the Pioneer status, which they even conceded could be lost anytime, and worse, previous benefits may be refunded.
    Need I be told more?.sold off the stinking shares before the promoters will come offload on the market in a few months

  10. Very interesting read, this comment will turn into an article if I proceed to comment on all issues raised so I will limit my comment to the argument that O&G companies (Upstream operations) cannot be granted pioneer status as the Industrial Development (Income Tax Relief) Act does not apply to them .

    1. The IDITRA is an ACT of the National Assembly and the mention of a “Principal Act” does not diminish this fact in any way. It is necessary to state this point because Section 1 of the IDITRA provides that:

    “Where the President is SATISFIED that ANY industry is not being carried out in Nigeria on a scale suitable to the economic requirements of Nigeria or at all ……. “.

    The discretionary powers granted to the President here is ridiculously open ended. He only needs to be satisfied. Too subjective. That’s why orders could comfortably come from ‘above’ that the pioneer certificates granted to companies like Seplat be not disturbed. The Fed Executive Council (or which ever body he chooses to exercise this power through) will simply hide under ‘Satisfied’ and ‘Any’. Shikena.

    2. The IDITRA defines “Pioneer Company” as: ANY company certified by ANY pioneer certificate as a pioneer company. And that’s all. So if the President is ‘satisfied’ Seplat gets a pioneer certificate (at any time) and they become known as a pioneer industry. End of. (‘Any’ is a big problem in this Act)

    3. In 1995 a later Act established the NIPC. According to the Act, NIPC is basically set up to “Encourage and promote investment in the Nigerian economy” (Notice how this isn’t industry sensitive at all). Section 4 of this Act says that the Commission shall “Encourage, Promote and Co-ordinate investment in the Nigerian economy… ”

    Now Section 22 of the NIPC Act provides; “For the purpose of identified strategic or MAJOR INVESTMENT, the Commission shall … negotiate specific incentive packages for the promotion of investment as THE COMMISSION MAY SPECIFY.

    By Section 23 and Section 30 of the Act, the Commission has powers to issue regulations, guidelines (Which they have done with the Pioneer Status Incentive Regulation January 2014) and specify priority areas of investment and prescribe applicable incentives and benefits. So if the NIPC goes ahead to list ‘Mineral Oil Prospecting and Production’ and ‘Petroleum’ as pioneer industry and pioneer product, they are well within their legal limits. They are merely prescribing an incentive to an industry.

    Obviously, the literal meaning of the word ‘Pioneer’ is totally different from what our Laws have expressed.

    I am of the view that the issue here is quite simple. The IDA should be revised. Seplat and the Government have merely taken advantage of a badly written Law.

    1. This is illuminating but still doesnt answer the question as to what exactly it is that Seplat did to qualify for pioneer status. This is a specific law targeted to achieve specific outcomes.
      So simply expending capital cannot be a qualification given that the law already has a favourable treatment of capital expenses with capital allowances. The slippery slope here is that anyone can choose not to pay taxes for 5 years just because the law says ‘any’. I am almost certain the law wasnt set up for that.

      So the question remains – what did Seplat do to a business that has been paying taxes for many many years that suddenly qualified it to be taken out of taxation completely?

      1. That is exactly my point. Seplat does not have to ‘do anything’ per se (asides applying for pioneer status) and if the ‘ogas at the top’ are ‘satisfied’ they get tax holiday.

        Noting the ‘intention’ of a law is a very good place to start when interpreting Statues but a joint reading of the IDA and the NIPC Act will show you that the spirit of that law isn’t exactly against this open-ended interpretation being given to the law.

        If it were against open ended interpretations the law would have specifically made provisions plugging all possible ‘holes’. Those holes were left open for these ‘Seplat situations’. And in my opinion, that is the issue. Why cry over symptoms of a problem we haven’t even attempted solving?

  11. I remember when i first read Proshare asking questions on Seplat’s pioneer status, i erroneously and hastily thought Proshare was being ignorant of the PPTA. I was arguing that Seplat was entitled to a 65.75% tax rate for their first five years of production as Article 21 of the PPTA provides and not 85% as others are paying. I assumed they were referring to Seplats reduced tax rate because the tax rate of 65.75% as against 85% is in itself an INCENTIVE for ‘pioneer companies’. The idea of Seplat been a ‘CIT pioneer company’ and not paying a kobo of PPT was inconceivable, impossible. It was far-fetched. But here we are, they are have pioneer status! Incredible!

    But to be fair, from all the arguments and relevant laws/regulations, Seplat has done NOTHING illegal. They have only managed to exploit the provisions of the law to their benefit. The PPTA which governs the oil industry has always kind of ringfenced the industry from the CITA. The only relationship the oil industry has with CITA is on gas revenues i.e OilCos only pay CIT on gas profits. But Seplat has managed to exploit both laws. Kudos to their promoters. Very likely Seplat might also be the first beneficiary of this bonanza because if FIRS had to be forced to accept the directive, that means there is no precedence. Note also that Seplat’s Newton Energy also have received the pioneer status.

    Is Seplat qualified? The President seems ‘satisfied’ that they are. You may question the motive but the NIPC Act clearly empowers the President and the Board to determine beneficiaries. Definitely, the law needs some review but we all know that wont happen. Presidents rarely make laws that restrain them. Hopefully, the resultant revenue squeeze and exposes like this would make them ‘delay’ approvals for new companies who i can bet are working frantically to secure their status. President Jonathan knows what he was saying when he said ‘Stealing is different from Corruption’.

  12. I remember when i first read Proshare asking questions on Seplat’s pioneer status, i erroneously and hastily thought Proshare was being ignorant of the PPTA. I was arguing that Seplat was entitled to a 65.75% tax rate for their first five years of production as Article 21 of the PPTA provides and not 85% as others are paying. I assumed they were referring to Seplats reduced tax rate because the tax rate of 65.75% as against 85% is in itself an INCENTIVE for ‘pioneer companies’. The idea of Seplat been a ‘CIT pioneer company’ and not paying a kobo of PPT was inconceivable, impossible. It was far-fetched. But here we are, they are have pioneer status! Incredible!

    But to be fair, from all the arguments and relevant laws/regulations, Seplat has done NOTHING illegal. They have only managed to exploit the provisions of the law to their benefit. The PPTA which governs the oil industry has always kind of ringfenced the industry from the CITA. The only relationship the oil industry has with CITA is on gas revenues i.e OilCos only pay CIT on gas profits. But Seplat has managed to exploit both laws. Kudos to their promoters. Very likely Seplat might also be the first beneficiary of this bonanza because if FIRS had to be forced to accept the directive, that means there is no precedence. Note also that Seplat’s Newton Energy also have received the pioneer status.

    Is Seplat qualified? The President seems ‘satisfied’ that they are. You may question the motive but the NIPC Act clearly empowers the President and the Board to determine beneficiaries. Definitely, the law needs some review but we all know that wont happen. Presidents rarely make laws that restrain them. Hopefully, the resultant revenue squeeze would make them ‘delay’ approvals for new companies who i can bet are working frantically to secure their status. President Jonathan knows what he was saying when he said ‘Stealing is different from Corruption’.

  13. Well, inspired by your post and the comments, i did a little digging just to find out how extensive is the practise of baptising indigenous companies as pioneer companies. My conclusion is that SEPLAT is just continuing an established trend. It has suddenly just become street knowledge because they exposed themselves through the IPO and the significance of their production. Maybe the following can convince you.

    1. The Ribadu Probe of the Oil Industry already identified this practice as a challenge and advised against it. The names of companies enjoying it for a while – Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria Limited, Suntrust Oil Company Nigeria Limited; and Niger Delta Petroleum Resources Limited are listed in his committee’s report. http://saharareporters.com/sites/default/files/ribadu-report.pdf

    2. All the Shell successors seem to have also explored the pioneer status option with positive results. http://www.proactiveinvestors.co.uk/companies/news/66910/the-big-picture-nigeria-set-for-not-too-taxing-rise-in-oil-output-66910.html. Se Afren here subtly highlighting the impact on their bottom line.

    My advice is if you are an indigenous company and have not taken advantage of this opportunity, sack your CFO.

  14. The Pioneer Status policy under the NIPC act was designed to encourage investments in new business areas and spur industrial growth. To all intent and purpose, the provision applies to the companies profits. I will like to believe that petroleum profits tax is a different regime entirely. I find no merit in the argument that local companies buying O & G assets should be blessed with a tax free regime simply because they are local companies. The idea of the Local content policy is not to promote local companies buying existing assets, it is to build local capacity in oil and gas exploration and production. True that Seplat has made substantial financial investments in buying up those assets but that transaction is of a business nature and it doesnt concern the feederal government. Its a straight contractual arrangement between Shell and Seplat. On the basis of this, the question to be answered is thus; why does the FG bless seplat with tax holidays in a transaction that the federal government is not a party nor beneficiary?. In any event, we should ask, supposing an italian company comes and buys chevron assets in the easetern part of the country, would it be entititled to tax holidays because its coming into the country for the first time? If the answer is no on the grounds that it is an italian company, then the question becomes whether the tax holiday regime is for Nigerian companies only. I doubt whether that is the object of the legislation or the intention of the Local Content Act. I think this is a clear and fine distinction between corruption and stealing.

  15. How do you think government officials can afford their lifestyle?

    What’s the FIRS chairman’s or directors salary by the way, not to talk of clerks or junior managers

  16. For your information good people, i got to find out from a close person who has just recently acquired some shell assets too that the practice is industry wide and not peculiar to this seplat transaction

  17. As long as the tax breaks are not in perpetuity, I don’t see the issue here. What it really comes down to is this: in the assessment of the President, is it in the public interest for local firms (even if purchasing producing assets) to benefit from pioneer status? The answer appears to be a resounding yes and, in light of the existence of a Local Content Act, supports the government’s goal of increasing local participation in the oil and gas industry. Undoubtedly there is a short-term loss of revenue, but in the long run it should pay off and here is why:

    If I know I have a tax holiday for only 5 years, it is in my interest to increase production and receive the maximum benefit from the holiday. This increases production, which cannot easily be reversed after 5 years, will later become taxable as a typical field will produce for 10-30 years.

    For a government keen on increasing production in the face of seeming reluctance of IOCs to invest (due to PIB uncertainties among others), providing a tax incentive to these smaller producers appears to be a reasonable course of action to achieve this goal.

    In my opinion, the analysis on the merits/demerits of this pioneer status should be thus: how much revenue is forgone in the 5 years compared to the revenue expected to be gained over the longer term from increased production/investment? If the latter is higher, then it is a good policy from a fiscal perspective. Even if it is not, the government may point to the less clear cut ‘benefit’ of domesticating more of our oil production.

    1. Or given that these are depleting assets which have been producing for quite a while (assume Shell would have wanted to extract the maximum from these assets before selling them), the government might have made a wrong bet. At the end of 5 years, the guys would have extracted the majority of whatever is there and the govt will get nothing

      But we wait and see

      1. True that they are depleting assets but the P1 and P2 reserves of most of those fields is very substantial. The largest of the 4 fields still has about 1.5bb bbl in reserves. Shell is one of the most conservative operators and any serious investor who nicks one of the assets can very easily increase production over the long term. So it is very unlikely to extract the material value from the fields in only five years. Shells reasons for divestment are a change in strategy, for Nigeria, “they want to focus on gas”.

        I agree with Debola that there is very limited ramp up in production that can be done during the five year tax holiday. But with the increasing number of locals in the upstream now, it is not unlikely that a “cabal” would swiftly move for the passage of the PIB where they would be under a new and reduced tax regime of Nigerian Hydrocarbon Tax(NHT) of 50% (for onshore and shallow waters) as well as CIT of 30%. I won’t do any merit/demerit analysis. The government is simply increasing the wealth of the wealthy.

    2. Debola, given that these aren’t new wells, it’s entirely plausible that in 5 years, they’ll be nearing the end of their life cycle. Also, given that he was granted pioneer status for buying an existing asset, what happens if he sells the now Low producing assets to a smaller local operator who in turn wants the same pioneer status? On what grounds will the govt deny B the same situation it gave A without looking like an even bigger fraud?
      IOC’s are pulling out of Nigeria not only bcos of PIB, but the increasing taxes, all the levies on all levels of government. It’s no longer economical for them to run, so they’re offloading them and moving on to Angola. I worked for two of them here, so that’s their main gist. My last supervisor worked in Nigeria for 11 years before coming back home after they sold their operations. Basically, our govt is not thinking it through. Which isn’t new anyhow.

  18. My main problem with all of this: instead of trying to fiddle with the rules to get local companies into the O&G game, why not lower the overall tax rate? How attractive is 5 years tax holiday to me as a long term investment if I’m going to be paying 85% of my profits once those 5 years are passed?
    I’m not sure if that’s what it”s always been, but I interned with two O&G firms here in the States. They’re all heading for the EXITS in Nigeria and headed to Angola which means this policy might be new.
    As far as the Pioneer Company thing, name any well-intentioned policy and I’ll show you a million ways our govt & people will turn it into a farce and an opportunity to steal. We all know that. Maybe this is who we are. Even if we get a government that doesn’t encourage our worst traits, how long before we reverse to the mean?

  19. Well when you have the Ministers for Petroleum and Trade&Investment lining up to buy a piece of your overpriced shares, I suppose you can easily walk on water. I was one of those who believed there is something fishy about this SEPLAT “success” story Aganga likes to make noise with every now and then.

  20. Pingback: Taxes of Bow-Tie | Agùntáṣǫólò

  21. I was surprised when I saw from the Seplat’s annual report they were also exempted from paying Petroleum Profit Tax and Education tax. These taxes were not supposed to be exempted. The only tax pioneer status covers is Company Income tax.

  22. Pingback: Socialism, Poverty and Inequality | Ẹni Iyì

  23. Pingback: Guest Post: Agenda For The Next Petroleum Minister | Agùntáṣǫólò

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