-By Teddy Nwanunobi
One of the oldest bills in the National Assembly is the Petroleum Industrial Bill (PIB). Several governments, in the last 20 years, have failed in their attempts to pass the all-encompassing bill. No thanks to its scope and complexity which have ensured its repeated failure.
Interestingly, the bill seeks to promote best practices in the management of the extraction of Nigeria’s oil and gas sector. It is also intended to deregulate and liberalise the downstream petroleum sector. It also aims to create efficient and effective regulatory agencies, and promote transparency and openness in the administration of the petroleum resources in Nigeria.
Crude oil dominates Nigeria’s economy, accounting for around 90 per cent of export earnings. Nigeria has the largest oil and gas reserves in sub-Saharan Africa, with an estimated 37 billion barrels of oil and 202 trillion cubic feet of gas. Yet for decades, the virtually ungovernable industry has been plagued by poor leadership, eye-watering corruption and environmental degradation.
Value has leached away through opaque licensing deals, unaccountable middlemen, a lack of refining capacity and graft in the government and the Nigerian National Petroleum Corporation (NNPC). Sabotage and pipeline theft in the oil-rich Niger Delta have ensured that the taxpayer loses out on billions of dollars in annual revenues.
Before the introduction of the bill, Nigeria’s oil and gas sector was (and is still) largely governed by the duo of the Petroleum Act and the Petroleum Profit Tax (PPT) Act, which were both enacted since 1969 and 1959, respectively. Since the enactment of these laws, the global oil and gas industry has changed significantly from an investment, governance and fiscal perspective.
Although certain obsolete aspects of the aforementioned Acts have been amended, their inadequacies are still evident, contributing to the development of the Petroleum Industry Bill (PIB).
Since its introduction over two decades ago, the bill has suffered setbacks which have hindered its successful passage. The bill, which is yet to be enacted, has led to increased uncertainty, and hindering the flow of the desired investments to the Nigerian oil and gas sector.
A year ago (February 2020 to be precise), the Minister of State for Petroleum Resources, Timipre Sylva, disclosed that the non-passage of the bill has been a challenge as it has hampered and delayed investments coming into the oil sector. He emphasised that the lack of a bill brought a lot of uncertainty to the investment climate. He, therefore, maintained that its passing was essential to attract the much-needed funding to Nigeria’s oil and gas sector.
On September 28, 2020, President Muhammadu Buhari presented the PIB to the National Assembly for consideration. Summarily, the bill seeks to introduce pertinent changes to the governance, administrative, regulatory and fiscal framework of the Nigerian oil and gas industry, in order to ensure transparency, strengthen the governing institutions, and attract investment capital, among other objectives.
The new bill
Over the years, there had been various reviews of the bill under different administrations. However, it has never been signed into law. This has negatively affected the oil and gas sector, and in turn, the country.
The new bill promises to offer a radical departure from past norms. It plans for the selling of shares in a reformed NNPC, the replacement of regulatory bodies, and the reduction and streamlining of royalties.
The legislation suggests that the NNPC should become “a commercially oriented and profit-driven national petroleum company” independent of government, and audited annually. The PIB could also boost the amount of money companies pay to local communities and for the environmental cleanups, introduce new dispute resolution mechanisms between the Federal Government and oil companies, and set up a midstream infrastructure fund.
“It would play a vital role in addressing the inefficiencies plaguing the NNPC, from slow approval for oil projects to budget shortfalls that hinder its ability to pursue public-private partnerships (PPPs). What is more, the bill would create a supportive environment for both IOCs and indigenous petroleum companies, help protect the environment and the interests of host communities, support economic diversification in Nigeria, and critically important, promote transparency in Nigeria’s administration of petroleum resources,” the Executive Chairman of the African Energy Chamber, NJ Ayuk stated.
Buhari’s chances
Buhari must be one lucky man. After his reelection in the 2019 presidential election, his All Progressives Congress (APC)-led government comfortably controls the current National Assembly. This single fact boosts the chances and hopes that the bill would secure easy and quick passage at both the House of Representatives (HoR) and Senate chambers.
Given the PIB’s tangled history, its passage would represent a significant political victory for Buhari, and send a message to the international investors. Furthermore, the plunge in global oil prices brought about by the COVID-19 pandemic, which has seen crude trading at less than $40 per barrel, and triggered a 60 per cent slump in the Federal Government’s revenues, may give renewed impetus to reform efforts.
But the complexity of the legislation remains a problem. Unlike the previous failed version in which the bill itself was separated, the latest PIB comprises of one version that is separated into four chapters.
The Senate has resolved to pass the bill as quickly as possible. But it, however, warned that it would be very thorough with the bill.
“Let me state very clear that we will sacrifice thoroughness at the altar of speed,” the Senate President, Ahmad Lawan, warned.
What the bill proposes
To understand how indispensable the bill is to help in the future development of the Nigerian oil and gas sector, it is important to highlight the key fiscal changes that the PIB proposes to introduce to the fiscal framework of the Nigerian petroleum industry.
Fiscal changes the PIB 2020 proposes to introduce:
Under the stringent penalty regime, the penalties for defaults or offences committed under the fiscal framework of the PIB increased significantly. For instance, the penalty for non-filing of estimated HT returns, actual HT returns, CIT returns and any offence or default with no specific penalty have been increased from N10,000 to N10,000,000 for the first day of default, and from N2,000 to N2,000,000 for subsequent days the default continues, for each offence or default.
Non-payment of CIT and HT due will attract a penalty of 10 per cent and interest at the Nigerian Interbank Offered Rate (NIBOR) plus 10 per cent, or London Interbank Offered Rate (LIBOR) plus 10 per cent from the date when the tax becomes payable until it is paid, for Naira and foreign currency remittances, respectively.
In the case of the requirement for companies and taxation of income from petroleum operations, nothing, based on the existing laws, precludes an entity from operating in more than one sector (i.e. upstream, midstream and downstream sectors) of the Nigerian oil and gas industry. For instance, a company engaged in upstream petroleum operations e.g., the production of crude oil, may also invest in the processing of the associated gas (downstream/ midstream operation). However, with the introduction of the PIB, a company shall not be involved in more than one stream of petroleum operation and would have to register a separate company for each stream of petroleum operations.
The bill also provides that HT shall not be payable on associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil. However, HT will apply to crude oil, condensates and natural gas liquids produced from associated gas.
Furthermore, a newly incorporated company that is yet to commence the bulk sales or disposal of chargeable oil is now required to file its audited accounts and returns within 18 months from the date of its incorporation.
Although a significant portion of the provisions of the PPT Act was imported into the fiscal section of the bill, the PIB amends several of these provisions as it relates to ascertaining the assessable profits of companies with upstream petroleum operations. The proposed changes include the following:
Introduction of the reasonability test for deductibility of expenses incurred for HT purposes. This is in addition to the requirement under the PPT Act for allowable expenses to be wholly, exclusively and necessarily incurred, to be tax deductible.
Royalty expense will only be deductible in ascertaining the HT payable after it has been incurred and paid. This is a deviation from the accrual basis for royalty deduction under the PPT Act.
Education tax, bad debt, bank charges, cost incurred by affiliates, arbitration/ litigation cost, penalties, natural gas flare fees and taxes paid on behalf of another person will not be deductible expenses for the purpose of determining the HT payable.
To ascertain the accessible profits of companies engaged in petroleum operations for CIT purposes, the PIB introduces new provisions to apply to such companies, in addition to the provisions of the CIT Act. For instance, rents and royalties incurred and paid, contributions to abandonment and host community funds, and other deductions that may be prescribed by the Ministry of Finance will be deductible expenses. However, signature bonuses paid for the acquisition of rights, penalties and gas flare fees will not be deductible expenses for CIT purposes.
Based on the above, companies will have to pay particular attention to the computation of their HT and CIT payable, given that certain expenses such as bad debt and bank charges that are not deductible for HT purposes are tax deductible when determining the CIT payable.
On the new tax regime and rate of tax, companies that are engaged in upstream petroleum operations will now be subjected to a dual income tax regime, i.e. the Hydrocarbon Tax (HT) and the Companies Income Tax (CIT). While the applicable CIT rate will be in line with the provisions of the CIT Act, the HT rate will be graduated and dependent on the area of operation and the period the mining lease was granted.
Companies with downstream and midstream petroleum operations will continue to be taxable in line with the provisions of the CIT Act.
Claim of Capital Allowance on Capital Work in Progress (CWIP): Paragraph 15 of the Second Schedule of the PPT Act (i.e. extension of meaning of “in use”), which extends the definition of “in use” and serves as a basis for claiming capital allowance on CWIP has been deleted. Consequently, assets classified as CWIP will have to be transferred to the appropriate asset class and put to use for it to be eligible for capital allowance claim.
Regarding the other changes to capital allowance provisions, where there is a transfer of petroleum rights between related parties, the acquisition costs of petroleum rights shall be eligible for annual allowance for CIT and HT purposes, at the rate of 10% with a retention value of 1 per cent in the last year until the asset is disposed of. However, where the transaction is between unrelated parties, the acquisition cost of the petroleum rights shall only be eligible for capital allowances under the CIT Act.
The upstream companies, under the taxation of income deemed to be incidental to petroleum operations, are liable to PPT based on their petroleum operations. The definition of “petroleum operations” under the PPT Act includes “operations incidental thereto” the winning or obtaining of chargeable oil. However, the definition of “upstream petroleum operations”, under the PIB does not include the phrase “operations incidental thereto”.
This suggests that income streams such as interest income, which is typically considered incidental to petroleum operations by some upstream companies and therefore subjected to PPT, will now be liable to only CIT and may not be included in the profits for computing any HT payable. Furthermore, activities such as the operation of facilities to treat crude oil and natural gas have now been expressly included in the definition of upstream petroleum operations and hence, liable to HT.
On the minimum tax provision, the PIB expunged the restriction to capital allowance claimable in a given accounting year under the PPT Act. It, however, introduces a Cost Price Ratio (CPR), which restricts the allowable deductions claimable in a given accounting period to 65% of the gross revenues determined at the measurement points, for the determination of the HT payable. Any excess cost not deductible due to the above will be carried forward to subsequent years and any cost not deducted upon termination of upstream operations will be lost. It is, however, unclear whether the CPR will apply to only deductible expenses or also to capital allowance claimable.
Although the objective of this provision may be to boost revenue collection by government, the cash flow implications for upstream companies may discourage investments, especially given the huge capital outlay required for new projects.
The bill, under the gas utilisation incentives, expands the list of companies eligible for the GUI provided for under Section 39 of the CIT Act, to include companies engaged in midstream petroleum operations and large-scale gas utilisation industries. While there has been some lingering controversy over the applicability of these incentives to companies operating in petrochemical industries and operators of gas storage facilities, the bill provides clarity by specifically including these companies in its definition of midstream petroleum operations and large-scale gas utilisation industries.
Although most companies operating in these sectors may already be eligible for pioneer status incentive (PSI), which confers the benefits of a tax holiday (amongst others), the associated cost and administrative inconvenience of processing the PSI may make the GUI more attractive.
In calculating the royalty payable, under royalties, condensates shall be treated as crude oil and natural gas liquids as natural gas.
The price based royalty will be payable in addition to the production based royalties. The price levels provided under the price-based royalty shall apply only to the year 2020. At the beginning of 2021 and of each succeeding calendar year, these price levels shall be increased by 2 per cent relative to the values of the previous year.
The royalty rate for natural gas in onshore area is 7.5 per cent, while the rate for every other area and for gas produced and utilised in-country is 5 per cent.
At this point, it is a fact that the Nigerian PIB is the path to reform and prosperity.
Should the bill, which is now with the Senate, become law, as is expected, it is hoped that this will mark a turning point for the petroleum industry in Nigeria and that the challenges that the sector has faced for many years would now be addressed.