Government loses N1.2tr tax revenue to crude oil price dispute

The lingering pricing dispute between the International Oil Companies (IOCs) and the Federal Government has resulted in a revenue loss of over $4.04 billion (N1.232 trillion at N305-$1) in eight years, according to the Nigerian Extractive Industry Transparency Initiative (NEITI).

There are indications that the Federal Government may not be able to recover the money as the IOCs have adopted strategies to evade payment.

Over the years, the IOCs have used the Tax Appeal Tribunal (TAT), which has the final say on any tax issue, to avert the payment of huge revenue accruable to the Federal Government from oil production.

The Nigerian government is almost solely dependent on oil revenue to execute its programmes. The $4.05 billion would have ameliorated the financial challenges created by the economic recession, including funding of the budget for the development of the country.

As at September last year, the funds trapped in various divisions of the tribunal that had not been adjudicated were estimated at over $5 billion or N1.5 trillion, almost the value of the N1.8 trillion 2016 capital expenditure.

Responding to The Guardian’s enquiring on the issue, the spokesperson for the Department of Petroleum Resources (DPR), the industry regulator, Dorothy Bassey, said: “The industry has gone beyond this. However, I will send you the current status.” But she never did.

It was learnt that there is a long-standing dispute between the Federal Inland Revenue Service (FIRS) and oil- producing companies on the price to be used in valuing crude oil for the purposes of calculating the petroleum profits tax liability of international oil companies operating in the country.

In an effort by the DPR to resolve the dispute between the Federal Government and Oil Producers Trade Section (OPTS), in consultation with the Nigerian National Petroleum Corporation (NNPC) and FIRS, it said in 2013 that a realistic price should be used as fiscal price from January 2008 to June 2010. The agency also said that the Official Selling Price (OSP) should be used as fiscal price from July 2010 to December 2012, but the companies objected to the directive.

The IOCs had said that the applicable price of crude oil for calculating taxes was the Realisable Price (RP) as defined under a Memorandum of Understanding entered into with the Federal Government, as opposed to the OSP of crude unilaterally imposed by DPR.

The Guardian learnt that the Tax Appeal Tribunal had ruled in favour of some IOCs that RP was the appropriate price to adopt in making the required calculation for the tax years in dispute, and that the RP was consistent with the provisions of the Petroleum Profits Tax Act.

Specifically, on January 23, 2015, TAT ruled that the RP, and not the OSP, should be used for the tax years during which the relevant MoU between the government and the oil companies remained valid.

NEITI, in its latest 2014 Oil and Gas Audit report, said the price differentials continued as government and the IOCs could not reach a mutual agreement on the pricing methodology to be adopted.

The agency added that the disputes between the DPR and Shell Nigeria Exploration and Production Company (SNEPCO), persisted as both parties continued to compute royalty liabilities on different rates. While SNEPCO applied one per cent for the OML 118 (Bonga), DPR applied 1.75 per cent.

NEITI explained that the royalty payable on crude oil by companies is a function of its value, which in turn is determined by the price.

The agency emphasised the need for the Minister of Petroleum Resources to compel the DPR to finalise the appropriate pricing methodology for royalty computation, adding that the controversy over the new pricing regime of 2013, and the court ruling of 2015 on the application of OSP should be speedily resolved.

NEITI urged the DPR, FIRS and NNPC to conclude the ongoing discussions on pricing methodology. It suggested that an adequate pricing framework should be clearly defined in the Petroleum Industry Bill (PIB).

Speaking on the issue, SNEPCO stated: “The reason for the difference between the royalty rate applied by the National Petroleum Investment Management Services (NAPIMS) in the tax return filed on behalf of the contract area and the rate applied by the contractor, SNEPCO, in the tax computation is due to the fact that negotiations between DPR and SNEPCO are yet to be concluded regarding the compromise/mutually acceptable royalty rate that should be applied for the purposes of royalty computation and payment.”

The Executive Secretary of NEITI, Waziri Adio urged the government to strengthen its laws and institutions, especially in the oil and gas sector, so as to achieve maximum results in its revenue collection.

He stated: “Nigeria had an MoU with the oil companies which expired. There is a procedure for renewing the MoU. While that is going on, there is also room for certain things. There are two pricing methodologies; there is what is called the realisable price which the oil companies prefer. There is the official selling price, which the government prefers.”

He blamed the discrepancies on lack of political will and the inability of successive governments to implement recommendations on remediation in the nation’s oil and gas industry.

The President of the Chartered Institute of Taxation of Nigeria (CITN), Chief Mark Anthony Chidolue Dike, said the Federal Government would have to cancel the MoU, which allows the IOCs to use RP to determine the price of crude oil when it was no longer profitable to them.

He said it was wrong for the IOCs to insist on working with the old MoU when the government is insisting they adopt the OSP.

Dike urged the IOCs and the relevant government agencies to jointly agree on the price methodology that will be favourable to them.