The National Petroleum Fiscal Policy – Old wine in a new bottle?
Here we go again!
More talk of the Petroleum Industry Bill (PIB). You must be getting tired of hearing about it by now – we know we are. Late 2015, the government finally heeded the advice of various stakeholders to repackage and break up the PIB. In 2017, the Senate began the legislative process on a repackaged piece of the PIB, known as the “Petroleum Industry Governance Bill (PIGB)”. Then in January 2016 came the news that the PIB had been rechristened as the Petroleum Industry Reform Bill (PIRB).
The Ministry of Petroleum Resources recently released the draft National Petroleum Fiscal Policy (NPFP) which is meant to feed into the PIRB. Like the name implies, the NPFP aims to provide a fiscal framework for Nigeria’s oil and gas industry. Those familiar with the previous version of the PIB, will observe that the fiscal changes proposed by the NPFP are not entirely new, so the key question is – what are we going to do differently this time around? Let us take a look at some of the key fiscal highlights of the NPFP.
1. Resource tax and Companies Income Tax
The previous version of the PIB introduced a resource tax called the Nigerian Hydrocarbon Tax (NHT), which was to be levied on the chargeable profits of upstream companies at the rate of 50% for onshore and shallow waters, and 25% for bitumen, frontier acreages and deep water areas. While the NPFP retains the NHT, it has tweaked the rates by amending it to 40% for onshore areas, 30% for shallow waters and 20% for deep water areas. Like the PIB, all upstream companies will also be liable to Companies Income Tax (CIT). For both regimes (PIB and NPFP), the petroleum profits tax (PPT) currently in existence, will be no more. Meaning from a current maximum tax rate of 85%, the revised maximum tax rate will now be 70% (40% NHT plus 30% CIT) of chargeable profits.
There is no mention of bitumen anywhere in the policy, which should be a relief for potential miners, at least from an income tax perspective.
2. You can have income tax, but give us royalties!
The NPFP clearly shifts its focus from tax to royalties. The interesting thing about royalties is that it is paid on production (revenue in practice). Meaning that government gets paid as far as there is production, unlike income tax which is based on profits. Smart isn’t it? You see under the current regime, upstream companies operating in deep waters can get away with 0% royalty, because that is the rate provided by law, when you operate in areas in excess of 1,000 metres water depth.
The NPFP not only proposes to remove royalty payment based on water depth, it introduces a royalty payments regime based on both price and volume. Under the policy, if you produce more than 50,000 barrels per day, at a price of over $100 per barrel (wouldn’t we love this), you could be liable to a royalty rate of 40%! Interesting to note that the policy also proposes that taxes and royalties be paid at the same time (that is, on a monthly basis). Royalties are currently paid on a quarterly basis.
The policy does give a flat royalty rate of 5% to “small fields” but failed to define what constitutes a small field.
3. Less tax deductions and reliefs
In addition to the increased royalties, the NPFP proposes far fewer tax deductions and reliefs compared to the current regime and the PIB. Some interesting examples include:
• No more capital uplift. That is, no Petroleum Investment Allowance (PIA), Investment Tax Allowance (ITA) and Investment Tax Credit (ITC).
• No deductibility of interest. This seems rather harsh, given that many companies in the sector often rely on debt funding for their operations.
• Maximum of 80% recoverability for costs incurred overseas, and a cap placed on how much costs can be recovered locally. The policy does this on the erroneous assumption that non-recoverable costs are also non-deductible for tax purposes. There were a number of cases in 2016 where the tax appeal tribunal (TAT) clearly ruled that cost recoverability should have no bearing on tax deductibility. So if this policy is implemented in its current form, the upstream companies would have a field day in court.
• The policy also proposes to remove the tax deductibility of acquisition costs on the basis that the buyers would not pay tax for a long time because acquisition costs are tax deductible. One wonders if the buyers would have made the investments in the first place, if there were no tax reliefs for their investments.
• Elimination of gas flare deductibility.
4. What about gas?
Gas is a very sensitive issue, especially because of the state of the power sector. The drafters of this policy are obviously very unhappy about the current fiscal gas regime. It is pertinent to note that the Associated Gas Framework Agreement (AGFA), which was codified and inserted into the PPT Act as sections 11 and 12, enables companies that produce gas to take a higher tax deduction (up to 85%) against oil income, and still pay tax at 30%. While companies have seen this as an incentive to invest in gas, the government seems to feel that the incentive is being abused, and this policy is proposing that the sections which provide for these incentives be completely removed. Since the NPFP includes gas as part of petroleum operations, it means that gas will now be taxed at a maximum 70% – just like oil! Wonder how this would impact on investor decisions.
Now it’s not all bad news for gas. The policy proposes expanding section 39 of the CITA, which contains incentives for downstream gas utilisation, to include LPG projects and infrastructure, as well as refineries. Meaning that LPG projects could get a tax holiday of up to 5 years potentially.
The points above are not exhaustive of the provisions of the policy. In fact, the policy also proposes to increase the capital gains tax (CGT) on asset based transactions in the petroleum industry from 10% to 30%, reduce the time limit that petroleum companies can carry forward losses and review the Industrial Development (Income Tax Relief) Act to restrict petroleum companies from taking tax holidays.
The motive of the policy is clear – increase government take now (especially in deep water)! While there is nothing wrong with this, it is important to strike a balance between more revenue for government and attracting or retaining investment in the sector. While the proposals seek to remove or reduce existing incentives, there must equally be a deliberate effort to tackle current disincentives in the sector. This balance is paramount given a shrinking economy and growing need for foreign direct investment.
Seun is a Senior Manager in the Tax Reporting & Strategy Unit of PwC Nigeria. He has over 12 years of tax experience in the Oil and Gas sector. He is a member of the Institute of Chartered Accountants of Nigeria, Chartered Institute of Taxation of Nigeria and Nigerian Association of Petroleum Explorationists.
Babatunde is an Assistant Manager within the Tax and Regulatory Services Unit of PwC Nigeria. He has several years of tax experience in the Energy sector.