The hue and cry over the fiscal regime proposed by the PIB before the National Assembly is nothing new when it come petroleum development. Although host government and<\/p>\n
investors may have the common intent of creating maximum economic rent – their other goals may be far apart. Host governments aim is to maximize economic rent for their country over time, while achieving other development and socioeconomic objectives. Investors\u2019 aim is to ensure optimal return on investment consistent with risk profile and corporations\u2019 strategic objectives. To reconcile these often conflicting objectives, more and more countries rely on transparent institutional arrangements and flexible, neutral fiscal regimes<\/p>\n
In designing a fiscal system, the host government needs to take into consideration its relative position in relation to other countries. The following question becomes crucial: What is the effect of the fiscal regime on oil\/gas output? Does it discourage the development of marginal fields? Does it influence the pace of development? Does it favour early abandonment? Is it insensitive to oil\/gas price and cost variation? In other words, how flexible, neutral and stable is the fiscal regime?<\/p>\n
The host government\u2019s preeminent objective should be to enact a flexible fiscal regime that favours both parties\u2019 mutual interests by providing an equitable arrangement for both the highly profitable and the less profitable discoveries. Realistically, host countries should look to extricate maximum value from their natural resources – highest take whilst not totally discouraging potential investors.<\/p>\n
Presently, companies carrying on petroleum operations in Nigeria are presumed to be in the upstream regime and taxed under the Petroleum Profits Tax Act (PPTA) 2004 (as amended). While other companies (including those engaged in downstream petroleum operations) are subject to company\u2019s income tax pursuant to the Companies Income Tax Act (CITA). The current rate of petroleum profits tax is 50% for operations in the deep offshore and inland basin and 85% for operations onshore and in shallow waters.<\/p>\n
In an attempt to enact a flexible and neutral fiscal regime that favours stakeholders, the proposed PIB, include provisions for companies engaged in upstream petroleum operation to pay Companies Income Tax (CIT) at 30% and introduced the Nigerian Hydrocarbon Tax (NHT) at either 50% for onshore and shallow area of not more than 200 metres depth or 25% for bitumen, frontier acreages or deep water areas. Where petroleum operations fall in geographical areas that are subject to different tax rates, NHT shall be levied on the proportionate parts of the profits arising from such operations.<\/p>\n
Furthermore, Section 118 of the PIB proposes the establishment of the petroleum Host Community Fund \u2013 requiring a detailed and transparent financial distribution system to ensure that host communities benefit directly from petroleum activities. It provides for direct financial transfer of 10% net profit \u2013 adjusted profit less NHT and CIT, derived from upstream petroleum operations in onshore areas and shallow waters areas to the communities and littoral states. Contributions made to the Fund will be available as credit against fiscal rent obligations being royalty, NHT and CIT although no order of offset is provided for.<\/p>\n
The Bill allows for deductions for tax purposes – expenses wholly, exclusively, necessarily and reasonably incurred for the purpose of upstream petroleum operations. Deductions allowed include funds set aside for decommissioning, abandonment expenditure, and interest upon any loans, including intercompany loans as long as the tax authorities are satisfied that the interest payable is on capital used in upstream petroleum operations except interest incurred under a Production Sharing Contract (PSC).<\/p>\n
Section 306 of the PIB, like most global fiscal regimes excludes some categories of tax deductions – general, administrative and overhead expenses incurred outside Nigeria in excess of 1% of capital expenditure and 20% of any expenses incurred except for goods or services not available in Nigeria in the required quantity or quality. Furthermore, legal and arbitration costs related to cases against the tax authorities or the Federal Government except awarded to the company during the legal or arbitration process will not be tax deductible. Also excluded from the deductions are costs incurred in organising or managing any partnership, joint venture or other arrangement between or among companies, gas flaring charges, insurance costs payable to an affiliate of the company, any signature or production bonuses and costs of obtaining and maintenance of a performance bond under a PSC.<\/p>\n
As regards gas operations, taxing stimulus available to upstream gas operations is limited to tax holiday under the Companies Income Tax Act, which allows for gas supply exclusively for domestic market. Dividend distribution by upstream companies will not be affected by the withholding provision of the bill provided such profits have been subject to NHT and CIT.<\/p>\n
Nigeria\u2019s fiscal regime in comparison to its competitors and peers still remained attractive. The PIB introduces a more balanced and fair cost based incentives regime in place of the production-based regime -government revenues come from production and not cost.<\/p>\n
Based on ranking by government take and attractiveness to investments, the proposed (PIB) fiscal regime appears to be in the median percentile. In other words fewer governments appear to take a smaller share of the rent than what the bill is proposing. The global international average for CIT is 35%, while Nigeria\u2019s is 30%. Also, the international average for government equity for PSC is 75% – Saudi Arabia 100% Angola 78%, Norway 78% Ghana 80% more than what the PIB is also proposing. For example, Ernst & Young 2012 global oil and gas tax guide stated that, \u201cthe UK made two significant changes by increasing the tax rate for existing petroleum operations from 30% to 40% in 2002 and then another increase to 50% in 2005.The tax rate for the large old legacy fields like Ninian, Brae and Forties rose to 75%. …The negative financial impact to IOCs from these changes was one of the largest in the world.\u201d With these increases the North Sea still remains an attractive investment region to international oil companies.<\/p>\n
However, the above stated figure oversimplifies the question of the fairness and attractiveness of fiscal regimes and may, in fact, be misleading. Companies do not invest on the basis of the government\u2019s notional share of the returns only; they focus on the investor\u2019s actual economic returns on their investment and value creation \u2013 including project risk.<\/p>\n","protected":false},"excerpt":{"rendered":"
By Felix Ayanruoh The hue and cry over the fiscal regime proposed by the PIB before the National Assembly is nothing new when it come petroleum development. Although host government…<\/p>\n","protected":false},"author":1,"featured_media":8382,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[7],"tags":[],"class_list":["post-8378","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles-opinions"],"yoast_head":"\n