Pioneer status incentive is crucial for indigenous and marginal field operators
The Chief Executive Officer of Ascension Consulting Services and Director General of Ascension Academy Institute Limited, Azeez Alatoye, is legal practitioner and Chartered Tax Practitioner as well as a Fellow of the Chartered Institute of Taxation of Nigeria and a Fellow of the Institute of Chartered Accountants of Nigeria. In this interview with JOHN OMACHONU, deputy editor, Alatoye sheds light on the importance of PSI in the Oil and Gas sector in Nigeria. Excerpt:
It seems there is an uncertainty or some confusion surrounding the issue of industrial development through the grant of pioneer. What is the confusion about?
There should be no confusion at all. The act is supported by the Industrial Development (Income Tax) Relief Act of 1971 now Cap 17, Laws of the Federation of Nigeria, 2004. In section 1 of that Act, the President is empowered to grant tax holiday to “any industry” that is not up to the economic requirement of Nigeria. As you have rightly identified, Pioneer Status is a scheme of the government for the development of any industry. It is one of the tax incentive schemes. Basically, tax incentive is used to encourage investment in a sector of the economy to boost that sector and get it to the economic requirement level of such a country. This is where tax is consciously reduced or totally waved by the government for the purposes of making funds available for further investment in that sector. It is like a student that would have ended up at Technical College but given tuition waiver to complete University degree. Meanwhile, it could also be used to discourage investment where the government increases the taxes and make the business unprofitable. The Tobacco industry is a vivid example. Therefore, tax incentive is a tool that is used to improve the development of any sector.
The confusion is not as to whether it does not promote a sector in an economy but whether it is necessary for that sector to be encouraged to grow beyond the current level of its operations. If there is no need for growth and the government grants the incentive, then, it would be a misplaced grant. Meanwhile, if the government identifies a shortfall in a sector of the economy, it can announce a tax incentive to attract more players and therefore get more products to boost the economy.
Governments have been exploring several ways of encouraging investment. In what special ways do you think taxation would help in this regard, particularly in the oil and gas sector in Nigeria?
No doubt, the government has been aiming high to improve investments in the oil and gas sector but I think the first issue to clarify is, why should the government encourage the oil and gas businesses that are seen as dollar businesses? This is a question that a lot of people do not understand and the answer is very simple. The people are not looking at what the government is looking at. For instance, in the oil and gas industry, the Nigerian government since 2005 had announced that it intended to increase its daily production quota from 2.5million barrels to 4 million barrels per day. The target was year 2010. This was moved to year 2020. Hitherto, the industry was quite comfortable at the level of 2.5million barrels per day. However, with the challenge from the government to produce more 1.5million barrels per day, some level of investment is required. The other aspect is that, the government wanted the indigenous and marginal filed operators who are local or Nigerian businesses to take up the challenge. They are then confronted with how to raise funds. To demonstrate its seriousness, the government approved pioneer status for the industry, which means that, whatever amount of taxes they need to pay, they could hold back and add to it to raise more funds from the banks for further exploration and production businesses. The objective of the government is the increased production of the 1.5million barrels to achieve the 4 million barrels. If everyone is speaking from this perspective, we can then argue as to the modalities of the incentives that are required. Some people are of the view that, the government should grant production based incentive while some feel the government should just give mandate for the achievement of its target. The gap that these views fail to address is how they would raise funds to meet production or whether mere instruction would lead to any result.
The Nigerian government came up with the Pioneer Status Incentive (PSI) a few years ago. How has this played out in the sector?
It has contributed in a reasonable way towards the achievement of the government objectives from the contribution of the indigenous and marginal field operators’ perspective. For instance, when the International Oil Companies (IOCs) started divesting the onshore assets especially Shell, if the indigenous and the marginal field operators had not taken them over, the Nigerian production level would have dropped by the contribution of this group. Due to a range of other challenges especially the security threats, the production level had not reached 4million but instead, the current 2.7million barrels production would have still remained 2.5million barrels. Recently, the President promised the indigenous oil and marginal filed operators support so that they can contribute up to 1.2million barrels per day from the current 200,000 barrels per day. If this target will be achieved by year 2020, it is important that security is guaranteed in addition to the government support.
So, while it could be said that the government is yet to achieve the set target that is now reset for the year 2020, we can say that, there has been a remarkable achievement that pushed the local producers’ contribution from a total of about 80,000barrels per day to about 200,000 barrels per day.
Is that the only way the government can use taxation to encourage investments?
No. There are many other ways. The Nigerian government like every other government of the world has adopted several practices widely acceptable to encourage economic development within the country. All these are backed up by various laws. One of the other ways is the Tax Free Zones. In the Tax Free Zones, no tax is supposed to be payable once the operator within the zone is an approved entity and it limits its activities to the zone. Presently, Nigeria has about 22 free trade zones. One of them is the Onne Oil and Gas Free Trade Zones (OGFTZ) in Port Harcourt. The essence of this Tax Free Zones is to boost the economic activities and provide employment to a range of the good people of Nigeria.
As an informed stakeholder, do you recall any infraction on the PSI since inception?
The grant of Pioneer Status Incentive is an absolute discretion of the government, backed by the law, both the substantive and the procedural laws and it is not something that anyone can force the government to give. It has a complex procedure involving application, making business cases, inspections and approval processes, at least by three government agencies and therefore, it is not as easy as one may think that anyone can outsmart the government. If the procedures are followed, I believe that the question of infraction would not arise.
Some of the issues that people have raised are that oil and gas companies are not under the Companies Income Tax and therefore the government should not have given them. When you asked them whether oil and gas companies are not required to file Companies Income tax returns from 18 months after incorporation, they will respond in the affirmative. You further ask them whether oil and gas companies apply for tax clearance certificate and are issued companies’ income tax clearance certificate, they will also answer in the affirmative. Then ask them, why do you then say they are not to be given, when the Industrial Development Income Tax Relief Act empowers the President to give it to any industry? What would probably end the discussion is that, the government has given them adequate incentives before. When you ask for the list of the incentives they were already given, you will be directed to expenses deductibles under section 10 of the Petroleum Profits Tax Act, LFN 2004 and capital allowances under schedule of the Act.
There are two questions here. Firstly, is there a business that is not allowed to deduct its business expenses and capital allowances that are wholly exclusively and necessarily incurred for the business?
Secondly, if as claimed, those deductions as sufficient, why are the IOCs divesting? Are they tired of making profits or what? If Nigerian companies are taking up the security challenges of the operating environment, and the government supports them, is the government commendable or condemnable? In my own view, I think the government has taken the right decision and it cannot be said to be an infraction when the grant and the procedures are legally supported. Another issue is whether people who do not have oil blocks were not given pioneer status so that they can claim tax benefits. This is a very naïve proposition. This is not a payment by the Government like Export Expansion Grant (EEG) or fuel subsidy. This is something that you generate and you re-invest in further exploration and development activities for further production. So, if you do not have a block and you are given pioneer, you will simply be a loser because the 2 per cent processing fees you pay to the government is lost and besides, all your efforts will be a total waste as there is no benefit to such a company.
Who would you say is the greatest beneficiary of the PSI scheme and why?
The beneficiary of the PSI can be viewed from two standpoints; there are direct beneficiaries and indirect beneficiaries. The direct beneficiaries are the government and the local oil companies. The indirect beneficiaries are the employed individuals and communities with improved corporate social responsibilities. Most persons, who complain about the PSI across all segments of Nigeria, may be doing so as a result of insufficient information about the scheme. The government benefits by the quantum of increased production that would have reduced the level of productions assuming the divested assets were not worked over and put back to production. This means more income to the government in royalties that is based on production. It means more revenue to the government in transaction taxes including withholding taxes and value added taxes.
Secondly, the oil companies will benefit to the extent that there is a base fund they could use to raise more funds from the banks for more exploration activities. If such base funds are not available, the only option left to them is to operate at the level they are or at their own pace, not at the government pace. After the pioneer period, the government tax revenue will go up materially to the extent that it would recover far more than what it gave as an incentive within the next five years immediately after the pioneer period. For example, the Nigerian Liquefied Natural Gas was given 10 years tax holiday. I was so happy as a Nigerian to the extent that the company was finally located in Nigeria as against any other neighboring country that has more years of grant. Ghana is happy to grant 12 years tax holiday and Cote de V’ivoire is even happy to grant 15 years. Today, Nigerians are happy with the contribution of NLNG to the Nigerian economy in all ramifications. Local companies are also making countries like Malaysia to be proud.
Unfortunately, as a nation, our culture of investment in long term is very poor and unacceptable. Left to me, about 15 years ago, Nigeria should have invited more investors, negotiated 10 years tax holiday for the likes of NLNG and today, it would have been a totally different story. Nigerian government and Nigerians would have been happier for it. Households in Nigeria would been using gas rather than still using some other orthodox means of cooking.
Apart from the government and the companies, the Nigerian masses are indirect beneficiaries of the PSI schemes in terms of employment and corporate social responsibilities to the communities. This has a catalytic effect on the quality of life and arrest potential insecurity by mopping able men from the street. Irrespective of what anyone may say, it cannot be argued that the provision of employment contributes negatively to any society. It cannot also be said that, the social responsibilities by those companies contributed negatively to any society. All these are complementary efforts to the efforts of the government. For me, the key thing is harnessing the benefits of the PSI.
Are there specific examples of benefits the PSI has brought to the oil and gas sector in Nigeria?
The specific benefits are the increment in the production. This can be measured by the numbers of barrels associated with the scheme on the overall. For instance, local companies have moved up by 120,000 barrels per day. As for the indigenous and marginal oil companies, the amount of loan they are able to raise for their businesses is a noticeable benefit while for the Nigerians, employment, improved corporate social responsibilities and benefits from the government spending of the contributions from the PSI.
What concerns could government genuinely have on the management and implementation of the PSI policy?
One of the genuine concerns that the government could have is whether the tax relief was utilized as applied for. Since this is measurable in number terms, it is fairly simple. Two key tools that the government could use to ensure compliance are monitoring and enforcement of the terms of grant. Another aspect of concern is whether the local companies are employing or have employed as they promised during the process of the grant. Finally, the government should be able to control the approvals where necessary. Again, this is also measurable.
As to monitoring, the Nigerian Investment Promotion Commission is empowered to monitor compliance with the terms of the grant and section 7 of the IDITRA is very clear. The government can cancel or restrict any grant and this is why I say that, the whole scheme is wholly within the control of the government.
What do you think stakeholders should do to ensure the benefits of the PSI are maximized?
In my view, on the side of the government, there must be a clear definition of what it wants to do. In this case, the government is clear. The second issue is where the objectives have not been met, what does it do? It simply has to move on with the scheme at the appropriate time to ensure that not only it meets its objectives but exceeds it.
The local oil companies would do themselves a lot of good if they invest wholly the fund in further production and even beyond the years of the pioneer period, keep on growing their capital base so that they can have the strength of the IOCs.
The masses seem not to have a choice as to whether they want to maximize the benefits or not. Of course, if there is employment today, I bet you, the vacancy will be filled immediately.
Why in your opinion is the average Nigerian largely ignorant of the PSI policy?
Firstly, it is a challenge of the overall literacy level of Nigeria. Apart from the professionals especially the lawyers, accountants and tax practitioners, hardly would you see anyone that understands how this scheme works. What many people think is that, it is a payment to the oil companies just like the EEG or the fuel subsidy. They would even say that the government declared bonanza! I laughed when I saw some publications to that effect very recently.
Some people are not ignorant but are either selfish or simply mischievous. For instance, it is a good selfishness if a tax collector who is retiring in the next three years raises strong objection to PSI. It is understood because it would reduce his own current collection but increases his successor’s collections. This objection is understood and acceptable. A better way to manage this is to exclude the scheme from yardstick of current performance and consider the investment of previous administration in subsequent collections. All these are intellectual works that need to be well coordinated at the government level. There are other people whose industry is not the turn to benefit. Of course, it cannot be said that those categories do not understand but the issue is that, they are not benefiting and therefore, to them the scheme is not fine by them. Again, this is understood for obvious reasons. The government should therefore stand on its feet and achieve its set targets by the scheme. Government is a continuum and this type of scheme would benefit the nation. Therefore, it should not be seen from a personal perspective but in the overall benefit of the country.
What steps do you think government should take to improve the PSI at this time?
There will always be the need for improvement in any sphere of life. The first thing is for the government to carry people along through enlightenment programs. This would give people opportunity to contribute to the grant. Secondly, there is a need for reform in all aspects of our legal system. The law should be reviewed such that where amendments are needed, it could be easily made. Thirdly, the grant should be subjected to rigorous intellectual processes such that no one will come and say that a government scheme is deficient. Fourthly, there must be monitoring of the scheme to ensure that the government objectives are met and finally, there must be enforcement of the terms of grant. The government should have the courage to caution deviation from the terms of grant and either cancel or restrict it as the law provides.
JOHN OMACHONU