‘Pioneer status incentive to indigenous and marginal field operators will boost Nigerian economy’
Azeez Alatoye is a lawyer and solicitor of the Supreme Court of Nigeria , the Chief Executive Officer of Ascension Consulting Services and Director-General, Ascension Academy Institute Limited, Lekki, Lagos. He is also a chartered tax practitioner and Fellow of the Chartered Institute of Taxation of Nigeria and a Fellow, Institute of Chartered Accountants of Nigeria. In this interview with journalists including Cleopatra Eki, he discusses the impact of taxation on the Nigerian economy among other issues. Excerpts.
There seems to be some uncertainty or confusion surrounding the issue of industrial development through the grant of pioneer. Why so?
There should be no confusion at all as 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 incentives are 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 fund 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. An example is the tobacco industry. Therefore, the tax incentive is a tool that is used to improve the development of any sector.
In my opinion, 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.
However, 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.
Government has 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?
Clearly, the government has been seeking to improve investment in the oil and gas sectors but I think the first issue to clarify is why should the government encourage the oil and gas businesses which many view as Dollar businesses? This is an issue a lot of people misunderstand but which is actually quite straightforward. 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 intends to increase its daily production quota from 2.5million barrels to 4 million barrels per day. The target year was 2010. This was later moved to the 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 an extra 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 and they became 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 needed to pay, they could hold back and use to support funds from the banks for further exploration and production activities. The objective of the government is the production of the additional 1.5million barrels to achieve the 4 million barrels.
If everyone were 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 fund to meet production or whether mere instruction would lead to any result.
Are there any other ways the government can use taxation to encourage investments?
Yes, there are many other ways. The Nigerian government, like every other government in the world, has adopted several widely acceptable practices to encourage economic development within the country. All these are backed up by various laws. Another way is the Tax Free Zone. In the tax free zones, no taxes are paid by an operator within the zone as long as it is an approved entity and it limits its activities to the zone. Presently, Nigeria has about 22 free trade zones. An example is the Onne Oil and Gas Free Trade Zones (OGFTZ) in Port Harcourt.
The objective of these Tax Free Zones is to boost economic activities and provide employment to a wide range of Nigerians.
Back to the subject, 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 these groups.
Due to a range of other challenges, especially the security threats, the production level had not reached 4million but instead of the current 2.7million barrels productions would have still remained 2.5million barrels. Recently, the President had promised the indigenous oil and marginal filed operators support so that they can increase their contribution to 1.2million barrels per day from the current 200,000 barrels per day. If this target is to be achieved be achieved by the year 2020, it is important that security is guaranteed in addition to the government supports.
So, while it could be said that the government is yet to achieve the set target, we can say that the push of the local producers’ contribution from a total
of about 80,000barrels per day to about 200,000 barrels per day is an achievement itself.
As an informed stakeholder, do you recall any infractions on the PSI since inception?
The grant of pioneer status incentive is an absolute discretion of the government, backed by both substantive and procedural laws and so, it is not something that anyone can force the government to grant. It has a complex procedure involving application, making business cases, inspections and approval processes by at least three government agencies and therefore, it is not as easy as one may think or for anyone to 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 was 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 why do they 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’ve already been 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. First, 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 are 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 support them, is the government to be commended or condemned. 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 don’t have a block and you are given pioneer, you would simply be losing because the 2% processing fees you pay to the government is lost and all your efforts will be a total waste and there would be 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 segment of the Nigerian economy, may be doing so as a result of insufficient information about the scheme. The government benefited 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 are based on production. It also means more revenue to the government in transaction taxes including withholding taxes and value added taxes.
Moreover, the oil companies will benefit to the extent of having 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. I give you the example of Nigerian LNG. It was given 10 years tax holiday. I was so glad that the company was finally located in Nigeria as against any other neighboring countries that have more years of grant. Ghana is happy to grant 12 years tax holiday and Cote d’Ivoire is even happy to grant 15 years.
Today, Nigerians are happy with the contribution of Nigeria LNG to the Nigerian economy in all ramifications. And it is local companies that are making countries like Malaysia proud.
Unfortunately, as a nation, our culture of long-term investment is very poor and unacceptable. If I had been in charge, Nigeria should have invited more investors about 15 years ago, negotiated 10 years tax holiday for the likes of Nigerian LNG and today, it would have been a totally different story. Nigerian government and Nigerians would have been happier for it.
Households in Nigeria would have switched to 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 can have a cathartic effect on the quality of life and arrest potential insecurity by mopping up able-bodied men from the streets. Wherever the views may differ, it cannot be argued that the provision of employment contributes negatively to any society. It cannot also be said that the social responsibilities fulfilled by these companies contributed negatively to society. All these are complementary to the efforts of the government. So, 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?
As I said earlier, 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, the local companies have moved up by 120,000 barrels per day. As for the indigenous and marginal oil companies, the volume of loans 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 utilised 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 maximised?
In my view, on the side of the government, there must be a clear definition of what it wants to do and 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 that it exceeds it.
The local oil companies would do themselves a lot of good if they invest the funds wholly in further productions and keep growing their capital base beyond the years of the pioneer period 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 were a call for employment today, I bet you, the vacancies would be filled immediately.
Why, in your opinion, is the average Nigerian largely ignorant of the PSI policy?
It is majorly the 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 recent publication inferring this.
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 because it would reduce its own current collection but increase its 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 latter administrations in subsequent collections. All these are intellectual exercises that need to be well coordinated at the government level. There are other people whose industries are yet 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. It is left for the government to stand 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 personal perspective but in the overall good of the country.
What steps do you think government should take to improve the PSI at this time?
There will always be need for improvement in any sphere of life. The first thing is for the government to carry the people along through enlightenment programmes. This would give people an opportunity to contribute to the grant. There is also a need for reform in all aspects of our legal system. The law should be reviewed such that amendments could be easily made where needed. Thirdly, the grant should be subjected to rigorous intellectual processes to avoid allegations of it being deficient. Fourthly, there must be monitoring of the scheme to ensure that the government objectives are met.
Finally, there must be enforcement of the terms of grant. The government should have the courage to sanction deviation from the terms of grant by either cancelling or restricting it as the law provides.
Final take on this subject…?
My take is that government should adopt a scientific approach on the issues of PSI, enlighten the people on a continuous basis, and strengthen its monitoring and enforcement procedures to enable the country to continue to enjoy the benefits of the PSI scheme.