Nigeria, Africa’s largest economy is said to have lost about $3.3billion (N653billion) as a result of a ten-year tax break granted by successive administrations to some of the world’s biggest Oil & Gas Companies –Shell, Total and ENI.
Apart from the sheer value of the lost revenues from tax incentives, decisions to grant them are often shrouded in secrecy and not based on a thorough public cost-benefit analysis, according to agencies of the civil society and trade unions, who met last week in Abuja to deliberate on “tax incentives and the implications for development in Nigeria.”
Nigeria and other resource rich developing countries are encouraged to review their tax incentive policies, publish those policies and practices and all communications with corporations pertinent to tax incentives, and collaborate with other countries to end harmful regional tax competition.
Calculations based on the annual accounts of the Nigeria Liquefied Natural Gas (NLNG) company by Johannesburg-based Action Aid International –a non-partisan, non-religious development organisation –show that foregone tax revenue from Shell is $1.668 billion; Total – $977 million; and Eni’s share- $677million.
The tax breaks, granted in 1990 under military rule, kicked-in in 1999, lasted 10 years, and the impacts are still being felt. The formation in 1989 of a Joint Venture (JV) between NNPC, Royal Dutch Shell (Netherlands & Britain), Total (France) and Eni (Italy), called NLNG, to exploit Nigeria’s huge reserves of gas, was important for Nigeria. The consortium is Nigeria’s major company in the liquefied gas sector.
Together, the three European companies hold a 51 percent stake in the consortium, while the state-owned NNPC holds the rest. This brings the estimated loss of tax revenue from the consortium alone, for the period between 2005 and 2013 to $3.3 billion.
“This is a conservative estimate for the following reasons –The estimate only includes lost tax revenues from two taxes: corporate income tax and education tax. It excludes all other taxes exempted under the tax holiday. The calculations only include lost tax revenues from the three private companies’51percent share of the Joint Venture.”
The Consortium was founded in 1989 by its current shareholders and in 1990, the Nigerian parliament passed the unique‘ NLNG Act’ granting the ten-year tax holiday – making the company exempt from all corporate tax payments for the first ten years of operations. The Act also permanently exempts the Consortium from a range of other taxes. The law stayed dormant for nearly a decade before entering into force in October 1999, when the Consortium started operations.
In 1989, companies with pioneer status were given tax holidays for the first three or five years of operations. Tax holidays are not uncommon in Nigeria. Domestic and foreign companies in industries considered vital to Nigeria’s economic development have been granted pioneer status tax holidays for years.
“However, while tax holidays are normal, ten-year tax holidays are not, nor are tailor-made laws. The Consortium is the only company in Nigeria with its own law defining its tax framework. Unfortunately, there is little publicly accessible information about how a special tax framework was created for the Consortium.
“ The Consortium was effectively given three tax-free periods over a period of 12 years: years 1-5 of operations when all companies with pioneer status are tax exempt; years 6-10 of operations, when typically all pioneer status companies start paying corporate income tax (CIT) at 30 percent; and years 11-12, when the Consortium enjoyed a further CIT-free period due to deferred tax assets accumulated during their extraordinary tax holiday,” according to a recent report by Johannesburg -based Action Aid International, a non-partisan, non-religious development organisation.
“This massive tax break was a triple whammy. First came a five year tax holiday granted to most international energy investors in Nigeria; second, an extension for a further five years, exceptionally allowed for this particular deal, and third, tax allowances that would have been used during the tax holiday were rolled over and exempted the companies from tax for a further two years,” according to Action Aid.
“West Africa States offer formal corporate tax incentives, but also off-the-books or discretionary incentives in special deals with companies. Regional tax competition is encouraging countries to give away much more than necessary to attract investment.
“Incentives regimes must be rationalised by bringing them all under the control of a single entity with effective and resourced oversight mechanisms to ensure accountability and transparency of public spending,” the non-partisan organisation said in another co-authored report with Tax Justice Network-Africa (TJN-A), a Kenya-based member of the Global Alliance for Tax Justice.
There are several questions regarding the Consortium’s taxes that are still unanswered. The Consortium and the Nigerian tax authority, the Federal Inland Revenue Service (FIRS) have different views on the Consortium’s tax obligations, beginning with FIRS’ discontent with the tax holiday granted through the NLNG Act.
In a 2012 newsletter from FIRS, the then Director of Oil and Gas, FIRS, Bamidele Ajayi, stated: “upon the expiration of the tax holiday in 2009, it has been difficult to get them to clear up tax liabilities because of the complex clauses in the tax holiday document which made it an open-ended document.” The dispute settlement between the Consortium and FIRS illustrates that transparency around laws. Accounting details and payments is crucial for accountability to governments of countries where MNCs operate, said Action Aid which also estimates that corporate tax incentives cost developing countries over $138 billion every year.
Tax incentives, like cuts to headline tax rates on corporate profits have negative long-term impacts by encouraging harmful tax competition.
IHEANYI NWACHUKWU
