A total of $22 billion will be lost by Nigeria in the form of tax holiday and divestment tax forfeitures between 2014 and 2019 according to a government document seen by BusinessDay.
The losses resulting from a bogus tax exemption policy begin at $1.232 billion in 2014, $2.080 billion in 2015, $2.445 billion in 2016, $2.378 billion in 2017, $2.265 billion in 2018 and a whopping $9.4 billion in 2019 which the government called “a cataclysmic year.”
The 23 page document prepared by Timothy Okon of the Nigerian National Petroleum Corporation, questions the position by some that the oil divestment will help boost the country’s proven oil reserve levels but it is in the area of tax losses that it was more scathing.
Two basic laws govern divestment of assets in Nigeria oil and gas sector. These are the capital gains tax, CGT, which prescribes a tax of 10 per cent of the capital gains arising from the disposal of an asset and the petroleum profit tax, (PPT) which allows for the deduction of acquisition cost as qualifying capital expenditure.
According to the document, “the combined effect of tax holiday and unlimited tax loss carry forward, means that 2019 will be a cataclysmic year in which about $9.4 billion in taxes will be eligible to be deducted (forfeited). From our calculations, all the divested assets in 2014 and 2015 that have been given 5-year tax holidays will not be eligible to pay taxes until 2023.
“The capital gains tax is the only positive income earned by the government in the divestment. All other cost associated with the divestment result in tax losses for the government.
“The apparent granting of tax holidays although illegal, introduces further losses to government. The net effect of the deductibility of the acquisition cost at a lower rate tax of 65.75 per cent for new companies, the unlimited tax loss carry forward and tax holidays will have the effect of significant revenue loss to the government,” the report said.
In particular, a review of the level of capital gains tax (CGT) that is used by countries to secure maximum revenues for the state, show that Nigeria lags significantly behind peers.
In Nigeria, CGT is taxed at 10 per cent whereas it is 40 per cent in South Africa, 35 per cent in Zambia and Zimbabwe, 30 per cent in Uganda, 25 per cent in Botswana, 20 per cent in both Cape Verde and Tanzania and 15 per cent in Senegal.
Many have long questioned the appropriateness of granting tax holidays in an old industry like oil and gas and where until the PIB imbroglio emerged, there was hardly any want of investment into the sector.
The document further acknowledged that factors like militancy, community unrest, pipeline vandalism and crude theft, as well as fiscal uncertainty, may be fueling the alarming rate of divestment by the IOCs but its author was quite clear in singling out divestment by the Anglo Dutch oil giant Shell.
According to him, “in many respects, the Shell divestment represents capital flight.”
Since 2010, there are currently 28 OMLs, which have either been acquired or awaiting approval of the Petroleum Minister. Of this deal total, 19 have been completed, three awaiting the minister’s approval while six have been slowed down by legal disputes surrounding them. All the oil asset sale in question are valued at $7.71 billion and they account for 401,000 barrels of day oil production, about a sixth of the nation’s total oil production.
The 28 OMLs are estimated to hold a total of 1.83 billion barrels equivalent in oil reserves and another 2.30 billion barrels equivalent in gas.
Of these, the largest are OML 30 believed to hold 1.86 billion barrels equivalent of oil and OML 34 with 928 million barrels equivalent of oil.
