By Humphrey Onyeukwu
Several versions of the PIB materialized as an outcome and greatly skewed the many efforts in producing a bill that would fundamentally reform an industry lacking significant changes in administration and regulation. Discordant tunes emerged from the various stakeholders, each with self-confessed belief on how the reform agenda would have been carried out. The International Oil Companies, indigenous operators, international independents, regulators and even the minister alike, joined in a macabre dance of what a PIB should be and what it should not be.
A gust of relief may have seemingly arrived with the recent transmission of the bill to the seventh National Assembly. The Special Task Force for Implementation of the PIB, brainchild of the Federal Government’s concerted efforts to deliver on its promise to the nation in aftermath of the subsidy protests, submitted their finished product, a new Petroleum Industry Bill.

Investment decisions in the upstream sector are roused by numbers and economics. The fiscals of the new PIB replaced the Petroleum Profits Tax (PPT) with Nigerian Hydrocarbon Tax (NHT) and Companies Income Tax (CIT) as the applicable imposition on profits of companies engaged in upstream petroleum operations. NHT is chargeable at the rate of 50% for operations in onshore and shallow water areas, while the deep water region, frontier acreages and bitumen attract 25% NHT, while CIT is at 30% of the company’s net profits.
Concerns exist that the introduction of CIT under the new regime may amount to double taxation, especially for the marginal operators given the size of their operations. However, this may not be the case as assessment for CIT under the PIB does not trigger onerous fiscal implications. The CIT is determined on the basis that NHT shall not be tax deductible, transfer pricing rules recognizable to disregard any artificial or fictitious transaction that reduces liability to tax affected and most importantly, rents and royalties payable by concessionaires are allowable deductions. Also, the new PIB sought to transfer the hitherto 5 years tax holiday reserved for gas utilization (downstream) companies under the extant Companies Income Tax Act (CITA) to companies engaged in upstream gas operations of which their gas supply is destined for the domestic market.
Clearly, the tax holiday is a remarkable ploy to incentivize domestic gas obligations of the upstream play.

However, expenses relating to costs that are not intrinsically related or wholly incurred for the purpose of operations are not allowed deductions. This further extends to pre-acquisition/set-up costs for acquiring data on the reserve and pre-incorporation expenses, signature bonuses, production bonuses, head office costs exceeding 1% of total annual capex, gas flaring penalties and 20% of offshore expenses unless local content exceptions apply and regulatory approval is obtained.
The PIB terms substitutes the ongoing arrangements of investment tax credits applicable to pre-1998 PSCs and post-1998 PSCs investment tax allowances with the General Production Allowance (GPA). The overarching provisions of the GPA, which is to the exclusion of companies in JV arrangement with NNPC, make allowance based solely on production volumes irrespective of the asset cost which was the underlying principle of the ITC/ITA regime.
Royalty rates payable on acreages are not predetermined in the new PIB, however left at the prerogative of the Minister through regulations that would be issued pursuant to the Act. Under the pre-existing fiscal regime, royalty is depth-related with standard 20% royalty for all onshore operations and 18.5% for the swamp/shallow waters and a reducing sliding scale for offshore fields ranging between 16.67% to nil% at water depth exceeding 1,000 meters. The PIB of 2011 had prescribed a progressive royalty linked to production rates and oil prices with differentiations for oil and gas. In present terms, the new PIB fails to put forward a firm position on the dynamics of government take except that any fees and royalty payable shall be in the Act and any regulations made by the Minister pursuant to the Act.
This is obviously an anticlimax to the new PIB. One of the major thrusts that drive spending in the upstream sector is determination of government and investor takes as investors would be unwilling to commit risk capital without a clear sight of the fiscal imperatives. As it is, uncertainty would continue to pervade the clime and the much needed investment tonic to boost Nigeria’s declining oil reserves may continue to elude us.
Humphrey ONYEUKWU is a lawyer and President, The Lagos Oil Club. Read a previous article of his on this site: Dundee Alumni: Humphrey Onyeukwu speaks on Nigerian Petroleum Industry Bill
No comments:
Post a Comment