Controversy trails SEPLAT’s pioneer tax status

The experts noted that the Local Oil Companies-LOCs, that are operators of Oil Mining Lease- OML, under the Petroleum Profit Tax, PPT,  Act do not have a right to benefit from their Pioneer Status in Industrial Development (a Companies Income Tax, CIT Act subsidiary legislation).

They also argue that extant companies that have been paying PPT for many years cannot suddenly take advantage of the pioneer status.

They also argue that pioneer companies as defined in the Acts, are companies engaged in manufacturing, processing, mining, servicing and Agricultural industries whose products have been declared pioneer products on satisfying certain conditions.

Investigation based on the leaked letter, show that sometimes in August 2014, Dr. Ngozi Okonjo-Iweala, the former finance minister, wrote a letter to Umar, to complain about the indiscriminate tax holidays granted Seplat, Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria Limited, Suntrust Oil Company Nigeria Limited, and Niger Delta Petroleum Resources Limited as well as other companies that are alleged to have a link to top government officials between 2010 and 2014.

The letter, which was published in May 10, 2015 in some newspapers (not Hallmark ) alleged that the Federal Government lost huge revenue estimated around $20 billion to questionable tax holidays granted to the companies by NIPC.

She alleged that while oil companies were supposed to be taxed 65 per cent in accordance with the Petroleum Profit Tax Act (PPTA), certain officials of NIPC had fraudulently listed such companies under the Industrial Development (Tax Relief) Act and handed them pioneer certificates NIPC, as an agency of the government ,is charged with the responsibility of promoting investment opportunities in country.

Part of the incentives for investors is tax holiday for which the commission has to issue “pioneer status” certificates.

Hallmark gathered that the waivers are to be applied within certain criteria, specifically for companies investing in a virgin area that need incentives.

The ActPioneer conditions

– Publication of list of pioneer industries and products and issuing of pioneer certificates

 Where the President is satisfied that, ”Any industry is not being carried in Nigeria on a scale suitable to the economic requirements of Nigeria at all, or there are favourable prospects of further development in Nigeria of any industry;” or ”It is expedient in the public interest to encourage the development or establishment of any industry in Nigeria by declaring the industry to be a pioneer industry and any product of the industry to be a pioneer product.

The act giving the period for the tax relief states: ”The tax relief period of a pioneer company shall commence on the date of the production day of the company, and subject to sections 3 (6) and of 7 (2) of this Act, the tax relief period shall continue for three years.

The tax relief period of a pioneer company may at the end of the three years be extended by the President – ”For a period of one year and thereafter for another period of one year commencing from the end of the first period of extension.” or ”For one period of two years.” meaning that the maximum period for pioneer status is five years.

The section 16 highlighting what pioneer status does for a company states; Profits exempted from income tax, ”Subject to the provisions of subsection (2) of this section and section 17 (6) of

this Act, where in the application of Parts IX and X of the principal Act, a statement issued under section 14 (4) of this Act has become final and conclusive, any profits shown by that statement shall not form part of the assessable profits or total profits of the pioneer company for any year of assessment and shall be exempt from tax under the principal Act.

– The board may, in relation to any statement issued under section 14 (4) of this Act, declare that the whole or a specified part of the profits is not in dispute, and any such undisputed profits shall be exempted from tax under the principal Act pending the statement becoming final and conclusive.

Investigation shows that the sixteen companies are major beneficiaries of the Nigeria’s Local Content Act as a result of the divestment of the assets by the International Oil Companies- IOCs.

Seplat, one of the LOCs, in July 2010 acquired 45 per cent interest to operate three major Oil Mining Leases OML(s) 4, 38 and 41 from Shell Petroleum Development Company (SPDC) and Agip.

The company also has a 40% working interest in OPL 283 with Chevron’s OML 53, when the blocs were producing around 18,000bpd.

They obtained a five year pioneer status in 2013 which is expected to expire in 2018.

It was gathered that in 2011 and 2012, the Federal Inland Revenue Service, FIRS, had collected taxes on these assets to the tune of $95m.

By 1 January 2013, these same working assets had become ‘pioneer’, thereby contributing nothing as Petroleum Profit Tax on crude oil profits, corporate income tax on natural gas profits and educational tax since it acquired the divested assets.

But, it later stopped paying when it got the pioneer certificate.

The assets according to analysts based on the Act, cannot be said to be qualified for Pioneer treatment since it is already producing as it is an oil-producing assets unlike Oil Prospecting Lease.

According to them, the pioneer status is only applicable to virgin sector that need tax holiday to grow.

Although Okonjo-Iweala did not give the actual figures of revenue lost through the tax holidays, she said while oil companies were supposed to be taxed 65 per cent under the Petroleum Profit Tax Act, certain officials of NIPC listed such companies under the Industrial Development (Tax Relief) Act, thereby making them qualify for pioneer status.

She said the tax holidays were granted to companies “whose products do not meet the requirements of the list of industries or products specified in the schedule to the Act”.

She also disclosed that the officials of NIPC further breached the rule by backdating the pioneer certificates, forcing the FIRS to refund taxes that had already been paid into its coffers by these companies.

A beneficiary of this, according to Okonjo-Iweala, Seplat, is an operator of one of the fields belonging to NNPC.

“While SDPC (Shell) disposed of its interest to Seplat, NNPC disposed of its interest to NPDC (Nigerian Petroleum Development Company, being the exploration arm of NNPC).

Seplat, thereafter, was granted a tax holiday whereas NPDC continued to pay taxes from the operation of the same field. This confers an unfair advantage on Seplat,” she wrote.

As many as 15 oil companies are believed to have benefited from the tax holidays despite not being eligible but for the connivance of NIPC officials.

According to the Ribadu Task Force report, it cannot be a correct exercise of incentive for oil operators to be given pioneer status for an activity that is well established for over 40 years and which to any commercial consideration is a profitable venture.

The loss of revenue from the grant of pioneer status to oil operators is an avoidable loss.

The Task Force, however, recommended that any further consideration of the industry for pioneer status be stopped forthwith.

It added that because the application of the Act has been extended to oil exploration, the status to the LOC is ultra vires and ought to be set aside and or revoked.

It also recommended that all tax exemption by the companies must be reinstated from the date of the initial grant and payments be made to FIRS accordingly.

According to Mr. Olubunmi Martins, an energy expert, divested assets have offered Nigerian companies capacity to compete favourably with the International Oil Companies.

The pioneer status has made Nigerian players a stakeholder in the global oil and gas market.

Rather than being punitive, the government should withdraw the waivers; though there would not be local content without a sustainable waiver.

The market structure is bad as it could discourage investment in the sector.

He said, ”the pioneer status is considered expedient in the public interest for establishment of local operators in the oil industry in Nigeria, as demonstrated by the Local Content Act itself.

Therefore the FG has decided to forgo some tax revenue now in the hope of spurring more investment by the likes of Seplat which may leads to higher tax receipts (PPT as well as corporate income tax) in future when local companies taking over these OMLs increase production.

” What the government needs to do is to put corrective measures in place.

Discretionary power of the minister was used to offer the waiver. Correct the matter as they are but don’t go back to punishing the oil companies, as such act could impact the industry negatively.’’

Mr. Ugo Obi-Chukwu, a financial analyst, said that, if the government sensed a loophole, there is likelihood that it will come after Seplat and other oil companies.

If such happens Seplat and its shareholder stand the risk of back taxes for PPT it has not paid between 2013 and 2014 due to the Pioneer status that it obtained.

If the incoming government finds legal grounds to revoke Seplat’s pioneer status, then back taxes could crystallised.

The FIRS could achieve this by deciding to launch a back duty investigation on the company. The impact of this could be detrimental to shareholder value should it occur.

 Seplat in 2014 reported that it had crystallised a Deferred Tax liability of about N14billion in 2014 which it included in its profit after tax. If the FIRS finds parts of this tax credit as illegal it could request the company to refund the cash. This could also impact on the company’s operations and liquidity status.

He added that the company had in its 2013 Initial Public Offer-IPO, document projected that the waiver obtained could results in a whopping US$2.3bn tax savings estimated between 2014 and 2017.

He said, ”The Company’s projection is assumed on the basis of an increase in anticipated production levels which it frankly hasn’t achieved.

Since its IPO valuation was mostly hinged on the tax savings, any reversal whatsoever will negatively impact on investor sentiments and the ability of the company to make future projections especially on tax and fiscal issues.

Also concerned by the undeserving status, Proshare has complained that the country’s revenue has been handed out without cause to Seplat.

This is just as the company claimed it has saved approximately 85 per cent and 32 per cent of net revenue and corporate income taxes respectively payable to the FIRS.

It also noted that there is a growing discontent with the arrangement as at least one state governor has indicated interest in going to court to affirm the states’ right(s) over the ‘status’ conferred on SEPLAT to deny them of revenue that should rightly accrue to the government coffers and negate the wrongful use of the pioneer status waiver.

According to Mr. Kehinde Fagbohun, a concerned Nigerian, ”It is interesting that the pioneer status offered to Seplat was granted for the five year period at a go.

That’s certainly against the letters and spirit of the law. It is supposed to be for a three year period and then one or two years as stated in the law.’’

Seplat has however acknowledged some of this threat in its 2014 annual report of the company.

The Group continued to benefit from pioneer tax status in 2014 which resulted in the effective tax rate remaining consistent with 2013 (2014 and 2013: nil %).

It said that there was a tax credit in the prior year relating to the reversal of the deferred tax balance as a result of being granted pioneer tax status.

Post period end the Nigeria Investment Promotion Council (NIPC) notified oil and gas companies that are in receipt of the pioneer tax incentive of its intention to test compliance with the conditions under which the pioneer tax status was awarded to all companies, including Seplat, in order that the final two out of five years of the incentive be reviewed.

The group had noted that it is currently in its third year of the scheme and considers that it has met or exceeded these requirements, as evidenced by the investments it has made to develop its blocks and in particular accelerate the expansion of its gas business to supply the domestic market.

The company has however warned its shareholders and potential investors to track the actions of this incoming government regarding this issue.

The experts have however advised government to review its Acts which have been overtaken by the indigenous oil and gas companies.

According to them the pioneer certificate has caused serious decline in revenue from PPT.

They noted that investigation into the entire deals revealed an oddity, as it reveals that Seplat and other oil forms commenced exploration in 2012 without remitting tax, and later obtained the pioneer certificate in 2013.