Tax holidays granted to the Nigerian Liquefied Natural Gas cost the federal government more than $3.3 billion
| By Anayo Ezugwu | Feb 1, 2016 @ 01:00 GMT |
IN the last 16 years, Nigeria has lost more than $3.3billion to extraordinary tax exemptions granted by the federal government to some of the world’s biggest oil and gas companies operating in the country. The companies include Shell, Total and ENI, which form part of the Nigeria Liquefied Natural Gas, NLNG, Limited. The tax break started in 1999. The NLNG Act grants a 10-year tax holiday, exempting the company from all corporate tax payments for the first 10 years of operation.
A new report by ActionAid Nigeria, a non-governmental organisation entitled, “Leaking Revenue: How a Big Tax Break to European Gas Companies Has Cost Nigeria billions” highlighted the loss by the Nigerian government through the contentious pioneer status regime granted the company. The report said findings from its investigations showed that during the tax exemption period, the NLNG had calculated what its tax benefits from interest costs and capital allowances would have been if it had paid CIT.
However, these deductible costs items were forwarded in NLNG’s balance sheet by deducting its reservoir of deferred tax assets from its CIT payments. The report noted that although the tax holiday granted under the NLNG Act ended in 2009, the NLNG did not start paying CIT until 2012.
During the period of the holiday, the report said NLNG had accumulated a total of $2,157 billion in tax assets, which explained why the company paid no CIT in 2009, 2010, 2011 and part of 2012. The $1.148 billion that would have been due for payment in 2012 after the reservoir of deferred tax assets, the report pointed out, was however delayed following the report of further unrelieved tax obligations not reported during the year as “deferred tax liability”.
Although the report said under normal accounting practices, such deferred payments would eventually be paid, it however expressed doubts regarding when the NLNG would do so. Citing the example of the situation in 2013, the report said although $1.402 billion was booked under “current deferred liabilities” in the company’s balance sheet, no CIT was paid by NLNG.
“This massive tax break was a triple whammy”, the report noted. “First, came a five tax holiday granted to most international energy investors in Nigeria; second, an extension for a further five years exceptionally allowed for this deal, and third, tax allowances would have been used during the tax holiday were rolled over and exempted the companies from tax for further two years.”
The report criticised the tax arrangement, arguing that even with a normal five-year tax holiday, the NLNG would still have been profitable. A review of the company’s accounts showed that it earned a profit every year since 2004 if its tax holiday had ended that year.
“The difference in the Consortium’s actual profit (with the 10-year tax holiday) and the estimated profit it would have earned with a five-year tax holiday is less than 20% on average over the years 2004-2013,” the report said.
The Nigeria LNG is a joint venture project by the Nigerian National Petroleum Corporation, NNPC, in partnership with Royal Dutch Shell (25.6 percent), Total (15 percent), and ENI (10.4 percent). The consortium was established in 1989 to help Nigeria harness and exploit her huge reserves of natural gas resources for exports.
In a bid to encourage the company realise its objective, the federal government had granted a pioneer status to the project, an incentive granted legally to fresh investors that venture into difficult economic terrains to do businesses that positively impact the country’s economy. Under the pioneer status arrangement, benefiting companies are entitled to exemption from all corporate income tax payment for the first three or five years of operation in its chosen area.
A company with pioneer status is always entitled to deduct the costs of interest payments and investments in physical capital, capital allowances from its pre-tax profits, making it easier for it to borrow to invest in capital equipment. However, under the provisions of the NLNG Act approved by the Nigerian government in 1990, the company was not only granted the legal five years exemption, but also an extension for another seven years.
During the period of the extraordinary tax holiday, the NLNG was not only exempted from paying 30 per cent corporate tax on its profits for five years between 1999 and 2004, but also for an extended seven years period till 2012 valued at about $3.2 billion (about N630.4 billion). The exemption also covered a range of other taxes, including two per cent of its profits in education tax earmarked by the government for the advancement of education in Nigeria.
The exemption cost the country a total of $141 million (about N27.8 billion). The third component of the controversial exemptions, for which the report said was difficult to come by accurate data, covered capital allowances the partners got from government each time they bought equipment, which were allowed to roll over to periods not covered by the pioneer status regime.
Details of the loss through the dubious tax arrangement showed that the Nigerian government lost a minimum of $1,668 million (about N328.6 billion) in revenues through the share of tax the Shell BV should have paid for the period. Another $977 million (about N 192.5 billion) was lost through Total, in addition to $677 million about (N133.4 billion) through ENI, based on calculations from the NLNG annual accounts. The NNPC share was however not covered by the losses conveyed in the report.