Politics Today

A new report has revealed that Nigeria gave away an estimated $3.3 billion to Shell, Total and Eni through generous tax breaks over a seven-year period to compensate for their investments in the Nigeria Liquefied Natural Gas (NLNG) Company Limited.

This was contained in a new report prepared by British-based ActionAid, titled: “Leaking Revenue, How a Big Tax Break to European Gas Companies Has Cost Nigeria Billions,” which was made available to THISDAY yesterday by ActionAid’s country director, Ms. Ojobo Atuluku.

Shell, Eni, Total and the Nigerian National Petroleum Corporation (NNPC) own the NLNG under an incorporated joint venture arrangement.
The report showed among other findings that Nigeria lost $3.3 billion as a result of a 12-year tax break it granted to the three international oil companies (IOCs) for their investment in NLNG.

According to the report, granting such generous tax breaks to the European oil multinational firms was unnecessary because they had already made profits from their investments in NLNG within the first normal five-year tax holiday that Nigeria granted the companies under the pioneer status tax regime and which NLNG enjoyed.

It further explained that rolling over the tax breaks for another five years after the first, on the basis that it discouraged wasteful flaring of gas, among other reasons, was uncalled for since flaring gas in Nigeria is already an illegal act, hence tax breaks to discourage it were pointless and uneconomical.

The report noted that the massive tax breaks were enabled by the NLNG Act passed in 1990 and which granted the company the 10-year tax holiday in what it described as “triple whammy” cycles stretching from 1999 to 2012.

The tax breaks, it stated, did not just exempt the consortium from all corporate tax payments for the first 10 years of operation, but also permanently from a range of other taxes suggesting that more tax revenues may have been lost by the country from the generous concession.

Under the pioneer status law, a company is allowed to deduct the costs of interest payments and investments in physical capital and capital allowances from its pre-tax profits, making it easier to borrow to invest in capital equipment.

However, where tax holidays apply, a company can calculate what its tax benefits from interest costs and capital allowances would have been if it had paid corporate income tax (CIT) and then carry these deductible cost items forward on its balance sheet, and deducting its reservoir of deferred tax assets from its CIT obligations.

The report explained that the consortium did this as permitted by the NLNG Act but that the 10-year tax holiday ended in 2009 without the consortium paying CIT until 2012.

While describing the process through which the tax revenue was lost, ActionAid, a not-for-profit body registered in England and Wales, stated in the report that the first occurred through the five-year tax holiday which is granted to most investors in Nigeria; the second came from the five-year extension, exceptionally allowed for this particular deal; and the third was another tax holiday which was rolled over, effectively exempting the IOCs for another two years.

The report showed that the extraordinary tax breaks ran contrary to the country’s application of the pioneer status tax holidays to companies.

It added that even at the end of the tax holiday in 2012, an estimated $1.15 billion in taxes that the consortium was due to pay to the Nigerian government in 2013 had not been paid, adding that it was unclear how or if the Nigerian National Petroleum Corporation (NNPC) paid its share to the federal government’s accounts.

“The tax holiday extension meant US$2 billion of revenue was lost, and the rolled over allowances, where the same tax was effectively foregone twice, a further US$1.3 billion.

“This brings the estimated loss of tax revenue from the consortium alone for the period between 2005 and 2013 to US$3.3 billion. This is a conservative estimate,” said the report.

It however explained that the $3.3 billion lost was based on the tax that would have been due from the 51 per cent owned by Shell, Total and Eni, and that earnings from NNPC’s 49 per cent stake were presumed to have ended up with the federal government.

From the reported foregone tax earnings, Shell’s 25.6 per cent stake amounted to $1. 668 billion, Total’s 15 per cent share was $977 million and Eni’s 10.4 per cent share amounted to $677 million.

The consortium, it continued, paid no CIT for its first five years between 1999 and 2004.
“This was a normal incentive for investors in Nigeria and as such this tax exemption enjoyed by the consortium could have been granted under the pioneer status without the requirement for a special law.

“As such, the breaks enjoyed by the consortium during the first five years are not included in our calculation of the US$3.3 billion lost to tax breaks. However, it still represents a full five-year exemption from corporate tax,” ActionAid stated in the report.

ActionAid added that the grant was only one of many examples of wasteful tax incentives to foreign investors across the African continent, and that there are several questions regarding the NLNG consortium’s taxes that are still unanswered.

It said the consortium and the Federal Inland Revenue Service (FIRS) have different views on the tax obligations beginning with FIRS’ discontent with the tax holiday granted through the NLNG Act and that the estimate only includes lost tax revenues from two categories of taxes: corporate income tax and education tax but excludes all other taxes exempted under the tax holiday.

The report also advised the government to ensure that a proposed amendment to the Companies Income Tax Act of 2004 to extend the pioneer status tax holiday from five to 10 years does not go ahead, adding that these types of tax breaks had cost Nigeria so much, cautioning that new tax law, if enacted, would allow more companies to obtain 10 years tax breaks in the country.

But in a response from its General Manager, External Relations Division, Kudo Eresia-Eke, the NLNG faulted the claims made by the report.

Eresia-Eke explained that the report was misleading and false, adding that it had not broken any known law guiding business operations in Nigeria.

“The attention of NLNG has been drawn to a report by ActionAid, an NGO, which focused on the alleged impact of tax breaks on social services in Nigeria.

“The report makes several references to Nigeria LNG Limited and purported tax losses to the government totalling $3.9 billion as a result of tax breaks granted to the company.

“NLNG wishes to state that this claim is false and misleading.  It is most instructive to note also that ActionAid itself admits in its report that its figure is a ‘hypothetical’ one,” said Eresia-Eke in the statement.

Eresia-Eke added: “Contrary to ActionAid’s claim, the reality is that the federal government’s initial investment of US$2.5 billion, bolstered by the associated tax incentives, has so far yielded over US$33 billion in the form of dividends, taxes and feed gas purchases for the country over the past 16 years, with an additional US$5 billion accruing through corporate spend on local goods and services during the same period.

“The company paid $3.6 billion in Company Income Tax and Education Tax between 2014 and 2015. This is in line with NLNG’s corporate vision to help build a better Nigeria.

“Nigeria LNG Limited was established at a period when the LNG technology was still very new in Africa. Indeed, the establishment of NLNG made Nigeria the first country in sub-Saharan Africa to possess such new technology and the second such country in all of Africa.

“Considering the pioneering nature of such a company in Nigeria, as well as the huge investments required, running to several billions of dollars in foreign investments, NLNG was granted a 10-year tax holiday by the Government of the Federal Republic of Nigeria under the provisions of the Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act, CAP. N87, Laws of the Federation of Nigeria, 2004 ('NLNG Act').”

The statement noted that the concept of tax holidays was not an unusual practice in the global business community.
“Indeed Angola has notably offered as much as 12 years tax holidays to encourage investments in their LNG industry, while other countries like Oman, Malaysia, Qatar and Trinidad have offered up to 10-year tax holidays to attract LNG investments.

“Additionally, more generous tax incentive schemes currently exist in free trade zones in Nigeria where participants are granted absolute exemption from all forms of taxes and levies chargeable by any level of government, in perpetuity.

“Several well-known corporations in the country have and are currently investing in these zones (in logistics, infrastructure and refineries, to name a few of such ventures) on the basis of such perpetual and overarching tax incentives.

“NLNG’s tax holiday period was from 1999 to 2009 and, contrary to the observations in the report, is expressly provided for under Section 2 of the NLNG Act, an Act of parliament,” Eresia-Eke explained.

ActionAid’s report and NLNG’s reaction came just as the Nigerian Extractive Industries Transparency Initiatives (NEITI), FIRS and the Nigeria Customs Services (NCS), provided details of how the nation was shortchanged through the oil swaps between NNPC in conjunction with its subsidiary, Pipelines and Product Marketing Company (PPMC), and oil traders.

Other than outstanding tax liabilities, or tax evasion, several of the companies engaged in the swaps did not import refined products commensurate with the crude oil they were given for export under the deal, said NEITI.

The NNPC was accused of complicity in tax evasion through its subsidiary, Duke Oil Global Investment Ltd, which was registered in Panama in 1989, and operates from a London office registered in the United Kingdon since 1992.

All these were disclosed at the public hearing conducted by the House of Representatives ad hoc Committee on Refined Products Exchange Agreement/Crude Oil Swaps yesterday in Abuja.

According to NEITI, whereas Duke Oil exported 33,707,282 metric tonnes (MT) of crude oil in 2015, it imported 5,000MT of refined products in the same year.

The firm paid N26.5 million as tax by self-assessment, without opening its books to FIRS.
Also, Taleveras Nigeria Ltd imported about 40,000MT of refined products between 2013 and 2014, but exported 7,008,584MT of crude oil between 2011 and 2015 under the swap agreement.

It however paid taxes of N290 million, but has an outstanding of N859.9 million to pay to FIRS.
According to NCS, Trafigura Limited is not registered in Nigeria but exported 12,541,645.7MT of crude oil between 2010 and 2015, but there is no record of any imports of refined products.

FIRS also has no record of any tax paid into the coffers of the nation by the firm.
NEITI also revealed that the total estimated losses to Nigeria was $607.3 million and $502 million under the off-shore processing agreements in 2011 and 2012 respectively.

The acting Executive Secretary of NEITI, Mr. Ogbonnaya Orji, in his presentation to the ad hoc committee, disclosed that the organisation had recommended that the NNPC stops the oil swaps, and concentrates on importation as a short-term measure.

He blamed the estimated loss of $1.1 billion on the value chain, which he said was fraught with inefficiencies in processing fees, demurrage, freight, insurance and others.

“It was a good arrangement in the 1980s, because institutional arrangements and processes were very efficient at the time. Each of the lapses in processes and procedures have serious cost implication,” he said.

Orji further disclosed that the NNPC between 2011 and 2012 owed $3 billion to its importers.
The Chairman of FIRS, Mr. Tunde Fowler, in his submission, revealed that Aiteo Nigeria Ltd paid taxes of N262.7 million but has an outstanding liability of N256 million, while Ontario Nigeria Ltd paid taxes of N513 million, with an outstanding liability of N11.2 million.
On Duke Oil, Fowler said the NNPC has a responsibility to report on all incomes of the company to FIRS.

“However it has failed to comply in this regard. In our records, the company has cumulatively paid N26,546,666.75 since inception between August 2013 and August 2014. There are no further records of payments prior to 2013 and after August 2014,” he said.
He added that Trafigura Ltd, also a non-resident company, was not registered with the FIRS, even though it exported about 12.5 million MT of crude oil between 2010 and 2015.

“It has never filed any returns with FIRS and is therefore in breach of the relevant provisions of our tax laws, which require any company that carries on business in Nigeria to file returns on income derived in Nigeria," Fowler said.

The Assistant Comptroller General of Customs, Tariffs and Trade, Mr. Alu Sule Roberts, responding to queries from the committee members, insisted that Trafigura did not import any petroleum product into the country, unless it did so using another company.
The hearing will continue today.

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