President Muhammadu Buhari has submitted a new Finance Bill to National Assembly seeking to undertake a wide range of reforms in Nigeria’s tax laws aimed at stimulating economic growth and reducing the budget deficit as it shores up government’s non-oil revenue stream.
Some of the strategic objectives of the new bill include promoting fiscal equity, reforming domestic tax laws to align global best practice, supporting small and medium enterprises (SMEs) and introducing tax incentives for investments in infrastructure and capital markets. The oil and gas sector has both incentives and disincentives to investment flows from the Bill.
Gas utilisation incentive for downstream companies
The new Finance Bill offers incentives for companies in the downstream oil and gas sector that are deliberate and strategic about gas utilisation. The Companies Income Tax Act (“CITA”) provides that companies engaged in gas utilisation (downstream operation) are granted a series of incentives for utilisation of gas. These incentives include: a tax-free period for up to five years, accelerated capital allowance after the tax-free period, tax-free dividends during the tax-free period and tax-deductibility of interest payable on loans obtained with the prior approval of the Minister for a gas project.
The Bill proposes to modify Section 39 through the following: capital allowances will be computed and considered utilised during the tax-free period such that after the tax-free period, the capital allowance will be claimable on the tax residual value of qualifying capital expenditure (QCE). It deletes the need for Ministerial approval for tax deductible interest and Companies cannot claim Gas Utilisation Incentives (GUI) and Pioneer Status Incentive (PSI) on the same QCE.
According to PricewaterhouseCoopers (PwC) in its ‘Nigeria’s Finance Bill Insights Series’ the proposed amendment integrates the GUI and PSI into one incentive framework that would be applicable to downstream gas utilisation. Under the new consolidated framework, the tax-free period under the GUI is renamed as ‘pioneer period’.
The Bill introduces a clause which prevents companies that have enjoyed incentives under the Industrial Development (Income Tax Relief) Act (i.e. PSI) from utilising the GUI defined under CITA. Prior to this amendment, companies who have enjoyed the GUI, which is a three to five-year tax-free period could, theoretically also apply for PSI under Industrial Development Income Tax Relief Act (IDITRA), thereby enjoying another three to five-year tax-free period.
Upstream hit by 10% withholding tax
The proposal to repeal section 60 of the Petroleum Profit Tax Act (PPTA) and Section 43 of CITA means the dividend distributed from profits already charged to Petroleum Profits Tax would be subject to withholding (WHT) up to 10 percent. This could be quite adverse for the upstream oil and gas exploration and production sector which is chargeable to the highest tax rate (up to 85% in some instances).
This will affect the valuation of oil and gas assets; global competitiveness and investment appraisals going forward. Upstream oil and gas companies with significant retained earnings may consider distribution before the Finance bill is passed into law as there are no grandfathering rules in the proposed Bill.
Nigeria may become unattractive as group headquarters
Currently, companies are charged to tax at 30 percent on their dividend distributions where such dividends exceed the taxable profits for the year notwithstanding that profits being distributed may have been taxed in prior years, exempt from tax, or taxed under different tax law.
This particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location. The Finance Bill proposes changes to limit the application of the tax only to untaxed profits that are not exempt from tax.
Experts have sometimes argued that with peak oil demand forecast to happen around 2035, economic reforms need to stimulate non-oil exports. But the reality though is that the stream of income from oil revenue is still critical for massive industrialisation and diversification of the country.
