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Scope of tax holiday provisions in the Nigeria LNG (fiscal incentives, guarantees and assurances) Act

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Tax holidays are government incentive programme that offer tax reduction or elimination to business. Almost always, tax holidays are granted in the hope of increasing a country’s gross domestic product (GDP) as well as attracting foreign investments. In Nigeria, several tax incentives, designed to promote investment have been introduced. One of such incentives is granting “pioneer status” to a business pursuant to the provisions of the Industrial Development (Income Tax Relief) Act, Cap I 7, Laws of the Federation of Nigeria, 2004.

The Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act, (“the NLNG Act”) is a Nigerian legislation with tax holiday provisions specifically granted in favour of Nigeria LNG (“NLNG or the Company”). Understandably, one justification for the tax holiday granted to the NLNG is that the Company is considered as one of the most significant economic projects carried out in Nigeria. Indeed, NLNG’s focus is to harness Nigeria’s vast natural gas resources and produce Liquefied Natural Gas (LNG) and Natural Gas Liquid (NGLs) for export. Thus, NLNG is an integral part of the revenue diversification programme of the Federal Government and over the years, has generated significant revenue and foreign exchange for Nigeria

This article highlights specific tax holiday provisions of the NLNG Act vis-à-vis the provision of section 15 of the (a) of the Nigeria Maritime Administration and Safety Agency Act (“NIMASA Act”) and Regulations made pursuant to the NIMASA Act, as well as section 43 (a) of the Coastal and Inland Shipping (Cabotage) Act

The relevant provisions of the NLNG Act under consideration are sections 6 (8) (9) (10) 7(7).

Section 6 (8) of the NLNG Act provides that where any shipping company owned directly or indirectly by the Company or one of more of the shareholders of the Company carries on the business of transport by sea of liquefied natural gas produced by the Company, such shipping company shall be exempt from tax in Nigeria under section 14 of the Companies Income Tax Act, or any other law, on the profits derived from that business.

In the author’s view, to rely on section 6(8) of the NLNG Act, it must be shown that the shipping company is owned directly or indirectly by NLNG, or one or more of its shareholders, and carries on the business of transport by sea of liquefied natural gas produced by NLNG. It is submitted that the phrase any other law should be construed narrowly. In other words, the construction of the phrase should be limited to provisions in other laws requiring tax payment by non-Nigerian companies engaged in shipping or air transport.

Section 6 (9) of the NLNG Act operates to exempt NLNG from the requirement to withhold tax or any other impost from payments made to shipping companies defined in section 6 (8) of the NLNG Act – shipping companies owned directly or indirectly by NLNG or one or more of its shareholders, engaged in the business of transport by sea of liquefied natural gas produced by NLNG.

Section 6 (10) of the NLNG Act is to the effect that the provisions of the National Shipping Policy Act and the regulations made thereunder shall not be applicable to the Company, its contractors, sub-contractors, its customers or a shipping company referred to in subsection (8) of this section to the extent that the National Shipping Policy Act has been repealed by section 63 (1) (a) of the NIMASA Act, section 6 (10) of the NLNG Act is partially ineffective. This is because, by virtue of section 61 (2) of the NIMASA Act, all Regulations, Orders and other subsidiary legislation made under the National Shipping Policy Act shall, so far as they are not inconsistent with the provisions of the NIMASA Act, continue in force as if they had been made under the NIMASA Act and shall be treated accordingly.

Section 7(7) provides in trenchant terms that no export duties, taxes or other duties, levies, charges or impost of a similar nature shall be payable or imposed on the export of liquefied natural gas or other hydrocarbons produced by the Company.

The issue that agitates the mind is whether pursuant to the above cited provisions of the NLNG Act, NLNG is exempted from paying: (a) 3 percent of gross freight earning on all international inbound and outbound cargo from ships and shipping companies operating in Nigeria, pursuant to section 15 (a) of NIMASA Act; (b) a surcharge of 2 per centum of the contract sum performed by any vessel engaged in coastal trade, pursuant to section 43 (a) of the Coastal and Inland Shipping (Cabotage) Act; and (c) levies payable under the Marine Environment (Sea Protection Levy) Regulations 2012 made pursuant to the NIMASA Act.

The resolution of this issue will turn on the settled principles of interpretation of statutes. The fundamental principle in the interpretation of statutes is that except same is ambiguous (or where same will lead to absurdity), a literal interpretation should be employed. Instructively, the word “shall” appears in all the sections of the NLNG Act under consideration. It is a well-established tenet of our statutory interpretation, that the use of the word “shall”, generally indicates the legislature’s intention to make a provision mandatory, as opposed to discretionary. See Agip (Nig) Ltd. v Agip Petroli International (2010) 5 NWLR (Pt. 1187) 348. However, depending on the context of its usage, the word “shall”, may be construed in a non-mandatory sense. See Cont. Res (Nig) Ltd v UBA Plc. (2011) 16 NWLR (Pt. 1274) 592. Generally, the word “shall”, will be construed in a non-mandatory sense where: (a) the statute’s purpose confute[s] the probability of a compulsory statutory design; (b)unjust consequences would result; and (c) no advantage is lost, no right destroyed, no benefit is sacrificed, either to the public or to the individual, by giving it a non-mandatory construction.

In light of the above, and after a careful reading of the provisions of the NLNG Act under consideration, this author is of the view that the word “shall” in these provisions should be construed in a mandatory sense. But the issue does not stop here!

Section 2 of the NLNG Act provides that the tax relief period for NLNG shall commence on the production day of the company and shall continue for a period of ten years. However, same may be terminated at the first anniversary date after the first five years when the cumulative average sales price of liquefied natural gas reaches US 3 dollars/mmbtu. From NLNG’s website, it appears that NLNG commenced production on liquefied natural gas on September 15, 1999. There is no information available to this author on NLNG’s cumulative average sales price for liquefied natural gas. Therefore, assuming that NLNG’s tax relief period was not determined on the basis of cumulative average sales price, the tax relief period should have terminated by September 15, 2009 – a period of ten years from September 15, 2009.

On the basis of the foregoing, this author is of the view that the provisions of sections 6(8), 6(9), 6 (10) 7 (7) of the NLNG Act have become inoperative by effluxion of time. Therefore, it appears without more, that NLNG is now subject to the provisions of section 15 (a) of NIMASA Act; section 43 (a) of the Cabotage Act and the Marine Environment (Sea Protection Levy) Regulations 2012, in so far as these provisions relate to, or fall within, sections 6 (8), 6 (9) 6 (10) 7(7) of the NLNG Act.

It is instructive to note the provisions of Paragraph 3 of Schedule II of the NLNG Act as follows:

“Without prejudice to any other provision contained herein, neither the Company nor its shareholders in their capacity as shareholders in the Company,shall in any way be subject to new laws, regulations, taxes, duties, imposts or charges of whatever nature which are not applicable generally to companies incorporated in Nigeria or to shareholders in companies incorporated in Nigeria respectively”

Admittedly, the taxes/levies payable under the NIMASA Act and the Regulations made pursuant thereto as well as the Cabotage Act are not generally applicable to companies incorporated in Nigeria or to shareholders in companies incorporated in Nigeria. Indeed, the taxes/levies payable under these statutes apply specifically to shipping companies and, a fortiori NLNG. In the circumstance, it would appear that NLNG can invoke the provisions of paragraph 3, Schedule II of the NLNG Act, for the simple reason that the NIMSA Act and the Regulations made pursuant thereto as well as the Cabotage Act were enacted/issued after the NLNG Act. On the strength of the foregoing, it can be argued that NLNG is exempted from subsequent legislations imposing on it, obligations to pay any form of tax, levies duties, etc. of whatever nature, in so far as these taxes, levies, duties are not generally applicable to companies in Nigeria or to shareholders of companies incorporated in Nigeria. However, there is room to argue that the provisions of paragraph 3, Schedule II of the NLNG Act should be read in consonance with section 2 of the NLNG act so that the application of paragraph 3, Schedule II of the NLNG Act will be limited to the tax relief period stated in section 2 of the NLNG Act. It is settled law that the provisions of a Schedule to an Act, cannot override the substantive provisions thereof. In Buhari v Yusuf (2003) 14 NWLR (Pt. 841) 477, the Supreme Court held that it would be quite contrary to the recognised principles of construction of statutes to restrain the operation of clear and unambiguous words of sections by reference to what appears in a schedule, table or form.

Quite apart from the foregoing, a possible argument against the operation of paragraph 3, Schedule II of the NLNG Act is that subsequent legislations (in this case the NIMASA Act and the Regulations made pursuant thereto and the Cabotage Act) are deemed to have impliedly repealed the provisions of paragraph 3, Schedule II of the NLNG Act. In the case of Abacha v Fawehinmi (2006) 6 NWLR (Pt. 660), it was held that although a latter statute may suspend or repeal an earlier one either expressly or by implication, suspension or repeal by implication is not, as a general rule, favored by the courts in the absence of clear words to that effect. Consequently, absent clear words in the NIMASA Act and Cabotage Act respectively suggesting the repeal of paragraph 3, Schedule II of the NLNG Act, same is deemed operative.

One case that provides some perspective to the operation of paragraph 3, Schedule II of the NLNG Act is the case of NDDC V NLNG Limited (2011) 4 TLRN 1, where the Niger Delta Development Commission (NDDC) contended that pursuant to section 14 (2) (b) of its enabling Act, NLNG, being a gas processing company was liable to pay to the NDDC, 3% of NLNG’s total annual budget. In declining liability, NLNG contended amongst other things that it was not liable to pay any such taxes being exempted by virtue of the uarantee and assurances contained in Paragraph 3 of the Second Schedule to the NLNG Act. The trial court after observing that paragraph 3 of the Second Schedule to the NLNG Act was unconstitutional, declined to declare same unconstitutional on the ground that the no relief in this regard was sought by NDDC.

On appeal, the Court of Appeal held, by a majority of 4 to 1, that the trial’s court pronouncement of the unconstitutionality of paragraph 3 of the Second Schedule to the NLNG Act was an obiter dictum and same was accordingly set aside. In his dissenting judgment, I. I. Agube, JCA. described the provisions of paragraph 3, Schedule II of the NLNG Act as “offensive” and “repugnant”. His Lordship further held the provisions of paragraph 3, Schedule II of the NLNG Act are deemed repealed in so far as they are contained in an existing law which violate the powers of the National Assembly to make laws for the peace, security and good government of any part of the country including the oil and gas bearing communities of the Niger Delta area, as entrenched by the provision of section 4 of the Constitution of the Federal Republic of Nigeria, 1999.

Under Nigerian law, a dissenting judgment does not represent the decision of the court -NMA v MMA Inc. (2010) 4 NWLR (Pt. 1188) 613. In Bamaiyi v the State (2001) WRN 16, the Supreme Court held that a dissenting judgment cannot be presented in preference to a decision of the majority on a point. Therefore, the dissenting views of I. I. Agube JCA, on the constitutionality of paragraph 3, Schedule II of the NLNG Act, powerful as they may appear, do not represent the position of the law on this point.

It is hoped that in no distant time, the court will have an opportunity to pronounce on the issues raised in this piece particularly, the constitutionality/ applicability of the provisions of paragraph 3, Schedule II of the NLNG Act.

Chinedum Umeche is an Attorney with commercial law firm, Banwo & Ighodalo

Chinedum Umeche