February 19, 2019
The contributions of the oil and gas sector is integral to the economic growth and development of a country’s economy. In Nigeria, the oil and gas sector has become the mainstay of the economy, as the sector accounted for about 86% of the country’s foreign exchange earnings and contributed 8.60% to the aggregate real gross domestic product in 2018. Furthermore, the Nigerian oil and gas industry is a significant employer of labour in the country and the sector contributes tax revenues to the government coffers on an annual basis.
Given the contributions of the oil and gas sector and the considerable operational and financial risks associated with oil related activities, it becomes imperative for government to provide a friendly business environment to enable private sector investments to thrive in the sector. One important means by which the government may incentivize private companies operating in the oil and gas industry is by ensuring certainty in taxes to be paid and discouraging the imposition of multiple taxes by different government agencies and tiers of government. Where taxpayers experience imposition of multiple taxes, it affects investor confidence and may impair future investment decisions in such a jurisdiction.
The foregoing notwithstanding, it appears that the various tax authorities and revenue agencies in Nigeria view oil and gas companies as easy targets for any ‘smash and grab raids’ to augment shortfalls in revenue targets in a fiscal year. For instance, some State Governments in the country have enacted laws imposing numerous taxes, fees and levies on oil companies and vessels operating within their states. These taxes, fees and levies are imposed on the same company/revenue stream by more than one State or Local Government Council. In a particular instance, the internal revenue authority of a certain State imposed a levy of ₦5 million on companies providing man-power services to exploration and production companies in that State. This was done without considering the amount of revenue or profits generated by such companies from the state.
Furthermore, apart from taxes imposed on profits of oil and gas companies, they are also exposed to a host of other levies imposed by other laws and government bodies in Nigeria. Examples include the deduction of 1% Nigerian Content Development Levy on invoices of companies operating in the upstream sector of the oil and gas industry, cabotage levy, contributions to the Niger Delta Development Commission Fund, oil terminal dues etc.
This article highlights the potential implications of multiple taxes and levies on the operation of companies operating within the Oil and Gas industry.
The Nigerian Constitution has allocated the responsibilities of imposing specific taxes, levies and fees between the different tiers of government, to curtail the incidence of multiple taxation. Thus, the extent of the legislative powers of the federal and state governments are highlighted in the exclusive legislative and concurrent legislative lists in the Nigerian constitution. In furtherance of this distinction by the constitution, the National Tax Policy, which prescribes the guidelines and rules to regulate the Nigerian tax system, notes the incidence of internal multiple taxation as a major disincentive to local and foreign investments and encourages the federal, state and local governments to take collaborative steps in eliminating multiple taxation in the country.