April 30, 2019
The common English proverb that “necessity is the mother of all inventions” sure has an application outside of science and technology, as the origination of pass-through contracts in the Nigerian oil and gas industry is closely linked to local content requirements. Prior to the local content drive in the Nigerian oil and gas industry, most contracts were simply awarded based on the capacity of the bidders to execute such contracts (technical bid), and the proposed cost of executing such contracts (commercial bid). Thus, contracts were either awarded as single contracts to foreign service providers (FSP) because of the advanced technology required for execution or jointly awarded as tripartite contracts to two main contractors, which could include a Nigerian service provider (NSP) and an FSP.
Following the enactment of the Nigerian Oil and Gas Industry Content Development Act (NOGICDA), companies operating in the upstream sector of the oil and gas industry are now required to give preference to “Nigerian” companies in awarding contracts. According to Section 106 of the NOGICDA, a Nigerian company is defined as “a company formed and registered in Nigeria…. with not less than 51% equity shares by Nigerians”. This has resulted in the award of contracts to some Nigerian companies that may not necessarily have the requisite skills and capacity to perform the contract. Such companies started partnering with foreign subcontractors in executing contracts in a way that would facilitate the transfer of skills and technology to Nigerians.
The implication of the alteration in contracting model in the oil and gas industry is that it gives rise to new tax considerations that were, hitherto not issues of concern to business owners. However, there is now a growing concern on the tax considerations for such models as the tax authorities continue to increase their collection drive.
This article focuses on the origin and essence of pass-through contracts in the Nigerian oil and gas industry, certain resulting tax implications based on the strict interpretations of the subsisting laws and regulations, and possible adjustments to the potential tax implications.
No doubt, large projects such as those in the construction, oil and gas and information technology sectors typically require some advanced and foreign inputs because of the complexities of execution processes. Where a preferred bidder may not satisfy the provisions of the NOGICDA, pass-through arrangements are commonly used for this nature of projects especially because of some regulatory concerns that mandate local participation. Under such arrangements, the main contractor which comes into the contracting mix because of such regulatory concerns add little or no value to the project execution, as the project is usually executed by the subcontractor.