A Review of the Nigerian Energy Industry

New FIRS chairman and challenge of oil slump

23 March 2015, Lagos – To say that the global economic environment is fraught with uncertainties would be stating the obvious. The world is currently experiencing weaker-than-expected growth in major economies.

Samuel-Ogungbesan, Executive Chairman, FIRS
Samuel-Ogungbesan, Executive Chairman, FIRS

While economies like those of the United States and the United Kingdom are doing slightly better than others with projected Gross Domestic Product growth slightly above two per cent in 2014 and 2015; other economies like Japan are under trial following two straight quarters of economic contraction.

In the same vein, the Eurozone consisting of countries like France, Germany, Portugal, Spain, Netherlands, Italy, among others, are expected to record less than two per cent growth rates in 2014 and 2015, according to the International Monetary Fund.

Not immune to trends in the advanced economies, emerging economies like Brazil, India, China and South Africa, which sustained global growth in recent years, are now experiencing a slowdown.

China, for instance, which has been growing at about nine per cent annually is now expected to grow at 7.4 per cent in 2014 and 7.1 per cent in 2015.

Russia and Brazil are facing stagnation with growth expected at only 0.2 per cent and 0.3 per cent respectively in 2014, and 0.5 and 1.4 per cent respectively in 2015.

However, India’s projected growth is expected to grow at an average of six per cent over the next two years.

Overall, the IMF in October 2014, revised downwards its projection on global growth to 3.3 per cent and 3.8 per cent for 2014 and 2015 respectively.

The lesson from all these, according to financial analysts, is that the world economy is not in good shape over the short to medium term.

On the back of this weak global growth performance comes the recent steep drop and incredible volatility in the price of oil – a phenomenon that had impacted negatively on oil revenue.

This drop in crude oil price of about 49 per cent between last year and now has come as a result of weak demand from Nigeria’s biggest markets and a supply glut that involves the arrival of new oil producers in Africa and increased exploitation of shale oil and gas in the US.

Nigeria’s economy, which is quite integrated into the global economic system, is much affected by these lower prices and weak demand. The demands have shifted as the US no longer imports Nigeria’s oil as it now has its own.

India and China are now amongst Nigeria’s biggest markets. In particular, demand for Nigeria’s crude oil, which according to the National Bureau of Statistics made up 71.8 per cent of total exports in the first three quarters of 2014, is expected to slow down on the back of the economic downturn in the BRICS countries, especially Brazil, India and South Africa and the Eurozone, particularly Spain, the Netherlands, and France.

These two blocs of countries account for at least 25.8 per cent and 25.3 per cent of Nigeria’s crude oil exports respectively, based on the NBS Quarter 3 figures of 2014.

However, the fall in oil prices is not happening for the first time. The country had experienced it in the 1980s when prices fell to $8 per barrel and the economy fell into recession with GDP contracting by at least eight per cent in 1986 and 1987, and it had to turn to international financial institutions for budget support.

The country also experienced a price shock in 1998 when oil prices fell below $10 per barrel, and the economy was yet again gripped by stagnation with growth of 0.47 per cent in 1999, according to World Bank data.

These were very difficult times and the country lost as much as three per cent growth in GDP as a result of oil price volatility, making it difficult for salaries to be paid for many months during these periods.

Experts however said these challenging times should be seen as a time of opportunities to further move the economy on the right path through repositioning of the nation’s tax system in order to boost non oil revenue.

The Finance Minister, Dr Ngozi Okonjo-Iweala, gave credence to this when she said that analysis had revealed that about 30 per cent of those that received tax waivers from government especially under the pioneer status scheme now abuse the system.

The minister said as a short-term measure, government had commenced a review of the implementation of pioneer status exemptions to which is expected to unlock up to N36bn of additional tax revenues in 2015.

In the medium term, the government’s plan is to focus on tax policy to see where opportunities lie to streamline and rationalise certain taxes and levies while looking to boost others.

For example, Okonjo-Iweala explained that Nigeria has one of the lowest Value Added Tax rates in the world and medium term efforts must involve the legislature to see what opportunities exist with VAT which largely benefits states.

While state governments get 85 per cent of VAT, the Federal Government gets just 15 per cent. A five per cent increase in VAT rate for instance, according to the finance minister would yield N614bn, most of which would go to the states and local governments.

In the 2015 fiscal period, the minister also said the government would be ramping up the tax initiative with McKinsey to contribute an extra N160bn in tax receipts and an aggregate of about N460bn over and above the 2014 levels in the 2015-2017 period.

Similarly, the federal government as part of efforts to generate more revenue has approved the imposition of a one per cent mansion tax on residential properties within the Federal Capital Territory with value of N300m and above.

The property tax for luxury building within the FCT, is estimated to yield additional N360m.

As the the new Chairman of the FIRS, Mr Samuel Ogungbesan, who was appointed last Wednesday by President Goodluck Jonathan, assumes duty, analysts have said there would be greater expectations from him in terms of driving these initiatives.

This is because the drop in oil prices as well as the fact that the government in driving the generation of more revenue from taxes particularly non-oil taxes has come up with so many initiatives, has put more burden on the service under him.

Just last month, statutory allocations from the federation account to the three tiers of government witnessed a decline of N188.8bn from the budgeted estimates of N688.94bn to N500.13bn.

The N500.13bn, which is contained in the communique issued at the end of the Federation Accounts Allocation Committee meeting, also represented a decline of N80.25bn over the N580.38bn shared by the three tiers of government in the month of December.

The gross revenue of N416.09bn received for the month was lower than the N490.03bn received in the previous month by N73.93bn.

With these developments, experts are of the view that the time had come for the nation to embrace industrialisation and reduce the emphasis on oil through deepening the tax system.

Ogungbesan, who is expected to implement some of the initiatives of government in the area of taxation, holds a Bachelor of Science degree in Economics and he is a fellow of the Chartered Institute of Taxation and also an Associate member of Nigerian Institute of Management.

He was said to have pioneered the administration of large taxpayers unit in Lagos and paddled the administration of Tax Policy Department of the Service for many years.

Before his appointment, he was coordinating director, standards and compliance group and he is described as a strong advocate of change, focusing improvement in the tax administration system in Nigeria.

The immediate past Chairman of the FIRS, Alh Kabir Mashi, while handing over to the new FIRS boss, called for support from stakeholders owing to the challenges ahead.

He said, “I am leaving and one of us is taking over. I am sure you will continue to give him all the necessary support.

“FIRS is a family and we should continue to work as a team. I believe we will continue to work and support each other as a family.

“I urge and encourage you to work as a family and give him all the support he needs to succeed.

“If he succeeds, the credit goes to all of you that has succeeded. I am sure he will succeed.”

Figures shows that within the last three years, a total tax revenue of N14.52trn had been generated by the FIRS for the government, under the leadership of its outgoing chairman, Mashi.

A breakdown of the tax collection shows that the FIRS recorded N5.07trn as its annual collection in 2012, N4.805trn in 2013 and N4.714trn in 2014.

But speaking on the challenges ahead of the new FIRS boss, the Registrar, Chartered Institute of Finance and Control of Nigeria, Mr. Godwin Eohoi, called for strict enforcement of the tax law especially as it concerns the issue of tax evasion.

Findings from the ministry of finance revealed that 65 per cent of registered taxpayers have not filed their returns for the past two years, while 75 per cent of registered small and medium size business are currently not captured in the tax net.

Eohoi said while reforming tax administration is essential,there is need to simplify the tax system by creating the needed awareness and adequate data base for the tax payers.

He said, “Oil revenue is dropping and so in this situation, we need to intensify efforts in internal revenue particularly taxes to bridge the gap in oil revenue.

“The appointment of a new chairman for FIRS is a welcome development because there is a huge challenge ahead of the firs.

“There is need to ensure strict compliance with the new tax system especially in the area of tax evasion.”

– Ifeanyi Onuba, Punch

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