08 July 2013, Lagos – The Petroleum Industry Bill, PIB, team of the Nigerian National Petroleum Corporation, NNPC, has faulted recent comments credited to the Chairman of the Nigerian Extractive Industries Transparency Initiative, NEITI, Mr. Ledum Mitee, that the PIB would deny oil-producing states the 13 per cent derivation they currently enjoy if the bill is passed into law.
The team also said in a statement that there was no iota of truth in the allegation by Mitee that the split of the Petroleum Profit Tax, PPT, in the extant PPT Act into the Nigerian Hydrocarbon Tax, NHT, and Company Income Tax, CIT, under the PIB, would erode the revenue accruing to the oil producing states under the PPT Act.
“The framework for the application of the 13 per cent derivation principle as contained in Section 162(2) of the 1999 Constitution provides that “… with regard to any revenue allocation formula, the principle of derivation shall be constantly reflected in any approved formula as being not less than 13 per cent of the revenue accruing to the Federation Account directly from any natural resources,” said the statement.
The team, which is headed by the NNPC’s Group Executive Director, GED, in charge of Exploration and Production, Mr. Abiye Membre, also noted that based on this constitutional provision, the revenues accruing from NHT as proposed in the PIB qualify for the application of the 13 per cent derivation principle.
According to the group, the tax under CITA on profits derived from upstream petroleum operations as proposed in the PIB would also qualify for the application of the 13 per cent derivation principle.
The team also argued that the two tier taxation system proposed in the PIB would have no negative impact on the 13 per cent derivation accruing to the states, stressing that the revenue accruing to the federal government under the PPT Act, particularly to the oil producing states, would not be less under the PIB.
“Under the PPT Act, the tax rate is 85 per cent of chargeable profit from onshore and shallow water terrains and 50 per cent for frontier and deep water acreages. In the PIB, the NHT and CIT for onshore and shallow water terrains are 50 per cent and 30 per cent of chargeable profits respectively. However, while the PPT allows all operational costs to be charged against the single tier tax rate of 85 per cent, only the NHT of 50 per cent is so impacted under the PIB. Besides, many more deductions are disallowed for NHT computation than currently obtains under the PPT Act,” the statement added.
The PIB team further stressed that the PIB tax regime was predicated on production or results, compared to the PPT Act, which is essentially based on investment.
“Therefore, while the PPT Act more or less encourages high cost of operation, the PIB encourages more production at minimal cost. The net effect would be increased government revenue (in excess of the notional five per cent difference between the two tax regimes) and consequently more revenue to the oil producing states based on the 13 per cent derivation principle,” the statement added.
On the issue of transfer pricing raised by Mitee, the NNPC team argued that the biggest area of transfer pricing under the current regime was the provision that allowed the cost of gas development to be deducted from oil revenue based on the principles contained in the Associated Gas Framework Agreement (AGFA).
According to the team, the PIB ensures that the costs of oil and gas development are independently accounted for with a view to ensuring that government does not indirectly subsidise the development of gas.
The PIB proposes an amendment to section 22 of the CITA which addresses transfer pricing while providing for payment of additional tax based on selling prices of crude oil and condensate exported by a company based on “fair market value”.
The team also faulted Mitee’s argument that the Environmental Remediation Fund (ERF) created under the PIB was meant for the development of the oil producing communities, saying it was actually meant for the remediation of environmental damage resulting from petroleum operations.
“This is based on the principle that the “Polluter Pays”. On the other hand, the funds provided in the PIB for host communities are essentially impact funds meant to align the interests of such communities with those of the oil and gas companies. This does not equate to federal government abdication of its developmental responsibilities towards its citizens,” the team stressed.
– Ejiofor Alike, This Day