Harnessing potential from the extractive sector

By Abubakar Jimoh
It is not gain saying that Nigeria is a member of Organization of Petroleum Exporting Countries (OPEC), one of the major exporters of crude oil in the world, the 6th largest producer of crude oil and the 5th largest supplier of crude oil to America and Western Europe, 8th largest oil exporter in the world with proven oil reserves exceeding 9 billion tons, the largest hydrocarbon feedstock producers in Africa, and ranks twelfth place worldwide.
The country relies heavily on its petroleum industry for economic growth – the sector accounts for about 80% of government revenues and provides 95% of foreign exchange. Despite all this, Nigeria has over the years being denied its fair share of adequate revenue from the oil and gas.
Apart from the oil and gas sector, Nigeria is blessed with abundant natural resources of various types. A report by Civil Society Legislative Advocacy Centre (CISLAC) titled “Maximizing Tax Revenue from the Extractive Industries”, estimated that Nigeria has over 500 mineral deposits sites of over 34 different minerals across the country. These include gold, coal, tin, columbite, bitumen, diamonds, and precious stone of various degrees.
Findings have revealed that of all the resources, 100 are common, 50 are occasional and others are extremely rare. It would be important not to be carried away by these, but the extent at which Nigeria effectively harness the present common resources to provide for the basic needs of the citizens.
It is noteworthy that though principal objective of every fiscal policy is to ensure the government receives the best share of revenue from resources, however, Nigeria records no significant rise in revenue during periods of increase profitability.
As reveals by the 2014 Nigerian Natural Resource Charter (NNRC), “The fiscal regime does not ensure that the government receives a rising share of revenues during periods of increased profitability as the fiscal terms in the contracts covering almost all of Nigeria’s oil production.
“The fiscal regime does not ensure that the government has a minimum revenue stream in all production periods, with the exception of signature bonuses and royalties except for deep-water operation under the 1993 PSC contract, for which royalty is zero. The fiscal regime does not provide robustness to changing circumstances as it often requires the government and IOCs to re-negotiate when circumstances change, and many previously agreed contractual terms are still under dispute.”
The principle legislation governing petroleum operations in Nigeria is the Petroleum Profits Tax Act of 2007. Its major fiscal instrument is the Petroleum Profit Tax, a resource rent which focuses on profitability. This tax according to 2014 NNRC Report, “is considered progressive as it taxes only increase in profitability with Net Present Value (NPV) threshold rate calculation. Under the PPT, the tax rate is set at 67.5% for the first five years of taxable operation by the company and 85% thereafter.
“According to industry experts, extensive revenue losses persist due to weak cost regulation. At the time of signing the 1993 PSC, the conditionality for petroleum products including industry cost for production was low. Till date, the country is yet to overhaul the fundamental strategy components that will address contemporary market conditions.”
In order to promote transparency and accountability in the management of revenues from oil, gas and mining sectors, Nigeria took a bold step with the creation and legal strengthening of the Nigeria Extractive Industries Transparency Initiative (NEITI) in 2004, when it signed on to the Extractive Industries Transparency Initiative (EITI), a global initiative aimed at ensuring that resources from the extractive industries contribute to poverty reduction and sustainable development.
The NEITI has the primary objectives of promoting greater transparency and accountability in the management of natural resource revenues as well as combating corruption between the public and private sectors by calling for the mandatory disclosure of payments from companies to the national governments and declaration of payment received from companies by the governments. Secondary objectives pursued by NEITI implementing countries are reducing poverty, creating a climate favourable to economic growth by the improved use of state revenues coming from the extractive industries, and addressing the environmental impacts of the extractive industries.
Accessing the achievement, NEITI since it was adopted in Nigeria, Madeline Young, a Financial Nigeria columnist, wrote, “Nigeria can be proud that it was the first of 45 member nations to enact formal legislative framework for EITI (NEITI Act of 2007).
“The initiative has brought positive developments in revenue transparency, but it has not had a significant effect on human development and governance reform. International stakeholders in the public and private sectors are concerned that the Nigeria Extractive Industry Transparency Initiative (NEITI) is being undermined by fundamental incoherencies between unchecked commercial activities in the extractive industries and incongruous development cooperation policies.”
Young argues that in order for the international community to effectively contribute to the economic and political development processes of the NEITI initiative in parallel to Nigeria’s own national reform efforts, the problems of skewed economic interests and policy incoherencies must be addressed at international levels.
Presently, Nigeria depends heavily on the extractive industry (largely oil and gas) for over 85% of her revenue. Extraction of resources provides huge financial benefit to Nigeria through export earnings and taxation, which constitutes more than 60% of the total tax revenue accruing to the Nigeria treasury.
Fiscal policies remain the fundamental principles which guide the orderly development of tax laws and administration, and lays basis for the formation of the whole tax system. Inconsistent tax policies would certainly result in dysfunctional of the entire system. Thus, it has become imperative to fast-track the passage of Petroleum Industrial Bill presently lying dormant before National Assembly to reform legal frameworks on the Petroleum and Tax Policy.
Apart from the proposed PIB, government has promulgated various legislative frameworks to regulate taxation of the extractive sector and ensure maximum tax revenue accrues to the government. Among these are 1999 Constitution of the Federal Republic of Nigeria, Companies Income Tax Act, NEITI Act, Mineral and Mining Act of 2007, Companies Income Tax Act Cap C21 Laws of Federation of Nigeria 2004, Petroleum Profit Tax Act Cap P13 Law of Federation of Nigeria, Federal Inland Revenue Service Act Cap F36 Laws of the Federation of Nigeria, Value Added Tax Act Cap V1 Laws of Federation of Nigeria 2004, Deep Offshore and Inland Basin Production Sharing Contract Act Cap D3 Laws of the Federation of Nigeria 2004.
However, various factors have been observed thwarting efforts at maximizing taxation revenue from the extractive sector in the country. As reported by CISLAC, these are poor record and accountability, over-reliance on self-assessment by extractive industry companies, undue incentive under PSCs and MoUs, complicated tax regime, poor capacity among tax official, tax evasion and avoidance by the companies in the extractive industry, lack of political will to prosecute evaders, ineffective monitoring, illegal bunkering and mining, widespred corruption, ambiguous provision with respect to taxation of gas, insecurity.
Harnessing extractive revenue for the maximum benefit of citizens requires enhanced public accountability through reducing in government’s influence on NEITI’s actions and audit reports; and civil society oversight to promote NEITI’s objectivity and increase its independence from the public administration.
Formulating and adopting effective measures by all levels of government to address the identified challenges resulting in leakages in revenue has become essential. This includes timely reviewing and strengthening of the existing laws, giving serious consideration to speedy dispensation of tax disputes and evasion prosecution.
It is important to put in place appropriate record keeping by mandated agencies to track production data and financial inflows to enable government make informed decision and independent assessment of the extractive companies; and appreciable efforts to curb illegal mining, oil bunkering and systemic corruption.
It is a known fact that taxation of oil and gas industry is presently regulated by Petroleum Profit Tax Act and Deep Offshore and Inland Basin Production Sharing Contracts Act. It is important to fast-track the passage of the Petroleum Industry Bill to harmonise loose frameworks regulating taxation of extractive industry and simplify the collection of government revenues for maximum realization of tax revenue.
As Ministry of Mine and Steel Development currently lacks power to regulate the whole extractive sector. Giving the vast number of extractive industries and the presence of various types of minerals in different part of the country, decentralizing the power to regulate the mineral whose exploitation does not exceed beyond certain threshold is crucial to ensure efficient regulation, proper monitoring and effective data storage to fortify appropriate taxation.
Adequate support for the host communities to facilitate the utilization of licenses granted mining industries by the federal government through execution of Memorandum of Understanding between the mining industries and the host communities.
Furthermore, sufficient provision for Federal Inland Revenue Service to promote sustainable tax reform through effective training and retraining programmes, motivation, adequate funding and operational equipment for staff of various department dealing with taxation of extractive industry as well as administrative and legislative response to address the current anomalous arrangement insulating FIRS from direct dealing with accruable tax from extractive sector.

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