Criticism of NLNG’s generous tax holiday illustrates a number of points, writes
Ed Reed
NIGERIALNG (NLNG) has been accused of profiting unduly as a result of a 10-year tax holiday, with a report from a Dutch NGO claiming this has led to the avoidance of US$3.3 billion in taxation to the Nigerian state. The sum in question is substantial but so too was the investment needed to get the project off the ground. The question of tax holidays is a complex
one, with different countries employing different incentives to attract investment. The use of
extraordinary, one-off tax initiatives for such projects should be shunned, but given the major
scale – and risk – of such works, governments are forced to compete, just as much as companies are.
the case The report, “How Shell, Total and Eni benefit from tax breaks in Nigeria’s gas industry”, was published by SOMO last week. The 78-page briefing from Mark van Dorp said the Nigerian government had given “excessively generous tax breaks” to the three foreign companies, and the avoided tax could have been used to support Nigeria’s public services.
The NLNG Act gave the joint venture, in which the three European companies have a 51% stake, a 10-year tax holiday, while deferred costs allowed it to circumvent another two years of payments. As such, SOMO calculated lost tax payments to Nigeria of US$3.3 billion, and said
that this figure should be “considered a minimum estimate”. The calculation of the lost tax
revenue was based on the share of profits accruable to the three foreign companies – Nigerian
National Petroleum Corp. (NNPC) holds the remaining 49% stake in the venture – and covers
corporate income tax and education tax alone.SOMO said the break given to the venture
had created an “unacceptable advantage” for the European companies and that the report’s ulti
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mate goal was to raise awareness of the issue and the problems linked to tax holidays. The report
focused on NLNG, it said, because this provided the “most telling ‘red flag’, both in terms of “economic impact and in terms of possibilities of outreach”. The findings were based on studies from 2007 to 2013 but, the report said, “most of the key data for the [previous years] were found in annual accounts from later years”.
A number of oil and gas companies working in Nigeria have qualified for pioneer status,
which gives them a three- to five-year tax holiday. SOMO cited an International Monetary Fund
(IMF) report noting the ineffectiveness of tax holidays and that investments would generally
have been made regardless of such incentives. In addition, NLNG does not pay royalties on
gas sales, as these are paid by the producer. No royalties are due on LNG sales. the response
NLNG responded on January 19 to the report from SOMO and ActionAid. The claim over tax
losses to the government was “false and misleading”, the company said, describing Action
Aid’s description of the number in question as “hypothetical”. The Nigerian government’s investment of US$2.5 billion plus tax incentives has provided more than US$33 billion in payments to the country’s coffers over 16 years, in addition to another US$5 billion spent on local goods and services. NLNG went on to say the decision to embark on the construction of the LNG terminal in Nigeria was “pioneering” and required “several billions of dollars in foreign investments” and added the comment that a number of countries had provided 10-year tax holidays, including Oman, Malaysia and Trinidad, while Angola offered a 12-year tax holiday for its LNG industry. During the 10-year period, another four trains were built at the development, bringing the total to six. “NLNG is a good corporate citizen and believes
in the payment of applicable taxes,” the statement said, commenting that it had invested in host
communities and the larger society. Transparenc In addition to questions over the efficacy of the tax holiday, the Dutch NGO’s report raised a number of points about payments to and from
NNPC that have not been resolved. “It is unclear how or if the NNPC’s income from NLNG finds its way to Nigerian government accounts, and there is no publicly available information on how this is accounted for”, the report said. From 2006 to 2008, for instance, NNPC is
reported to have received dividends of US$4 billion from NLNG, but SOMO said it was
unclear “how or if ” this sum had gone to the government, a question that has been raised in
the audits from the Nigerian Extractive Industry Transparency Initiative (NEITI). The 2009-
11 NEITI audit, for instance, asked whether the NNPC’s 49% stake in NLNG was “for the benefit of the federation, or the federal government or NNPC itself ?”The state-owned company has claimed the NLNG dividend has to be retained in order to fund gas-related developments, adding that it would be unconstitutional to pay this cash to the federal account.
A July 2015 statement from the ruling All Progressives Congress (APC) party raised concerns about dividend payments to the federation account from NLNG. There is a practical reason that NNPC may have been reluctant to pay dividends from NLNG to the government: namely that the company struggled to pay cash calls for its share of spending in its joint ventures with foreign companies. The lack of transparency is worrying, though, particularly given NNPC’s corruption problems. SOMO’s report is not the first to raise concerns about the relationship between NLNG,
NNPC and the government. The famous 2012 report from Nuhu Ribadu on the petroleum
sector highlighted a number of concerns about these companies, including questions over feed
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stock pricing, and it noted that details on gas sales had not been made available.
one of a kind The effectiveness of tax holidays needs to be considered closely, particularly when applied to smaller companies. Given the long-term nature of gas projects and the substantial investments needed to get a liquefaction development up and running, the decision to provide such an incentive to the NLNG partners is hard to find fault with, but the tax-free period could have been shorter and the extent to which costs should have been allowed to roll over is also a matter worthy of debate. Tax holidays provide governments with a relatively straightforward way of attracting investment in a way that minimises compliance burdens, and therefore appeal to countries working to grow new sectors for investment. The potential problems associated with such incentives, though, may reduce the attractiveness of new investments in a development once the period has ended. Indeed, discussion of a
seventh train at NLNG has dragged on, with little progress made. Given the current state of
the energy industry, with low LNG prices and companies under pressure, a final investment
decision (FID) appears unlikely in the next five years at least.
In addition to the current conservative mood, the political appetite for more liquefaction is low
at a point when local power generation is still far below demand. The question raised in the report of transparency at NNPC is more of a cause for concern.
That NNPC could operate for so long without it being clear where the dividends paid to the
company from NLNG were going is much more worrying than the tax holiday question.
This is not the first time that controversy has centred on NLNG. Construction work on the
project was handled by an international group of service companies that were found by the US
to have participated in foreign corruption, then the LNG plant was blockaded by local customs
in 2013 and ribadu’s report. The project was one of a kind, making it hard to compare it with the
wider use of tax holidays in the country. when considering the economic viability of
such investments, companies must bear in mind that the exercise of such tax holiday rights runs
the risk of activist scrutiny and – in the extreme – of governments attempting to claw back some
of these advantages after the fact.