Interview: Yomi Olugbenro
How can businesses stay abreast of the numerous changes in the country’s tax laws?
YOMI OLUGBENRO: The updates to tax legislation are necessary because they help to align the laws with current realities. To stay abreast of these revisions, finance officers should undertake continuous training through webinars, and participate in capacity-building programmes and workshops aimed at improving their knowledge of the tax and regulatory environment, as well as seek professional advice for guidance.
Where have you seen the biggest gains from the Petroleum Industry Act (PIA) signed in 2021?
OLUGBENRO: The most significant improvement associated with the legislation is the policy and regulatory certainty it has brought to the sector. Investors now have greater clarity on applicable fiscal and licensing regimes, and this has opened the oil and gas industry to much-needed foreign direct investment. Furthermore, the enactment of the PIA provided a legal basis for the privatisation of the Nigerian National Petroleum Corporation (NNPC) as a limited liability company. With a focus on profit-making for its shareholders, the NNPC now runs as a commercial company under the Companies and Allied Matters Act 2020.
The oil industry now has dedicated regulators for upstream, midstream and downstream segments. The Upstream Petroleum Regulatory Commission (UPRC) regulates the upstream segment, while the Midstream and Downstream Petroleum Regulatory Authority (MDPRA) oversees midstream and downstream operators. These bodies draft regulations to support different provisions in the PIA, and offer guidance in terms of implementation. For example, the UPRC drafted a manual and constitution to help industry actors carry out obligations of the law in host communities. Further, with the sector focusing on the drive towards net-zero carbon emissions, provisions in the act remove tax deductions for routine and non-routine gas flares, criminalise the failure to install gas metering equipment, and require upstream enterprises to submit plans for the monetisation and removal of natural gas flares.
What are some of the challenges associated with the PIA? How can businesses navigate these issues?
OLUGBENRO: The question for most companies is deciding whether to adopt the fiscal terms of the PIA or to remain under the existing regime. It is important to note that the reasons for converting or otherwise are driven by economics, long- and short-term plans, and other non-quantitative considerations. For instance, the act limits deductible operating and capital expenditure to 65% of gross revenue, and the remaining 35% may only be deductible in the coming years. For entities that intend to convert, proper cash flow planning and modelling must be done to quantify both the net present value and cash flow effect of this cap on their business plan. Additionally, the requirement in the PIA to have a cash-backed decommissioning fund reduces money otherwise available for reinvestment or other operational needs. This mandate applies whether or not the operator decides to transition to the PIA.
The challenge with the provision of Section 233 of the PIA is that the operator’s funds are held in an escrow account that may only be used for decommissioning and abandonment. To manage this issue, players should continue to engage the government and regulators to ensure that contributions to the fund are back loaded, as opposed to the current plan of an equal annual commitment that can only be reviewed every 10 years. The PIA stipulates that the UPRC or MDPRA must approve any amount paid towards the decommissioning and abandonment fund in order to qualify for a tax deduction. This requirement may be a challenge due to possible delays in securing authorisation. Companies could advocate for a prescriptive guideline from the regulator as an alternative to the current requirement for express approval by the relevant regulating body.
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