BY Clara Nwachukwu

Petroleum Industry, PIB, Lead Team, which put together the proposals contained in the Petroleum Industry Bill, PIB, has clarified certain issues raised by the Chairman, Nigerian Extractive Industries Transparency Initiative, NEITI, Mr. Ledum Mitee, on Friday.

Mitee was quoted in some dailies on the impact of the PIB on the 13 percent derivation revenue that accrues to oil-producing states.

He also spoke on the effect of transfer pricing on revenue accruing to the Federal Government and the Environmental Remediation Fund.

However, the PIB Lead Team in a response made available to Vanguard, noted that some of Mitee’s comments were misleading, and clarified on some of the issues he raised.

On the 13 percent Derivation Fund, Mitee was quoted as saying that the split of the Petroleum Profit Tax in the extant PPT Act into the Nigerian Hydrocarbon Tax, NHT, and Company Income Tax, CIT, under the PIB, will erode the revenue accruing to the oil producing states under the PPT Act.

However, the team pointed out that the framework for the application of the 13 percent 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 percent of the revenue accruing to the Federation account directly from any natural resources.”

Therefore, the team noted, the revenues accruing from NHT as proposed in the PIB qualify for the application of the 13 percent derivation principle. Likewise, tax under CITA on profits derived from upstream petroleum operations as proposed in the PIB would also qualify for the application of the 13 percent derivation principle.

Accordingly, it maintained that the two tier taxation system proposed in the PIB would have no negative impact on the 13 percent derivation accruing to the states.

It further explained: “Under the PPT Act, the tax rate is 85 percent of chargeable profit from onshore and shallow water terrains and 50 percent for frontier and deep water acreages.

“In the PIB, the NHT and CIT for onshore and shallow water terrains are 50 percent and 30 percent of chargeable profits, respectively.

“However, while the PPT allows all operational costs to be charged against the single tier tax rate of 85 percent, only the NHT of 50 percent is so impacted under the PIB.

“Besides, many more deductions are disallowed for NHT computation than currently obtains under the PPT Act.

“Furthermore, the PIB tax regime is predicated on production or results compared to the PPT Act, which is essentially based on investment or spending.

“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 percent difference between the two tax regimes) and consequently more revenue to the oil producing states based on the 13 percent derivation principle.”

Fair market value
With regard to transfer pricing, the Team explained that 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”.

“Apart from bearing a fair and reasonable relationship to the established official selling price of Nigerian crude oil of comparable quality and gravity, the new approach would allow government to take advantage of small variations in price as they arise. There are therefore safety nets in the PIB for protecting revenue accruing to the Federal government from transfer pricing,” the Team said.

It noted that the biggest area of transfer pricing under the current regime is the provision that allows the cost of gas development to be deducted from oil revenue based on the principles contained in the Associated Gas Framework Agreement (AGFA).

“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 subsidize the development of gas,” it argued further.

Polluter pays
With regard to the Environmental Remediation Fund, created under the PIB, the Team explained that the fund is not for the development of the oil producing communities as alleged by Mitee, but for the remediation of environmental damage resulting from petroleum operations.

According to the Team: “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’s abdication of its developmental responsibilities towards its citizens.”