New York

Nov 19, 2005

In what is considered alarming and shocking, Nigeria must have lost millions of dollars of revenue due from contractors lifting Nigeria's crude oil, who are not being assessed for tax and so have been avoiding taxes due to the federation account.

This revelation is contained in an interim report of the ongoing audit of the NNPC and the entire Nigerian oil and gas industry.

A copy of the report made available to this reporter showed that the Federal Inland Revenue Services, FIRS, Nigeria's own IRS, has been encountering difficulty in assessing crude lifting contractors for tax purposes, "due to problems identifying who they are, and the amount of freight income they receive."

As a result the auditors, the Hart Group of UK have recommended that such contractors and indeed "all parties to crude lifting should be statutorily compelled to make information available to FIRS," to enable the assessment.

Crude oil lifting contractors in the oil sectors are those licensed by the federal government, mainly directly from the president who remains the substantial Oil Minister, and given the authority to transport and sell the crude on behalf of NNPC in the open market. Normally they are given a selling price of up to $9-10 less than the market price to enable them make a profit.

The disclosure of the report which is marked confidential follows this reporter's story on the mess encountered by the external auditors of NNPC book. The report listed the taxes in the oil and gas sector as including Petroleum Profit Tax, PPT, Withholding Tax, WHT, Value Added Tax, VAT, Royalties, Licensing fees, Company Income Tax, CIT, among others. All are payable to the federal government either through payment to NNPC or directly to the federation account.

Although the Company Income tax Act, CITA requires companies operating within Nigeria territorial waters to pay tax on freight income they earn lifting Nigerian crude oil, the auditors from Hart Group of the UK found out that "it has not been possible to assess these companies to Nigeria tax as a result of lack of information as to their name, address and amount of freight income received by them."

This is the case even though these contractors are licensed by the same government that oversees the FIRS which needs the information to assess their taxes.

An incorrect data, the auditors also revealed, is being applied in the computation done by DPR, of royalties paid by the international oil companies to the federation account of Nigeria.

Relying on the DPR manual, the auditors noted regarding royalty computation: "The Petroleum Act of 1969 provides that a certain per cent be paid as Royalty on the chargeable value of crude oil/or casing head petroleum spirit production in a relevant period."

This is the provision that DPR uses in calculating royalty for fiscal purposes. But the auditors also noted that the Petroleum Proft Tax Act Cap 354 LFN of 1990 section 2 states that royalty is calculated on 'casinghead petroleum spirit' or 'chargeable oil', which clarifies that royalty should have been calculated at least on production at the gathering/flow station at separation point which is the first available metered casinghead(wellhead) separation data upstream.

Not doing this meant that government's income from the royalty had been undermined because the information used by DPR to fiscalize oil production varies from the volume at the oil wellhead.

The auditors also lamented what it described as "inadequate interface" between FIRS, CBN and other government offices in the oil sector, which is responsible for FIRS inability to asses crude oil lifting contractors for tax purposes. According to the auditors "several points of difficulty and/or systems weaknesses arise from the lack of information sharing between Govt entities.

Specifically regarding the interface between FIRS and CBN, the auditors noted that "there are difficulties of various kinds in tracking, monitoring and reconciling payments between FIRS and CBN. For instance it was noted that "the foreign current payment of WHT, VAT and CIT is collected by local designated which instruct their correspondent bank to remit this to the relevant CBN foreign account."

The auditors continue: "For instance USD are remitted to Reserve Bank of New York and Pound Sterling are remitted to Bank of England. CBN advises FIRS through a columnar Foreign Operations Department statement. All these taxes are lumped under the miscellaneous column."

The audit report then stated that the one effect of such an arrangement is that foreign currency payment of WHT, VAT and CIT cannot be reconciled to the tax types and the payer by FIRS.

There is also a reported delay in the issuance of PPT payment advice by the CBN to FIRS, taking as long as 15 and 30 days in some cased, something that is done on daily basis in other countries.

Another significant concern expressed by the auditors whose final report is due in Feb 2006, but is expected to issue government another of its regular interim reports in December is on the issue of "possible low producer estimates of monthly PPT."

According to the interim report: The PPT Act and the FIRS do not specify any standard template for producing companies to estimate monthly PPT for filing and payment. As a result, companies are free to use different parameters which could in some cases generate low monthly PPT payments followed by a large adjusting(13th month) payment on final assessment."

The auditors were seemingly alarmed that " There are no penalties for under estimation of interim payments," and added that although this "weakness does not affect the aggregate amount of PPT collected but might adversely affect the timing of payment. The timing difference may be exploited to the benefit of companies and corresponding disbenefit of the FGN."

Other significant worries expressed by the auditors include the fact that the Nigerian Petroleum Development Company, NPDC, have been making royalty and PPT payments in local currency "even though the payments are supposed to be made in the currency of transaction," which is US dollars.

Equally worrying is the fact that the CBN is said to be unable "to reconcile NNPC payments for domestic crude to its constituent elements," be it crude consumed by local refineries or exported and ultimately paid for by NNPC, confirming the story of The Guardian on Sunday on October 23 that the NNPC audit is in a mess.

The auditors therefore recommended that the composition of the Crude Oil Accounts Reconciliation Committee be reviewed. Currently the committee is made up of top level govt officials but the auditors noted that such senior people in government "may not have time for detailed and extensive reconciliation. Therefore the Hart Group suggested that "officers that directly execute the process should be members of the committee for effective reconciliation.