Applying Nigerian Content Development Levy in Oil Industry


Martins Arogie

“Operating and service oil and gas companies that default in remitting one percent of the value of their contracts to the Nigerian Content Development Fund (NCDF) would henceforth be blocked from participating in the industry tendering processes by the Nigerian Content Development and Monitoring Board (NCDMB). Such non-compliant companies would also be suspended from getting statutory clearances such as the processing of Expatriate Quota applications.”

The Executive Secretary NCDMB, Engr. Simbi Wabote, made the above statement on Monday, at the 2019 Nigerian Oil and Gas Conference in Abuja and added that the Board also “reserved the right to refer such economic sabotage to the Economic & Financial Crimes Commission (EFCC) for further action in line with our Service Level Agreement.”

The above statement, available on the website of the NCDMB, has become a source of concern for many companies operating in the oil and gas sector. Nigerian tax and regulatory authorities can be aggressive with the interpretation and implementation of provisions of statutes which empower them to collect taxes and or levies from companies in the country.

It is, therefore, only normal that a statement like that, attributed to the most senior official of the Board, will be a cause for concern for companies. This is even more-so given the ambiguity around the application of the Nigerian Content Development (NCD) levy which is the subject of the statement.

Oil and gas is the major source of government revenue in Nigeria, accounting for over 65 per cent of government’s receipts. It also contributes over 90 per cent of the country’s foreign exchange earnings. You would, therefore, expect it to be the largest contributor to the country’s gross domestic product.

It is not even the second largest contributor as it currently lags behind agriculture and manufacturing. A significant amount of the resources generated in the sector is spent abroad due to a perceived dearth of quality goods and competent resources in Nigeria.
The industry is highly technical and expensive; therefore, it is normal for investors to be wary of increasing the risk profile of their projects by commissioning the use of goods and or services that may not be of the required quality.

These issues, however, did not make the Nigerian Government to wave the white flag and rightly so. It, therefore, sought to put in place a plan to increase the level of Nigerian content in the oil and gas industry with the passage of the Nigerian Oil and Gas Industry Content Development Act (NOGICDA) in 2010.

Nigerian Content Development Fund
It was acknowledged, though, that Nigerian content could not merely be legislated into reality. Government had to take more definite steps to improve the capacity of Nigerian companies and the proficiency of Nigerian technical personnel to take up more responsibility in the sector.

The transfer of contracts and jobs to firms without the capacity to execute may adversely impact an industry, over the long term, which remains the lifeblood of government. It was, therefore, important for government to create an avenue for these Nigerian firms and personnel to obtain the required operating standards in the oil and gas industry.
It was against this backdrop that Section 104 of the NOGICDA was introduced.

The section provides for the funding of the implementation of Nigerian Content Development in the oil and gas industry. The funding is expected to be generated from the application of a one per cent levy on ‘every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity or transaction in the upstream sector of the Nigeria oil and gas industry.’
The fund, which is to be managed by the Board, should be directed at any activity, project or programmes aimed at increasing Nigerian content in the oil and gas industry.

The above provision appears straight forward and should not be a concern to companies operating in Nigeria.
The Board and its Executive Secretary will be well within their rights to apply punitive measures against companies, which fail to abide by the provision. But it is not straight forward, and many companies have cause to be concerned as they do not even know if they are amongst the defaulters referred to by the ES.

They may think that they are not amongst the defaulters’, after-all, you cannot default in compliance of an obligation that does not apply to you or your contracts in the first place. But are they correct?
Or should they wait to see if they receive visitors from the Economic and Financial Crime Commission (EFCC) before determining if the provision applies to them? Will it be appropriate to wait until it is time to apply for or renew your expatriate quota positions?

The Sub-contract question
The question is who and what does that provision apply to? The first item of “dispute” in the provision was the extent to which the requirement to deduct would apply to a subcontract or what exactly is a subcontract?

If I get a drilling contract from a major exploration and production company today and subcontract it to another company, will I be obliged to deduct the one per cent on the subcontract sum given that the E&P Company would have deducted the one per cent from my own fee? It is the same drilling contract so should the one per cent be paid twice?

What if my sub-contractor then decides that he is unable to undertake the work and subcontracts the same scope that I obtained from the E&P company (there is actually no change in scope throughout the sub-contract process), would he still be liable to deduct the one per cent?

The response of the Board to these queries today as you rightly guessed is YES to all! The levy should apply to all sub-contracts no matter how far it goes. This is despite that players in the industry have pointed to the fact that all of these additional costs brought on by multiple applications of the levy is ultimately transferred to the major E&P company and that the Nigerian Government gets to pay at least 55 per cent of the cost at the end of the day so it may be counter-productive.

The Board has, on their part, argued that its primary objective is to increase the actual participation of Nigerian companies in the implementation of projects in the oil and gas industry.
A scenario where a Nigerian company obtains a contract solely on the basis that it is Nigerian and thereafter subcontracts it to a foreign company would not suffice in helping the Board achieve its targets.

Therefore, the application of the levy to all levels of subcontract is to create a situation where it becomes economically unviable to subcontract after obtaining a contract on the basis that you meet the minimum Nigerian content requirement from an ownership perspective.

Consequently, it would be cheaper in the long run to award the contract to a Nigerian company with the technical capacity to do the job than to one, which is merely acting as a pass-through.
This, therefore, underscores the need for the application of the levy to be retained across all sub-contract levels. It is, however, debatable if this argument has justifiable merits.

The Upstream Sector Question
Another area of dispute is what constitute an activity, work, project or transaction in the upstream sector of the Nigerian oil and gas industry. Unfortunately, the NOGICDA does not define this phrase.
The Board, it appears, has, therefore, taken a very liberal view of the phrase to include all contracts awarded by E&P and servicing companies. Their position is that the primary focus of these companies is with respect to upstream-related activities and they would not be able to achieve this focus without the support of other ancillary industries or activities. Therefore, the ancillary or support industry activities should qualify as an activity in the upstream sector.

A case in point is the provision of catering services to engineers aboard a drilling rig. The engineers would be unable to undertake their task without food. Therefore, the caterer is providing an activity in the upstream sector of the economy and his fees would qualify for the application of the one per cent NCD levy.

But is this correct? It is debatable. The key questions are what should qualify as an upstream oil and gas activity and is this different from participating in an activity in the upstream sector of the oil and gas industry?
To answer the first question, I have reproduced below, several definitions of upstream oil and gas activity.

“The upstream oil and gas segment is also known as the exploration and production (E&P) sector because it encompasses activities related to searching for, recovering and producing crude oil and natural gas.”
“Upstream industry is the portion of the oil and natural gas industry that is responsible for finding crude oil and natural gas deposits, along with producing them. Upstream industry is sometimes known as the exploration and production or E&P sector.

This part of the petroleum industry includes all activities that happen out in the field including drilling wells, trucking supplies, and mining oil sands. In addition, it includes planning and preparation— including environmental studies and engineering plans.”

The definitions may not be able to pass legal mettle because, unfortunately, none of the sources can be considered as an unimpeachable expert in the subject matter. However, the common theme in each of the quoted definitions is that upstream oil and gas activity is restricted to activities related to the exploration, drilling, completion and production of oil and gas.

This excludes activities such as catering and accounting services (which the writer actually provides). Therefore, any activity that is not directly connected to any of the four sub-sets earlier listed would not qualify as upstream oil and gas activity.

However, is it possible to participate in the upstream sector of the oil and gas industry without engaging in upstream activity? The answer on face value may be yes.
A caterer providing food to an E&P company is clearly not carrying out an upstream activity but would struggle to argue that he or she is not involved in an activity or transaction in the upstream sector of the economy.

But is that the intention of the Act? Should caterers providing food to E&P companies also suffer a one per cent deduction from their contract fees? How does taking one per cent from a tax adviser’s fees help in the implementation of the NOGICDA especially when you consider that these services are typically provided by Nigerians anyway?

Also, how does this apply to service companies? Or better still, what is a service company? Will a company qualify as a service company because it has only E&P clients or because it says it is one in its memorandum and articles of association? So, if a catering company indicates in its MEMART that it provides catering services for companies in the oil and gas industry, does that automatically make it an oil and gas servicing company?

If yes, is it obliged to deduct one per cent from the fees paid to the firm which supplies it the fruits it serves as part of its menu daily to the workers of the E&P Company?
Surely, the fruits supplier cannot be said to be involved in an upstream activity or involved in an activity in the upstream sector of the economy?

The same applies to the vendor who supplies stationery to a company involved in the provision of vessels to an E&P company.
The stationery vendor cannot be deemed to be involved in an upstream oil and gas activity or in an activity in the upstream sector of the oil and gas industry, despite the fact that its customer’s activities are solely in the upstream sector of the oil and gas industry.

It is important to note at this point that the NOGICDA itself stipulates that it will only apply to “…all matters pertaining to Nigerian content in respect of all operations or transactions carried out in or connected with the Nigerian oil and gas industry.”

It also defines the Nigerian oil and industry to include all activities connected with the exploration, development, exploitation, transportation and sale of Nigerian oil and gas resources including upstream and downstream oil and gas operations.

Consequently, it would be difficult to extend the application of the levy to activities not directly related to those outlined above.
Section 104 of the NOGICDA actually sought to limit the application of the levy to a particular sub-set of the Nigerian oil and gas industry.
It would, therefore, be disingenuous to attempt to extend the scope to cover all transactions engaged in by E&P companies and companies which provide services to them.

Application to foreign contractors
Another area of confusion with respect to the application of the levy is the extent to which, if any, it applies to foreign companies. Are foreign companies also liable to deduct the one per cent levy where they sub-contract a portion of work obtained directly from Nigeria?
If yes, how is the NCDMB supposed to monitor this? Would it not be better to restrict the obligation to only Nigerian companies whose books the NCDMB can have access to?

Or would restricting the obligation to deduct to only Nigerian awardees of contract and subcontract be an incentive to use a foreign company as a pass through rather than a Nigerian company? I doubt that the latter would be the case as, if you could award the contract to a foreign company in the first place, why would you need another foreign company as a pass through?
It is, therefore, important that the Board considers whether there are any merits to require compliance from entities it may not be able to enforce compliance on.

Dispute resolution process

Another issue with the implementation of the provisions of Section 104 of the NOGICDA is the apparent lack of a clear dispute resolution process. Section 68 of the NOGICDA provides for a penalty of five per cent of the contract sum or cancellation of a contract upon conviction of any act in contravention of its provisions.

This suggest that the Board should normally be unable to apply any judgment without first referring the alleged errant company to and case to court. This is, however, contrary to the statement credited to the Executive Secretary.

This is only possible because of a lack of a clear dispute resolution process. Who is responsible for adjudicating in the event that an application for expatriate quota approval is rejected by the Board?

They do have a right to do so and may, as already stated by the Executive Secretary, do so without any due consideration of the merit of your application just to get you to pay a levy that may or may not apply to your transactions.

Or has the Board unilaterally appointed the EFCC as the adjudicator in this instance? What role does the EFCC have to play in this process or is it just a tactic to strong arm companies to pay the levy irrespective of their concerns on its application?

It can be argued that companies are always at liberty to approach the courts to enforce their rights but how many companies will feel the need to invest in an environment where their only option from the get-go is to accept to pay a levy that may not apply to all their transactions or go to court?

This is especially given the length of time required to conclude court cases in the country. Surely, there is need for an independent arbiter which can quickly review cases of dispute between the Board and operators and rule immediately.

The NOGICDA and the overall plan to increase the participation of Nigerians in the oil and gas industry is laudable. However, it must be implemented in a way and manner that does not impede on Government’s stated objective to improve the ease of doing business in the country. A lack of clarity on the application of laws in any industry surely serves as an impediment to business. It is, therefore, necessary that these issues are properly addressed with the ultimate goal of increasing the participation of Nigerians in the oil and gas industry as well as improve the ease of doing business in the country.

Arogie is an Associate Director, Tax, Regulatory and People Services Division of KPMG in Nigeria