Nigeria: Tax: Perks Or Plagues To The Nigerian Power Sector?

Last Updated: 4 June 2019
Article by Temitope Kolade
Most Read Contributor in Nigeria, August 2019

Power, regardless of its source, remains a critical factor for economic and industrial development in any country. Unfortunately, the Nigerian power sector is yet to deliver on its mandate of supplying uninterrupted power to Nigerians and Nigerian businesses despite government's investments in the sector over the years. In its efforts to improve service delivery in the sector, the Federal Government of Nigeria decided to unbundle and privatize the Power Holding Company of Nigeria (PHCN). This process was completed in November 2013.

The objectives of the exercise were to foster competition, increase power supply efficiency and boost the amount of investments coming into the sector. Nonetheless, there remains significant roadblocks in the path to uninterrupted power supply despite government efforts to push the sector forward.

However, the fundamental problems of the sector are not insurmountable; neither do they lack pragmatic and sustainable solutions. While some of the issues within the sector are regulatory in nature, some of the critical issues faced by companies within the sector stem from faulty due diligence and feasibility studies carried out during the acquisition. In addition, tax which was not necessarily an issue for the government-owned entity turned out to be part of the quagmires to resolve post-privatization.

Indeed, there are arguments for using tax to change the narrative by creating tax perks to spur investments in the sector. Thus, this article highlights some of the key tax issues, possible resolutions and potential tax considerations that could facilitate rapid growth of the sector.

General Problems of the Nigerian Power Sector

Distribution companies in the power sector have not been relieved of challenges such as energy theft, dilapidated distribution infrastructure, collection losses, and huge debts which was further exacerbated by the devaluation of the Naira in 2016 and has led to an astronomical increase in the balance of foreign currency denominated loans.

Although the Transmission Company (TransCo) was strategically left in the hands of the government, it has been reported that it has limited capacity to transmit power supplied by the generation companies (GenCos) who are sometimes able to produce beyond the TransCo's capacity. The GenCos are not left out of the challenges as their performances are also closely hinged on the success of the distribution segment of the sector.

Unfortunately, tax which could have been a veritable fiscal tool for engineering the success of the sector creates additional problems for companies operating in the sector. Whereas, the country has clear roadmaps with specific tax provisions for critical sectors such as mining, gas production and utilization, etc., there are currently no specific fiscal guidelines that could help clear the doubts of power companies or exempt them from general tax provisions that negatively impact their businesses. Thus, the subsisting tax issues in the power sector may not be unconnected to the fact that such specific fiscal policies are not available to guide operations within the sector.

Consequently, there is an urgent need to address the following tax issues amongst others, to ensure that the industry achieves its objective of delivering power to Nigerians.

(a). Minimum Tax: The minimum tax provision is one of the anti-avoidance strategies that applies to companies during years in which they do not declare taxable profits or where the tax payable is less than the minimum tax. Although, there are exceptions to the provision, most companies operating in the power sector are significantly affected by the minimum tax provision because they do not meet the requirements for exemption.

Thus, while many of the power companies are currently making huge losses, they are still liable to minimum tax because of their huge net assets and revenue. If properly monitored, the benefit obtained from the exemption from minimum tax paid by some Discos could be utilized in addressing metering gaps and other infrastructural challenges plaguing the sector.

(b). Value Added Tax in the Power Sector Value Chain: Gas constitutes a major supply for the gas-based power plants used in generating the bulk of electricity in Nigeria. Given that the Value Added Tax (VAT) Act does not exempt natural gas from VAT, generating companies currently incur VAT on the gas supplied by the gas producing companies. However, they are unable to charge output VAT on electricity supplied to the Distribution companies. Thus, they are unable to recover the input VAT paid to the gas suppliers and this is against the underlying VAT principle that the tax should be borne by the final consumers.

In 2018, a VAT Modification Order was drafted to address the above problem. Based on the draft Order, gas supplies to generation companies shall be exempted from VAT. In addition, the supply of electricity would not be liable to VAT along the value chain but for the last stroke of the chain between the distribution companies and customers. Although, the Order is yet to be signed, it appears that certain GenCos no longer pay input VAT on gas. Thus, there is a risk that the tax authority may take a different view during their reviews.

Providing Tax Perks to the Nigerian Power Sector

There is an urgent need to sign the VAT Modification Order into law to exempt gas supplies to GenCos from VAT. This would reduce the tax cost of doing business and potentially attract some investments into the Nigerian power sector. The Federal Government may also want to consider exempting companies operating in the power sector from minimum tax subject to satisfactory performance in line with the provisions of Section 23(2b) of the Companies Income Tax Act (CITA), as amended. The Section provides that "the President may exempt by order from tax all or any profits of any company or class of companies from any source, on any ground which appears to it sufficient".

While many of the power companies are currently making huge losses, they are still liable to minimum tax because of their huge net assets and revenue. If properly monitored, the benefit obtained from the exemption from minimum tax paid by some Discos could be utilized in addressing metering gaps and other infrastructural challenges plaguing the sector.

The Electric Power Sector Reform Act (EPSRA) can be amended to incorporate certain tax incentive provisions for the power sector as is the case with the Nigerian Minerals and Mining Act (NMMA), 2007 which details the tax incentives specific to companies operating in the mining sector. For instance, the NMMA provides some import duty exemptions as well as a special basis for the claim of capital allowances in the Mining Sector.

One power subsector that can benefit from consolidated and specific tax incentives, such as mining highlighted above, is the renewable energy subsector. The government, realizing that renewable energy projects typically involve huge capital outlay and have long gestation periods, recently included renewable projects as part of the industries that qualify for Pioneer Status Incentive (i.e. tax holiday) where the projects proposed are located in economically disadvantaged areas. In addition, certain solar equipment may be exempt from VAT and Custom Duties, depending on the Nigerian Customs Service HS-Code.

However, there may be a need to consolidate these incentives and expand the scope of such incentives to address the specific challenges of the subsector. For instance, some tax credits could be given to companies that utilise renewable energy sources rather than other power sources that result in environmental pollution and are dependent on imports. This could be achieved by granting concessions to encourage the fabrication and manufacturing of equipment required for renewable energy projects in Nigeria, rather than relying on imports.

Since mini-grids that run on renewable energy sources are flexible, easy to use and adaptable to local needs and conditions, incentivizing investments in this subsector should help address the inadequacy of diverse energy sources being encountered in the Nigerian power sector.

Conclusion

Although studies have shown that tax incentives are not usually the primary factor in making investment decisions, they remain very vital in ensuring that investments are productive and sustainable. Taxation should not be seen only from the prism of immediate government revenues but rather as a means to foster economic development through consolidated and specific tax provisions that would incentivize investments in the power sector.

While some perceive tax as one of the distressing plagues of the Nigerian power sector, the seeming plagues could be turned into perks by adopting some of the above recommendations. The existing incentives, though fragmented, should be consolidated and advertised to potential investors during roadshows. This way, the power sector can attract substantial investments, increased productivity and most importantly, begin the journey to generating enough power to satisfy Nigeria's teeming population and support the expected economic development.

The power sector is already awash with several operational inhibitors. Adverse or incoherent tax policies should not add to the burden for the companies that are trying to navigate the challenging business climate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions