VAT Modification Order 2024: The Nigerian Federal Government Introduces a New Era of Fiscal Incentives and Tax Exemptions.

Introduction

The Federal Government of Nigeria has recently introduced two key fiscal incentives that
offer extensive tax exemptions for the Nigerian oil and gas sector.

These incentives, which were unveiled by the Honourable Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun (the “Minister”) were contained in the Value Added Tax (Modification) Order, 2024 (the “VAT Order”) passed pursuant to the powers vested in the Minister by section 38 of the Value Added Tax Act, Cap V1, Laws of the Federation of Nigeria, 2004 (as amended) (the “Principal Act”); as well as the Notice of Tax Incentives for Deep Offshore Oil & Gas Production, in accordance with the Oil & Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order 2024 (“the Notice”).

Background

Importantly, the VAT Order, together with the Notice, forms part of a new fiscal regime introduced by the Federal Government of Nigeria to mitigate the spate of divestments that has recently plagued the Nigerian oil and gas industry. As the latest amendment to the Principal Act, the VAT Order follows a sequence of notable amendments to the Principal Act since its inception in 1993, including the Value Added Tax (Modification) Order 2021 and the provisions of several Finance Acts between 2019 and 2023, among others.

Significance

The VAT Order provides for certain tax exemptions with respect to the Value Added Tax (“VAT”) obligations of companies operating in the oil and gas sector in Nigeria. The amendments to the Principal Act primarily touched on the First Schedule, which contains certain goods and services which are given exemption status under the Principal Act. The VAT Order significantly expands the list of exempted goods and services. The implication of this is that such goods are not to be subjected to VAT. Some notable commodities that are now exempt from VAT under the VAT Order include Equipment and Infrastructure related to the expansion of Compressed Natural Gas (“CNG”) including conversion kits; Domestic Liquefied Natural Gas (LNG) Processing Facilities and Equipment; and Electric Vehicles, among others. On the other hand, exempted services comprise: CNG conversion and installation services; Liquefied Petroleum Gas conversion and installation services; and manufacturing, assemblage and sale of vehicles.
In addition, the Notice introduces a 10-year gas tax credit to non-associated gas (“NAG”) greenfield projects in onshore and shallow waters with first gas production by January 1, 2019 The credit granted is $1.00 per thousand cubic feet (SCF) or 30% of the fiscal gas price, whichever is lower, and $0.50 per thousand SCF if hydrocarbon content exceeds 30 barrels per million SCF.

Projects starting after January 2029 qualify for a $0.50 gas tax allowance under similar terms, but the tax credit cannot exceed the company’s income tax payable, nor combine with AGFA incentives.

Companies can also, under the Notice, claim midstream capital allowances of 25% on
qualifying plant and equipment expenditures.
Furthermore, the Notice directs the relevant Ministries to ensure incentives for deep water oil
and gas projects and implement commercial enablers for new brownfield and greenfield
investments in the deep water.

An overview of these provisions reveals that the concessions are connected with a push by the government to have an industry-wide transition to natural gas, which is a cleaner energy
source than the more traditional energy sources such as crude oil. The government is also
attempting to increase participation in the sector, more generally. Nigeria has substantial
natural gas deposits that have remained under-utilised until very recently. It is clear that the
federal government intends to significantly increase natural gas exploitation and reliance on
renewable energy sources, moving forward.

The benefits of effectively utilising our natural gas deposits range from the opportunities for the government in generating revenue and not missing out on the global shift to renewable energy. Additionally, there is a vacuum in the market for electric vehicles. The tax exemption given to the manufacture and sale of electric vehicles are intended to fill this gap. On a related note, the VAT Order empowers the Nigeria Customs Service and the Federal Inland Revenue Service to issue guidelines for the effective implementation of the VAT Order, with the approval of the Minister.

Conclusion

The emergence of this fiscal regime will bring some much-needed relief to private actors in the oil and gas industry. This comes at a time when the energy industry in Nigeria has faced several challenges, ranging from the rising costs of fuel to persistent fuel scarcity occurrences. The concessions are aimed at controlling the spate of divestments from the sector and to mitigate the energy crises by extension.

Additionally, as the worries concerning climate change continue to grow, electric vehicles are fast becoming a viable alternative to gasoline-powered vehicles. The government is clearly working to ensure that Nigeria is not left behind in this regard.

The objective of the regulations is to effectively revitalise the oil and gas industry by incentivising stakeholders to ramp up their investment in the sector. It is also clear that these concessions will go a long way to enable the country to better adapt to the global shift towards cleaner forms of energy.